Opening CaseOpening CaseInstruments of Trade Policy: TariffsInstruments of Trade Policy: SubsidiesInstruments of Trade Policy: QuotasHypothetical Tariff Rate QuoteInstruments of Trade Policy: Local ContentInstruments of Trade Policy: Administrative PoliciesInstruments of Trade Policy: Antidumping PoliciesPolitical Arguments for InterventionPolitical Arguments for InterventionEconomic Arguments for InterventionEconomic Arguments for InterventionDevelopment of the World Trading SystemDevelopment of the World Trading SystemDevelopment of the World Trading SystemDevelopment of the World Trading System Disturbing Trends in the World Trading SystemGATT Criticisms The World Trade OrganizationThe WTOThe WTOWTO at WorkThe WTO -AchievementsWTO in SeattleDoha Agenda -WTOLooking Ahead to Chapter 7Chapter SixThe Political Economy of International Trade6 - 3McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Opening Case• Since 1974, international trade in the textile industry has been governed by a system of quotas known as the Multi-Fiber Agreement- Designed to protect textile producers in developed nations from foreign competition• The World Trade Organization agreed to let the MFA expire on December 31, 2004- In 2003 China was making 17% of the world’s textiles- By 2007 the WTO expects that China may make up to 50% of the world’s textiles6 - 4McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Opening Case• Trade associations from more than 50 textile-producing nations signed the ‘Istanbul Declaration’ in 2004- Requested that the WTO delay the removal of quotas- The request was denied• The result of the removal of quotas is that China’s increased production could cripple the economies of countries like Bangladesh• Even though China has increased export tariffs, many see this as a token gesture• In the first three months of 2005, imports of Chinese textiles into the US surged 62% compared with the same period in 20046 - 5McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Instruments of Trade Policy:Tariffs• Tariffs are the oldest form of trade policy; they fall into two categories- Specific tariffs are levied as a fixed charge for each unit- Ad valorem tariffs are levied as a proportion of the value of the imported good• Tariffs are good for government because they generate revenue• Tariffs protect domestic producers but they reduce efficiency• Tariffs are bad for consumers because they increase the cost of goods6 - 6McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Instruments of Trade Policy:Subsidies• Government payment to a domestic producer- Cash grants- Low-interest loans- Tax breaks- Government equity participation in the company• Subsidy revenues are generated from taxes• Subsidies encourage over-production, inefficiency and reduced trade6 - 7McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Instruments of Trade Policy:Quotas• Import quota- Restriction on the quantity of some good imported into a country• Voluntary export restraint (VER)- Quota on trade imposed by exporting country, typically at the request of the importing country6 - 8McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Hypothetical Tariff Rate Quote6 - 9McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Instruments of Trade Policy: Local Content• Requires some specific fraction of a good to be produced domestically- Percent of component parts- Percent of the value of the good• Initially used by developing countries to help shift from assembly to production of goods.• Developed countries (US) beginning to implement• For component parts manufacturer, LCR acts the same as an import quota• Benefits producers, not consumers6 - 10McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Instruments of Trade Policy:Administrative Policies• Bureaucratic rules designed to make it difficult for imports to enter a country- France – video tapes• Japanese ‘masters’ in imposing rules- Tulip bulbs- Federal Express6 - 11McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Instruments of Trade Policy:Antidumping Policies• Defined as- Selling goods in a foreign market below production costs- Selling goods in a foreign market below fair market value• Result of- Unloading excess production- Predatory behavior• Remedy: seek imposition of tariffs6 - 12McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Political Arguments for Intervention• Protecting jobs and industries- CAP (Europe) and VER• National security- Defense industries - semiconductors• Retaliation- Punitive sanctions6 - 13McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Political Arguments for Intervention• Protecting consumers- Genetically engineered seeds and crops- Hormone treated beef• Furthering foreign policy objectives- Helms-Burton Act- D’Amato Act• Protecting human rights- MFN6 - 14McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Economic Arguments for Intervention• Infant industry- Oldest argument - Alexander Hamilton, 1792- Protected under the WTO- Only good if it makes the industry efficient- Brazil auto-makers - 10th largest - wilted when protection eliminated- Requires government financial assistance• Today if the industry is a good investment, global capital markets would invest6 - 15McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Economic Arguments for Intervention• Strategic trade policy- Government should use subsidies to protect promising firms in newly emerging industries with substantial scale economies- Governments benefit if they support domestic firms to overcome barriers to entry created by existing foreign firms6 - 16McGraw-Hill/IrwinInternational Business, 6/e© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.Development of the World Trading System•