Rationales for Trade Intervention

1
Rationales for Trade Intervention

• Two principal issues have shaped the debate on
  appropriate trade policies
• Whether a national government should intervene to
  protect the countrys domestic firms by taxing
  foreign goods entering the domestic market or
  constructing other barriers against imports.
• Whether a national government should directly
  help the countrys domestic firms increase their
  foreign sales through export subsidies,
  government-to-government negotiations, and
  guaranteed loan programs.

2
Free Trade
Free trade implies that the national government
exerts minimal influence on the exporting and
importing decisions of private firms and
individuals.
3
Fair Trade
Fair trade, sometimes called managed trade,
suggests that the national government should
actively intervene to ensure that exports of
domestic firms receive an equitable share of
foreign markets and that imports are controlled
to minimize losses of domestic jobs and market
share in specific industries.
4
The National Defense Argument

• National defense has often been used as a reason
  to support governmental protection of specific
  industries. Since world events can suddenly turn
  hostile to a countrys interests, the national
  defense argument holds that a country must be
  self-sufficient in critical raw materials,
  machinery, and technology or else be vulnerable
  to foreign threats.

5
The Infant Industry Argument

• Alexander Hamilton, the first U.S.Secretary of
  the Treasury, articulated the infant industry
  argument in 1791. Hamilton feared that the young
  nations manufacturers would not survive their
  infancy and adolescence because of fierce
  competition from more mature European firms.
  Hamilton thus fought for the imposition of
  tariffs on numerous imported manufactured goods.

6
Maintenance of Existing Jobs

• To maintain existing employment levels, firms and
  workers often petition their governments for
  relief from foreign competition. Government
  officials, eager to avoid the human and economic
  misery inflicted on workers and communities when
  factories are shut down, tend to lend a
  sympathetic ear to such pleas.

7
Strategic Trade Theory

• In the early 1980s new models of international
  trade, known collectively as strategic trade
  theory, were developed. Strategic trade theory
  makes very different assumptions about the
  industry environment in which firms operate than
  do the classical theories. Strategic trade theory
  considers those industries capable of supporting
  only a few firms worldwide, perhaps because of
  high product development costs or strong
  experience curve effects.

8
Economic Development Programs

• An important policy goal of many governments,
  particularly those of developing countries, is
  economic development. Countries dependent on a
  single export often choose to diversify their
  economies in order to reduce the impact of, say,
  a bad harvest or falling prices for the dominant
  export.

9
Industrial Policy

• In many countries, the government plays an active
  role in managing the national economy. Often an
  important element of this task is determining
  which industries should receive favorable
  governmental treatment.

10
Public Choice Analysis

• Why do national governments adopt public policies
  that hinder international business and hurt their
  own citizenry overall, even though the policies
  may benefit small groups within their societies?
  According to public choice analysis, a branch of
  economics that analyzes public decision making,
  the special interest will often dominate the
  general interest on any given issue.

11
Three Forms of Import Tariffs

• Ad valorem tariff
• Assessed as a percentage of the market value of
  the imported good
• Specific tariff
• Assessed as a specific dollar amount per unit of
  weight or other standard measure
• Compound tariff
• Has both an ad valorem component and a specific
  component

12
Reasons for Tariffs
Tariffs historically have been imposed for two
reasons

• Tariffs raise revenue for the national
  government. Customs duties are reasonably easy to
  collect.
• A tariff acts as a trade barrier. Because
  tariffs raise the prices paid by domestic
  consumers for foreign goods, they increase the
  demand for domestically produced substitute goods.

13
Nontariff Barriers

• Quotas
• Numerical export controls
• Other nontariff barriers

14
Quotas

• Countries may restrain international trade by
  imposing quotas. A quota is a numerical limit on
  the quantity of a good that may be imported into
  a country during some time period, such as a year.

15
Numerical Export Controls

• A country may also impose quantitative barriers
  to trade in the form of numerical limits on the
  amount of a good it will export. A voluntary
  export restraint (VER) is a promise by a country
  to limit its exports of a good to another country
  to a prespecified amount or percentage of the
  affected market.
• An embargo is an absolute ban on the exporting
  (and/or importing) of goods to a particular
  destination.

16
Other Nontariff Barriers

• Product and testing standards
• Restricted access to distribution networks
• Public-sector procurement policies
• Local-purchase requirements
• Regulatory controls
• Currency controls
• Investment controls

17
Promotion of International Trade

• Subsidies
• Foreign Trade Zones
• Export Financing Programs

18
Subsidies

• Countries often seek to stimulate exports by
  offering subsidies designed to reduce firms
  costs of doing business.

19
Foreign Trade Zones

• A foreign trade zone (FTZ) is a geographical area
  in which imported or exported goods receive
  preferential tariff treatment. An FTZ may be as
  small as a warehouse or a factory site or as
  large as an entire city.

20
Export Financing Programs

• For many big-ticket items such as aircraft,
  supercomputers, and large construction projects,
  success or failure in exporting depends, in part,
  on offering an attractive financing package.
• Because of the importance of the financing
  package, most major trading countries have
  created government-owned agencies to assist their
  domestic firms in arranging financing of export
  sales.

21
Countervailing Duty
A countervailing duty (CVD) is an ad valorem
tariff on an imported good that is imposed by the
importing country to counter the impact of
foreign subsidies.
22
Super 301

• Another weapon available to the U.S. government
  to combat unfair trading practices of foreign
  countries is Section 301so-called Super 301of
  the 1974 Trade Act. Super 301 requires the U.S.
  trade representative, a member of the executive
  branch, to publicly list those countries engaging
  in the most flagrant unfair trade practices.