Instrument of Trade Policy Tariff, subsidies, voluntary export restraints, local content requirement, administrative policies, antidumping policies

Tariffs 1. Tariffs are taxes levied on imports that effectively raise the cost of imported products relative to domestic products 2. Specific tariffs are levied as a fixed charge for each unit of a good imported. 3. Ad valorem tariffs are levied as a proportion of the value of the imported good. 4. Tariffs increase government revenues, provide protection to domestic producers against foreign competitors by increasing the cost of imported foreign goods, and force consumers to pay more for certain imports 5. So, tariffs are unambiguously pro-producer and anti-consumer and tariffs reduce the overall efficiency of the world economy Import quotas and voluntary export restraints 1. Import quotas directly restrict the quantity of some goods that may be imported into a country. 2. Tariff rate quotas are a hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than to those over the quota. 3. Voluntary export restraints are quotas on trade imposed by the exporting country, typically at the required of the importing countrys government. 4. A quota rent is the extra point that producers make when supply is artificially limited by an import quota. 5.Import quotas and voluntary export restraints benefit domestic producers by limiting import competition, but they raise the process of imported goods. Administrative policies 1. Administrative trade policies are bureaucratic rules that are designed to make it difficult for imports to enter a country. 2. These policies hurt consumers by denying access to possibly superior foreign products 3. Netherlands export of tulip bulbs to Japan suffered as they were all checked. 4. France required all imported video tape recorders enter though a single small entry point which poorly staffed. Antidumping policies 1.Dumping refers to selling goods in a foreign market below their costs of production, or selling goods in a foreign market below their fair market value. 2. Dumping enables firms to unload excess production in foreign markets. 3. Some dumping may be predatory behavior, with producers using substantial profits from their home markets to subsidize prices in a foreign market with a view to driving indigenous competitors out of that market, and later raising process and earning substantial profits 4. Antidumping policies are designed to punish foreign firms that engage in dumping and protect domestic producers from unfair foreign competition. Political arguments for free trade

1. Protecting jobs 2. Protecting industries deemed important for national security 3. Retaliating to unfair foreign competition 4. Protecting consumers from dangerous products 5. Furthering the goals of foreign policy 6. Protecting the human rights of individuals in exporting countries Furthering Policy Objectives 1. Foreign policy objectives can be supported through trade policy 2. Preferential trade terms can be granted to countries that a government wants to build strong relations with. 3. Trade policy can also be used to punish rogue states that do not abide by international laws or norms. 4. However, it might cause other countries to undermine unilateral trade sanctions 5. The Helms-Burton Act and the DAmato Act. have been passed to protect American companies form such actions. The infant industry argument 1. The infant industry argument suggests that an industry should be protected until it can develop and be viable and competitive internationally. 2. The infant industry argument has been accepted as a justification for temporary trade restrictions under the WTO 3. However, it can be difficult to gauge when an industry has grown up 4. Critics argue that if a country has the potential to develop a viable competitive position its firms should be capable of raising necessary funds without additional support from the government 5. Brazil had the 10th largest auto industry in the world with protection for 30 years. But after the protection was removed in the 1980s it turned out to be one of the most inefficient in the world. 6. But TATA is an example of government protection being fruitful Trade Barriers and firm strategy 1. Trade barriers raise the cost of exporting products to a country 2. Voluntary export restraints may limit a firms ability to serve a country from locations outside that country 3. To conform to local content requirements a firm may have to locate more production activities in a given market than it would otherwise. 4. All of these can raise the firms costs above the level that could be achieved in a world without trade barriers. The case of government intervention 1. Protecting job and industry 2. National security 3. Retaliation to unfair foreign competition 4. Protecting consumers from dangerous products 5. Furthering foreign policy objectives 6. Protecting human rights World Trade Organization (WTO) The WTO began life on January 1, 1995, but its trading system is half a century order. Since 1948, GATT had provided the rules for trading system. Over the years GATT evolved through several rounds of negotiations. The last and largest round, was the Uruguay Round which lasted from 1986 to 1994 and led to the WTOs creation.

WTO deals with the rules of trade between nation at a global or nearglobal level. Its an organization for liberalizing trade. Its forum for government to negotiate trade agreements. Its a place for governments to settle trade disputes 10 benefits of WTO trading system 1. To promote the peace 2. To handle disputes constructively 3. To make life easier for all because its based on rules rather than power. 4. Free trade cuts cost of living 5. To give consumers more choice and a broader range or qualities 6. To raise income, Because of WTO more trade more income 7. To generate economic growth by generating economic activities for free trade 8. To allow division of labor between countries 9. To prevent governments from narrow interest 10. To encourage good government 10 Misunderstandings of WTO trading system 1. WTO dictates trade policy 2. WTO sometimes does not consider for free trade at any cost 3. Not priority over development 4. Not priority over environmental protection 5. Not dictate governments on issues like food safety, and human health and safety 6. WTO sometimes destroys jobs 7. Small countries are powerless in the WTO 8. The tool of powerful lobbies 9. Weaker countries are forced to join the WTO 10. Theoretically WTO is democratic but practically undemocratic. Sources of FDI Strong currency, strong economy, strong corporate, Strong profit and cash flow, Excess capital to invest in foreign countries Forms of FDI Greenfield investment , Acquiring or merging with a firm in a foreign country Why Merger/Acquisition? 1. Cross border mergers and acquisitions are quicker to execute than green-field investment 2. Foreign firms are acquired because those firms have valuable strategic assets 3. Firms make acquisitions because they believe they can increase the efficiency of the acquired unit by transferring capital, technology or management skills. Why do so many firms apparently prefer FDI over either exporting or licensing?/ Arguments favoring Horizontal FDI Transport costs, Market imperfection, Following competitors and strategic behavior, Product life cycle, Location specific advantages Political Ideology and FDI 1. Radical view a. Marxist roots b. Collapse of communism and poor economic performance 2. Free market view 3. Pragmatic nationalism view Benefits of FDI of host countries 1. Resource transfer effects: FDI can make a positive contribution to a host country or economy by supplying capita, technology and management resources that would otherwise not be available. Such

resource transfers can stimulate the economic growth of the host economy. 2. Employment effects: arise from the direct and indirect creation of jobs by FDI. 3. Balance of Payment Effects: Arise from the initial capital inflow to finance FDI, from import substitution effects and from subsequent exports by the new enterprise Government policy instrument and FDI Home country policies A. Encourage outward FDI 1. By providing government backed risk insurance and government loans 2. By eliminating double taxation 3. By political persuasion/influence to relax restrictions on inbound FDI B. Restricting outward FDI 1. limit capital outflow 2. Use tax code to encourage companies to stay home 3. Prohibitions against investing in certain countries Host country policies A. Encourage inward FDI 1. offer investment incentives 2. Attempt to attract investment away from other countries B. Restricting outward FDI 1. Ownership restraints by excluding from specific fields and restrictions on amount of ownership 2. Performance requirements

Level of economic integration 1. Free trade area: All barriers to trade among members removal. Each country can determine own trade policies toward nonmembers 2. Customs union: Eliminates barriers among members and has a common external trade policy 3. Economic Union: No barriers among members, common external policy, common monetary and fiscal policy, harmonize tax rates and common currency 4. Political union: has a coordinating bureaucracy accountable to all citizens