Session 7: Government Policy & International Trade

Question 1

Opening Case: U.S. and South Korea trade deal. What type of trade deal did they strike? What theories of international trade explain the negotiations and deal?

Answer 1

• In 2012, a free trade deal between the USA and South Korea went into effect
• In 2016, the US exported $63.8Bn in goods and services to South Korea and imported $80.8Bn, resulting in a trade deficit of $17Bn
• January 2018: the US announced it was entering into negotiations
  with South Korea to revise the terms of the agreement
• In late March, the two countries announced that they had reached a revised deal. South Korea would be exempt from the 25 percent tariff on steel imports into the United States

Question 2

Opening Case: U.S. and South Korea trade deal

Answer 2

2012 Free trade agreement:
* International trade is good: New trade theory
* Obama Administration 2016 US trade deficit in the trade balance with Korea
2018 Revisions of the agreement
* Trade deficit is bad:Mercantilism
* Trump Administration 2018 Korea exempted 25% tariffs on steel imports into the US
* Korea too important as a trade and geopolitical partner: Realism

Question 3

Trade policy uses 7 main instruments:

Answer 3

1. tariffs
2. subsidies
3. import quotas
4. voluntary export restraints
5. local content requirements
6. administrative policies and
7. anti-dumping duties

Question 4

2 types of tariffs

Answer 4

1. Ad valorem tariffs
2. Specific tariffs

Question 5

Ad valorem tariffs

Answer 5

• Are levied as a proportion of the value of the imported good (for example, 10% of the value of steel imported)

Question 6

Specific tariffs

Answer 6

• Are levied as a fixed charge for each unit of a good imported (for example, $3 per barrel of oil)

Question 7

2. Subsidies
   A government payment to a domestic producer. Can take many forms:

Answer 7

• cash grants
• low-interest loans
• tax breaks
• government equity participation.

Question 8

By lowering production costs, subsidies help domestic producers in two ways:

Answer 8

• they help them compete against foreign imports.
• they help them gain export markets.

Question 9

3. Import quotas

Answer 9

• A direct restriction on the quantity of some good that may be imported into a country.
• The restriction is usually enforced by issuing import licences to a group of individuals or firms.

For example, the United States has a quota on cheese imports.
* The only firms allowed to import cheese are certain trading companies

Question 10

2 ypes of voluntary export restraints

Answer 10

1. Export tariff
2. Export ban

Question 11

Export tariff

Answer 11

A tax placed on the export of a good. The goal behind an export tariff is to discriminate against
exporting to ensure there is sufficient supply of a good within a country

Question 12

Export ban

Answer 12

A policy that partially or entirely restricts the export of a good. One well-known example was the ban on U.S. crude oil production exports enacted by the U.S. Congress in 1975.

Question 13

5. Local content requirements

Answer 13

• Demands that some specific fraction of a good be produced domestically.
• The requirement can be expressed either in physical terms,
• (e.g., 75 percent of component parts for this product must be
  produced locally) or in value terms
• (e.g., 75 percent of the value of this product must be produced
  locally).
  Policy example: Buy America Act, specifies that government agencies must give preference to American products when putting contracts for equipment.

Question 14

6. Administrative policies

Answer 14

• Bureaucratic rules designed to make it difficult for imports to enter a country.
• Japanese are the masters of this trade barrier.
  ✓ In recent decades, Japan’s formal tariff and nontariff barriers have been among the lowest in the world
  ✓ Yet, Japan’s informal administrative barriers to imports
  compensate the lack of tariff barriers
  ✓ E.g.: Car Industry in Japan

Question 15

7. Antidumping policies

Answer 15

Dumping is selling goods in a foreign market at below their costs of production, or selling goods in a foreign market at below their “fair” market value.

Question 16

Antidumping duties (often called countervailing duties):

Answer 16

• If a domestic producer believes that a foreign firm is dumping production in the local market, it can file a petition
• In Canada, companies can complain to the Canada Border Services Agency (CBSA)

Question 17

Example: Dumping of steel by Chinese companies in 2015:

Answer 17

• Large American steel producers filed complaints with the US Department of Commerce. Large imports of steel from China had resulted in an unfair competition due to unfairly low in price.
• Investigation by the International Trade Commission found that the Chinese companies were guilty of dumping steel products. The Commission imposed a 500% import duty on selected Chinese steel imports

Question 18

6 Political Arguments for Intervention:

Answer 18

1. Protecting jobs and industries
2. National security
3. Retaliation
4. Protecting consumers
5. Furthering foreign policy objectives
6. Protecting human rights

Question 19

Protecting jobs and industries

Answer 19

• The most common political argument for government intervention is that it is necessary for protecting jobs and industries from unfair foreign competition.
• Competition is viewed as unfair when producers in exporting country are subsidized in some way by their government
• In Canada: protection of cultural industries from foreign competition; dairy and meat industries are also heavily protected.

Question 20

Protecting national security

Answer 20

• Countries argue that it is necessary to protect certain industries because they are important for national security.
• E.g.: aerospace, advanced electronics, and semiconductors.
• E.g.: Trump Adminstration announced tariffs on imports of foreign steel and aluminum in March 2018 citing national security issues.

Question 21

Retaliation

Answer 21

• Trade policies often used as a tool to exert pressures and/or payback in the context of diplomatic, military, and commercial relationships among nations.
• E.g., The U.S. government has used the threat of punitive trade
  sanctions to try to get the Chinese government to enforce its intellectual property laws
• E.g., Russia sanctions in the aftermath of the invasion of Ukraine

Question 22

Protecting consumers

Answer 22

• Many governments have long had regulations to protect consumers from unsafe or unethical products.
• The indirect effect of such regulations often is to limit or ban the importation of such products.
• In 2003 several countries, including Japan and South Korea,
  banned imports of U.S. beef after a single case of mad cow disease was found in Washington State

Question 23

Further foreign policy objectives

Answer 23

• A government may grant preferential trade terms to a country with which it wants to build strong relations.
• Trade policy has also been used several times to pressure or punish “rogue states” that do not abide by international law or norms.
• E.g., Measures against Russia in the aftermath of the Ukrainian conflict

Question 24

Protecting Human Rights

Answer 24

• Governments sometimes use trade policy to try to improve the
  human rights policies of trading partners.
• In the 1980s and 1990s, Western governments like Canada used trade sanctions against South Africa as a way of pressuring that
  nation to drop its apartheid policies, which were seen as a violation of basic human rights.

Question 25

2 Economic Arguments for Intervention

Answer 25

1. The infant industry argument
2. Strategic trade policy

Question 26

The infant industry argument

Answer 26

• New manufacturing industries cannot initially compete with wellestablished industries in developed countries (→ 1 st mover adv.)
• To allow manufacturing to get a toehold, governments could
  temporarily support new industries with tariffs, import quotas, and subsidies until they have grown strong enough to meet international competition.

Question 27

Strategic trade policy

Answer 27

• Government can help raise national income through interventionism
• Government might intervene in an industry if it helps domestic firms to overcome the barriers to entry created by foreign firms.
  ➢ Bombardier in Quebec has benefited greatly from support from the federal government and the Quebec provincial government

Question 28

Revised case for Free Trade

Answer 28

Strategic trade policy looks appealing in theory but in practice it may be unworkable, leaving the case for free trade very strong:
* A strategic trade policy aimed at establishing domestic firms in a dominant position in a global industry is a beggar-thy neighbour policy (Paul Krugman) that boosts national income at the expense of other countries/industries.
* Governments do not always act in the national interest when they intervene in the economy; politically important interest groups often influence them.