Session 7: Government Policy & International Trade Flashcards
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?
- 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
Opening Case: U.S. and South Korea trade deal
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
Trade policy uses 7 main instruments:
- tariffs
- subsidies
- import quotas
- voluntary export restraints
- local content requirements
- administrative policies and
- anti-dumping duties
2 types of tariffs
- Ad valorem tariffs
- Specific tariffs
Ad valorem tariffs
- Are levied as a proportion of the value of the imported good (for example, 10% of the value of steel imported)
Specific tariffs
- Are levied as a fixed charge for each unit of a good imported (for example, $3 per barrel of oil)
- Subsidies
A government payment to a domestic producer. Can take many forms:
- cash grants
- low-interest loans
- tax breaks
- government equity participation.
By lowering production costs, subsidies help domestic producers in two ways:
- they help them compete against foreign imports.
- they help them gain export markets.
- Import quotas
- 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
2 ypes of voluntary export restraints
- Export tariff
- Export ban
Export tariff
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
Export ban
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.
- Local content requirements
- 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.
- Administrative policies
- 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
- Antidumping policies
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.
Antidumping duties (often called countervailing duties):
- 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)
Example: Dumping of steel by Chinese companies in 2015:
- 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
6 Political Arguments for Intervention:
- Protecting jobs and industries
- National security
- Retaliation
- Protecting consumers
- Furthering foreign policy objectives
- Protecting human rights
Protecting jobs and industries
- 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.
Protecting national security
- 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.
Retaliation
- 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
Protecting consumers
- 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
Further foreign policy objectives
- 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
Protecting Human Rights
- 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.
2 Economic Arguments for Intervention
- The infant industry argument
- Strategic trade policy
The infant industry argument
- 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.
Strategic trade policy
- 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
Revised case for Free Trade
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.
