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Instruments of Trade Policy

and Barriers to Free Trade

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Governments and Trade More often

governments manage trade (… level the “playing-field”)

For political Economic and “social” reasons!

Protectionism?

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Agricultural Subsidies &Development Rich nations provide $ 300 bn as subsidies 2$ a day for every cow in EU EU farmers exports and Dumps sugar beet

produces>>>>>>>>South Africa US cotton subsidies depresses world

market>>>>> Brazil ,India ( $1 bn loss) “Developed nations give foreign aid of $ 50

bn per year ,to developing word, agricultural subsidies cost producers in the developing world some $ 50 bn,in lost exports ,effectively canceling out the effect of the aid” –UN

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In 2001, Mali lost $43m in export revenues due to plunging cotton prices , significantly more than the $37m in foreign aid it received from the US that year”

Elimination of agricultural subsidies and price support to developing world producers- Oxfarm

Rich nations spend more than $300 billion a year to subsidize their farmers

Subsidies create surplus production

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Surplus production leads to dumping and depressed prices

Rich countries of the developed world subsidize farm products– Reasons

• To keep commodity prices low • To favor politically active farmers

Consequences– Surplus production– Depressed world prices (a result of surplus)

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Instruments of Trade Policy

Tariffs

Subsidies

Import Quotas

Voluntary Export Restraints(VERs)

Local Content Requirements

Anti-dumping Policies

Administrative Policies

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Tariffs

Taxes levied on imports (also sometimes on exports)

– Specific tariff: fixed charge for each good imported• $3/ barrel of Oil

– Ad valorem tariff: a % of imported goods value • 20% on Latin American Banana Imports

by EU

Pro producer anti consumer

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Tariffs

Tariffs still exist in US?– March 2002 US in steel Industry……8-30% tariffs

on steel imports

Pro-producer and anti consumer– Japanese consumer pays $ 890 per year due to

tariffs (1989)

Tariff reduces the overall efficiency of the world economy– US consumer lost $233.4b in 1996 alone!

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Who gains: – Government ,gets revenue– Domestic producers (at least in the short run)– Employees of protected industries keep their jobs

Who loses:– Consumers who pay higher prices– The economy which remains inefficient– Employees of protected industries who don’t

develop new skills

Tariffs are pro producer and anti consumer,.,., it reduces the over all efficiency of the world economy

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Subsidies Are government payments to domestic

producers– Cash grants, low-interest loans, tax breaks,

government equity participation in domestic firms, government orders

Subsidies are aimed at lower costs to help– Compete against cheaper imports– Gain export markets– Increase domestic employment– Local producers achieve first-mover advantage in

emerging industries Governments tax individuals… to pay for

subsidies Consumers buy more expensive goods with

lower disposable incomes

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Agricultural Subsidies:

Japan- $ 21, 000 per farmer,.,

EU - $ 19,000 per farmer,USA- $19,000, and Canada - $ 8000 per farmer,,, in 2002 EU met subsidies of 43$ b

Results– Inefficient farmers– Over production

It’s the Taxpayer’s money?

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Import Quotas and Voluntary Export Restraints Import quota: government specifies how

much of what product can be imported from which countries– Direct restriction on the quantity of some good that

may be imported• @ US quota on Cheese

Voluntary export restraint(VER): a quota imposed by the exporting country officially or unofficially– @Japan’s VER with US on Automobile

Exports, 1981- up to 1.85 million vehicles per year !

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The extra profit “ quota rent” will be made by the producers when supply is artificially limited by import quota!

Benefits producers by limiting import competition– Japan – limited exports to 1.85 mm

vehicles/year– Cost to consumers - $1B/year between ‘81

- 85.– Money went to Japanese producers in the

form of higher prices

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The Multi Fibre Arrangement (MFA) ( Agreement on Textile and Clothing (ATC))

Governed the world trade in textiles and garments from 1974 through 2004,

Imposing quotas on the amount developing countries could export to developed countries. It expired on 1 January 2005.

HK based ESQUEL Group– Biggest shirt exporters to USA– Due to quota right ,.,. To China– Malaysia– Mauritius– Mexico– Jamaica – N American FTA….All using Chinese labor !

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Local Content Requirements

– Some % of a good has to be produced domestically with local raw materials and local labor

– Used by LDCs to• Achieve technology transfer, skills transfer• Shift manufacturing base to a higher

technological level

– Similar effects to those of import quotas– Buy American Act!

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Administrative policies– Bureaucratic rules that make it difficult for imports to

enter a country

Bureaucratic rules designed to make it difficult for imports to enter a country.– France – video tapes

Japanese ‘masters’ in imposing rules.– Tulip bulbs.– Federal Express

By Safeguards, Health Standards, Customs Procedures, Consular Formalities, Environment Protection etc.,.,.,

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Anti-dumping Policies

– Dumping: selling goods in an overseas market

• At below their production costs or • Below “fair market value”

– 1997 SK manufacturer of semiconductors ( LG and Hyundai) selling DRAMs in US Mkt…… US imposed 9-4% antidumping duties !

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– Types• Sporadic Dumping• Intermittent Dumping- Predatory Dumping• Long Period Dumping

– Anti-dumping policies punish producers who dump and protect domestic producers

– File a petition with the Govt…….countervailing duties!

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Antidumping cases by WTO members

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Trade Barriers

Tariff Barriers Non Tariff Barriers– Quotas– VER– Administered Protection

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Indian Case : the peak level of tariff from 300% to 25% in 2003 ( but excluding Agri. And Dairy products)

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Arguments for Intervention

Political Economic

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Political Arguments for Intervention

Protection Jobs and Industries– But decreases international competitiveness– US is protected from Japan and Tai

Machine tools imports National security

– Defense related industries– US and India

Individual industries and jobs protected

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Retaliation– US Vs China on IPRs of Microsoft

Consumer protection (health, safety)– From unsafe products– US ban on imported weapons– EU ban on Hormone treated Beef– GM seeds?

Furthering foreign policy objectives– Trade policy to support foreign policy– Preferential trade relations– Punish rough states

Protection Human Rights!– Trade policies as a Political Weapon– US on HR issues with China– “HR issues should be decouples from Trade”

Clinton

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Economic Arguments for Intervention Infant industry protection

– Of the developing countries– BUT is it makes industries efficient? Is that

because of non availability of Capital?

Strategic trade policy– First Mover Advantage by Govt. Help( Boeing)– Counter rivals first move initiatives by govt.

help( Airbus)– To face competition– Japan’s LCD Screens– Indian Software Story?

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Shrimps-turtles and WTO

Source: World trade Organization , http://www.wto.org/english/tratop_e/envir_e/edis08_e.htm

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Non-tariff barriers to trade can be:

State subsidies, procurement, trading, state ownership

Occupational safety and health regulation

Employment law Import licenses Export subsidies Quota shares

Source: en.wikipedia.org/wiki/Non-tariff_barriers_to_trade

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Non-tariff barriers Foreign exchange controls and multiplicity Over-elaborate or inadequate infrastructure "Buy national" policy. Intellectual property laws (patents,

copyrights) Bribery and corruption Unfair customs procedures Restrictive licences Import bans Seasonal import regimes Source: en.wikipedia.org/wiki/Non-tariff_barriers_to_trade

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Thank U