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The Political Economy of International Trade

1. Governments intervene in international trade through various policies like tariffs, subsidies, quotas, and anti-dumping duties to protect domestic industries and jobs, often at the expense of consumers. 2. There are political and economic arguments for government intervention, with political arguments focused on protecting certain groups and economic arguments aimed at boosting overall national wealth. 3. Trade barriers raise costs for exporting firms and can limit their ability to serve markets, so managers have an incentive to lobby for free trade policies.

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77 views

The Political Economy of International Trade

1. Governments intervene in international trade through various policies like tariffs, subsidies, quotas, and anti-dumping duties to protect domestic industries and jobs, often at the expense of consumers. 2. There are political and economic arguments for government intervention, with political arguments focused on protecting certain groups and economic arguments aimed at boosting overall national wealth. 3. Trade barriers raise costs for exporting firms and can limit their ability to serve markets, so managers have an incentive to lobby for free trade policies.

Uploaded by

Wilson
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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The Political Economy of

International Trade
What Is The Political Reality 

Of International Trade?

➢Free trade occurs when governments do


not attempt to restrict what citizens can buy
from another country or what they can sell
to another country
➢many nations are nominally committed to free
trade, but intervene to protect the interests of
politically important groups

2
How Do Governments 

Intervene In Markets?
➢ Governments use various methods to
intervene in markets including
1. Tariffs
➢ specific tariffs
➢ ad valorem tariffs
2. Subsidies
3. Import Quotas
➢ tariff rate quotas
➢ quota rent

3
How Do Governments 

Intervene In Markets?
4. Voluntary Export Restraints
5. Local Content Requirements
6. Administrative Polices
7. Antidumping Policies / countervailing
duties
➢ dumping

4
Why Do Governments 

Intervene In Markets?
➢ There are two main arguments for government
intervention in the market
1. Political arguments - concerned with protecting
the interests of certain groups within a nation
(normally producers), often at the expense of
other groups (normally consumers)
2. Economic arguments - concerned with boosting
the overall wealth of a nation – benefits both
producers and consumers

5
What Are The Political Arguments For
Government Intervention?
1. Protecting jobs - the most common political
reason for trade restrictions
2. Protecting industries deemed important for
national security - industries are often protected
because they are deemed important for
national security
3. Retaliation for unfair foreign competition - when
governments take, or threaten to take, specific
actions, other countries may remove trade
barriers
4. Protecting consumers from “dangerous”
products – limit “unsafe” products

6
What Are The Political Arguments For
Government Intervention?
5. Furthering the goals of foreign policy -
preferential trade terms can be granted to
countries that a government wants to build
strong relations with
6. Protecting the human rights of individuals in
exporting countries – through trade policy
actions
7. Protecting the Environment – international
trade is associated with a decline in
environmental quality

7
What Are The Economic Arguments For
Government Intervention?
1. The infant industry argument - an industry
should be protected until it can develop
and be viable and competitive
internationally
2. Strategic trade policy - first mover
advantages can be important to success

8
When Should Governments 

Avoid Using Trade Barriers?
➢ Paul Krugman argues that strategic trade policies
aimed at establishing domestic firms in a
dominant position in a global industry are beggar-
thy-neighbor policies that boost national income
at the expense of other countries
➢ countries that attempt to use such policies will
probably provoke retaliation
➢ Krugman argues that since special interest
groups can influence governments, strategic
trade policy is almost certain to be captured by
such groups who will distort it to their own ends

9
How Has The Current World Trading
System Emerged?

➢ Until the Great Depression of the 1930s, most


countries had some degree of protectionism
➢ After WWII, the U.S. and other nations realized
the value of freer trade
➢ General Agreement on Tariffs and Trade (GATT) - a
multilateral agreement to liberalize trade
➢ In the 1980s and early 1990s protectionist
trends emerged
➢ The Uruguay Round of GATT negotiations
began in 1986 focusing on
1. Services and intellectual property
2. The World Trade Organization (WTO)

10
How Has The Current World Trading
System Emerged?

➢The WTO encompassed GATT along with


two sisters organizations
➢the General Agreement on Trade in Services
(GATS)
➢working to extend free trade agreements to
services
➢the Agreement on Trade Related Aspects of
Intellectual Property Rights (TRIPS)
➢working to develop common international
rules for intellectual property rights

11
How Has The Current World Trading
System Emerged?

➢ The WTO has emerged as an effective advocate


and facilitator of future trade deals, particularly in
such areas as services
➢153 members in 2011
➢so far, the WTO’s policing and enforcement
mechanisms are having a positive effect
➢most countries have adopted WTO
recommendations for trade disputes
➢a magnet for various groups protesting free
trade

12
What Is The Future Of The World Trade
Organization?

➢The current agenda of the WTO focuses


on
➢the rise of anti-dumping policies
➢the high level of protectionism in agriculture
➢the lack of strong protection for intellectual
property rights in many nations
➢continued high tariffs on nonagricultural goods
and services in many nations

13
What Is The Future Of The World Trade
Organization?

➢ The WTO launched a new round of talks at


Doha, Qatar in 2001 that were still going on in
2011
➢ The agenda includes
➢cutting tariffs on industrial goods and services
➢phasing out subsidies to agricultural producers
➢reducing barriers to cross-border investment
➢limiting the use of anti-dumping laws

14
What Do Trade Barriers 

Mean For Managers?

➢ Managers need to consider how trade


barriers affect the strategy of the firm and
the implications of government policy on
the firm
1. Trade barriers raise the cost of exporting
products to a country
2. Voluntary export restraints (VERs) may
limit a firm’s ability to serve a country from
locations outside that country

15
What Do Trade Barriers 

Mean For Managers?

3. To conform to local content requirements,


a firm may have to locate more
production activities in a given market
than it would otherwise
➢ Managers have an incentive to lobby for
free trade, and keep protectionist
pressures from causing them to have to
change strategies

16

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