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Bus 302 - CH 06 (F01)

The document discusses various theories and concepts related to international trade, including: 1) Free trade refers to a situation where governments do not influence trade through quotas or duties. Importing products that can be produced more efficiently abroad and exporting goods where a country has technological advantages are benefits of trade. 2) Countries' climate, resources and innovations influence their trade patterns. As products become widely accepted, production shifts to other countries and may ultimately be exported back to the country of origin. 3) Governments intervene in trade for political and economic reasons, using instruments like tariffs, subsidies, quotas and antidumping policies to influence imports and exports. The goal is often to protect domestic groups or industries.

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Hasnat nahid Himel
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34 views19 pages

Bus 302 - CH 06 (F01)

The document discusses various theories and concepts related to international trade, including: 1) Free trade refers to a situation where governments do not influence trade through quotas or duties. Importing products that can be produced more efficiently abroad and exporting goods where a country has technological advantages are benefits of trade. 2) Countries' climate, resources and innovations influence their trade patterns. As products become widely accepted, production shifts to other countries and may ultimately be exported back to the country of origin. 3) Governments intervene in trade for political and economic reasons, using instruments like tariffs, subsidies, quotas and antidumping policies to influence imports and exports. The goal is often to protect domestic groups or industries.

Uploaded by

Hasnat nahid Himel
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 PPTX, PDF, TXT or read online on Scribd
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The Political

Economy of
International Trade
CHAPTER 06
Free Trade

Refers to a situation
in which government
does not attempt to
influence through
quotas or duties
The Benefits of Trade
Ex: India export caw’s in Bangladesh
where Bangladesh export Ilish or Hilssa fish
to India

Importing products are those that can be


produced more efficiently in other
countries

Ex: USA export commercial jet aircraft,


because they have the technology & know
how

Ex: USA import textile from Bangladesh,


because it needs cheap labor force, which
The Pattern of
International Trade
Climate & natural resources endowments
Ex: Ghana exports cocoa, Brazil exports coffee,
Saudi Arabia exports oil, etc.

When a new product become widely accepted


internationally, production starts in other
countries

Sometime the product may ultimately be exported


back to the country of it’s origin of innovation

Ex: Hover board invented in USA but importing


from China
Seven Main Instruments Of
Trade Policy
1. Tariffs

2. Subsidies

3. Import quotas

4. Voluntary export restraints

5. Local content requirements

6. Antidumping policies

7. Administrative policies
1. Tariff
 A tariff is a tax levied on imports that effectively
raises the cost of imported products relative to
domestic products
 Specific Tariffs: are levied as a fixed charge for
each unit of a good imported
 Ad Valorem Tariffs: are levied as a proportion of
the value of the imported good
 Why Tariffs?
 Increase government revenues
 Provide protection to domestic producers against
foreign competitors by increasing the cost of
imported foreign goods
 Force consumers to pay more for certain imports
2. Subsidies
 A subsidy is a government
payment to a domestic
producer
 Subsidies help domestic
producers
 Compete against low-cost
foreign imports
 Gain export markets

 Consumers typically absorb the


3 .Import Quotas and
Voluntary & 4. Export
Restraints
 An import quota is a direct restriction on the
quantity of some good that may be imported into a
country
 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
 Voluntary export restraints are quotas on trade
imposed by the exporting country, typically at the
request of the importing country’s government
 A quota rent is the extra profit that producers make
when supply is artificially limited by an import quota
5. Local Content
Requirements
 A local content requirement demands that
some specific fraction of a good be
produced domestically. The requirement
can be in physical terms or in value terms.
Local content requirements benefit
domestic producers and jobs, but
consumers face higher prices
 Example: Hero - Honda
6. Administrative
Policies
 Administrative trade policies are bureaucratic rules that
are designed to make it difficult for imports to enter a
country. These polices hurt consumers by denying access
to possibly superior foreign products
 Dumping is selling goods in a foreign market below their
cost of production, or selling goods in a foreign market at
below their “fair” market value. It can be a way for firms
to unload excess production in foreign markets.
 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 prices and earning substantial
profits.
7. Antidumping
polices
Antidumping polices are designed to
punish foreign firms that engage in
dumping. The goal is to protect domestic
producers from “unfair” foreign
competition. U.S. firms that believe a
foreign firm is dumping can file a
complaint with the government. If the
complaint has merit, antidumping
duties, also known as countervailing
duties may be imposed
Why do governments
intervene in trade?
 There are two types of arguments :
1. Political arguments are concerned with protecting
the interests of certain groups within a nation
(normally producers), often at the expense of other
groups (normally consumers)
 Political arguments for government intervention include
 Protecting jobs
 Protecting industries deemed important for national
security
 Retaliating to unfair foreign competition
 Protecting consumers from “dangerous” products
 Furthering the goals of foreign policyProtecting the
human rights of individuals in exporting countries
Continue….
2. Economic arguments are typically concerned with boosting the overall
wealth of a nation (to the benefit of all, both producers and consumers)

 Economic arguments for government intervention in international trade


include
 The infant industry argument: suggests that an industry should be
protected until it can develop and be viable and competitive
internationally. This has been accepted as a justification for temporary
trade restrictions under the WTO

 The infant industry argument suggests that an industry should be


protected until it can develop and be viable and competitive
internationally. This has been accepted as a justification for temporary
trade restrictions under the WTO

 However, this argument has been criticized because


 It is useless unless it makes the industry more efficient
 If a country has the potential to develop a viable competitive position,
its firms should be capable of raising necessary funds

 Strategic trade policy


 Strategic trade policy suggests that in cases where there may be
important first mover advantages, governments can help firms from
New Trade Theory 01
Countries specialize in the production and
export of particular products not because
of underlying differences in factor
endowments, but because in certain
industries the world market can support
only a limited number of firms.

Ex: Commercial Aircraft business in USA.


Trade Theory & Government
Policy
Sometime government involve in
promoting exports & limiting imports
The Product Life Cycle
Theory
Raymond Vernon – Product Life Cycle – 1960

The demand for most new products tends to be based


on non-price factors

Firms can exchange relatively high prices for new


products, which leads them to low cost production sites
in other countries

In matures market, product become more standardized


and price become the main competitive weapon

Country with low labor cost can export to the origin of


the product’s country

Global production switches from USA to other advanced


countries to developing countries
Example
Photocopiers – Xerox – Developed in 1960 in USA

Sold initially to US users

Export from USA to Japan, Western Europe & other


developed countries

Xerox setup Production/Joint venture in Japan & Great Britain

Xerox patents of photocopier expired

Other foreign company enter the market

Export from USA decline

US user began to buy from low cost foreign countries

Ultimately, USA, Japan, Great Britain stop producing and


start importing
New Trade Theory 02
The ability of firms to attain economies of
scale might have important implication for
international trade

Economic of Scale:
Unit cost reductions associated with a large
scale of output
Sources:
Spend fixed costs over a large volume
Utilize specialized employees
Equipment that are more productive
Continue….
Increasing Product Variety & Reducing
Cost
Because of trade, each nation can increase
the variety of goods available to it’s
consumers & lower the costs of those goods

First Mover Advantages


The economic & strategic advantages that
occurs to early entrants into an industry
First mover advantage based on scale of
economics

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