International Business_3_ by hcj


									 Formulation of National Trade Policies
Rationales for Trade Intervention:
Politicians, economists, and business
  people have been arguing for centuries
  over government policy toward
  international trade.
Two principle issues have shaped the
  debate on appropriate trade policies:
(i). Whether a national government should
  intervene to protect the country’s 1
 Formulation of National Trade Policies
domestic firms by taxing foreign goods
  entering the domestic market or other
  barriers against imports.
(ii). Whether a national government should
  directly help the country’s domestic
  firms increase foreign sales through
  exports subsidies, government-to-govern
  ment negotiations, and guaranteed loan
  programs.                           2
 Formulation of National Trade Policies
Two issues are subject to analysis:
         i. Free trade
         ii. Fair trade
Free trade implies that the national govt
 exerts minimal influence on exporting
 and importing decision of private firms.
Fair trade sometimes called managed trade
 suggests that the national govt should
 actively intervene to ensure exports of
 Formulation of National Trade Policies
domestic firms receive an equitable share
 of foreign markets and that imports are
 controlled to minimize losses of
 domestic jobs and market share in
 specific industries.
Some participants argue that the govt
 should ensure level playing field on
 which foreign and domestic firms can
 compete on equal terms.              4
 Formulation of National Trade Policies
A. Industry Level Arguments: Voluntary
 exchange makes both parties to the
 transaction better off and allocates goods
 to their highest valued use.
Welfare of a country and its citizens is best
 promoted by allowing self-interested
 individuals, and regardless of where they
 reside, to exchange goods, services and
 assets as they see fit.                 5
 Formulation of National Trade Policies
Many businesspeople, politicians, and
  policy makers believe that under certain
  circumstances, deviations from free trade
  are appropriate.
i. The national defense arguments: This
  arguments holds that a country must be
  self-sufficient in critical raw materials,
  machinery, and technology or else be
  vulnerable to foreign threats.        6
 Formulation of National Trade Policies
National defense argument appeal to the
  general public, which is concerned that
  its country will be pushed around by
  other countries that control critical
ii. Infant industry arguments: Newly
  independent country’s infant manufactur-
  ing sector posses a competitive
  advantage that would ultimately allow it
 Formulation of National Trade Policies
to thrive in international markets.
  However, young nation’s manufacturers
  would not survive their infancy and
  adolescence because of fierce competi
  tion from more mature firms.
iii. Maintenance of existing jobs: Well-
  established firms and their workers,
  particularly in high-wage countries, are
  often threatened by imports from low-
 Formulation of National Trade Policies
wage countries. To maintain existing
  employment level, firms and workers
  often petition their govt for relief from
  foreign competition.
iv. Strategic trade theory: This theory
  considers those industries capable of
  supporting only a few firms worldwide,
  perhaps because of high product devel
  opment costs, or strong experience curve.
 Formulation of National Trade Policies
A firm can earn monopoly profits if it can
 succeed in becoming one of the few
 firms in such a highly concentrated
This theory suggests that a national
 government can make its country better
 off if it adopts trade policies that improve
 the competitiveness of its domestic firms
 in such oligopolistic industries.      10
 Formulation of National Trade Policies
B. National Trade Policies: A national
   government also may develop trade
   policies that begin by talking a broader
   perspective on the needs of the economy
   and society as a whole.
Government adopts industry-by-industry
   policies to promote the country’s overall
   economic agenda.
i. Economic development program: An     11
 Formulation of National Trade Policies
important policy goal of many govts
  particularly developing countries is
  economic development.
International trade plays major role in
  economic development of a country.
In an export promotion strategy, a country
  encourages firms to compete in foreign
  markets by harnessing some advantage
  the country possesses, eg. low labor cost.
 Formulation of National Trade Policies
In an import-substitution strategy govt
  encourages the growth of domestic
  manufacturing industries by erecting
  high barriers to imported goods.
ii. Industrial policy: National government
  identifies key domestic industries critical
  to the country’s future economic growth
  and them formulate programs that
  promote their competitiveness.         13
 Formulation of National Trade Policies
iii. Public choice analysis: The special-
  interest groups are willing to work harder
  for the passage of laws favorable to their
  interests that the general public is willing
  to work for the defeat of laws unfavor
  able to its interest.
This intervention helps some special
  interest groups and hurt citizens overall,
  the policies may benefit small groups. 14
 Formulation of National Trade Policies
Barriers to International Trade:
The government intervention can be
   divided into two categories:
           i. Tariffs
           ii. Non-tariffs
i. Tariff is a tax placed on a good involved
   in international trade. Some tariffs are
   levied on goods either as they leave the
   country (an export tariff) or as they pass
 Formulation of National Trade Policies
through one country bound for another (a
   transit tariff). Most, however, are
   collected on imported goods (as import
Three forms of import tariffs exists:
1. Ad valorem tariff: This tariff is assessed
   as a percentage of the market value of
   the imported good. Eg. 2.8%
2. Specific tariff: This tariff is assessed as
 Formulation of National Trade Policies
a specific dollar amount per unit of weight
   or other standard measures. Eg. 6.8 /kg
3. Compound tariff: It has both an ad
   valorem component and a specific
   component. Eg. 8.2% ad valorem tariff
   and 12.7 per kg specific tariff.
Most countries have adopted a detailed
   classification scheme for imported good
   called harmonized tariff schedule: HTC
 Formulation of National Trade Policies
Tariffs historically have been imposed for
    two reasons:
i. Tariffs raise revenue for the national
ii. A tariff acts as a trade barrier. Because
    tariffs raise the prices paid by domestic
    consumers for foreign goods, they
    increase the demand for domestically
    produced substitute goods.           18
 Formulation of National Trade Policies

Price of                                      S

BD made



                              Q    Q1
               Quantity of Bangladesh made products        19
 Formulation of National Trade Policies
For example, if govt impose tariff on
 imported goods, foreign producers will
 rise their foreign product’s price at the
 domestic markets.
This will increase the demand for domestic
 made substitutes, as a result domestic
 made product’s demand will shift D to
 D1resulting domestic products being sold
 at higher prices.                    20
 Formulation of National Trade Policies
ii. Non-tariff barriers are government
  regulations, policy or procedures other
  than a tariff that has the effect of
  impeding international trade.
Quotas: A quota is a numerical limit on
  the quantity of a good that may be
  imported into a country during some time
  period, such as a year. A tariff rate quota
  imposed a low tariff rate on a        21
 Formulation of National Trade Policies
Limited amount of imports of a specific
 good into the country, but then subject all
 imports of good above that threshold to a
 prohibitively high tariff.
Numerical Export Control: A country also
 may impose quantitative barriers to trade
 in the form of numerical limits on the
 amount of goods it will export.
A voluntary export restraint (VER) is a 22
 Formulation of National Trade Policies
promise by a country to limit its exports of
  a good to another country to a pre-
  specified amount of percentage of the
  affected market.
An embargo may also be adopted to
  punish the country’s political enemies. It
  is an absolute ban on the exporting (and/
  or importing) of goods to a particular
  destination.                          23
 Formulation of National Trade Policies
Other Non-tariff Barriers: Other non-tariff
  barriers include the following:
l Product and testing standards: Require
  ment that foreign goods meet a country’s
  domestic product standards or testing
  before they can be offered fro sale in that
l Restricted access to distribution network
  Retail distribution can be provided only
 Formulation of National Trade Policies
by local retailers or local individuals.
l Public sector procurement: Public sector
  procurement policies give preferential
  treatment to domestic firms.
l Local purchase requirement: Host govt
  may hinder foreign firms from exporting
  to or operating in their countries by
  requiring them to purchase goods or
  services from local suppliers.      25
 Formulation of National Trade Policies
l Regulatory   control: Govt can impose
  control by conducing health and safety
  inspections, enforcing environmental
  regulations, and requiring license.
l Currency and investment control: Expor
  ters of goods allowed favorable rates and
  importers face unfavorable rate. Control
  of investment and ownership in utility
  and defense or financial sectors.    26
 Formulation of National Trade Policies
Promotion of International Trade:
Government policies to promote internati-
 onal business, including subsidies, estab-
 lishment of foreign trade zones, and
 export financing programs.
These programs are designed to create jobs
 in the export sector or to attract
 investment to economically depressed
 areas of the country.                 27
 Formulation of National Trade Policies
1. Subsidies: Countries often offer a
  variety of subsidies to firm operating
  within their borders in order to increase
  economic activity and job creation.
Subsidies are designed to stimulate exports
  or promote investment in the country.
Exports are generally stimulated by govt
  actions that reduce the firm’s cost of
  doing business.                      28
 Formulation of National Trade Policies
Exempts imported inputs that are used to
 produce goods used to produce goods for
 export from taxes and tariffs.
Domestically produced goods used to
 manufacture goods for exports may
 similarly be exempted from taxation.
Exemption of export earnings from income
 taxes and providing economic develop
 ment incentives.                   29
 Formulation of National Trade Policies
2. Foreign Trade Zones: A Foreign Trade
  Zone (FTZ) is a geographical area in
  which imported or exported goods
  receive preferential tariff treatment.
FTZs are used by governments worldwide
  to spur regional economic development.
Through utilization of an FTZ a firm
  typically reduce, delay, or sometimes
  totally eliminate customs duties. 30
 Formulation of National Trade Policies
A firm can import a component into an
  FTZ, process it further, and then export
  the processed goods abroad and avoid
  paying customs duties on the value of
  imported component.
3. Export Financing Programs: For
  many big-ticket items such as aircraft,
  supercomputers, and large construction
  projects, success and failure depends on
 Formulation of National Trade Policies
a firm’s producing high-quality product,
 providing reliable repair service after the
 sale, and offering financing packages.
Because of the importance of the financing
 package, most major trading countries
 have crated government-owned agencies
 to assist their domestic trading firms in
 arranging financing of export sales, both
 large or small.                        32

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