Political Economy Of International Trade 5-2 Case: Agricultural subsidies and development  Rich nations spend more than $300 billion a year to subsidize their farmers  Subsidies create surplus production  Surplus production leads to dumping and depressed prices  UN estimates producers in developing nations lose $50 billion export revenue because of depressed prices 5-3 Agricultural subsidies and development  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) 5-4 Instruments of trade policy  Tariffs - oldest form of trade policy  Specific  Ad valorem  Good for government  Protects domestic producers  Reduces efficiency  Bad for consumers  Increases cost of goods 5-5 Instruments of trade policy-subsidies  Government payment to a domestic producer  Cash grants  Low-interest loans  Tax breaks  Government equity participation in the company  Subsidy revenues are generated from taxes  Subsidies encourage over-production, inefficiency and reduced trade 5-6 Instruments of trade policy - Quota  Import quota  Restriction on the quantity of some good imported into a country  Voluntary export restraint (VER)  Quota on trade imposed by exporting country, typically at the request of the importing country 5-7 Instruments of trade policy -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  Encourages strategic action by firms in order to circumvent quota 5-8 Instruments of trade policy- local content  Requires some specific fraction of a good to be produced domestically  Percent of component parts  Percent of the value of the good  Initially used by developing countries to help shift from assembly to production of goods.  Developed countries (US) beginning to implement.  For component parts manufacturer, LC Regulations acts the same as an import quota  Benefits producers, not consumers 5-9 Instruments of trade policy-administrative policies  Bureaucratic rules designed to make it difficult for imports to enter a country.  Japanese ‘masters’ in imposing rules. 5- 10 Instruments of trade policy-anti dumping policies  Defined as  Selling goods in a foreign market below production costs  Selling goods in a foreign market below fair market value  Result of  Unloading excess production.  Predatory behavior  Remedy: seek imposition of tariffs [...]... nonagricultural subsidies Advanced nations are the strongest defenders of this system Combination of high tariffs and subsides on agricultural product    Raises price to the consumer Reduces volume of agricultural trade Encourages overproduction of subsidized products 29 Protection of intellectual property  Trade related Aspects of Intellectual property (TRIPS)     WTO members allowed to grant... comprehensive trade agreement in history Formation of WTO had an impact on  Agriculture subsidies (stumbling block: US/EU)  Applied GATT rules to services and intellectual property (TRIPS)  Strengthened GATT monitoring and enforcement 20 The WTO      145 members in 2003 Represents 90% of world trade 9 of 10 disputes satisfactorily settled Tariff reduction from 40% to 5% Trade volume of manufactured... Development of the world trading system   Used ‘Rounds of talks’ to gradually reduce trade barriers Uruguay Round GATT 1986-93   Mutual tariff reductions negotiated Dispute resolution only if complaints were received 17 Disturbing trends in the world trading system  Pressure for greater protectionism due to    Increase in the power of Japan’s economic machine and closed Japanese markets US trade. .. open their market to fair competition Financial Services (1997)   95% of financial services market 102 countries will open, their markets to varying degrees 24 WTO in Seattle   Millennium round was aimed at further reduction of trade barriers in agriculture and services WTO meeting disrupted by      Human rights groups Trade unions Environmentalists Anti globalization groups No agreement was... Responsibility for trade arbitration:   Reports adopted unless specifically rejected After appeal, failure to comply can result in compensation to injured country or trade sanctions 22 WTO at work    280 disputes brought to WTO between 1995 and 2003 196 handled by GATT during its 50 year history US is biggest WTO user 23 The WTO -achievements  Telecommunications (1997)    68 countries (90%) of world... countries  Through use of VER 18 GATT criticisms     Economic theories don’t fit the ‘real world’ model US global preeminence has declined Shift from cutting tariffs to eliminating nontariff barriers angered countries ‘National Treatment’ or ‘Most Favored Nation’ status results in inequalities 19 The World Trade Organization    The WTO was created during the Uruguay Round of GATT to police and... Antidumping actions  Four sectors account for 70 percent of all antidumping actions reported to WTO      Metal industries Chemicals Plastics Machinery and electrical equipment Actions often initiated by politicians in the various countries to please strong lobbying groups in exchange for votes 28 Protectionism in agriculture  Recent focus of WTO on agricultural subsides    These are 3 to 5 times... Strategic trade policy   Government should use subsidies to protect promising firms in newly emerging industries with substantial scale economies Governments benefit if they support domestic firms to overcome barriers to entry created by existing foreign firms 15 Development of the world trading system  GATT -multilateral agreement established under US leadership1948   Objective is to liberalize trade. ..11 Political arguments for intervention  Protecting jobs and industries   National security   Common Agricultural Policy (Europe) and VER Defense industries - semiconductors Retaliation  Punitive sanctions 12 Political arguments for intervention  Protecting consumers    Genetically engineered seeds... (TRIPS)     WTO members allowed to grant and enforce patents and copyrights This encourages innovation Reduces piracy rates in drugs, software music Expected to boost global economic rates and social and economic welfare around the world 30 Managerial implications    Trade barriers act as a constraint on firm strategy May be useful to establish more production activities in the protected country Business . Political Economy Of International Trade 5-2 Case: Agricultural subsidies and development  Rich nations spend more. farmers  Consequences  Surplus production  Depressed world prices (a result of surplus) 5-4 Instruments of trade policy  Tariffs - oldest form of trade policy  Specific  Ad valorem  Good for government  Protects. reduced trade 5-6 Instruments of trade policy - Quota  Import quota  Restriction on the quantity of some good imported into a country  Voluntary export restraint (VER)  Quota on trade imposed