Trade Restrictions: Tariffs, Types of Tariff, Non-

tariff barriers

 Identify the policy instruments used by governments to

influence international trade flows.
 Understand why governments sometimes intervene in
international trade.
 Explain the rationale behind a country’s choice of
managing trade.
 Summarize and explain the arguments against strategic
trade policy.
 Describe the development of the world trading system and
the current trade issue.
 Explain the implications for managers of developments in
the world trading system.

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 Introduction

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.
• Nations nominally committed to free trade but intervene to
protect interests of politically important groups.
• Modern international trading system is based on General
Agreement on Tariffs and Trade (GATT) and the World
Trade Organization (WTO).

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 Instruments of Trade Policy 1

Tariffs
• Taxes levied on imports.
• The principal objective of most tariffs is to protect domestic
producers and employees against foreign competition.
• Specific tariffs levied as a fixed charge for each unit of imported good.
• Ad valorem tariffs levied as a proportion of the value of an imported
good.
• Impact: Why do governments impose tariffs?
• Increase government revenues.

• Force consumers to pay more for certain imports.

• Are pro-producer and anti-consumer.

• Reduce the overall efficiency of the world economy.

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 Tariffs

A tariff is a tax levied on imports that effectively raises the

cost of imported products relative to domestic products

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 Instruments of Trade Policy 2

Subsidies
• Government payment to a domestic producer.
1. Cash grants.
2. Low-interest loans.
3. Tax breaks.
4. Government equity participation.

• Help domestic producers compete against foreign imports

and gain export markets.
• Domestic producers gain while consumers typically absorb
the costs.

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 Instruments of Trade Policy 3

Import Quotas and Voluntary Export Restraints

• Import quotas are direct restrictions on quantity of some
good that may be imported.
• Issuing import licenses of a group of individuals or firms.

• Tariff rate quotas provide a lower tariff rate to imports

within the quota than those over the quota.
• Voluntary export restraint (VER) is a quota on trade
imposed by the exporting country.
• Brazil imposed on Vehicle imports from Mexico.
• Quota rent refers to the extra profit producers make when
supply is artificially limited by an import quota.

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 Instruments of Trade Policy 4

Export Tariffs and Bans

• Export tariff is a tax placed on the export of a good.
• Goal is to discriminate against exporting in order to ensure that there
is sufficient supply of a good within a country.

• Export ban is a policy that partially or entirely restricts

the export of a good.
• Example: 1975 ban on U.S. crude oil exports.

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 Instruments of Trade Policy 5

Local Content Requirements

• Some fraction of a good must be produced locally.
• Expressed in either physical or value terms.
• Protects domestic producers.
• Consumers face higher prices.

Administrative Policies
• Bureaucratic rules designed to make it difficult for imports
to enter a country.
• Hurt consumers by limiting choice.

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 Instruments of Trade Policy 6

Antidumping Policies
• Dumping occurs when companies sell goods in a
foreign market at below their costs of production or
below their “fair” market value.
• A way to unload excess production.

• Antidumping policies punish foreign firms that engage in

dumping and thereby protect domestic producers from
unfair foreign competition.
• Also known as countervailing duties.

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 Current Practice of “Managed” Trade

Socioeconomic Rationale Geopolitical Rationale

Countertrade National security
Export cartels Protection of critical (strategic)
Protection of infant industries industries
Questionable labor practices Embargoes
Environmental considerations
Health and safety

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 The Case for Government Intervention 1

Political Arguments for Intervention

• Protecting Jobs and Industries.
• Most common political reason for government intervention.
• Critics say claims of unfair competition are overstated for political
reasons.

• Protecting National Security.

• Certain industries, like defense-related ones, must be protected.

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 https://www.youtube.com/watch?v=Kk_-Jule9Ew
https://www.scmp.com/video/business/2178910/wha
t-are-non-tariff-barriers

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 The Case for Government Intervention 2

Political Arguments for Intervention continued

• Retaliating.
• Government should use threat of intervention as bargaining tool to
open foreign markets.
• May liberalize trade and result in economic gains.
• Risky strategy.

• Protecting Consumers.
• Protect consumers from unsafe products.
• Indirect effect is limit or ban of imports.

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 The Case for Government Intervention 3

Political Arguments for Intervention continued

• Furthering Foreign Policy Objectives.

• Government may grant preferential trade terms to a country where it
wants to build strong relations.
• Trade policy can be used to punish “rogue states.”

• Protecting Human Rights.

• Government trade policy used to improve human rights policies of
trading partners.
• Example: apartheid.

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 The Case for Government Intervention 4

Economic Arguments for Intervention

• The Infant Industry Argument.
• Governments should temporarily support new industries until they
have grown strong enough to meet international competition.
• Support comes through tariffs, import quotas, subsidies.
• Two criticisms:
1. Protection of manufacturing from foreign competition does no good unless the
protection helps make the industry efficient.

2. Assumes firms are unable to make efficient long-term investments by borrowing

money from the domestic or international capital market.

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 The Case for Government Intervention 5

Economic Arguments for Intervention continued

• Strategic Trade Policy.

• Government can help raise national income when a domestic firm
gains first-mover advantages.
• Might pay for a government to intervene in an industry by helping
domestic firms overcome the barriers to entry created by foreign
firms that have already reaped first-mover advantages.
• Both arguments support government intervention in international
trade.

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 The Revised Case for Free Trade 1

Retaliation and Trade War

• Krugman – strategic trade policies aimed at establishing
domestic firms in a dominant position in a global industry
boost national income at the expense of other countries.
• These policies will probably provoke retaliation.
• Help establish antidumping policies and rules that minimize trade-
distorting subsidies.

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 The Revised Case for Free Trade 2

Domestic Policies
• Governments don’t always act in the national interest.
• Interest groups may influence policy.
• Krugman concludes that strategic trade policy is almost
certain to be captured by special-interest groups which will
distort it to their own ends.

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 Development of the World Trading System 1

Strong economic arguments for unrestricted free

trade.
• Governments unwilling to unilaterally lower trade barriers
for fear others might not follow suit.
• General Agreement on Tariffs and Trade (GATT).
• World Trade Organization (WTO).

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 Development of the World Trading System 2

From Smith to the Great Depression

• Case for free trade dates to late 18th century work of Adam
Smith and David Ricardo.
• First embraced by Great Britain in 1846.
• Corn Laws.
• Major trading partners did not reciprocate in free trade.

• Smoot-Hawley Act created a wall of tariff barriers against

imports into the United States.

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 Development of the World Trading System 3

1947 to 1979: GATT, Trade Liberalization, and

Economic Growth
• Following the Great Depression, U.S. embraced free
trade.
• GATT was designed to liberalize trade by eliminating
tariffs, subsidies, import quotas, etc.
• Tariff reduction was spread over eight rounds with great success.

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 Development of the World Trading System 4

1980 to 1993: Protectionist Trends

• Three reasons for increased protectionism:
• Japan’s perceived protectionist (neo-mercantilist) policies created
intense political pressures in other countries.
• Persistent trade deficits in the U.S.
• Use of non-tariff barriers increased (VERs).

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 Development of the World Trading System 5

The Uruguay Round and the World Trade

Organization
• Uruguay Round sought to:
• Extend GATT rules to cover trade in services.
• Develop rules on intellectual property.
• Reduce agricultural subsidies.

• Strengthen GATT’s monitoring and enforcement.

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 Development of the World Trading System 6

The Uruguay Round and the World Trade

Organization continued

• The World Trade Organization:

• Encompasses GATT and two other groups:
• General Agreement on Trade in Services (GATS).

• Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

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 Development of the World Trading System 7

WTO: Experience to Date

• By 2019, 164 members that account for 98 percent of
world trade.
• Strong early start, but since late 1990s unable to get
agreements to further reduce barriers.
• Limited protectionism returned following global financial
crisis of 2008 to 2009.
• The Brexit vote and election of Donald Trump also suggest
a move toward greater protectionism.

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 Development of the World Trading System 8

WTO: Experience to Date continued

• WTO as Global Police:

• Enforcement mechanisms appear to be having a positive effect.
• Countries involved have mostly adopted WTO’s recommendations.

• Expanded Trade Agreements:

• Global telecommunication and financial services industries.
• Foreign direct investment.

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 Development of the World Trading System 9

The Future of the WTO: Unresolved Issues and the

Doha Round
• The current agenda of the WTO focuses on:
1. The rise of anti-dumping policies.
2. The high level of protectionism in agriculture.
3. The lack of strong protection for intellectual property rights in many
nations.
4. Continued high tariffs on nonagricultural goods and services in
many nations.

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 Development of the World Trading System 10

The Future of the WTO: Unresolved Issues and the

Doha Round continued

• Antidumping Actions:
• Vague definition of what constitutes “dumping” is a loophole many
countries are exploiting.
• Concentrated in certain sectors: metal industries, chemicals, plastics,
and machinery and electrical equipment.

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 Development of the World Trading System 11

The Future of the WTO: Unresolved Issues and the

Doha Round continued

• Protectionism in Agriculture:
• Tariff rates generally much higher on agricultural products.
• Reflects desire to protect domestic agriculture and traditional farming
communities.
• Net effect is to raise consumer prices.

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 Development of the World Trading System 12

The Future of the WTO: Unresolved Issues and the

Doha Round continued

• Protection of Intellectual Property:

• TRIPS agreement obliges WTO members to grant and enforce
patents lasting at least 20 years and copyrights lasting 50 years.
• Inadequate protections would reduce the incentive for innovation.

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 Development of the World Trading System 13

The Future of the WTO: Unresolved Issues and the

Doha Round continued

• Market Access for Nonagricultural Goods and Services:

• Most developed nations have average tariff rates of under 4 percent
of value.
• Certain imports still have high tariffs, which limits market access and
economic growth.
• Tariffs higher on services than industrial goods.
• WTO goal is to reduce tariff rates to zero.

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 Development of the World Trading System 14

The Future of the WTO: Unresolved Issues and the

Doha Round continued

• A New Round of Talks: Doha.

• Have been ongoing since 2001, currently stalled.
• Agenda includes:
• Cut tariffs on industrial goods and services.

• Phase out subsidies to agricultural producers.

• Reduce barriers to cross-border investment.

• Limit use of antidumping laws.

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 Development of the World Trading System 15

Multilateral and Bilateral Trade Agreements

• Reciprocal trade agreements between two or more
partners.
• Created in response to failed Doha Round progress.
• Designed to capture gain from trade beyond WTO treaties.

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 Development of the World Trading System 16

The World Trading System Under Threat

• Two events challenged belief or global consensus to
embrace free trade and lower barriers to cross-border flow
of goods and services.
1. British withdrawal from the European Union.
2. Election of Donald J. Trump.

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 Focus on Managerial Implications 1

Trade Barriers, Firm Strategy, and Policy Implications

• Why should an international manager care about political economy of
free trade?

• Trade Barriers and Firm Strategy:

• Trade barriers raise the cost of exports which can create a competitive
disadvantage.

• Quotas may limit a firm’s ability to serve a country from locations outside the
country.

• Local content requirements might raise costs.

• Firm might want to locate production activities in another country to reduce

threat of future trade barriers.

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 Focus on Managerial Implications 2

Trade Barriers, Firm Strategy, and Policy

Implications continued

• Why should an international manager care about political

economy of free trade? continued
• Policy Implications:
• Three drawbacks to government intervention:
• Tends to protect the inefficient rather than help firms become efficient global
competitors.

• Might invite retaliation and trigger a trade war.

• Unlikely to be well executed with the opportunity for it to be captured by special-

interest groups.

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