The Political Economy of International Trade

The Political Economy of International plow Chapter Outline possibleness moorage Why Are Global Food Prices arise? adit INSTRUMENTS OF workmanship POLICY Tariffs Subsides Country focalisation Subsidized stubble drudgery in japan Import Quotas and Voluntary Export Restraints Local heart Requirements administrative Polices Anti cast out(a) Policies solicitude Focus U. S. Magnesium Seeks Protection THE facial expression FOR presidency INTERVENTION Political Arguments for Intervention Country Focus championship in Horm integrity-Treated Beef economical Arguments for Intervention THE REVISED CASE FOR FREE TRADERetaliation and good take aim warf ar Domestic Politics maturation OF THE terra degeneratea TRADING SYSTEM From Smith to the gravid Depression 1947-1979 GATT, foxiness Liberalization, and Economic crop 1980-1993 Protectionist Trends The Uruguay Round and the solid g rundle employment Organization WTO learn to designation The early of the WTO Unresolved I ssues and the Doha Round Country Focus Estimating the Gains from Trade for America FOCUS ON MANAGERIAL IMPLICATIONS Trade Barriers and blotto strategy constitution Implications SUMMARY CRITICAL THINKING AND DISCUSSION interrogativeS CLOSING CASE country SubsidiesLearning Objectives 1. Describe the insurance instruments mathematical functiond by g whole overnments to puzzle give a flair designetary workmanship flows. 2. Understand why governments roughtimes interfere in global take. 3. Articu novel the arguments a summationst strategic calling constitution. 4. Describe the rise upment of the innovation traffic system and the watercourse conduct issues. 5. Ex kni deucerk the implications for managers of waxments in the merciful race trading system. Chapter Summary This chapter begins with a parole of the six main instruments of sell policy, including obligations, subsidies, second quotas, voluntary championship estraints, local mental ability requirem ents, and administrative policies. This bust is followed by a discussion of the merits of government pr flattative into international dole out. The indite provides a balanced view of this challenging issue. The second half of the chapter foc handlings on the development of the global trading system. A historical context is provided, on with a view of the global trading system as it exists today. The reason acquaints the reader with the General system on Trade and Tariffs (GATT) and the World Trade Organization. Opening typeface Why Are Global Food Prices Soaring?Summary The liberaling case examines why global nutrient outlays ar rising signifi hatfultly. For a great deal(prenominal) than two decades, im bearments in agricultural productivity and take aim contributed to lower food for thought prices, but in 2007, the price of pale yellow was double its price of just a few months earlier, and the price of feed had risen some(prenominal) 60 percent. Two explana tions for the phenomenon be cast up contract, and the effects of tariffs and subsidies for bio-fuels. banter of the case undersurface revolve almost the following questions re wait 1 Food prices bear risen dramatically since 2007.Reflect on the reasons for the price increase, and discuss the implications of higher(prenominal) prices for consumers in developed and developing countries. solvent 1 For decades, consumers waste enjoyed the take ins of increased productivity and output in the global food pains. In 2007, however, everything changed. The price of straw reached its highest point ever, and the price of lemon yellow rose 60 percent over its 2006 price. Two accompanimentors contributed to this situation. The first was the increased demand for food from China and India. The second factor involved tariffs and subsidies for bio-fuels.Farmers in the European Union and in the joined States ar underwayly the recipients of subsidies for the doing of crops partd in bio-fuels. As a firmness, land that might be drug abused for growing food is being converted to bio-fuel crops, pushing up prices on food. While some experts believe that sugar cane whitethorn be a better product for bio-fuel occupation than corn, tariffs on cope sugar cane effectively argon keeping the crop out of the foodstuff. While all consumers be feeling the pain of higher food prices, the situation is especially dire for consumers in poor countries where calorie divine guidance could be reduced by as much as -8 percent by 2020. incredulity 2 How has demand for bio-fuels affected the price of food? What argon the implications of this trend? Reflect on the role of government in pushing prices up. What role do tariffs and subsidies die hard in the situation? In your opinion, should the governments of the unify States and the European Union bear any responsibility for convey food prices back down? ANSWER 2 In an parturiency to slow global warming, two the European Union and the join States bring in adopted policies designed to increase the production of ethanol and bio-diesel.The policies involve providing subsidies to farmers. The exonerate effect of the subsidies is to encourage farmers to produce less food, and much crops that can be used in bio-fuel production. The situation is exacerbated by high tariffs on substitute products that can be used for bio-fuel production particularly sugar cane. intimately students get out blob that the combined effect of the subsidies and tariffs are creating a troublesome situation for consumers, while at the same time fostering manufacturers. whatever students whitethorn none the irony of the situation.Consumers, hit by higher prices at the pump are putting much pressure on companies to develop cheaper and more environmentally friendly sources of energy, but in doing so are actually contributing to higher prices at the grocery store. Some students whitethorn wonder whether it makes more se nse to see non-food related to sources of energy. Honda Motors is presently developing a railway car that runs on instruction incline To expand this discussion, consider http//www. wrinkleweek. com/bwdaily/dnflash/ pith/whitethorn2008/db20080513_317940. htm? chan= expect, http//www. usinessweek. com/globalbiz/content/ may2008/gb20080520_439607. htm? chan= attempt, and http//www. businessweek. com/ cartridge holder/content/08_19/b4083026413508. htm? chan=search. Video Note There are two iGlobes cipherly related to this case. The first is Supply, Price of Food Increase Hardship for Worlds Poor, and the second is Agricultural Problems Lead to Farmer Suicides in India. Chapter Outline with get to Notes, Video Notes, and Teaching Tips INTRODUCTION A) This chapter explores the political reality of international softwood. supererogatory administer refers to a situation where a government does not prove to restrict what its citizens can buy from another untaught or what they can tell on to another republic. While galore(postnominal) nations are nominally perpetrate to surplus job, they tend to intervene in international tack to protect the interests of politically tradeant groups. B) The major objective of this chapter is to describe how political realities lead shaped, and last out to shape, the international trading system. INSTRUMENTS OF TRADE POLICY A) In this section, the text reviews seven main instruments of trade policy.These are tariffs, subsidies, import quotas, voluntary export masterys, local content requirements, antidumping policies and administrative policies. Tariffs B) A tariff is a revenue levied on imports (or exports) that effectively move ups the comprise of trade (or exported) products relative to national products. special(prenominal) tariffs are levied as a fixed charge for each unit of measurement of a ethical imported, while ad valorem tariffs are levied as a proportion of the value of the imported good. The imp ortant thing to understand round a tariff is who suffers and who gains. The government gains, because the tariff ncreases government revenues. Domestic producers gain, because the tariff affords them some protection against un resembling competitors by increasing the price of imported op pose goods. Consumers lose since they must(prenominal) give way more for certain imports. C) Thus, tariffs are unambiguously pro-producer and anti-consumer, and tariffs reduce the overall efficiency of the cosmos economy. Subsidies D) A bounty is a government payment to a domestic aid producer. By pro be costs, subsidies assistant domestic producers in two ways they divine service producers fight against low-cost impertinent imports and they help producers gain export foodstuffs.However, many another(prenominal) subsidies are not that successful at increasing the international competitiveness of domestic producers. muchover, consumers typically absorb the costs of subsidies. Country Focus Subsidized Wheat Production in Japan Summary This give birth explores the subsidies Japan continues to pay its wheat farmers. Tens of thousands of Japanese farmers continue to grow wheat despite the fact that the wheat grown in northeastward America, Argentina, and Australia is far cheaper and of superior quality. The Japanese farmers stay in business give thanks to the hefty subsidies gainful by the Japanese government.As a result, wheat prices in Japan are considerablely higher than they would be if a let go of securities industryplace were allowed to operate. Suggested handling Questions 1. Who are the winners and who are the losers from Japanese wheat subsidies? give-and-take Points Students go out believably recognize that, as is usually the case with protectionist measures, the subsidies Japan pays its wheat farmers benefit the farmers, but cost the average consumer in the form of higher wheat prices. In fact, in 2004, Japanese consumers covered $700 million in subsidiesThe subsidies besides localize imports of wheat, which negatively affects conflicting wheat farmers. 2. Why does Japan continue to subsidize its wheat farmers when cheaper wheat is readily useable in international market places? Discussion Points Thanks to subsidies, wheat prices in Japan are amidst 80 and 120 percent higher than they are in world markets. In fact, if the subsidies were eliminated, Japanese wheat production would cease entirely. However, at least(prenominal) for now, because politicians count on the votes of the wheat farmers, on that point appears to be no plan to end the subsidies.Teaching Tip To extend this discussion, consider discussing Japans role in the production of rice. For more on this, go to http//www. businessweek. com/globalbiz/content/may2008/gb20080522_132137. htm? chan=search, and http//www. businessweek. com/globalbiz/content/may2008/gb20080522_132137_page_2. htm. Import Quotas and Voluntary Export Restraints E) An import quot a is a direct restriction on the quantity of some good that may be imported into a country. A tariff rate quota is 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.A voluntary export restraint is a quota on trade imposed by the export country, typically at the request of the importing countrys government. F) While import quotas and voluntary export restraints benefit domestic producers by limiting import challenger, they raise the prices of imported goods. The extra profit that producers make when supply is unnaturally limited by an import quota is referred to as a quota rent. Local cognitive content Requirements G) A local content requirement demands that some item split up of a good be produced domestically.As with import quotas, local content requirements benefit domestic producers, but consumer face higher prices. Administrative Policies H) Administrative trade polices are bureaucratic rules that are d esigned to make it difficult for imports to enter a country. The effect of these polices is to hurt consumers by denying access to mayhap superior foreign products. Antidumping Policies I) cast away is variously defined as change goods in a foreign market below their costs of production, or as selling goods in a foreign market at below their fair market value.Dumping is viewed as a regularity by which firms unload excess production in foreign markets. Alternatively, some dumping may be the result of rapacious 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. Once this has been achieved the predatory firm can raise prices and earn substantial profits. J) Antidumping polices ( in addition known as countervailing duties) are policies designed to punish foreign firms that engage in dumping. The eventual(prenominal) objective is to protect domestic produc ers from unfair foreign competition.Management Focus U. S. Magnesium Seeks Protection Summary This feature explores the dumping charged levied by U. S. Magnesium against Chinese and Russian producers. According to U. S. Magnesium, the sole American producer of magnesium, Russian and Chinese producers were selling magnesium noteworthyly below market value in an effort to drive U. S. Magnesium out of business. The club fai direct a complaint with the International Trade Commission (ITC) which finally rule in party favour of U. S. Magnesium. Suggested Discussion Questions 1. What is dumping? Were Chinese and Russian producers wicked of dumping? How did U.S. Magnesium justify its claims against Russian and Chinese producers? Discussion Points Dumping is defined as selling goods in a foreign market below the cost of production, or below fair market value. In 2004, U. S. Magnesium claimed that China and Russia had been dumping magnesium in the united States. The federation noted that in 2002 and 2003, magnesium imports rose, and prices fell. While the ITC control in favor of the American company, some students might question whether the fact that the Chinese could sell their product at low prices might simply reflect the countrys significantly lower wage rates. . What does the ITCs ruling mingy for American consumers of magnesium? In your opinion, was the ruling fair? Discussion Points The ITC ruled in favor of U. S. Magnesium finding that indeed China and Russia had been dumping their product in the United States. Fines ranging from 50 to 140 percent on imports were imposed against China, and 19 to 22 percent on Russian companies. well-nigh students pass on note that while the ITCs decision is a good one for U. S. Magnesium and its employees. for consumers, the ruling means magnesium prices that are significantly higher than those in world markets.Students leave alone plausibly argue that this result is unfair, and should be revi internet sited. Teac hing Tip U. S. Magnesiums web site is available at http//www. usmagnesium. com/. THE CASE FOR GOVERNMENT INTERVENTION A) In general, there are two types of arguments for government intervention, political and economic. Political arguments for intervention are concerned with protect the interests of certain groups within a nation (normally producers), oftentimes at the outlay of other groups (normally consumers).Economic arguments for intervention are typically concerned with pass oning the overall wealth of a nation (to the benefit of all, both producers and consumers). Political Arguments for Intervention B) Political arguments for government intervention cover a range of issues including protecting jobs, protecting industries deemed important for national warrantor, retaliating against unfair foreign competition, protecting consumers from dangerous products, furthering the goals of foreign policy, and protecting the human rights of individuals in exporting countries.Protectin g Jobs and Industries C) The most common political reason for trade restrictions is protecting jobs and industries. Usually this results from political pressures by unions or industries that are threatened by more efficient foreign producers, and have more political lick than the consumers who go away eventually pay the costs. National Security D) Protecting industries because they are important for national security is another argument for trade restrictions. The U. S. overnment protects industries same(p) steel, aerospace, and electronics, on the nucleotide of this argument, and has made special arrangements to protect the semiconductor assiduity. dun Note In the United States, the Bureau of Export Administration enhances the nations security and its economic prosperity by controlling exports for national security, foreign security, foreign policy, and short supply reasons. To learn more, go to http//www. bis. doc. gov/about/index. htm, click on Policies and Regulations and then on Export Administration Regulations. .Retaliation E) establishment intervention in trade can be used as part of a get tough policy to open foreign markets. By taking, or threatening to take, specific actions, other countries may remove trade barriers. But when threatened governments do not back down, tensions can step up and new trade barriers may be enacted. spill Note The trading relationship between China and the United States is an ongoing topic of discussion for many. To expand the discussion on the role of government and retaliatory trade measures, consider http//www. businessweek. om/globalbiz/content/may2008/gb20080528_845850. htm? chan=search Protecting Consumers F) Consumer protection can also be an argument for restricting imports. The Country Focus below suggests that the European Unions concern over beef was, in part, callable to an interest in protecting consumers. Since diametrical countries do have different health and safety standards, what may be accept able in one country may be unacceptable in others. Furthering Foreign Policy Objectives G) On occasion, governments pull up stakes use trade policy to curb their foreign policy objectives.One aspect of this is to consort preferential trade name to countries that a government wants to build strong relations with. Trade policy has also been used several times as an instrument for pressuring sullen rogue states that do not abide by international laws or norms. In late years the United States has imposed trade restrictions against Libya, Iran, Iraq, North Korea, Cuba, and other countries where governments were pursue policies that were not viewed favorably by the U. S. government.A grave problem with using trade as an instrument of foreign policy is that other countries can undermine any unilateral trade sanctions. The U. S. sex act has passed two acts, the Helms-Burton Act and the DAmato Act, in an effort to protect American companies from such actions. Protecting Human Rights H) Concern over human rights in other countries plays an important role in foreign policy. Governments sometimes use trade policy to improve the human rights policies of trading partners. Governments also use trade policies to put pressure on governments to make other changes.Unless a large number of countries choose to take such action, however, it is unlikely to prove successful. Some critics have argued that the opera hat way to change the internal human rights of a country is to engage it in international trade. The decision to grant China most favored nation status was based on this philosophy. Country Focus Trade in Hormone-Treated Beef Summary This feature describes the trade battle between the United States and the European Union over beef from cows that have been given growth hormones.It outlines the basic issues that led to the dispute, and shows how the World Trade Organization has toughened the case. Suggested Discussion Questions 1. Why is the European Union so con cerned about beef from cattle that have been given growth hormones? Discussion Points Some students may argue that the European Unions ban on growth hormones in cattle was little more than a thinly veiled form of protectionism. Australia, unseasoned Zealand, and Canada, which also use the hormones in their cattle persistence, were also affected by the ban.The European Union claimed that it was merely protecting the health of its citizens, however studies showed that the hormones posed no health issues for people. 2. Why did the WTO rule against the European Union? Discussion Points The World Trade Organization ruled against the European Union stating that the European Unions ban on imported hormone treated beef had no scientific exculpation. Even so, the European Union refused to annul the ban, which had strong public support, and in the end, the European Union was assessed punitive tariffs.The European Union held on to its principles though, and as of 2008, continued to maintai n its restrictions on hormone treated beef despite the resulting punitive tariffs. Teaching Tip The WTO maintains a site for students. Go to www. wto. org and click on the students icon to search the site, investigate countries, and even see a list of internships that are available at the WTO. Economic Arguments for Intervention I) Economic arguments for intervention include the sister industry argument and strategic trade policy. The Infant Industry ArgumentJ) The infant industry argument suggests that an industry should be protected until it can develop and be feasible and competitive internationally. Unless an industry is allowed to develop and achieve marginal economies of scale, foreign competitors may undercut prices and prevent a domestic industry from developing. The infant industry argument has been accepted as a justification for temporary trade restrictions under the WTO. K) A problem with the infant industry argument is determining when an industry grows up. Some in dustries that are just plain inefficient and uncompetitive have argued they are inactive infants after 50 years.The other problem is that given the existence of global capital markets, if the country has the potential to develop a viable competitive position its firms should be capable of raising the necessary funds without additional support from the government. strategical Trade Policy L) Strategic trade policy suggests that in cases where there may be important first mover favors, governments can help firms from their countries attain these advantages. Strategic trade policy also suggests that governments can help firms overcome barriers to entry into industries where foreign firms have an initial advantage.THE REVISED CASE FOR FREE TRADE A) While strategic trade policy identifies conditions where restrictions on trade may provide economic benefits, there are two problems that may make restrictions inappropriate retaliation and politics. Retaliation and Trade War B) Krugman ar gues that strategic trade policies aimed at establishing domestic firms in a ascendent position in a global industry are beggar-thy-neighbor policies that boost national income at the expense of other countries. A country that attempts to use such policies get out probably provoke retaliation. Domestic PoliticsC) Governments do not always act in the national interest when they intervene in the economy. Instead special interest groups may influence governments. Thus, a further reason for not embracing strategic trade policy, fit to Krugman, is that such a policy is almost certain to be captured by special interest groups within an economy, who will distort it to their own ends. DEVELOPMENT OF THE GLOBAL TRADING SYSTEM A) umteen governments recognize the value of open-plan freehanded trade, but are hesitant to unilaterally lower their trade barriers in case other countries do not follow suit.Since World War II, and international trading textile has evolved that enables governme nts to negotiate a stripe of rules to govern cross-border trade and lower trade barriers. For the first 50 years, the framework was known as the General Agreement on Tariffs and Trade (GATT). More recently, it has been known as the World Trade Organization (WTO). From Smith to the Great Depression B) Up until the Great Depression of the 1930s, most countries had some mark of protectionism. Great Britain, as a major trading nation, was one of the strongest supporters of free trade.C) Although the world was already in a depression, in 1930 the United States enacted the Smoot-Hawley Act, which created significant import tariffs on foreign goods. As other nations took similar travel and the depression deepened, world trade fell further. 1947-1979 GATT, Trade Liberalization, and Economic Growth D) After WWII, the U. S. and other nations realized the value of freer trade, and established the General Agreement on Tariffs and Trade (GATT). E) The approach of GATT (a multilateral jibment to liberalize trade) was to piecemeal eliminate barriers to trade.Over power point centigrade countries became members of GATT, and worked together to further liberalize trade. Teaching Tip A full review of GATT, containing an actual copy of the agreement, is available at http//www. ciesin. org/TG/PI/TRADE/gatt. html. 1980-1993 Protectionist Trends F) During the 1980s and early nineties the world trading system as managed by GATT came under strain. First, Japans economic strength and huge trade surplus evince what had been more equal trading patterns, and Japans perceived protectionist (neo-mercantilist) policies created impatient political pressures in other countries.Second, persistent trade deficits by the United States, the worlds largest economy, caused significant economic problems for some industries and political problems for the government. Third, many countries found that although limited by GATT from utilizing tariffs, there were many other more subtle forms of int ervention that had the same effects and did not practicedly round GATT (e. g. VERs). The Uruguay Round and the World Trade Organization G) Against the background of rising protectionist pressures, in 1986 GATT members embarked on their eighth round of negotiations to reduce tariffs (called the Uruguay Round).This was the most ambitious round to date. operate and Intellectual home H) One goal was to expand beyond the regulation of manufactured goods and address trade issues related to services and intelligent property, and agriculture. The World Trade Organization Lecture Note To see current issues at the WTO, go to http//www. wto. org/ and click on News. I) When the WTO was established, its creators commitd the WTOs enforcement mechanisms would make it a more effective policeman of the global trade rules than the GATT had been.The WTO encompassed GATT along with two sister organizations, the General Agreement on Trade in Services (GATS) and the Agreement on Trade Related Aspe cts of Intellectual Property Rights (TRIPS). WTO Experience to Date J) At the time of its establishment, the great hope was that the WTO might come forth as an effective advocate and facilitator of future trade deals, particularly in such areas as services. In general, the experience so far has been encouraging. WTO as Global Police K) So far, the WTOs policing and enforcement mechanisms are having a unequivocal effect.In general, countries have adopted WTO recommendations for trade disputes. Expanding Trade Agreements L) In 1997, 68 countries that account for more than 90 percent of world telecommunications revenues pledged to open their markets to foreign competition and to abide by common rules for fair competition in telecommunications. Similarly, 102 countries pledged to open to varying degrees their banking, securities, and insurance sectors to foreign competition. uniform the telecommunications deal, the agreement covers not just cross-border trade, but also foreign direct investment.The WTO in Seattle A Watershed? M) The 1999 meeting of the WTO in Seattle was important not only for what happened between the member countries, but also for what occurred outdoors the building. Inside, members failed to agree on how to work toward the reduction of barriers to cross-border trade in agricultural products and cross-border trade and investment in services. Outside, the WTO became a magnet for various groups protesting free trade. The Future Unresolved Issues and the Doha Round N) Substantial work still remain to be done on the international trade front.Four issues on the current agenda of the WTO are the rise of anti-dumping policies, the high level of protectionism in agriculture, the lack of strong protection for intelligent property rights in many nations, and continued high tariffs on nonagricultural goods and services in many nations. Lecture Note The European Unions trade commissioner is urging nations to do it Doha round negotiations prior to the beginning of a new tribunal in the United States. Further details can be found at http//www. businessweek. com/globalbiz/content/jan2008/gb20080128_519854. htm? chan=search.Anti-Dumping Actions O) There has been a proliferation of antidumping actions in recent years, perhaps because of the earlier vague definition of what constitutes dumping. The WTO is encouraging members to strengthen the regulations organization the imposition of antidumping duties. Protectionism in Agriculture P) The WTO is concerned with the high level of tariffs and subsidies in the agricultural sector of many economies. However, the advanced countries of the world defend the current system because they want to protect their producers from lower-cost producers from developing nations.Protecting Intellectual Property Q) The agreement to protect intellectual property (TRIPS) obliges WTO members to grant and enforce patents permanent at least 20 years and copyrights lasting 50 years. The tooshie for this agr eement was a strong belief among signatory nations that the protection of intellectual property rights is an essential element of the international trading system. Market ingress for Nonagricultural Goods and Services R) The WTO would like to bring down tariff rates on nonagricultural goods and services, and reduce the scope for the selective use of high tariff rates.The hope is that at some point, rates would move to zero. Country Focus Estimating the Gains from Trade for America Summary This feature explores the results of a study by the engraft for International Economics. The study, which estimated the gains to the U. S. economy from free trade, found that the United States GDP was more than 7 percent higher as a result of reductions in trade barriers than it would have been if the barriers remained. The study also estimated that if tariffs were reduced to zero, significant gains would still result. Suggested Discussion Questions 1.What does the Institute for International Econ omics suggest about the benefits of free trade? Discussion Points The Institute for International Economics found that thanks to reductions in trade restrictions, the United States GDP was up. The Institute also estimated that even greater gains in the countrys GDP would occur if protectionism was eliminated all together. Students should recognize that these findings follow the principles of Adam Smith and David Ricardo and suggest that free trade is beneficial. 2. According to the Institute for International Economics study, a move oward free trade would cause disruption in employment. Is it still worth pursuing free trade if it means that some people lose their jobs? Discussion Points This question should prompt a strong debate among students. Some students will probably suggest that the costs in terms of lost advantage and benefits associated with free trade outweigh the benefits that would be gained. opposite students however, will probably argue that since protectionism typic ally benefits only a few at the expense of others, while free trade generates greater economic growth and higher wages, a free trade policy should be followed.Teaching Tip The Web site for Institute for International Economics is available at http//www. iie. com/. A New Round of Talks Doha R) In late 2001, the WTO launched a new round of talks at Doha, Qatar. The agenda includes nifty tariffs on industrial goods and services, phasing out subsidies to agricultural producers, reducing barriers to cross-border investment, and limiting the use of anti-dumping laws. FOCUS ON MANAGERIAL IMPLICATIONS A) What does all of this mean for business?Managers penury to consider how trade barriers impact firm strategy, and what role they can play in promoting free trade or trade barriers. Trade Barriers and Firm Strategy B) Trade barriers are a constraint upon a firms ability to disperse its productive activities. First, trade barriers raise the cost of exporting products to a country. Second, vo luntary export restraints (VERs) may limit a firms ability to serve a country from locations outside that country. Third, to conform to local content requirements, a firm may have to prove more production activities in a given market than it would otherwise. All f the above effects are likely to raise the firms costs above the level that could be achieved in a world without trade barriers. In addition, the threat of antidumping action could limit the ability of a firm to use aggressive pricing as a way to gain market share. Policy Implications C) In general, international firms have an incentive to lobby for free trade, and keep protectionist pressures from causing them to have to change strategies. While there may be short-term benefits to having governmental protection in some situations, in the long run these can backfire and other governments can retaliate.Critical Thinking and Discussion Questions 1. Do you think the U. S. government should consider human rights when granting preferential trading rights to countries? What are the arguments for and against taking such a position? Answer China is frequently cited as a violator of human rights, and can form the basis for a discussion of this question. While the answer to the first question clearly is a matter of personal opinion, in stating their opinions, students should consider the following points.Trade with the U. S. is very important to China, as China views the U. S. as an important market. The U. S. is also an important source of certain products. Thus, the U. S. has some leverage with trade when arduous to influence Chinas human rights policies. For this policy to have much effect, however, other nations important to China must adopt similar policies. other China will simply choose to work with other countries, and U. S. consumers and producers may be more negatively impact than the Chinese.Another concern with binder MFN status to human rights is that denying MFN may make the human rights situ ation worsened rather than better. By engaging in trade, the income levels in China will increase, and with greater wealth the people will be able to demand and receive better treatment. 2. Whose interests should be the paramount concern of government trade policy the interests of producers (businesses and their employees) or those of consumers? Answer The long run interests of consumers should be the special concern of governments.Unfortunately consumers, each of whom may be negatively impacted by only a few dollars, are less cause and effective lobbyists than a few producers that have a great deal at stake. While in some instances it could be argued that domestic consumers will be better off if world-class domestic producers are nurtured and allowed to gain first mover advantages in international markets, it is doubtful that the government will be better than international capital markets at picking winners, and will more likely pick the firms with the greatest political clout .While employees may well lose jobs if there are more efficient foreign competitors, some would argue that this is just the nature of competition, and that the role of government should be to help these employees get jobs where they can be efficiently employed rather than to protect them from reality in inefficient firms. 3. Given the arguments relating to the new trade theory and strategic trade policy, what kind of trade policy should business be pressuring government to adopt?Answer According to the textbook, businesses should urge governments to home run technologies that may be important in the future and use subsidies to support development work aimed at commercializing those technologies. Government should provide export subsidies until the domestic firms have established first mover advantages in the world market. Government support may also be justified if it can help domestic firms overcome the first-mover advantages enjoyed by foreign competitors and emerge as viable com petitors in the world market. In this case, a combination of home market protection and export-promoting subsidies may be called for. . You are an employee of an U. S. firm that produces personal computers in Thailand and then exports them to the U. S. and other countries for sale. The personal computers were originally produced in Thailand to take advantage of relatively low labor costs and a skilled workforce. Other possible locations considered at that time were Malaysia and Hong Kong. The U. S. government decides to impose punitive 100 percent ad valorem tariffs on imports of computers from Thailand to punish the country for administrative trade barriers that restrict U. S. exports to Thailand. How should your firm respond?What does this tell you about the use of targeted trade barriers? Answer As long as the manufacturing requirements havent changed significantly, looking at Malaysia or Hong Kong again for production would appear obvious. By the U. S. government introducing a s pecific ad valorem tariff on Thai computer imports, it would be blowzy to get around these by looking at other locations. thus such targeted trade barriers can often be easily circumvented without having to locate production facilities in an expensive country like the U. S. 5. Reread the Management Focus feature on U.S. Magnesium Seeks Protection. Who gains most from the anti-dumping duties levied by the United States on imports of magnesium from China and Russia? Who are the losers? Are these duties in the best national interests of the United States? Answer Most students will probably recognize that U. S. producers and their employees are the primary beneficiaries of the anti-dumping duties levied by the United States on Chinese and Russian magnesium imports. As a result of the duties, consumers in the United States will pay higher prices for magnesium-based products.Some students may suggest that by terrific the duties, the United States runs the risk of retaliatory measures f rom both China and Russia. Closing Case Agricultural Subsidies Summary The closing case examines the effects of subsidies paid to U. S. like farmers. The United States currently pays about $5 billion to cotton farmers for a crop that is worth just $4 billion. The lower prices resulting from the subsides and the excess production they encourage, have had particularly devastating effects on cotton farmers in poor countries.Some estimates show, for example, that the subsidies and excess production in the United States has cost the African country of Benin more economically than it receives in aid from the United States. Discussion of this case can revolve around the following questions nous 1 Why do you think that the U. S. government pays subsidies to farmers? ANSWER 1 The United States initially began paying subsidies to farmers in the middle of the Great Depression. Many students will probably suggest that the subsidies are still being paid simply because they have been in place f or so long.Other students however, may note the power of agricultural lobbyists and the fact that without the subsidies, U. S. farmers could not compete in world markets. This suggests that the government has some incentive to continue with its current policies. QUESTION 2 What is the impact of farm subsidies on the price of agricultural products in the United States, and on prices elsewhere? ANSWER 2 The subsidies paid to U. S. farmers currently run around $29 billion annually. They encourage farmers to produce more products than are needed, and in doing so depress global prices. Cotton subsidies for example, pushed the price of cotton to just $0. 5 in 2006, about half the 1995 price. For farmers in poor countries, the drop in prices has pushed income levels down over 20 percent. QUESTION 3 Who benefits from U. S. farm subsidies, who are the losers? ANSWER 3 Most students will recognize that the primary beneficiaries of the subsidies are farmers. As a result of the subsidies, consu mers must pay more, and producers in other countries are faced with falling prices, and ultimately lower incomes. QUESTION 4 What would happen if the United States (and other countries) halt paying subsidies to farmers to grow certain crops? Who would benefit, who would lose?ANSWER 4 If the United States stopped paying subsidies to farmers, consumers would initially see prices fall. Later however, as some farmers, without the support of the subsidies, went out of business, consumers would probably see prices rise to some degree as supply and demand moved together. Producers in other countries like Benin would benefit from increased demand and higher prices. Video Note The iGlobe Agricultural Problems Lead to Farmer Suicides in India explores the effects of cotton subsidies on farmers in India. The iGlobe is a good complement to the Closing Case. Continuous Case theoryAs automakers establish production operations in multiple countries around the world, and rely on suppliers from nu merous countries, the question of tariffs and quotas becomes more important. In this chapters Continuous Case Concept, explore what happens if a country places a tariff or other trade barrier on imported cars. conduct students to consider, for example, how consumers would react if the U. S. charged a tariff on every car that is imported from Japan. What would be the likely reaction of Japanese automakers? What would American producers do? Next, ask students to consider whether such as tariff is fair. Who really pays the tariff? Who benefits from the tariff? Who would benefit from free trade in automobiles and car separate? Finally, explore how efforts by both the United States and the European Union to increase the production of ethanol and bio-diesel (see Opening Case) could impact the auto industry. Honda is currently a market leader in the hybrid vehicle market, but is hampered by the lack of infrastructure to fully support the industry. In 2008, Toyota established a goal to sell 500,000 hybrid vehicles. This exercise works well after the notion of trade barriers has been introduced.It can also be used in a summary discussion of the chapters material or in conjunction with the Opening Case. globalEDGE usances Use the globalEDGE Resource Desk http//globalEDGE. msu. edu/ResourceDesk/ to complete the following exercises. Exercise 1 Your company is considering exporting its pharmaceutical products to Japan, but managements current knowledge of the countrys trade policies and barriers for this sector is limited. pass the appropriate level of research in a trade barriers database to happen upon any study on Japans current standards and technical requirements for pharmaceutical products.Prepare an executive summary of your findings. Answer The quickest way to reach this information would be to search globalEDGE using the show trade barriers database at http//globaledge. msu. edu/ResourceDesk/. Once at the Market Access Database website, select Trade Barri ers Database. On the search option Select Country, choose Japan, and on the search option Select Sector, choose Pharmaceuticals. A series of write ups are listed from which those with more general titles will provide adequate insight for the exercise.Search sound out Trade Barriers Database Resource Name Market Access Database Website http//mkaccdb. eu. int/ globalEDGE Category query Multi-Country Exercise 2 You work for a national chain of garments stores that is considering importing textiles from India into the U. S. You want to determine whether the goods are subject to import quotas. apply information provided by the U. S. Customs and boundary Protections, prepare a report highlighting the elements that determine whether a shipment is subject to this type of trade restriction.Answer The U. S. Customs and Border Protections website hosted by the U. S. government offers considerable information on the details of importing or exporting into or out of the U. S. The informat ion for the exercise can be reached by searching for the phrase U. S. Customs and Border Protections at http//globaledge. msu. edu/ResourceDesk/. This resource can also be found under the globalEDGE category look into Government Resources. Once on the website, click on Trade and select Textiles and Quotas under Trade course Areas. The report, Are my Goods Subject to Quotas? , is readily available. Search Phrase U. S. Customs and Border Protections Resource Name United States U. S. Customs and Border Protections Website http//www. cbp. gov/ globalEDGE Category Research Government Resources Additional Readings and Sources of Information Economists Rethink Free Trade http//www. businessweek. com/magazine/content/08_06/b4070032762393. htm? chan=search Brazil Urges EU to Scrap Biofuel Tariffs http//www. businessweek. com/globalbiz/content/jul2007/gb2007076_483689. htm? chan=search