This document discusses agricultural subsidies provided by wealthy countries and their negative impacts. It notes that the EU, US, and others provide hundreds of billions in subsidies annually to domestic farmers. This leads to surplus production that is dumped on world markets at prices below production costs. For example, the EU dumps over 6 million tons of subsidized sugar annually. This depresses world prices and costs countries like Brazil hundreds of millions in lost export revenues. The document argues that these subsidies undermine development and hurt poor farmers abroad, and should be reformed.
3. 6-3
Agricultural Subsidies & Development
Rich Countries provides $300 billion as SUBSIDIES to
farmers in their own countries.
EU has set the price of per ton butter at euros 3,282. If
price falls below that then the EU would compensate the
farmers in the form of SUBSIDY.
The US provides $0.70 to her farmers for every pound of
cotton they harvest.
4. 6-4
Agricultural Subsidies & Development
This results in surplus production
This surplus is then dumped in the world market.
EU provides $4000 per acre subsidies to sugar beet
producers.
EU farmers produce more than the EU market can
absorb
The 6 million tons per year is dumped in the world
market.
If EU stopped dumping then sugar price would increase
by 20%.
This would benefit the South American economy by $ 40
million from sugar exports.
5. 6-5
Agricultural Subsidies & Development
US cotton subsidies reduced world cotton price by 50%
since the mid 90s
This cost Brazil $640 million in lost revenues.
In 2001 , Mali lost $43 in export revenues more than the
$37million it received from the US as foreign aid.
An UN official said, “Its no good building up roads,
clinics, and infrastructure in poor areas if you do not
give them access to markets and engines for
growth.”
6. 6-6
Introduction
Free trade occurs when governments do not attempt to
restrict what its citizens can buy from another country or
what they can sell to another country
While many nations are nominally committed to free
trade, they tend to intervene in international trade to protect
the interests of politically important groups
7. 6-7
Instruments Of Trade Policy
The main instruments of trade policy are:
Tariffs
Subsidies
Import Quotas
Voluntary Export Restraints
Local Content Requirements
Administrative Policies
Antidumping Policies
8. 6-8
Tariffs
Tariffs are taxes levied on imports that effectively raise the cost of
imported products relative to domestic products
Specific tariffs are levied as a fixed charge for each unit of a good
imported ($3 per barrels of oil)
Ad valorem tariffs are levied as a proportion of the value of the
imported good (EU tariff on Banana import from Latin America, 15 to
20 % for the first 2.5 million tons)
Tariffs increase government revenues, provide protection to domestic
producers against foreign competitors by increasing the cost of
imported foreign goods, and force consumers to pay more for certain
imports
So, tariffs are unambiguously pro-producer and anti-consumer, and
tariffs reduce the overall efficiency of the world economy
9. 6-9
Subsidies
Subsidies are government payments to domestic
producers
Consumers typically absorb the costs of subsidies
Subsidies help domestic producers in two ways:
they help them compete against low-cost foreign imports
they help them gain export markets
10. 6-10
Import Quotas And Voluntary
Export Restraints
Import quotas directly restrict the quantity of some good that may be
imported into a country (US allows only certain firms to import cheese)
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 (Japanese exports of automobiles to the US in 1981 to
1.68 million.).Countries agree due to avoid more damaging actions.
A quota rent is the extra profit that producers make when supply is
artificially limited by an import quota (the Japanese gained $1 billion
per year from 1981 to 1985)
Import quotas and voluntary export restraints benefit domestic
producers by limiting import competition, but they raise the prices of
imported goods
11. 6-11
Local Content Requirements
A local content requirement demands that some specific
fraction of a good be produced domestically
Local content requirements benefit domestic producers,
but consumers face higher prices.(India enforces this on
cement import from Bangladesh)
12. 6-12
Administrative Policies
Administrative trade polices 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
Netherlands’ export of tulip bulbs to Japan suffered as
they were all checked.
France required all imported video tape recorders enter
though a single small entry point which was poorly staffed.
13. 6-13
Antidumping Policies
Dumping refers to selling goods in a foreign market below their costs
of production, or selling goods in a foreign market below their “fair”
market value (the US accused EU of dumping Steel)
Dumping enables 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
Antidumping polices (or countervailing duties) are designed to punish
foreign firms that engage in dumping and protect domestic producers
from “unfair” foreign competition. The US imposed 9% and 4% tariffs
on two Korean semi conductor exporters.
14. 6-14
The Case For Government Intervention
Arguments for government intervention:
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)
Economic arguments are typically concerned with
boosting the overall wealth of a nation (to the benefit of all,
both producers and consumers)
15. 6-15
Political Arguments For Free Trade
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 policy
protecting the human rights of individuals in exporting
countries
16. 6-16
Protecting Jobs And Industries
Protecting jobs and industries is the most common
political reason for trade restrictions : Japan imposed
Import quotas on Rice to protect jobs in the agricultural
sector.)
Usually this results from political pressures by unions or
industries that are "threatened" by more efficient foreign
producers, and have more political clout than the
consumers that will eventually pay the costs .
(The EU applied CAP or Common Agricultural Policy to
protect the politically powerful farmers.)
17. 6-17
National Security
Industries such as aerospace or electronics are often
protected because they are deemed important for national
security.
In 1986 , the US semiconductor manufacturing
consortium of 14 companies , SEMATECH, convinced the
government that their product was vital to defense
industries and so the US could not rely on foreign supplies
for these. As a result the government provided $100 million
per year as subsidies. It was withdrawn in 1996 only after
the rise in demand for personal computers and Intel
processors.
18. 6-18
Retaliation
When governments take, or threaten to take, specific
actions, other countries may remove trade barriers. The US
threatens China to face trade sanctions unless they impose
Intellectual Property Laws. This caused the US millions of
dollars due to piracy. After threats to impose 100% tariff on
certain Chinese imports , China agreed to tighten its
implementation of Intellectual property laws.
If threatened governments don’t back down, tensions can
escalate and new trade barriers may be enacted.
19. 6-19
Protecting Consumers
Governments may intervene in markets to protect
consumers.
The US banned import of 58 types of assault weapons to
avoid incidents of shooting in 1998 after such an incident
took place in Arkansas, home state of the then president
Bill Clinton, that killed four children and a school teacher.
Austria and Luxembourg banned import of Genetically
modified cotton seeds by Monsanto as they can cause
genetic pollution.
20. 6-20
Furthering Policy Objectives
Foreign policy objectives can be supported through trade
policy
Preferential trade terms can be granted to countries that
a government wants to build strong relations with.(US
relations with Israel)
Trade policy can also be used to punish rogue states that
do not abide by international laws or norms.(US sanctions
against Iran)
However, it might cause other countries to undermine
unilateral trade sanctions
The Helms-Burton Act and the D’Amato Act, have been
passed to protect American companies from such actions
22. 6-22
The Infant Industry Argument
The infant industry argument suggests that an industry
should be protected until it can develop and be viable and
competitive internationally
The infant industry argument has been accepted as a
justification for temporary trade restrictions under the WTO
However, it can be difficult to gauge when an industry
has “grown up”
Critics argue that if a country has the potential to develop
a viable competitive position its firms should be capable of
raising necessary funds without additional support from the
government
23. 6-23
The Infant Industry Argument
Brazil had the 10th
largest auto industry in the world with
protection for 30 years. But after the protection was
removed in the 1980s it turned out to be one of the most
inefficient in the world.
But TATA is an example of government protection being
fruitful.
24. 6-24
Strategic Trade Policy
Strategic trade policy suggests that in cases where there
may be important first mover advantages, governments can
help firms from their countries attain these advantages.
(US govt. gave substantial R & D grants to Boeing which
built the 707 passenger jet following a military plane)
Strategic trade policy also suggests that governments
can help firms overcome barriers to entry into industries
where foreign firms have an initial advantage. (The
Japanese government provided research support in the 70s
an early 80s to LCD manufacturers who ultimately beat the
Americans who entered the market first.)
26. 6-26
From Smith To The Great Depression
Until the Great Depression of the 1930s, most countries
had some degree of protectionism
The Smoot-Hawley tariff was enacted in 1930 in the U.S
creating significant import tariffs on foreign goods
Other nations took similar steps and as the depression
deepened, world trade fell further
27. 6-27
1947-79: GATT, Trade Liberalization,
And Economic Growth
After WWII, the U.S. and other nations realized the value
of freer trade, and established the General Agreement on
Tariffs and Trade (GATT)
The approach of GATT (a multilateral agreement to
liberalize trade) was to gradually eliminate barriers to trade
28. 6-28
1980-1993: Protectionist Trends
In the 1980s and early 1990s, the world trading system was strained
Japan’s economic strength and huge trade surplus stressed what
had been more equal trading patterns, and Japan’s perceived
protectionist (neo-mercantilist) policies created intense political
pressures in other countries
Persistent trade deficits by the U.S., the world’s largest economy,
caused significant economic problems for some industries and political
problems for the government
Many countries found that although limited by GATT from utilizing
tariffs, there were many other more subtle forms of intervention that
had the same effects and did not technically violate GATT
29. 6-29
The Uruguay Round And The
World Trade Organization
The Uruguay Round of GATT negotiations began in 1986
The talks focused on several areas:
Services and Intellectual Property
-going beyond manufactured goods to address trade issues related
to services and intellectual property, and agriculture
The World Trade Organization
-it was hoped that enforcement mechanisms would make the WTO a
more effective policeman of the global trade rules
The WTO encompassed GATT along with two sisters organizations,
the General Agreement on Trade in Services (GATS) and the
Agreement on Trade Related Aspects of Intellectual Property Rights
(TRIPS)
30. 6-30
WTO: Experience To Date
Since its establishment, the WTO has emerged as an
effective advocate and facilitator of future trade deals,
particularly in such areas as services
So far, the WTO’s policing and enforcement mechanisms
are having a positive effect
Most countries have adopted WTO recommendations for
trade disputes
31. 6-31
WTO: Experience To Date
In 1997, 68 countries that account for more than 90% of
world telecommunications revenues pledged to open their
markets to foreign competition and to abide by common
rules for fair competition in telecommunications
102 countries pledged to open to varying degrees their
banking, securities, and insurance sectors to foreign
competition
The agreement covers not just cross-border trade, but
also foreign direct investment
In 2005 , all the quotas on textile and apparel exports
vanished.
32. 6-32
WTO: Experience To Date
The 1999 meeting of the WTO in Seattle was important
not only for what happened between the member countries,
but also for what occurred outside 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
33. 6-33
The Future Of The WTO: Unresolved
Issues And The Doha Round
The WTO is encouraging members to strengthen the
regulations governing the imposition of antidumping
duties(India , EU and the US benefit from such laws as
they account for half of the antidumping cases between
2000-2002)
The WTO is concerned with the high level of tariffs and
subsidies in the agricultural sector of many economies
(Agricultural subsidies cover agricultural costs: 64% in
Japan, 49% in EU, 24% in the US, 23% in Canada.)
34. 6-34
The Future Of The WTO: Unresolved
Issues And The Doha Round
TRIPS(Trade Related Aspects of Intellectual Property
Rights) obliges WTO members to grant and enforce
patents lasting at least 20 years and copyrights lasting 50
years
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
35. 6-35
The Future Of The WTO: Unresolved
Issues And The Doha Round
The WTO launched a new round of talks at Doha, Qatar
in 2001
The agenda includes:
cutting tariffs on industrial goods and services
phasing out subsidies to agricultural producers
reducing barriers to cross-border investment
limiting the use of anti-dumping laws
36. 6-36
Implications For Managers
Managers need to consider how trade barriers affect the
strategy of the firm and the implications of government
policy on the firm
37. 6-37
Trade Barriers And Firm Strategy
Trade barriers raise the cost of exporting products to a
country
Voluntary export restraints (VERs) may limit a firm’s
ability to serve a country from locations outside that country
To conform to local content requirements, a firm may
have to locate more production activities in a given market
than it would otherwise.(The Japanese automobile industry
setup manufacturing facilities in the 70s and 80s to
overcome such barriers)
All of these can raise the firm’s costs above the level that
could be achieved in a world without trade barriers
38. 6-38
Policy Implications
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 run benefits to having
governmental protection in some situations, in the long run
these can backfire and other governments can retaliate
Hinweis der Redaktion
Tariffs are the oldest form of trade policy; they fall into two categories:
Specific tariffs are levied as a fixed charge for each unit
Ad valorem tariffs are levied as a proportion of the value of the imported good
Tariffs are good for government because they generate revenue.
But, while they protect domestic producers but they reduce efficiency, and create higher prices for consumers.
Subsidies are government payments to domestic producers. They can be in the form of:
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.
Management Focus: U.S. Magnesium Seeks Protection
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 significantly below market value in an effort to drive U.S. Magnesium out of business. The company failed a complaint with the International Trade Commission (ITC) which ultimately ruled in favor of U.S. Magnesium.
Suggested Discussion Questions
1. What is dumping? Were Chinese and Russian producers guilty 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 their costs of production, or below their fair market value. In 2004, U.S. Magnesium claimed that China and Russia had been dumping magnesium in the United States. The company noted that in 2002 and 2003, magnesium imports rose, and prices fell. While the ITC ruled 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 country’s significantly lower wage rates.
2. What does the ITC’s ruling mean 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. Most students will note that while the ITC’s 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 will probably argue that this result is unfair, and should be revisited.
Teaching Tip: U.S. Magnesium’s web site is available at {http://www.usmagnesium.com/}.
The U.S. has use trade policy against countries like Libya, Iran, Iraq, North Korea, and Cuba.
Country Focus: Trade in Hormone-Treated Beef
This feature describes the trade battle between the United States and the European Union over beef from cattle that have been given growth hormones. It outlines the basic issues that led to the dispute, and shows how the World Trade Organization has treated the case.
Suggested Discussion Questions
1. Why is the European Union so concerned about beef from cattle that have been given growth hormones?
Discussion Points: Some students may argue that the European Union’s ban on growth hormones in cattle was little more than a thinly veiled form of protectionism. Australia, New Zealand, and Canada, which also use the hormones in their cattle industry, 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 EU?
Discussion Points: The World Trade Organization ruled against the European Union stating that the European Union’s ban on imported hormone treated beef had no scientific justification. Even so, the European Union refused to lift 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 2006, continued to maintain its restrictions on hormone treated beef despite the resulting punitive tariffs.
Teaching Tip: Students can go to the WTO website {www.wto.org} and click on the students icon to see a range of options available to students including the ability to search the site, research countries, and even see a list of internships that are available at the WTO.
Oldest argument - Alexander Hamilton, 1792.
Protected under the WTO.
Only good if it makes the industry efficient.
Brazil auto-makers - 10th largest - wilted when protection was eliminated.
Requires government financial assistance.
Today if the industry is a good investment, global capital markets would invest.
Strategic trade policy suggests that:
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
GATT - multilateral agreement established in 1948 under US leadership.
Objective is to liberalize trade by eliminating tariffs, subsidies, and import quotas.
Nineteen original members grew to 120.
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.
GATT regulations could be circumvented using voluntary export restraints.
The WTO:
Had 145 members in 2003
Represents 90% of world trade
Settles 9 of 10 disputes satisfactorily
Reduced tariff from 40% to 5%
Saw trade volume of manufactured goods has increased 20 times
Because members believe that the protection of intellectual property rights is an essential element of the international trading system, TRIPS obliges WTO members to grant and enforce patents lasting at least 20 years, and copyrights lasting 50 years.
Country Focus: Estimating the Gains from Trade for America
This feature explores the results of a study by the Institute for International Economics. The study, which estimated the gains to the American economy from free trade, found that America’s 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 Economics suggest about the benefits of free trade?
Discussion Points: The Institute for International Economics found that thanks to reductions in trade restrictions, America’s GDP was up. The Institute also estimated that even greater gains in the country’s 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 toward 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 wages and benefits associated with free trade outweigh the benefits that would be gained. Other students however, will probably argue that since protectionism typically 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/}.
