Government Influence on Trade: Strategic Trade Theory

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Government Influence on Trade Strategic Trade
Theory
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Strategic Trade Theories

• Response to assumptions in comparative advantage.
• Policy Issue Should the US government
• restrict activities of foreign firms in the
  domestic market?
• promote the activities of domestic firms in
  global markets?
• Strategic Trade Policy involves government
  intervention.

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Strategic Trade Policy

• Governments sometimes target select industries,
  in terms of RD subsidies, import restraints or
  export subsidies, etc.
• Wherever they think they can succeed
• In rich nations, this often fails
• If the industry were good, private investors
  would invest in it
• In poor nations, there is often no alternative to
  targeting a few industries
• Few local investors
• Infrastructure must focus on something

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Traditional arguments for trade protection

• Traditional arguments made for protection
• National Security
• Strategic sectors, military preparedness
• Unfair competition
• Low wages, government subsidies
• Infant industry
• Temporary protection to shield new industry
• Income distribution and employment
• Allows relatively uncompetitive producers to stay
  in business
• Allows domestic firms to charge higher prices,
  pay higher wages

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• Arguments for Strategic Trade Policy
• Increasing returns to scale, learning curves and
  imperfect competition
• firms can affect market structure and conduct
  (preemption, predation, dumping . . .)
• RD intensity, technological spillovers
• ability to appropriate rents that would accrue to
  foreigners
• Possibilities of market failures
• e.g.. incentives to innovate in the presence of
  high risk
• exit and entry barriers

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Arguments against Strategic Trade Policies and
Protection

• Possibility of retaliation
• loss of export markets
• Special interest groups
• tend to maintain protectionist policies long
  after their useful life, especially as benefits
  are concentrated, while costs are diffused over
  the whole population
• Gains from free competition may far outweigh
  gains from protection
• With protection, firms have no incentive to
  become efficient
• Further, protection is usually sought by less
  efficient sectors of the economy, which leads to
  inefficient resource allocation
• Can Government pick winners?
• Markets better at this
• Who loses in a globally-integrated economy?
• Could it be American-owned firms?

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Types of Government Intervention

• Laissez-faire -- market forces
• Targeting industries
• Policies on intellectual property rights
• Breadth of patent
• First to file vs. invent
• Picking winners/ and planning death of losers
• Regional integration

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Rationales

• Economic Rationales Noneconomic Rationales
• Prevent unemployment Maintain essential
  industries
• Protect infant industries Deal with
  unfriendly countries
• Promote industrialization Maintain spheres of
  influence
• Improve position compared Preserve
  national identity to other countries

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Example International Business Strategy and the
Political Legal Environment

• U.S.-Japanese Auto Trade
• When facing import competition, companies can
• Try to get protection
• Move abroad
• Seek other market niches
• Make domestic output competitive
• Approaches to the International Environment
• What kind of companies have the most to lose from
  protectionism? Big or small? Diversified or not?

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Government Instruments of Trade Control

• Tariffs
• Import tariff
• Export tariff
• Transit tariff
• Specific duty
• Quotas
• Subsidies
• Aid and loans
• Customs valuation

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TRADE RESTRICTIONS BASED ON TARIFFS
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Issues With Sanctions

• Costs of sanctions on innocent people
• Inability of sanctions to induce a change in
  leadership
• Uneven application among countries
• Review the countrys overall record
• Lack of agreement about the cause being protested

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Conflicting Results of Policies

• Objectives may conflict
• Economic, social, and political goals of a
  country often conflict
• May be impossible to help some industries without
  hurting others
• Proposed reforms of trade regulations results in
  heated debates among pressure groups

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GATT (General Agreement on Trade and Tarriffs)

• Created in 1947 by 23 countries
• Intended to negotiate reductions in trade
  restrictions and develop common procedures for
  handling imports and exports
• Efforts led to a number of multilateral
  reductions in tariffs and nontariff barriers for
  member countries
• across-the-board reductions
• each country negotiated exceptions to its
  reductions
• Codes of conduct developed in each of five areas
• Inherent weakness of GATT
• Cumbersome negotiations
• Most-favored nation trade concessions applied to
  all trading partners
• No mechanism to assure compliance with negotiated
  agreements

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WTO(WORLD TRADE ORGANIZATION)

• Created in 1995 to replace GATT
• Negotiating process
• Ongoing negotiations about
• restrictions on trade in services
• nontariff barriers to trade
• protection of intellectual-property rights
• investment policies that affect trade
• Granting of normal trade relations
• Apply to WTO members
• Eliminates the free-rider complaint raised during
  GATT negotiations
• Certain exceptions recognized
• Settlement of disputes
• Clearly defined settlement mechanism
• Sanctions may be applied to countries that do
  not comply with rulings

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Regional economic integrationWhy ?

• Despite the World Trade Organization, many tariff
  and non-tariff barriers exist
• People can often understand each other better
  when they live close to each other

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Regional Economic Integration

• Distance goods need to travel between countries
  is short
• Consumers tastes are likely to be similar
• Distribution channels can be easily established
• Neighboring countries may have common history and
  interests
• Economic integration prevents wars

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Basic Types of Regional Economic Integration

• Free Trade Area (FTA) seeks to abolish tariffs
  between member nations
• Customs union eliminate internal tariffs common
  external tariff on goods from outside
• Common market same elements as customs union
  plus free mobility of production factors such as
  labor and capital
• Economic integration common economic policies
• Common currency
• Political integration

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MAJOR REGIONAL TRADING GROUPS
Free Trade Areas European Free Trade
Association Central European Free Trade
Agreement North American Free Trade
Agreement Association of South East Asian
Nations
Customs Union MERCOSUR
Common Market Caribbean Community and Common
Market Central American Common Market Andean
Group
Economic Integration European Union
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Effects of Integration

• Static effects
• Shifting of resources from inefficient to
  efficient companies as trade barriers fall
• Dynamic effects
• Overall growth in market
• Expanded production
• Greater economies of scale

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WHAT ARE THE IMPLICATIONS OF THE EU ON CORPORATE
STRATEGY?

• EU is a tremendous market
• Large, relatively prosperous population
• Likely expansion to Eastern and Central Europe
• More fragmented than U.S. market
• expansion likely to increase fragmentation
• Mergers, takeovers, and spin-offs will continue

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IMPLICATIONS OF NAFTA ON CORPORATE STRATEGY

• NAFTA perceived as one big regional market
• Companies can rationalize production, financing
• low-end manufacturing moving south
• sophisticated manufacturing increasing in U.S.
• Canadian and Mexican companies have not been put
  out of business
• Mexico perceived as a market for U.S. goods, not
  just a location for low-cost production

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IMPLICATIONS OF MERCOSUR?

• MERCOSURmajor trading group in South America
• significant because of its size
• signed free trade agreements with other South
  American countries
• trying to become a customs union

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IMPLICATIONS OF ASIAN TRADING GROUPS?

• Association of South East Asian Nations (ASEAN)
• promotes cooperation in industry and trade
• members rely more on U.S. market for exports than
  on each other
• created ASEAN Free Trade Area (AFTA)
• goal is to cut tariffs on intrazonal trade
• Asia Pacific Economic Cooperation (APEC)
• objectives are to
• resist protectionist pressures
• counter inward-looking regionalism
• deal with economic conflicts in the region
• size and diversity of members are problems

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PROBLEMS OF INTEGRATION

• problems if new members
• have weak economies
• have serious political problems

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Why a big US trade deficit now?

• Deficit with Europe
• European recession
• High dollar in early 2000s
• Deficit with Japan
• Slow growth of consumption in Japan
• Deficit with China
• Frozen value of Chinese currency
• Poorly developed domestic economy causes slow
  growth of imports

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Review

• Explain trade theories, government intervention
  including integration
• Discuss how global efficiency can be increased
  through free trade
• Introduce prescriptions for altering trade
  patterns
• Explore how business decisions influence
  international trade

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