Chapter 07 – Government Policy and International Trade
7-1
Government Policy and International Trade
Learning objectives
• Identify the policy instruments
• Understand why governments
sometimes intervene in
international trade.
policy.
• Describe the development of the
world trading system and the
managers of developments in the
world trading system.
This chapter focuses on the political systems and
tools of trade policy. The major objective of this
chapter is to describe how political realities shape
chapter describes the evolution of the World Trade
Organization and its impact on the global business
have been reluctant to engage in unrestricted free
trade.
response to domestic political pressures.
The opening case explores the subsidies paid to
aircraft makers Boeing and Airbus. Both firms have
dumping by Chinese steel makers. In response to
complaints by domestic steel companies, the U.S.
Commerce Department implemented hefty punitive
tariffs on steel imports from China, India, Italy,
South Korea, and Taiwan.
7
Chapter 07 – Government Policy and International Trade
7-2
OUTLINE OF CHAPTER 7: GOVERNMENT POLICY AND
The Revised Case for Free Trade
Retaliation and Trade War
Domestic Policies
Development of the World Trading System
1947–1979: GATT, Trade Liberalization, and Economic Growth
1980–1993: Protectionist Trends
The Uruguay Round and the World Trade Organization
WTO: Experience to Date
The Future of the WTO: Unresolved Issues and the Doha Round
Chapter 07 – Government Policy and International Trade
7-3
CLASSROOM DISCUSSION POINT
Ask students whether the United States promotes free trade. Jot their responses on the
framework presented in the text.
Next, ask students similar questions about the European Union. (For example, in 2015,
British farmers received $3.5 billion in subsidies from the European Union’s agricultural
fund.)
Another Perspective: At the WTO’s Doha Round in 2001, many nations—including
overhaul-and-eu-funding-gap-idUKKBN17C0UE}, and
{https://www.npr.org/sections/thesalt/2016/02/01/465132866/farm-subsidies-persist-and-
grow-despite-talk-of-reform}.
OPENING CASE: Boeing and Airbus Are in a Dogfight over Illegal
Subsidies
Summary
The opening case explores the ongoing battle between aircraft makers Airbus and
Boeing. Both companies have accused the other of receiving unfair government subsidies
designed to give them a competitive advantage, and both the United States and the
European Union have taken their complaints to the World Trade Organization (WTO). In
response to a 2006 complaint from the United States regarding perceived assistance to
Airbus, the WTO issued a ruling indicating that the Europe-based Airbus had indeed
received unfair subsidies. After Airbus failed to comply with WTO orders to remove the
subsidies, the WTO issued another warning to Airbus. Ironically, the United States is
unlikely to pursue Europe’s noncompliance with the WTO rulings as Boeing recently
Chapter 07 – Government Policy and International Trade
7-4
ANSWER 1: WTO rulings indicate that both Airbus and Boeing have benefited from
subsidies at some point in their business, often in connection with the release of an
aircraft. Indeed, according to the WTO, Airbus recently relied on European Union
QUESTION 2: In its early years, Airbus received subsidies for 100 percent of its
development costs. Discuss this situation. Is there a time when subsidies should be
considered acceptable? Why or why not?
ANSWER 2: Student answers will vary but should initiate an engaging debate over the
role of subsidies—especially in industries like the aircraft industry. Students may note,
for example, that given the extremely high start-up costs involved in the aircraft industry,
QUESTION 3: Boeing is expected to benefit from some $5.7 billion in tax breaks from
the state of Washington. Why is the state of Washington willing to provide these tax
breaks to Boeing?
ANSWER 3: The WTO has ruled that the nearly $6 billion in tax breaks given by the
state of Washington to Boeing between 2020 and 2040 constitute illegal subsidies. The
state of Washington, however, sees the payments as an investment in its economic future.
Chapter 07 – Government Policy and International Trade
7-5
LECTURE OUTLINE
This lecture outline follows the Power Point Presentation (PPT) provided along with this
clicking on “view,” then on “notes.” The following provides a brief overview of each
Power Point slide along with teaching tips and additional perspectives.
Slide 7-3 What Is the Political Reality of Free Trade?
Slides 7-4 ‒ 7-9 Instruments of Trade Policy
The main instruments of trade policy are:
• tariffs
• subsidies
Tariffs are the oldest form of trade policy. The principal objective of most tariffs is to
protect domestic producers and employees against foreign competition. Tariffs also raise
revenue for the government. Domestic producers gain, because tariffs afford them some
protection against foreign competitors by increasing the cost of imported foreign goods.
Consumers lose because they must pay more for certain imports. Tariffs reduce the
equity participation in domestic firms). By lowering production costs, subsidies help
domestic producers in two ways: they help them compete against foreign imports and
they help them gain export markets. Subsidy revenues are generated from taxes.
Governments typically pay for subsidies by taxing individuals. Therefore, whether
subsidies generate national benefits that exceed their national costs is debatable.
Chapter 07 – Government Policy and International Trade
7-6
Import Quotas and Voluntary Export Restraints (VER) are direct restrictions on the
quantity of some good that may be imported into a country. The quota restriction is
Export tariffs are taxes placed on the export of a good with the goal of discouraging
exporting to ensure that there is a sufficient supply of a good within a country. An export
ban partially or entirely restricts the export of a good.
Local content requirements have been widely used by developing countries to shift
their manufacturing base from the simple assembly of products whose parts are
foreign competition. The aggregate economic effects are also the same; domestic
producers benefit, but the restrictions on imports raise the prices of imported components.
Governments sometimes use informal or administrative policies to restrict imports and
boost exports. Administrative trade policies are bureaucratic rules that are designed to
make it difficult for imports to enter a country.
below “fair” market value. Antidumping policies are designed to punish foreign firms
that engage in dumping and protect domestic producers from unfair competition.
Slides 7-10 ‒ 7-14 The Case for Government Intervention
There are two types of arguments for government intervention—political and economic.
Political arguments for government intervention include:
• protecting the human rights of individuals in exporting countries
Chapter 07 – Government Policy and International Trade
7-7
The most common political reason for trade restrictions is “protecting jobs and
industries.”
Consumer protection can also be an argument for restricting imports. Since different
countries do have different health and safety standards, what may be acceptable in one
country may be unacceptable in others.
Sometimes, governments use trade policy to support their foreign policy objectives.
Governments sometimes use trade policy to create pressure for improving the human
rise to about 40 percent.
Another Perspective: In the United States, the Bureau of Export Administration enhances
the nation’s 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/} and click on Export Administration regulations.
protection helps make the industry efficient. Brazil built up the world’s 10th largest auto
industry behind tariff barriers and quotas. Once those barriers were removed in the late
1980s, however, foreign imports soared and the industry was forced to face up to the fact
that after 30 years of protection, the Brazilian industry was one of the most inefficient in
Chapter 07 – Government Policy and International Trade
7-8
Slides 7-15 – 7-16 Revised Case for Free Trade
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. Over 100 countries became members of GATT, and worked
together to further liberalize trade.
1. Japan’s success in such industries as automobiles and semiconductors coupled
2. The world’s largest economy, the United States, was plagued by a persistent
deficit. The loss of market share to foreign competitors in industries such as
3. Many countries found ways to get around GATT regulations.
The Uruguay Round wrote the rules governing: