Chapter 3
International Trade: Institutional Barriers and Facilitators
LEARNING OBJECTIVES
After studying this chapter students should be able to:
• Identify different trade barriers imposed on international trade and the arguments
used to erect and maintain these barriers.
CHAPTER SPOTLIGHTS
• Arguments for Protectionism: There are several arguments to justify barriers. This
chapter will examine the following arguments: protection of markets with excess
productive capacity, protection of markets with excess labor, infant industry
CHAPTER OVERVIEW
This chapter examines different types of trade barriers imposed on international
marketing operations and the justifications used by governments to impose and maintain
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CHAPTER OUTLINE
3-1 Arguments for Protectionism
3-1a Protection of Markets with Excess Productive Capacity
Markets with excess productive capacity only need a fraction of the resources
3-1b Employment Protection and Protection of Markets with Excess Labor
This argument addresses markets with high levels of excess labor and
3-1c Infant Industry Arguments and Arguments Related to the Industrialization of
Developing Countries
3-1d Natural Resources Conservation and Protection of the Environment
Environmental protection is frequently used as an argument to allow governments
3-1e Protection of Consumers
3-1f National Defense Interests
3-2 Tools of Government Protectionism: Tariff and Nontariff Barriers
3-2a Tariffs
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3-2b Non-tariff Barriers
Non-tariff barriers to trade include all other measures used to distort international
trade flows. The following are the most frequently encountered non-tariff barriers:
1) Import Quotas: Specify a maximum quantity or a value of a product that
may be imported during a specified period
5) Price Controls: Include increasing prices of imports to match minimum
prices of domestic offerings, antidumping and countervailing duty actions
that counter unfair competition and predatory pricing, and paratariff
measures that increase the cost of imports in a manner similar to tariffs.
6) Standards: Used as barriers to imports primarily by highly-industrialized
countries, preventing importing firms from selling products below a
certain quality specification.
7) Local Content Requirements: Mandate that a certain percentage of the
countries against another for non-compliance.
11) Currency and Capital Flow Controls: Control of capital and currency
flows in and out of a particular country.
12) Blocked Currency: The strategy of forbidding importers to exchange
local currency for a currency acceptable by the seller as payment.
13) Differential Exchange Rates: Rate differences are of two types. One is
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3-3 International Trade and Trade Facilitators
3-3a The International Trade Imperative
Free trade is essential to economic development. One argument for free trade is
3-3b The International Trade and Economic Development Organizations
International trade and economic development organizations:
1) World Trade Organization: Has its origins with the General Agreement on
Tariffs and Trade; consists of 142 member countries, provides assistance
to developing economies and promotes regional trade agreements and
cooperation in global economy.
2) Group of Eight (G8): Consists of the most industrialized countries
(Canada, France, Germany, Italy, Japan, United Kingdom, and United
States) and Russia; acts as a forum for addressing economic and financial
3-3c Government Organizations
Government organizations: there are several local and national government
bodies that promote international trade.
1) United States federal and state government agencies promote the interest
of U.S. businesses abroad, and encourage foreign direct investment in the
U.S.
2) United States Agency for International Development (USAID) is an arm
3-3d Other institutions and procedures facilitating international trade:
1) Foreign Trade Zone (FTZ, also known as a free trade zone): A tax-free
2) Other types of customs-privileged facilities: Customs-privileged facilities,
such as warehouses and factories that operate similar to a foreign trade
zones. Special economic zones (SEZs) in China (see later) and
3) United States Privileged Trade Partners: Permanent Normal-Trade-
Relations (PNTR) Status, the Generalized System of Preferences, and the
Africa Growth and Opportunity Act.
The Permanent-Normal-Trade-Relations (PNTR) Status (previously
known as the Most-Favored-Nation Status): grants preferential tax
African Development Bank: A bank, headquartered in Abidjan, Ivory Coast, that has as
a primary goal poverty reduction in Africa, providing support and expertise in
agriculture, human resources, and health services, with an emphasis on small business.
Antidumping: Legislation designed to counter unfair price competition; lengthy
antidumping investigations can also serve as an impediment to trade.
currency).
Boycott: An action calling for a ban on consumption of all goods associated with a
particular company and/or country.
Comparative Advantage: The premise that countries benefit from specialization in an
industry where they have comparative advantage and from trading with one another.
Employment Protection: Protection of local employment by not granting import
licenses for products competing with similar, locally produced, goods.
European Bank for Reconstruction and Development: A bank headquartered in
London, United Kingdom, which has as main goals reforming and strengthening markets
in the transition economies of Central and Eastern Europe.
Group of Eight (G8): A group of the eight most industrialized countries: Canada,
France, Germany, Italy, Japan, the United Kingdom, Russia, and the United States. The
group addresses issues such as biotechnology and food safety, economic development,
arms control and nonproliferation, organized crime, drug trafficking, terrorism,
environmental issues, digital opportunities, microeconomic issues, and trade.
programs; debt-reduction guidelines; ceilings for bank credit, budget deficit, borrowing,
and international reserves; and development programs for borrowing countries.
Local Content Requirement: A protectionist measure requiring that a certain
percentage of the products imported are locally produced.
Maquiladora: Customs-privileged contract manufacturing facilities in Mexico that take
countries with low labor costs, where products are manipulated and re-exported.
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Orderly Market Arrangement: Protectionist measures involving intricate processes for
establishing quotas in the textile and apparel industries.
Paratariff Measures: Additional, nontariff fees that increase the costs of imports in a
multinational companies can take advantage of low-cost labor.
Standards as Barriers to Trade: Trade barriers imposing performance, environmental,
or other requirements that are primarily aimed at imports.
Tariffs: Taxes imposed on goods entering a country.
United Nations Organizations: The totality of United Nations bodies created to
and bringing buyers and sellers together.
United States Department of State: The foreign affairs arm of the United States
government, in charge of promoting relations with other governments.
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Voluntary Export Restraints: A government’s self-imposed export quotas to a
particular country that are established to avoid more severe protectionist action by the
respective importing country.
DISCUSSION QUESTIONS:
1. Discuss the different arguments used by countries invoking the protection of
national industry and consumers.
Central and Eastern European countries have argued for the protection of their
markets on the basis that they needed to first address issues of excessive production
capacity before allowing free reign to international firms in their markets. These
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2) Look up recent articles regarding China’s trade restrictions. Which of these
arguments does it best appear to advocate?
China recently has been relatively compliant with regard to trade rules. Most
experts attribute this to its membership in the WTO. However, occasionally problems
3) What are the financial controls imposed on international trade, i.e., price
controls and currency controls?
Price controls are strategies requiring a product to sell for a particular price in the
local market. Price controls are usually used to increase the prices of imports to
match the prices of local competition. These strategies include antidumping and
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4) Describe the mission and accomplishments of the World Trade Organization
The WTO is the largest and the most influential international trade organization in
the world with 150 member countries. Its membership is predicated on
implementation and adherence to all agreements reached within the organization. Its
5) How do international organizations overlap in their efforts to promote trade
and economic development?
The United Nations Development Program, the World Bank, and the United States
6) What are the U.S. equivalents of the Ministry of Foreign Trade and the
Ministry of Foreign Affairs? How do they promote trade?
The Ministry of Foreign Trade, the international equivalent of the Department of
Commerce, is responsible for a country’s international trade relations. The Commerce
Department promotes trade by offering export assistance and counseling to
REVIEW QUESTIONS:
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True/False
Multiple Choice
1) D
CASE 3-1
Transshipments: An International Trade Challenge
1. What are the reasons behind transshipments? Address them from the perspective
of U.S. law-enforcement officers and from the perspectives of Chinese
manufacturers.
Transshipments, also known as laundering trade, involve hiding the country of origin of a
2. What types of barriers to trade are transshipments attempting to bypass?
3. What is the next step for the customs officers and law enforcement in the Norfolk
case?
Answers will vary. One approach would involve hiring more employees to ensure
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