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CHAPTER 9
Formulation of National Trade Policies
Chapter Objectives
After studying this chapter, students should be able to:
1. Present the major arguments in favor of and against government
intervention in international trade.
2. Identify the advantages and disadvantages of adopting an industrial
policy.
4. Describe the major tools countries use to restrict trade.
6. Explain how countries protect themselves against unfair trade
practices.
LECTURE OUTLINE
OPENING CASE: Jumbo Battle over Jumbo Jets
The opening case details the competition between Boeing Co. and Airbus in the jumbo
jet market and issues arising from Airbus’s development of the A380. Both companies
have received benefits from their governments in the past. Now the WTO will need to
resolve which subsidies to the firms are illegal.
Key Points
• The Boeing 747 has been the world’s largest commercial aircraft (carrying 495
people) since its introduction in 1969.
• Boeing’s monopoly of the jumbo jet market has given it an advantage in selling
smaller planes, since they often share spare parts.
• Airbus is introducing the 650-seat A380, hoping to break Boeing’s hold over the
jumbo jet market segment. The expenses of introducing the A380 have been
financed in part with low-interest loans from the German, French, and British
governments.
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CHAPTER SUMMARY
Chapter Nine explores the issue of national trade policy. The chapter begins with a
discussion of why governments intervene in the free flow of trade and then considers the
various types of trade barriers and how they are used.
RATIONALES FOR TRADE INTERVENTION
• There are two basic issues to consider when developing a national trade policy.
First, should a national government intervene to protect its domestic firms by taxing
foreign goods entering the domestic market or constructing other barriers against
imports? Second, should a government help domestic firms increase their foreign
sales through export subsidies, government-to-government negotiations, and
guaranteed loan programs?
• In the United States, the debate has centered on the question of whether the
government should promote free trade or fair trade. Free trade implies minimal
government influence on the exporting and importing decisions of private firms and
individuals. Fair trade (also called managed trade) suggests active intervention by
the national government to ensure that exports receive an equitable share of foreign
markets and that imports into the country are controlled to minimize losses of jobs
Industry-Level Arguments
Teaching Note:
It is useful to review the ideas of Adam Smith regarding free trade (see
Chapter Six) before proceeding with the discussion of why
governments intervene in the free flow of goods between nations.
• The national defense argument for intervening in the market suggests that a nation
must be self-sufficient in critical raw materials, machinery, and technology, or else be
vulnerable to threats from other countries. The text provides the example of the
restrictions Japan puts on imported rice, forcing the country to become self-sufficient.
• The national defense argument is a popular one, and one that has been used to
protect a variety of industries, ranging from electronics to steel.
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• The infant industry argument is based on the idea that some industries could thrive
if they are protected from foreign competition during their infancy and adolescence.
As the text mentions, Japan has been very successful at nurturing new industries
through various national policies.
National Trade Policies
In addition to focusing on the needs of particular industries, governments may also
implement broad policies designed to consider the needs of the economy and society as
a whole. These broad national policies are then followed by specific industry policies.
• Economic Development Programs. In many countries, the focus of broad national
policies is economic development. Some countries that depend on a single export
commodity will attempt to diversify their economies to minimize risk.
• Some countries will follow an export-promotion strategy as a means of achieving
higher levels of economic development. An export-promotion strategy encourages a
country’s businesses to compete in foreign markets by capitalizing on a particular
advantage the country possesses.
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VENTURING ABROAD
Toyota’s Politics Are Local
This section provides some historical perspective on Toyota’s Trade and Investment
strategies for the U.S. market. In the early 1980s, Toyota realized that as more and more
Japanese-produced vehicles were exported to the U.S., the U.S. domestic automobile
manufacturers would be negatively impacted and a significant number of high-wage jobs
would be threatened. The threat of lost jobs would then provide politicians with material
they could use in arguing for the imposition of trade restrictions (i.e. tariffs, quotas, etc.).
BARRIERS TO INTERNATIONAL TRADE
Barriers to trade can either be in the form of tariffs or in the form of nontariff barriers.
Tariffs
• A tariff is a tax placed on a good involved in international trade. Most tariffs are
collected on imported goods (import tariffs), but some are collected on goods as
Table 9.1 here.
• The harmonized tariff schedule (HTS) is a detailed classification scheme for
imported goods. Companies use the HTS to try to determine what tariffs will be
assessed on their goods. The text provides an example of how the HTS is used.
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BRINGING THE WORLD INTO FOCUS
The Fight over Rare Earths
This section deals with China’s decision to limit the exportation of rare earth
minerals. There are 17 different minerals that are critical in the production of high
tech products, such as smart phones, computer chips and batteries for hybrid cars.
The primary question is what is China’s motivations behind the imposition of the
restrictions. The Chinese government has stated that it is motivated by a desire to
protect the environment, while critics argue it is designed to encourage foreign
investment in China for the production of high tech products
• There are two main reasons why tariffs have historically been assessed. First, they
are a source of revenue for governments, particularly in developing countries.
Second, they act as a barrier to trade, and consequently increase the demand for
domestic products.
Nontariff Barriers
Nontariff barriers (NTBs) include quotas, numerical export controls, and other nontariff
barriers that impede international trade.
• Quotas are numerical limits on the quantity of a good that may be imported into a
country during some period of time. Quotas are frequently used to protect industries
that are politically powerful. A tariff rate quota (TRQ) imposes a low tariff rate on a
limited amount of imports of a specific good, but then subjects all imports of the good
above that threshold to a prohibitively high tariff. Use Figure 9.4 here.
• Although domestic producers benefit from quotas, the domestic consumer does not.
The text demonstrates that, as a result of quotas, the price of sugar in the U.S. is
roughly double the world price.
• Some countries prohibit any importation of a specific product as a means of
developing local industry.
• Numerical Export Controls. Countries may also use a numeric system to limit the
amount of goods they export. Embargoes are an absolute ban on the export (or
import) of goods to a particular location. They may be used by a country as a
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PROMOTION OF INTERNATIONAL TRADE
Various techniques such as subsidies, the establishment of foreign trade zones, and
export-financing programs are used by governments to promote international business.
Subsidies
• Subsidies reduce the cost of doing business, thus artificially affecting the
competitiveness of receiving firms. In an effort to increase economic activity and
create jobs, governments may employ subsidies, such as tax breaks and/or direct
Foreign Trade Zones
• Foreign trade zones (FTZ) are geographic areas in which imported or exported
goods receive preferential tariff treatment.
• FTZs are used by governments to encourage regional economic development. The
use of FTZs has grown in recent years. The text provides an example of how FTZs
have become an important component in the Mauritius economy.
• Maquiladoras, factories located in the free trade zone in Mexico along the U.S.
EMERGING OPPORTUNITIES
Cotton Subsidies and World Poverty
This section discusses the subsidies U.S. farmers have been receiving and the
impact of those subsidies on agricultural production in other countries. U.S. subsidies
to cotton farmers’ increase the amount (supply) of cotton produced in the U.S. This
Export Financing Programs
• Most major trading nations are, through the creation of government-owned agencies,
in a position to assist domestic firms with the financing of export sales. The Export-
Import Bank of the United States (Eximbank) offers assistance to U.S. exporters
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CONTROLLING UNFAIR TRADE PRACTICES
When governments feel that domestic exporters have received unfair treatment in other
countries, they may take retaliatory measures. In the United States, the International
Trade Commission (ITC) may impose duties to counteract unfair trade practices.
Countervailing Duties
• Countervailing duties (CVD) are ad valorem taxes imposed by the government of
the importing nation to counter the impact of foreign subsidies. The goal of the CVD
is to create a situation in which trade is a result of competitive and comparative
advantage, rather than a result of government-provided subsidies.
Antidumping Regulations
• Dumping occurs when (1) a company sells its goods for a lower price in a foreign
market than the price it charges in its home market, in which case it is a form of
international price discrimination, or (2) it sells its goods below cost in the foreign
market, in which case it is a form of predatory pricing.
• Antidumping laws are designed to protect local industries from goods that have
been “dumped” by foreign producers into the local market. However, determining
whether or not dumping has actually occurred can be tricky. The text demonstrates
the difficulty in identifying dumping situations in the auto industry.
Should Countries Enforce Their Unfair Trade Practice Laws?
• Unfair trade practice laws are intended to (1) promote global efficiency by
encouraging production in countries that can produce a good most efficiently; (2)
Safeguards
• International trade law allows countries to protect themselves from sudden surges in
imported goods, even if the goods were traded fairly, in order to allow them time to
adjust to the changed economic environment.
• Section 201 of the Trade Act of 1974 permits the imposition of temporary trade
restrictions to protect American firms from serious harm.
CHAPTER REVIEW
1. What is free trade? Who benefits from it?
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Free trade implies minimal government influence on the exporting and importing decisions
2. What is the infant industry argument?
The infant industry argument suggests that the infant manufacturing sector in a newly
3. What are the different types of tariffs?
A tariff is a tax placed on a good involved in international trade. An export tariff is levied on
goods as they leave a country, while a transit tariff is levied on goods as they pass through a
4. Why is it useful for an importer to seek out an advance tariff classification from the U.S.
Customs Service?
5. Why might a country adopt a VER?
6. What are the major forms of NTBs?
7. What is an FTZ?
8. What is the role of the Eximbank?
9. What is the purpose of a CVD?
10. What are the two definitions of dumping?
Dumping occurs when a firm sells its goods in a foreign market at a price below what it
QUESTIONS FOR DISCUSSION
1. What are the advantages and disadvantages of an industrial policy?
When a government adopts an industrial policy, it formulates policies based upon the needs
of the national economy that will promote the competitiveness of key products and industries
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2. Because of Japan’s success in competing in international markets, it has been the target of
numerous complaints that it restricts foreign access to its local markets. As Japan reduces
its barriers to imported goods, who is likely to gain from lowered barriers? Who is likely to
lose from them?
There are at least two constituents that are likely to gain from Japan’s lower barriers to
imported goods. First, Japanese consumers will probably benefit from the lower prices and
3. Strategic trade theory applies to industries that are composed of only a few firms worldwide.
List as many industries as possible that fit this description.
4. Refer back to figure 9.2 page 231. What would happen if Japan offered Toshiba a subsidy of
$1.5 billion after learning that France granted Areva a subsidy of $2 billion?
With the subsidy Areva is going to develop the technology. Using the figure, it shows that if
Toshiba were to get the subsidy and it chooses to develop the technology, Areva would
5. Indonesia has imposed high export taxes on the export of raw wood and on sawn timber.
Why would they do this? (Hint: What is the impact of these export tariffs on the domestic
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market for wood and timber? Which domestic industries would benefit from this impact?)
Who is hurt by high export taxes?
Export tariffs have the effect of reducing the amount of a product that is exported. Countries
often impose such tariffs to limit exporting of products that are in short supply. Indonesia’s
6. Should we worry if foreigners sell us goods cheaply?
Probably not. If the foreign exporter is engaging in predatory pricing with the hope of
eventually driving domestic competitors out of business, worry might be justified. However,
BUILDING GLOBAL SKILLS
Essence of the exercise
Students must pick an industry or product and report on the barriers to trade or investment that
five countries impose on that product or industry. The textbook suggests a number of useful
sources for students. The “answers” to this assignment depend entirely on the industry or
product selected by each student.
CLOSING CASE
Green Energy and Free Trade
The closing case discusses the promotion of Green Energy, by several countries as a focal
point in recovering from the negative effects of the Global Recession of 2008-2009. However,
many of these national programs run contrary to the free trade objectives of the World Trade
Organization (WTO). The case provides examples of these trade barriers, and looks at the
impact of them on all parties.
Key Points:
• Green energy involves power generated by sustainable renewable resources.
• In 2008, President Obama promoted a Green Energy initiative designed to reduce
dependency on foreign oil, lower green house gas emission, and create jobs.
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• Similar programs were announced by various governments around the world.
Case Questions
1. Why have so many governments chosen to subsidize green energy initiatives? Can
all of these programs be successful?
2. China has passed the United States as the largest emitter of greenhouse gases,
which displeases environmentalists concerned about global climate change. China
has subsidized its green energy manufacturers, allowing them to dominate key
industries, such as solar panels, which displeases advocates of free trade. What
would you recommend China do? Should it accommodate its critics? Should it ignore
them?
With China’s political ideology somewhere between Communism and Socialism, the
government has total control of what will be done, and it is assumed that they will do
3. What is the rationale for BTAs? Under what conditions if any, should countries be
allowed to impose BTAs?
Border Tariff Adjustments are trade measures that seek to level the playing field
4. What is the appropriate trade-off between promoting free trade and promoting green
energy? Should the WTO rules be suspended when dealing with green energy?