The Political Economy of International Trade
Governments and Trade
 More
often governments manage trade
(… level the “playing-field”)
– Restriction of imports: protectionist
intervention
– Promotion of exports
– Trade promotion and FDI incentives
 Free-trade “Good”
or “Bad”?
– Social issues related to free-trade
– Implications for business and individual groups
Instruments of Trade Policy
 Tariffs
 Subsidies
 Import
quotas
 Voluntary export
restraints
 Local content
requirements
 Administrative policies
 Anti-dumping policies
Tariffs
Taxes
levied on imports (also sometimes on exports)
– Specific tariff: fixed charge for each good imported
– Ad valorem tariff: a % of imported goods value
Who
gains:
– Government
– Domestic producers (at least in the short run)
– Employees of protected industries keep their jobs
Who
loses:
– Consumers who pay higher prices
– The economy which remains inefficient
– Employees of protected industries who don’t
develop new skills
Subsidies

Government support to domestic producers
– Cash grants, low-interest loans, tax breaks, equity
participation, government purchases
– Aim to achieve lower costs to
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
Compete against cheaper imports
Gain export markets
Increase domestic employment
Help local producers achieve first-mover advantage in
emerging industries
Governments
– Tax individuals… to pay for subsidies
– Consumers buy more expensive goods with lower
disposable incomes
Quotas and Voluntary Restraints

Import quota: government specifies how much of
what product can be imported from which countries
– Voluntary export restraint: how much of what product can
be exported to which countries imposed officially or
unofficially
Local Content Requirements
A product’s certain % has to be produced domestically with
local raw materials
Used by LDCs to
Achieve technology transfer, skills transfer
Shift manufacturing to a higher technological level
Similar effects to those of import quotas
Anti-dumping Policies
Dumping: selling goods in an overseas market
At below their production costs or
Below “fair market value”
Anti-dumping policies punish
producers who dump and protect
domestic producers
 Administrative policies
– Bureaucratic rules that make it difficult
for imports to enter a country
Political Arguments for Intervention
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National security
Individual industries and jobs
protected
Retaliation
Consumer protection (health, safety)
Furthering foreign policy objectives
Economic Arguments for Intervention
Infant industry protection
Strategic trade policy
Revised Case for Free Trade
 Retaliation and Trade War
– Krugman
– Strategic trade policy is tantamount to “beggar
thy neighbor” policy
– How to respond if one’s competitive nation is
subsidizing specific industries?
 Domestic politics
– Governments often do not act in the national
interest when they intervene
– Politically important groups influence them
International Trade Cooperation (!)
 U.S.A.
and:
– foreign companies trading with Cuba
– any company dealing with Iran - N. Korea
 W.T.O.
in place but... US prefers to resolve
disputes bilaterally with
– China--new WTO member
– Japan--old WTO member
 Trade
blocks proliferating
 Anti- free trade movement
The Global Trading System
Adam Smith to Great Depression
– Britain adopts free trade in 1846
– Smoot-Hawley act (US) 1930 aimed at
employment protection one cause of the Great
Depression
1947-1979: GATT, Trade
Liberalization,
Economic Growth
1980-1993: GATT needs fixing
– Uruguay round of GATT negotiations (1986-
1993)
– Creation of WTO with powers to implement
trade agreements
GATT
 Pre-WWII protectionism
– Smoot-Hawley +57% import tariffs (1930)
– UK, France, Italy followed suit
– world depression in ‘30s
 Havana Conference (1947) -> GATT
– 125 countries by 1994
– small staff in Geneva
– tariffs fm 40% in ‘47 to 3% in ‘95
– trade 15x to $6.75 trillion in ‘92
 WTO
superceded GATT in 1995
GATT/WTO
MFN
– any preferential treatment offered to one member
country must be extended to all other members
– members can extend MFN to non-members (e.g.,
China)
Exceptions
– GSP (Generalized System of Preferences) for LDCs
– regional arrangements such as NAFTA
– countries still use NTBs, other loopholes (peanut
waiver, 1955)
Uruguay Round of GATT negotiations

Tariffs cut further
 Agricultural Policy Modified:
– cut price supports 20%, export subsidies 36%
– For this policy: USA, Argentina, Australia, Canada
– Anti: Japan, Korea, India, EU

Services given prominence: developed set of
principles
 Intellectual Property Rights protected further:
patents, copyrights, trademarks, brand names
 WTO created: to implement Uruguay round,
controversial
WTO: Experience

WTO as a global policeman -- 146 members by ‘04
– 1995-2004: >304 trade cases brought to WTO for decision
– Three quarters had been resolved by late 2003 through
bilateral consultations
– WTO recommendations have been adopted

GATT dealt with 196 cases from 1947-1995!
 WTO telecommunications agreement 1998 (effect)
 WTO Financial Services agreement 1999 (effect)
 The WTO in Seattle
– Aim: reduce barriers to agricultural trade, trade &
investment services
– Protests
– Disagreements
– Environmental issues

Doha round and unresolved issues
“So what” for Business”
 Trade
barriers affect firm
strategy
 Government
policy has direct
impact on a firm’s business