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 Introduction
We are going to majorly deal with:
˜ The political and economic reasons that
government have in intervening in
international trade
˜ The range of policy instruments that the
government uses to intervene.
˜ Emergence of GATT and WTO.
˜ Implications to managers.
 Government Intervention

˜ To protect the interest of domestic

producers.
Imagine a world without trade
˜ To protect jobs from foreign competition.
barriers!!!
˜ Increase foreign markets for products of
Countries
domestic will produce what they can efficiently
producers.
produce and they will import what they cannot
efficiently produce!!!
˜ To further the economy of the country as a
whole
 |olitical arguments
˜ |rotecting jobs and industries from unfair foreign
trade.
˜ National security
˜ As a bargaining tool to help open foreign markets
or make them ͞play by the rules of the game͟
˜ |rotecting consumers
˜ Furthering foreign policy objectives (Helms
Burton Act 1996)
˜ |rotecting human rights. ( China)
 Economic Arguments
˜ Infant industry argument (Brazil)
˜ Strategic Trade policy (Japan, Air bus industrie)

Revised case for free trade

˜ Trade war
˜ Domestic politics
 Instruments of Trade policy

Tax levied on imports
˜ Specific tariffs (a fixed charge per unit)
˜ Ad valorem tariffs ( a proportion of total imports)
R 
Government due to increased revenue
Domestic producer
R 
 
Consumer

Whether the gains to govt and domestic producer exceeds loss

to consumer depends on importance of import goods, jobs
protected etc.
 Instruments of Trade policy
È


Government payment to a domestic producer
(cash grants, low interest loans, tax break, equity
participation etc)
It helps domestic firms
˜ Competing against foreign imports
˜ Gaining export markets
But whether subsidies generate national benefits
is debatable.
 Instruments of Trade policy
   
Direct restriction on the quantity of some good
that is to be imported (Cheese)
Tariff rate quota:
It is a hybrid of tariff and quota.
Voluntary Export Restraint:
Quota on trade by exporting company.
 Instruments of Trade policy
Î 
     
Certain specific fraction of a good to be
produced domestically. (Buy America Act)
  


Certain administrative difficulties (Japanese)

 |
 
Dumping excess production or production at a price
which is less than the fair value in foreign markets
 Developing World Trade Systems

What if a government cheats? Who will make sure they play

Imagine 2 nations do not wish to
by the rules? Monitor them??? A REFREE???
reduce trade
barriers with a view that the other nation will
not do so!!! YES!!!
Though it might seem unlikely there is an international trading
Such a deadlock can be resolved only if the
framework.
governments wish to negotiate!!!
K



È R
 From Smith to Great Depression
˜ It was first officially embraced by Great Britain
in 1846, repealed Corn Laws.
˜ For the next 80 years it was prevalent but not
reciprocated by other nations.
˜ In 1930͛s Great depression US stock markets
clashed, Smoot Hawley Act was passed.
˜ Other nations were affected and they raised
tariffs and world slid into greater depression.
 1947-1979 GATT Trade Liberalization
and Economic Growth
Now after the world war 2 US emerged victorious and
economically dominant, they were strongly in favor of free
trade (SH act)
˜ GATT was established in 1947
˜ From its foundation it has grown from 19 nations to 120
countries
˜ It attempted to liberalize trade by eliminating tariffs, quotas
etc, but not in one swoop.
˜ It was spread over 8 rounds.
˜ Last successful round was the uruguay round ended in
1993.
˜ GATT was very successful, in the 1963-73 decade world
trade grew at 8.9%
 1980-1993 |rotectionist Trends
There was greater protectionism around the
world
3 important reasons for this trends were
˜ Economic success of Japan
˜ |ersistent trade deficit in the USA
˜ VER͛s
 Uruguay round
˜Major
On theAchievements:
background of rising pressures for
1. Extension of GATT rules to cover trade in
protectionism, 1986 GATT embarked on its
services.
Uruguay round of trade negotiations.
2. Govern the protection of intellectual property
˜3.ItsReduce
by faragricultural
the most ambitious
subsidies one and the
4.most
Strengthen GATT͛s
difficult monitoring
one(7 years) and enforcement
mechanisms.
˜ The agreement was formally signed in 1994.
5. WTO was created to implement the GATT
Agreement.
 WTO
World Trade Organizaation acts as an umbrella
brand that encompasses GATT along with 2
sister bodies.
˜ GATS- General Agreement on Trade in Services
˜ TRI|S ʹ Trade Related Aspects of Intellectual
|roperty Rights
Besides WTO has something that the GATT
never had- ͞TEETH͟
 WTO: Till Date
˜ By 2005 has 148 countries including China
˜ Another 25 countries are still negotiating
(Russian Federation and Saudi Arabia)
˜ It has remained in the forefront to all major
trade experiments
(1995-2005 325 trade disputes have been
brought to WTO, bu 2004 3/4ths are solved)
˜ The collapse of WTO talks at Seattle is a point
of concern.
 WTO in Seattle
R    
˜ In Nov 1999 WTO member states met at Seattle,
˜ Demonstration by environmentalists, human rights groups
Washington to launch a new round of talks
and other organizations calling WTO undemocratic
dubbed ͞millenial round͟.
It struckconcern
˜˜Expressed harsh about
realityfree
without
trade ofany agreement
agricultural products
being reached.
on deforestation.
! È



"
A friction
˜˜About loss of between
jobs US and EU in eliminating
subsidies to agricultural products.
˜˜They calledofWTO
Efforts US as
to ͞global capitalism͟
write ͞basic and rights͟
labour ͞the rape of
into
thelaw ofbyworld
world trading system.
multinationals͟
 A new round of talks DOHA
In 2001 it was started to finish off unfinished agenda from
Seattle.
They were scheduled for 3 years but already extended
due.
Major achievements:
˜ USA bowed to pressure to revise antidumping rules.
˜ |harmaceutical turn around with respect to patents.
However talks are still ongoing about agricultural
subsidies between USA and EU.
 Implications to managers
˜ Trade barriers raise costs of importing, so in order to meet
indigenous competition abroad it is more advantageous to
locate production units abroad.
˜ Thus it is better to design and engineer product in one
country, manufacture components in another and
assemble in another nation.
˜ Sometimes even when there are no barriers it is necessary
to locate abroad to prevent barriers in the future
˜ Anti dumping policies
˜ As a business firm we should not become responsible for
trade wars.