Chap 08

Griffin and Pustay Third Edition
INTERNATIONAL
BUSINESS
A MANAGERIAL PERSPECTIVE
Chapter 8
Formulation of National Trade
Policies 1
Prentice
Prentice
Hall ©Hall
2002©International
2002 International
Business
Business
3e 3e
Chapter Objectives
After studying this chapter you should be able to:
• Present the major arguments in favor of and

against governmental intervention in
international trade.
• Identify the advantages and disadvantages of
adopting an industrial policy.
• Analyze the role of domestic policies in
formulation of a country’s international trade
policies.
2
Prentice Hall © 2002 International Business 3e
Chapter Objectives (cont.)
After studying this chapter you should be able to:
• Describe the major tools countries use to

restrict trade.
• Specify the techniques countries use to
promote international trade.
• Explain how countries protect
themselves against unfair trade
practices.
3
Desmarais is Tired of Being
Dumped On
• Desmarais was plagued by import
competition from low-priced photo albums
produced in Asia.
• Desmarais believed it was being victimized
by a practice known as dumping. A firm
engages in dumping when it sells its products
outside its domestic market at prices below
those it charges in its domestic market.
4
Desmarais is Tired of Being
Dumped On (cont.)
• The Canadian Import Tribunal imposed

an antidumping-duty—a tax on the
dumped imported goods—on Korean
and Japanese photo albums.
5
Rationales for Trade
Intervention
• Two principal issues have shaped the debate
on appropriate trade policies:
– Whether a national government should intervene
to protect the country’s domestic firms by taxing
foreign goods entering the domestic market or
constructing other barriers against imports.
– Whether a national government should directly
help the country’s domestic firms increase their
foreign sales through export subsidies,
government-to-government negotiations, and
guaranteed loan programs.
6
Free Trade
Free trade implies that the

national government exerts
minimal influence on the
exporting and importing
decisions of private firms
and individuals.
7
Fair Trade
Fair trade, sometimes called managed

trade, suggests that the national
government should actively intervene to
ensure that exports of domestic firms
receive an equitable share of foreign
markets and that imports are controlled to
minimize losses of domestic jobs and
market share in specific industries.
8
The National Defense
Argument
• National defense has often been used as a
reason to support governmental protection
of specific industries. Since world events
can suddenly turn hostile to a country’s
interests, the national defense argument
holds that a country must be self-sufficient
in critical raw materials, machinery, and
technology or else be vulnerable to foreign
threats.
9
The Infant Industry Argument
• Alexander Hamilton, the first U.S.Secretary of

the Treasury, articulated the infant industry
argument in 1791. Hamilton feared that the
young nation’s manufacturers would not
survive their infancy and adolescence
because of fierce competition from more
mature European firms. Hamilton thus fought
for the imposition of tariffs on numerous
imported manufactured goods.
10
Maintenance of Existing Jobs
• To maintain existing employment levels,

firms and workers often petition their
governments for relief from foreign
competition. Government officials, eager
to avoid the human and economic misery
inflicted on workers and communities
when factories are shut down, tend to
lend a sympathetic ear to such pleas.
11
Strategic Trade Theory
• In the early 1980s new models of international

trade, known collectively as strategic trade
theory, were developed. Strategic trade theory
makes very different assumptions about the
industry environment in which firms operate
than do the classical theories. Strategic trade
theory considers those industries capable of
supporting only a few firms worldwide, perhaps
because of high product development costs or
strong experience curve effects.
12
Economic Development
Programs
• An important policy goal of many

governments, particularly those of
developing countries, is economic
development. Countries dependent on a
single export often choose to diversify
their economies in order to reduce the
impact of, say, a bad harvest or falling
prices for the dominant export.
13
Industrial Policy
• In many countries, the government

plays an active role in managing the
national economy. Often an important
element of this task is determining
which industries should receive
favorable governmental treatment.
14
Public Choice Analysis
• Why do national governments adopt public

policies that hinder international business and
hurt their own citizenry overall, even though
the policies may benefit small groups within
their societies? According to public choice
analysis, a branch of economics that
analyzes public decision making, the special
interest will often dominate the general
interest on any given issue.
15
Three Forms of Import
Tariffs
• Ad valorem tariff
– Assessed as a percentage of the market value of
the imported good
• Specific tariff
– Assessed as a specific dollar amount per unit of
weight or other standard measure
• Compound tariff
– Has both an ad valorem component and a specific
component
16
Harmonized Tariff Schedule
• Most countries have adopted a detailed

classification scheme for imported
goods called the harmonized tariff
schedule (HTS). Because of its
complexity, the HTS can sometimes be
difficult to use.
17
Reasons for Tariffs
Tariffs historically have been imposed for two reasons:
• Tariffs raise revenue for the national

government. Customs duties are reasonably
easy to collect.
• A tariff acts as a trade barrier. Because
tariffs raise the prices paid by domestic
consumers for foreign goods, they increase
the demand for domestically produced
substitute goods.
18
Nontariff Barriers
• Quotas
• Numerical export controls
• Other nontariff barriers
19
Quotas
• Countries may restrain international

trade by imposing quotas. A quota is a
numerical limit on the quantity of a good
that may be imported into a country
during some time period, such as a
year.
20
Numerical Export Controls
• A country may also impose quantitative barriers to

trade in the form of numerical limits on the amount
of a good it will export. A voluntary export restraint
(VER) is a promise by a country to limit its exports
of a good to another country to a prespecified
amount or percentage of the affected market.
• An embargo is an absolute ban on the exporting
(and/or importing) of goods to a particular
destination.
21
Other Nontariff Barriers
• Product and testing standards

• Restricted access to distribution networks
• Public-sector procurement policies
• Local-purchase requirements
• Regulatory controls
• Currency controls
• Investment controls
22
Promotion of International
Trade
• Subsidies
• Foreign Trade Zones
• Export Financing Programs
23
Subsidies
• Countries often seek to stimulate

exports by offering subsidies
designed to reduce firms’ costs of
doing business.
24
Foreign Trade Zones
• A foreign trade zone (FTZ) is a

geographical area in which imported or
exported goods receive preferential
tariff treatment. An FTZ may be as small
as a warehouse or a factory site or as
large as an entire city.
25
Export Financing Programs
• For many big-ticket items such as aircraft,

supercomputers, and large construction projects,
success or failure in exporting depends, in part,
on offering an attractive financing package.
• Because of the importance of the financing
package, most major trading countries have
created government-owned agencies to assist
their domestic firms in arranging financing of
export sales.
26
Countervailing Duty
A countervailing duty (CVD) is

an ad valorem tariff on an
imported good that is
imposed by the importing
country to counter the
impact of foreign subsidies.
27
Super 301
• Another weapon available to the U.S.

government to combat unfair trading
practices of foreign countries is Section
301—so-called Super 301—of the 1974
Trade Act. Super 301 requires the U.S.
trade representative, a member of the
executive branch, to publicly list those
countries engaging in the most flagrant
unfair trade practices.
28
Chapter Review
• Formulating trade policies that advance the

economic interests of their citizens is an
important task facing most national governments.
• Some rationales for governmental intervention
focus on the specific needs of an industry while
others focus on the country’s overall needs.
• Over the centuries, governments have developed
a variety of trade barriers. What are they?
29
Chapter Review (cont.)
• National governments also seek to

promote the interests of domestic firms
in international trade through other
programs. How is this done?
• National governments protect local
producers from unfair foreign
competition by enacting unfair trade
laws.
30

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Griffin and Pustay Third Edition

• Present the major arguments in favor of and

• Describe the major tools countries use to

• The Canadian Import Tribunal imposed

Free trade implies that the

Fair trade, sometimes called managed

• Alexander Hamilton, the first U.S.Secretary of

• To maintain existing employment levels,

• In the early 1980s new models of international

• An important policy goal of many

• In many countries, the government

• Why do national governments adopt public

• Most countries have adopted a detailed

• Tariffs raise revenue for the national

• Countries may restrain international

• A country may also impose quantitative barriers to

• Product and testing standards

• Countries often seek to stimulate

• A foreign trade zone (FTZ) is a

• For many big-ticket items such as aircraft,

A countervailing duty (CVD) is

• Another weapon available to the U.S.

• Formulating trade policies that advance the

• National governments also seek to

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