Question: How do governments intervene in international trade?

Answer:

There are seven main instruments of trade policy

1. Tariffs

2. Subsidies

3. Import quotas

4. Voluntary export restraints

5. Local content requirements

6. Antidumping policies

7. Administrative policies

There are seven main ways a country can intervene in the market. Governments can implement tariffs
or subsidies, set imports quotas or voluntary export restraints, establish local content requirements or
antidumping policies, or use administrative policies to make it more difficult for companies to engage in
trade. Lets talk about each one.

Question: Why do governments impose tariffs?

Answer:

Tariffs

increase government revenues

provide protection to domestic producers against foreign competitors by increasing the

cost of imported foreign goods

force consumers to pay more for certain imports

So, tariffs are unambiguously pro-producer and anti-consumer, and tariffs reduce the overall
efficiency of the world economy

Why do governments implement tariffs? Well, tariffs are beneficial to governments because they
increase revenues. Theyre also beneficial to domestic producers because tariffs provide protection
against foreign competitors by increasing the cost of imported foreign goods. Of course, this means
higher prices for consumers, though.

In 2002 for example, the U.S. steel industry successfully lobbied Congress for protection from
foreign imports. The U.S. put ad valorem tariffs of between 8 and 30 percent on all steel imports.

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As a result, the price of steel products in the U.S. rose 30 to 50 percent, hurting not only consumers,
but also manufacturers of appliances, cars, and other steel products. These producers claimed that
the tariffs made it difficult to compete in the global market. Questions were raised as to whether
the benefits the tariffs brought to the steel producers were worth the costs to steel consumers. The
tariffs were revoked in 2003 when the WTO ruled that they violated free trade agreements.

In any case, there is general agreement that tariffs are unambiguously pro-producer, and anti-
consumer. Tariffs also reduce the overall efficiency of the world economy because they encourage
domestic producers to manufacture goods that could be produced more efficiently elsewhere.
Recall from the Opening Case for example, that there is concern that the recent global financial
crisis could result in greater protectionism a situation that will ultimately hurt consumers.

Question: Who benefits from import quotas and voluntary export restraints?

Answer:

Import quotas and voluntary export restraints benefit domestic producers by limiting import
competition, but they raise the prices of imported goods for consumers

Remember that import quotas and voluntary export restraints benefit domestic producers by
limiting import competition, but they raise prices of imported goods!

Question: Why do governments intervene in trade?

Answer:

There are two types of arguments

1. Political arguments - concerned with protecting the interests of certain groups within a
nation (normally producers), often at the expense of other groups (normally consumers)

2. Economic arguments - concerned with boosting the overall wealth of a nation (to the
benefit of all, both producers and consumers)

So, if we know from trade theory that free trade is beneficial to countries, why do governments
intervene in the market?

Governments intervene for political reasons and for economic reasons.

Political arguments are concerned with protecting the interests of certain groups within a nation,
normally producers, usually at the expense of other groups like consumers, while economic
arguments are typically concerned with boosting the overall wealth of a nation.

Well begin with political arguments.

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 Question: Why should international managers care about the political economy of free trade or
about the relative merits of arguments for free trade and protectionism?

Answer:

Trade barriers impact firm strategy

Firms can play a role in promoting free trade or trade barriers

What are the implications of all of this for companies?

Well, you already know that trade barriers raise the cost of exporting to another country, and that
voluntary export restraints also limit a companys ability to sell its product. Youve probably also
guessed that firms can play an active role in promoting either the use of trade barriers or free trade.

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