International Trade: Barriers and Facilitators

Dana-Nicoleta Lascu
Chapter 3

Copyright Atomic Dog Publishing, 2002

Chapter Objectives
Examine trade barriers imposed on international trade and arguments used to erect and maintain these barriers Provide an overview of organizations facilitating international trade directly or by promoting economic development Examine government efforts involved at promoting economic development and international trade Describe trade facilitators such as foreign trade zones, offshore-assembly plants, special economic zones and the Most-Favored-Nation Status
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Arguments for Protectionism

Excess productive capacity Excess labor Infant industry argument and industrialization Natural resources conservation and environmental protection Consumer protection National defense

Entry Barriers

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Tools of Government Protectionism

Tariffs

Discourage imports of particular goods Penalize countries that are not politically aligned with the importing country Generate revenues

US tariffs < 10% Other countries can impose tariffs > 100% for protected products

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Tools of Government Protectionism, continued

Non-Tariff Barriers

Measures, other than traditional tariffs, that are used to distort international trade flows
- Raise prices of both imports and import-competing goods - Favor domestic over foreign supply sources by causing importers to charge higher prices and to restrict import volumes - Examples: Orderly market arrangements Voluntary import expansion Voluntary export restraints

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Tools of Government Protectionism, continued

Quotas

Specify maximum quantity (unit limit) or value of a product that may be imported during a specified period Administered either on a global first-come, first-served basis or on a bilateral basis to restrict shipments from a specific supply source

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Licenses
Non-automatic import licenses

Restrict volume and/or quantity of imports

Automatic import licenses

Granted freely to importing companies Facilitate import surveillance Discourage import surges Place administrative and financial burdens on importer May raise costs by delaying shipments

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Voluntary Expansion and Restraints

Voluntary import expansion

Governments agree to allow imports from a particular country as result of pressure from another country Increases foreign access to a domestic market Increases competition and reduces local prices

Voluntary export restraints

Self-imposed export quotasimposed to avoid a greater penalty Used by the importing country to protect local industries

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Price Controls
Price increase

Increasing prices of imports to match minimum domestic prices When used as price controls, they involve initiating investigations to determine if products were sold below fair value to get rid of excess inventory (dumping) or as a result of foreign subsidies. Such measures can be used to intimidate importers. Additional charges that increase the cost of imports, such as advance import deposits, import charges, seasonal tariffs and customs charges

Antidumping and countervailing duty actions

Paratariff measures

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Standards
Environmental, performance, manufacturing and other standards used as barriers to imports; primarily imposed by highly industrialized countries Excessive standards can help local and international industry alike, by deterring gray markets
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Percentage Requirements
Requirement that a percentage of the products imported be locally produced Local content requirement

Met by manipulating and/or assembling the product on the territory of the importing country, usually in a foreign trade zone

Favoring local contribution and labor Alternatively, limiting foreign ownership to a certain percentage

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Boycotts, Embargos, Sanctions

Boycotts

Action group calling for a ban on all goods associated with a particular company and/or country Target company may be representative of, or even synonymous with, its country of origin
Prohibiting all business deals with the target country; affects third parties

Embargos

Sanctions

Punitive trade restrictions applied by a country or group against another country for noncompliance

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Currency Controls
Blocked currency

Does not allow importers to exchange of local currency for currency a seller is willing to accept as payment
Favorable and less favorable exchange rates imposed on imports, based on the extent to which they are necessary and desirable Can also be the difference between black market and government exchange rates Give priority to imports in the national interest Delay access to hard currency exchange for products not deemed essential

Differential exchange rates

Foreign exchange permits

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Facilitators of International Trade

International Trade and Economic Development Organizations Government Organizations Other Institutions and Procedures Facilitating International Trade

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World Trade Organization

Largest and most influential international trade organization Ensures free flow of trade Functions:

Provides assistance to developing and transition economies Offers help for export promotion Promotes regional trade agreements and economic cooperation Reviews members trade policies and engages in routine notification of new trade measures

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World Trade Organization, continued

WTO agreements represent trade rules and regulations and act as contracts guaranteeing countries trade rights and binding governments to free trade policies. Agreements:

General Agreement on Tariffs and Trade General Agreement on Trade in Services (GATS) Trade-Related Aspects of Intellectual Property Rights (TRIPS)

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Group of Seven (Eight) G7 (G8)

Members from the most industrialized countries: Canada, France, Germany, Italy, Japan, United Kingdom, United States and Russia

Yearly meetings involve heads of state, government ministers, directors of central banks Addresses: biotechnology,food safety, economic development, disarmament, arms control, organized crime, drug trafficking, terrorism, environmental issues and trade

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International Monetary Fund (IMF)

Encourages unrestricted conversion of currencies through clear and unequivocal values Member voting power linked to amount they contribute Less of a lender of last resort, than a body instituting appropriate development strategies Mediator between debtors and creditors Provides training and technical assistance for monetary and financial strategies
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Development Banks
The World Bank

Largest international bank that sponsors economic development Employs international specialists in economics, finance, sectoral development Focus on health and information technology

African Development Bank Asian Development Bank

European Bank for Reconstruction and Development Inter- American Development Bank
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United Nations Organizations

Promote the economic and financial welfare of developing countries Focus on developing industrial, communication, agricultural and transportation infrastructures 16 different United Nations Organizations

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Government Organizations
United States Agencies

US Agency for International Development (USAID) US Department of Commerce Export-Import Bank of the United States State and Local Government Agencies

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Free Trade Zones (FTZs)

Tax-free area not considered part of the country in terms of import regulations and restrictionssite is considered an international area Merchandise in FTZ is outside the jurisdiction of host countrys customs services Host country benefits:

Creates demand for local services, products, and raw materialshence local jobs Increases trade balancere-exports add to total number of exports from the respective country

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Free Trade Zones (FTZs), continued

Firm benefits from using an FTZ:

Foreign goods are exempt from duties as long as they do not enter the country Goods are imported when demand is high, thus deferring tariffs until that time Payment is delayed until goods are sold Firm can use the FTZ for breaking bulk

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Free Trade Zones (FTZs), continued

Firm benefits from using an FTZ, cont.:

Lowers prices for goods sold in the importing country Helps importing country impose local content regulations on products from abroad Safer than most ports of entrybonded warehouse Products can be labeled as manufactured in the foreign trade zone country, if products from that country have a positive country-of-origin (country image).

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Other Privileged Trade Positions

Customs-Privileged Facilities

Products are brought into an in-bond area, manipulated (processed, repackaged, assembled), and re-exported to country where products originated Low tariffs assessed only on value-added processing that took place in the zone Limits on products imported to encourage re-exporting
Preferential tax treatment on imported products from countries that are not part of a US trade agreement

Most-Favored-Nation Status

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Chapter Summary
Rationales for protectionism include protection of markets with excess production capacity, with excess labor, infant industry argument, protection of environment, consumers, and national defense arguments Protection tools involve imposing tariff and non-tariff barriers Several institutions facilitate international trade directly, or by promoting economic development. They are: the World Trade Organization, the Group of Seven (Eight), and the development banks; government institutions; and other entities, such as Free Trade Zones and Customs-Privileged Facilities
Copyright Atomic Dog Publishing, 2002