The Political Economy of International Trade

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The Political Economy of International Trade

Chapter Outline

OPENING CASE: Why Are Global Food Prices Soaring?

INTRODUCTION

INSTRUMENTS OF TRADE POLICY

Tariffs
Subsides
Country Focus: Subsidized Wheat Production in Japan
Import Quotas and Voluntary Export Restraints
Local Content Requirements
Administrative Polices
Antidumping Policies
Management Focus: U.S. Magnesium Seeks Protection

THE CASE FOR GOVERNMENT INTERVENTION

Political Arguments for Intervention
Country Focus: Trade in Hormone-Treated Beef
Economic Arguments for Intervention

THE REVISED CASE FOR FREE TRADE

Retaliation and Trade War
Domestic Politics

DEVELOPMENT OF THE WORLD TRADING SYSTEM

From Smith to the Great Depression
1947-1979: GATT, Trade Liberalization, and Economic Growth 1980-1993: Protectionist Trends
The Uruguay Round and the World Trade Organization
WTO: Experience to Date
The Future of the WTO: Unresolved Issues and the Doha Round Country Focus: Estimating the Gains from Trade for America

FOCUS ON MANAGERIAL IMPLICATIONS

Trade Barriers and Firm Strategy
Policy Implications

SUMMARY

CRITICAL THINKING AND DISCUSSION QUESTIONS

CLOSING CASE: Agricultural Subsidies

Learning Objectives

1. Describe the policy instruments used by governments to influence international trade flows.

2. Understand why governments sometimes intervene in international trade.

3. Articulate the arguments against strategic trade policy.

4. Describe the development of the world trading system and the current trade issues.

5. Explain the implications for managers of developments in the world trading system.

Chapter Summary

This chapter begins with a discussion of the six main instruments of trade policy, including tariffs, subsidies, import quotas, voluntary export restraints, local content requirements, and administrative policies. This section is followed by a discussion of the merits of government intervention into international trade. The author provides a balanced view of this difficult issue. The second half of the chapter focuses on the development of the global trading system. A historical context is provided, along with a view of the global trading system as it exists today. The author acquaints the reader with the General Agreement on Trade and Tariffs (GATT) and the World Trade Organization.

Opening Case: Why Are Global Food Prices Soaring?

Summary

The opening case examines why global food prices are rising significantly. For more than two decades, improvements in agricultural productivity and output have contributed to lower food prices, but in 2007, the price of wheat was double its price of just a few months earlier, and the price of corn had risen some 60 percent. Two explanations for the phenomenon are increased demand, and the effects of tariffs and subsidies for bio-fuels. Discussion of the case can revolve around the following questions:

QUESTION 1: Food prices have risen dramatically since 2007. Reflect on the reasons for the price increase, and discuss the implications of higher prices for consumers in developed and developing countries.

ANSWER 1: For decades, consumers have enjoyed the benefits of increased productivity and output in the global food industry. In 2007, however, everything changed. The price of wheat reached its highest point ever, and the price of corn rose 60 percent over its 2006 price. Two factors contributed to this situation. The first was the increased demand for food from China and India. The second factor involved tariffs and subsidies for bio-fuels. Farmers in the European Union and in the United States are currently the recipients of subsidies for the production of crops used in bio-fuels. As a result, land that might be used for growing food is being converted to bio-fuel crops, pushing up...
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