Political strategy in the face of globalization

Details

Politicians can make two basic responses:

Being in favour of market forces and deregulation. In this case, politicians will try to make their labour markets more flexible, for example by making it easier to hire and fire people. They will lower taxes to encourage private investment and private spending. They will cut red tape (= bureaucracy) to make it easier to start a new business. They will encourage free trade.
Being in favour of subsidies and protectionism. In this case, politicians will try to protect the job security and social benefits of people who already have a job. They will support high taxes in order to pay for social programs and other government spending, They will try to protect national businesses and jobs with measures such as tariffs (= taxes) and quotas (= limits) on imports.

Forms of trade control:

There are numerous ways in which a country may impose trade barriers. They can be distinguished:

- tariff barriers: which affect prices

- non-tariff barriers: may effect either price or quantity directly:

1 TARIFF BARRIERS: TARIFF = CUSTOMS DUTY

The most common type of trade control. It is a governmental tax levied on a good shipped internationally. Affect prices.

It serves 2 purposes:

- they raise money for the government to finance expenditures. This function isn’t so important for large industrial countries, but tariffs can be a major source of revenue in many low developed countries.

- increase the price of imports artificially

Types:

a.) export tariff: when it is collected by the exporting country

b.) transit tariff: if it is collected by a country through which the goods have passed.

c.) import tariff: is collected by the importing country. It is the most common type. It increases the price of imported goods and the domestic goods will gain a relative price advantage. It is a deliberate attempt to restrict imports.

d.) countervailing duty: is imposed on imports that benefit from a subsidy paid by the government of the exporting country.

e.) anti-dumping duty: is imposed on imports with the aim to reduce or stop imports of goods for sale at a price lower than in the country in which they were manufactured.

Tariff can be levied in some ways:

- ad valorem duty: the tariff may be assessed as a percentage of the value of the item

- specify duty: tariff assessed according to weight, volume or other unit of measurement.

- compound duty: combination of the ad valorem and specific duty; both of them are charged on the same product.

2A NON-TARIFF BARRIERS: DIRECT PRICE INFLUENCES

1.) subsidy: a grant given by government to encourage the production or consumption of a particular good or service. The competitiveness of subsidised goods can be increased in foreign markets, because subsidy allows to sell at lower price and reduces competition.

The use of the subsidy is very controversial, because the foreign companies frequently claim that they face unfair competition from subsidised production. It can distort normal commercial activities and hinder the achievements of GATT purposes.

The aim: government sometimes make direct payments to producers to compensate them for losses incurred from selling abroad.

But there are other ways in which the governments can provide assistance to their producers to make it cheaper or more profitable for companies to sell overseas:

- providing information

- sponsoring trade expositions/exhibition/fairs

- establishing foreign contacts

2.) special fees: excessive charges for import – related documents (for consular and customs clearance and documentation)

3.) customs deposits: are required to be placed in advance of shipment, and the minimum price levels at which goods can be sold after they have customs clearance.

2B NON-TARIFF BARRIERS: QUANTITY CONTROLS

1.) Quotas (kontingensek): the most common and type of import or export restriction based on the quantity.

- The import quota limits the quantitative amount of a product allowed to be imported in a given year.

- Export quotas may be established to assure domestic consumers of a sufficient supply of goods at a lower price, to prevent depletion of natural resources, or to attempt to raise an export price by restricting supply in foreign markets.

2.) Embargo: a specific type of quota that prohibits all trade. They are generally imposed for political purposes and the effect may be economic. They may be placed on either imports or exports, on whole categories of products regardless of destination, or on specified products to specific countries or on all products to given countries.

3.) Boycott: prohibition of all trade with certain selected companies, usually those have traded with political enemies.

4.) Voluntary export restrictions: agreement between two countries. One country agrees to limit exports of particular goods to another country for a specific period of time.

5.) ‘Buy Local’ legislation: Most governments give preference to domestic producers in their purchase of goods, sometimes in the form of content restrictions (a certain percentage of the product must be of local origin).

3 OTHER TYPES OF NON-TARIFF TRADE BARRIERS

1.) Standards: countries have set classification, labelling and testing standards in a manner that allows the sale of domestic products, but prohibit that of foreign-made one. The ostensible purpose: protecting the safety or health of the domestic population.

2.) Specific permission requirements: many countries require that potential exporters or importers secure permission from governmental authorities before executing contracts. This procedure is known as licensing arrangement. To gain a licence a company may have to send samples abroad in advance. Requiring licenses may not only restrict imports or exports directly by denial of permission, but also result in further deterrence of trade, because of costs, time uncertainty involved in the process.

3.) Administrative delays: there may be intentional administrative delays on entry, which create uncertainty and raise the cost of carrying inventory.

4.) Reciprocal requirements: It can occur that the importer is short of foreign exchange to purchase what he wants. The barter transaction, referred to counter-trade often require exporters to find markets for goods, thus may companies this type of business.

5.) Restrictions on services: Trade restrictions are usually associated with governmental interference in the international movement of goods. Many countries depend substantially on revenue from the foreign sale of such services as transportation, insurance, consulting, banking. These services account for about 30% of the value of all international trade. Countries engage in discrimination that favours their own companies.

Exercise 1: List some countries in favour of protectionism!