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PROTECTIONISM, AND TRADE BARRIERS

PROTECTIONISM, AND TRADE BARRIERS. Protectionism. PRE LIBERALIZATION ERA : EMERGING MARKETS Protected markets High Tariffs and Duties Stable and predictable Environment Trade volumes restricted Curtailed competition. Protectionism. Trade Protection ( Protectionism ) –

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PROTECTIONISM, AND TRADE BARRIERS

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  1. PROTECTIONISM, AND TRADE BARRIERS

  2. Protectionism PRE LIBERALIZATION ERA : EMERGING MARKETS • Protected markets • High Tariffs and Duties • Stable and predictable Environment • Trade volumes restricted • Curtailed competition

  3. Protectionism Trade Protection (Protectionism) – Policies that limit imports, usually with the goal of protecting domestic producers in import-competing industries from foreign competition Looking back to History – Mercantilism – thrust on export promotion and import substitution which ended up being a zero sum game

  4. Protectionism

  5. Trade Restrictions Tariffs - taxes levied basically on imported goods. They are imposed in an attempt to raise foreign exchange revenue and make imports expensive and prohibitive Nontariff barriers - all forms of trade restrictions other than tariffs.

  6. Tariffs • ad valorem import tariff - expressed as a percentage of the invoice value of the imported good • specific tariff - a fixed sum levied on a physical unit of the good no matter what its invoice price is • compound duty - a combination of ad valorem and specific duties • variable levy - calculated daily • official prices - a basis for ad valorem duty calculations • In India – Countervailing Duty

  7. Non Tariffbarriers • quantitative restrictions • Quotas - numerical limits for a specific kind of good that a country will permit to be imported without restriction during a specified period • Voluntary export restraints • Tariff quotas -permit a stipulated amount to enter the country duty free or at a low rate, but when that quantity is reached, a much higher duty is charged for subsequent importations • technical regulations • administrative regulations • other regulations of imports

  8. Impact of a Tariff on Steel S + Tariff Price of Steel (US $ per kg) S Amount of the tariff per unit 28 20 D 500 350 Quantity of Steel Bought and Sold from Abroad

  9. Impact of a Quota on Steel Quota level Price of Steel (US $ per Kg) S The quota restricts the supply to a set amount (250 in the example) which is likely to result in a shortage of this good and a subsequent rise in its price. Pre-trade position before a quota. 30 20 D 250 500 Quantity of Steel Bought and Sold from Abroad

  10. (1) Specific Limitations on Trade: • Quotas • Import Licensing requirements • Proportion restrictions of foreign to domestic goods (local content requirements) • Minimum import price limits • Embargoes Six Types of Non-Tariff Barriers • (2) Customs and Administrative Entry Procedures: • Valuation systems • Antidumping practices • Tariff classifications • Documentation requirements • Fees

  11. (3) Standards: • Standard disparities • Intergovernmental acceptances of testing methods and standards • Packaging, labeling, and marking • (4) Government Participation in Trade: • Government procurement policies • Export subsidies • Countervailing duties • Domestic assistance programs Six Types of Non-Tariff Barriers

  12. (5) Charges on imports: • Prior import deposit subsidies • Administrative fees • Special supplementary duties • Import credit discriminations • Variable levies • Border taxes • (6) Others: • Voluntary export restraints • Orderly marketing agreements Six Types of Non-Tariff Barriers

  13. Arguments for trade restrictions • Shielding domestic labour markets against cheap foreign labour • Intention to prune domestic unemployment • Counteract dumping in international trade • The need to protect indigenous and infant industries • Decrease the trade deficit induced balance of payments deficit • Improve the nation’s terms of trade and welfare • Strategic trade policies

  14. Arguments against protectionism: • Higher prices for producers and consumers: • Less choice for consumers: • Less competition, less efficiency: • Distorts comparative advantage, less efficient allocation of resources, total world output declines: • May hinder economic growth ??

  15. Free Trade POST LIBERALIZATION ERA : EMERGING MARKETS • Less Protected markets and hyper -competition • Reduced Tariffs and Duties • Unpredictable and turbulent environment • Reduction in barriers to trade and investments • Accelerated reforms fostering the emergence of global flow of goods, services, labour and capital

  16. Free Trade POST LIBERALIZATION ERA : EMERGING MARKETS • The forces of Liberalization, privatization and globalization • Permitting entry of FDI/ FII investments • Reduction in direct and indirect taxes • Announcing industry friendly policies, • Strengthening of bilateral and multilateral trade ties • Gradual Integration of world markets – resulting in heightened exposure towards socio, economic, political shocks

  17. REASONS FOR TRADE • If I buy meat from the butcher, then I get the meat and he gets my money. But if I raise a cow in my backyard for three years and slaughter it myself, then I've got the meat and I've got my money." • Why don't we keep cows in our backyard? • Why do nations trade? • How does a nation determine what it should specialize in? • How do nations benefit from trade?

  18. Free Trade vs. Protectionism Evolution of Trade Theories: • Indicating that free trade is better than no trade • Barrier free trade is better than sophisticated government intervention which prohibits trade Trade theories can be classified as Classical and Modern Trade theories emphasizing on the gains from trade

  19. Free Trade vs. Protectionism Evolution of Trade Theories: So what constitutes the basis of trade • Absolute cost advantage – Adam Smith • Comparative and relative cost advantage – Ricardo • Differences in factor endowments – Hecksher and Ohlin • International Product Life Cycle Theory • Strategic Trade theory – Economies of scale induced efficiency Paul Krugman – Advocated the concept of free trade

  20. Evolution of Trade theories Mercantilism Absolute advantage (Classical) Comparative advantage Factor Proportions Trade International Product Cycle New Trade Theory National competitive advantage

  21. Trade Liberalisation

  22. Free Trade vs. Protectionism INTERNATIONAL SUMMITS/ CONFERENCES • G 20 Summit • G 8 Summit • G 10 Summit The outcomes: Imperative to eliminate protectionist policies and with integration of global markets nations to collude, engage in trade Besides, coordinated monetary and fiscal stance to spearhead economic resurgence and nations to unite for facilitating global economic revival

  23. UNCTAD: OVERVIEW The United Nations Conference on Trade and Development (UNCTAD) was established in 1964 as a permanent intergovernmental body. It is the principal organ of the UN dealing with trade, investment, and development issues. The organization's goals are to "maximize trade, investments, and development opportunities of emerging nations and assist them in their efforts to integrate into the world economy. The first conference took place in Geneva in 1964, second in New Delhi in 1968, the third in Santiago in 1972, and finally the ninth at Johannesburg (South Africa) in 1996.

  24. Trade Liberalisation • GATT – General Agreement on Tariffs and Trade - First signed in 1947 – talks on-going since then! • Uruguay Round 1994 – set up the World Trade Organisation (WTO) as well as agreements covering a range of trade liberalisation measures • WTO instituted on 01 Jan, 1995 provides the forum through which trade issues can be negotiated and works to help implement and police trade agreements

  25. GATT: PROGRESS Uruguay Round - 1986-1994: The most ambitious round of negotiations began in 1986. 123 Countries took part in this round, and during this round numerous issues were addressed. It expanded the competence of the GATT to important new areas such as: Trade in Services – e.g. banking, insurance, tourism, etc Trade in Textiles – which was earlier protected under Multi-fibre Agreement A set of rules to govern the Trade Related Intellectual Property Rights (TRIPS) A set of rules governing Trade Related Investment Measures (TRIMS) Trade in Agriculture - Agriculture was essentially exempted from previous agreement. Many countries under the "Cairns Group" included mostly small and medium sized agricultural exporters such as Australia, Brazil, Canada, Indonesia, and New Zealand -who considered the exception of agriculture to be disturbing and refused to sign a new deal without some movement on agricultural products. The Agreement on Agriculture has three central concepts, Domestic support, Market Access and Export Subsidies

  26. Trade Liberalisation Potential benefits: • Promotes international specialisation • Increases world output • Promotes efficient use/ allocation of world resources • Allows developing countries access to the heavily protected markets of the developed world • Promotes international competition and associated benefits to all • Promotes investments, capital formation and fuels economic development and employment

  27. NAFTA: INTRODUCTION The North American Free Trade Agreement or NAFTA is an agreement signed by the governments of USA, Canada, and Mexico, creating a trilateral trade block in North America. The agreement came into force on January 1, 1994. The goal of NAFTA was to eliminate barriers to trade and investment between the US, Canada and Mexico. The implementation of NAFTA on January 1, 1994 brought the immediate elimination of tariffs on more than one-half of U.S. imports from and exports to Mexico. Within 10 years of the implementation of the agreement, all US-Mexico tariffs were expected to be eliminated except for some U.S. agricultural exports to Mexico that were to be phased out within 15 years. Most U.S.-Canada trade was already duty free. NAFTA also seeks to eliminate non-tariff trade barriers.

  28. NAFTA: BENEFITS and COSTS NAFTA's effects were both positive and negative : Some argue that NAFTA has been positive for Mexico, which has seen its poverty rates fall and real income rise triggered by price reductions. Others argue that NAFTA has been beneficial to business owners and elites in all three countries. NAFTA had negative impacts on farmers in Mexico who saw food prices fall based on cheap imports from US agri-business and negative impacts on US workers in manufacturing and assembly industries who lost jobs. Critics also argue that NAFTA has contributed to the rising levels of inequality in both the US and Mexico. Some have suggested that in order to fully benefit from the agreement, Mexico must invest more in education and promote innovation in agriculture and infrastructure.

  29. EUROPEAN UNION: INTRODUCTION The European Union (EU)  is an economic and political union of 27 member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community (ECSC) and the European Economic community (EEC) formed by six countries in 1958. In the intervening years the EU has grown in size by the accession of new member states and in power by the addition of policy areas to its remit. The Maastricht Treaty established the European Union under its current name in 1993.The latest amendment to the constitutional basis of the EU came into force in 2009.

  30. EUROPEAN UNION: SYSTEM The EU operates through a hybrid system of independent institutions and inter-government made decisions negotiated by the member states. The most Important institutions and trade bodies within the European Union include the: European Commission The European Council – representing all nations The European Court of Justice The European Central Bank – located in Germany The European Parliament – elected every five years by the EU citizens

  31. SAARC • SAARC established in 1985.Member countries: Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka. • Core objectives: • To promote and strengthen collective self-reliance among the countries of South Asia • To contribute to develop mutual trust, understanding and appreciation of one another’s problem • To promote active collaboration and mutual assistance in the economic, social, cultural, technical and scientific fields • To strengthen cooperation with other developing countries • To strengthen cooperation among themselves in international forums on matters of common interest • To cooperate with international and regional organizations with similar aims and purposes.

  32. SAFTA- Key Features… • South Asian Free Trade Agreement (SAFTA) signed at the 12th SAARC Summit in Islamabad, Pakistan. • Build on SAARC Preferential Trade Agreement (SAPTA) • Enhanced scope of regional trade dialogue to include competition, trade and transportation, harmonization of legislation, banking procedures, forex regulations and immigration processes. • Trade Liberalization Programme (TLP): reduce tariffs and eliminate restrictions on quantity of goods traded. • Trade not only in goods, but in services and investment too!

  33. FOR FURTHER DISCUSSION The BRICS Economic Alliance Why BRICS in the first place The constitution of the BRICS Bank Critical points of discussions in the last two BRICS Summit Would trade amongst BRICS nations accelerate in the near future. Specialization in production and trade across BRICS nations.

  34. USA CHINA TRADE WARS AND ITS STRATEGIC IMPLICATIONS

  35. Tariffs Introduced • President Donald Trump has unleashed a wave of tariffs over the past year against many of its largest trading partners including China, Canada, the European Union, and Mexico. • India too has been affected, particularly by tariffs on steel and aluminium. • Applying 25% tariffs on US$ 50-60 billion worth of Chinese goods, on March 2018. • Over 1,300 categories of Chinese imports were listed for tariffs, including aircraft parts, batteries, flat-panel televisions, medical devices, satellites, and various weapons

  36. Tariffs Introduced • China responded in April, 2008 by imposing tariffs on 128 products it imports from America, including aluminium, airplanes, cars, pork, and soybeans. • Trump responded saying that he was considering another round of tariffs on an additional $100 billion of Chinese imports as Beijing retaliates. • Additional 10% tariffs on another $200 billion worth of Chinese imports if China retaliated against these U.S. tariffs • China retaliated almost immediately, threatening its own tariffs on $50 billion of U.S. goods – thereby intensifying the trade war and conflicts • Series of tariffs and retaliation measures continue to be announced

  37. Trade War - Interpretation There are several interpretations to this trade war and conflict: • Is Beijing engaged in Dumping Products to USA – undercutting, underpricing causing injury to USA industries • Is Beijing involved in unfair trade practices • Can this trade war be diluted if China agrees and commits to purchase/ import additional quantities of USA Products • Favourable balance of trade across nations – cemented through strengthening of bilateral trade talks • Is this a step towards De-Globalization ??? • The Big Debate – Free Trade Vs Protectionism ???

  38. Trade War – Strategic Implications Global trade roughly accounts for about 25% of global gross domestic product. (SLOWDOWN INEVITABLE) Interconnected markets and global supply chains, the current trade tensions between the U.S. and China are likely to have significant contagion effects around the world.

  39. Trade War – Strategic Implications China’s predominance in the global economy is becoming increasingly evident and visible. China largest Trading Partner for Asean and G 20 Countries – popular destination for trade and investments USA – occupies a dominant position in the global manufacturing chain. Fragmented the world economic order into smaller blocs, creating new spaces that can be exploited by China.

  40. Trade War – Strategic Implications Current trade tensions between China and USA is about searching for strategic space as they are about trade. Two alternative views and perceptions: • U.S. population feel threatened by the rise of China and want to see the Chinese contained. • USA would also like to see changes in China’s economic structure and not just a reduction in its trade deficit.

  41. Trade War – Strategic Implications • The impact of the U.S.-China trade dispute on India - expected to not only affect India’s trade prospects but exert pressure on exchange rate. • China have already devalued their currency by 8 to 10 percent, making Indian goods less competitive. • Indian Currency depreciating as trade deficit widens, crude oil prices climb and speculative pressures intensify • Trade displacement - an opportunity for India. Identify sectors in which India has comparative advantage and promote them as alternatives in the international market.

  42. Trade War – Strategic Implications REPERCUSSIONS ON CHINA: • Hurt by tariff trade war in all indicators, including welfare, - Gross Domestic Product (GDP) growth declining, - manufacturing employment dipping - Foreign trade shrinking. • May not lead to a drastic collapse of the Chinese Economy if China succeeds in strengthening presence in other nations.

  43. Trade War – Strategic Implications REPERCUSSIONS ON USA • USA will gain on • Welfare, • GDP and • Non-manufacturing production, but will hurt • Employment and • Foreign Trade

  44. Trade War – Strategic Implications IMPLICATIONS FOR THE WORLD • Large and developed nations may encounter positive benefits from a US-China trade war. • As trade decreases between United States and China, trade will presumably increase between other nations as a consequence • For Trade Dependent economies - Total welfare, GDP, manufacturing production, employment, export, import, and total trade are expected to decrease

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