Relationships with Other Countries
Relationships with Other Countries
Another reason countries restrict trade is that they are concerned with their economic or political positions relative to other countries.
Balance-of-Payments Adjustments
Since the trade account is a major component within the balance of payments for most countries, governments make numerous attempts to modify what would have been an import or export movement in a free-market situation.
Trade influence differs from the other means of balance-of-payments adjustment (deflation of the economy or currency devaluation) primarily because of its greater selectivity. This may be either an advantage or a disadvantage compared to other adjustment mechanisms. If a country is running ;
a deficit, for example, either a devaluation or a domestic deflation can make domestically produced goods and services less expensive than foreign ones. This has a widespread effect on both imports and exports as well as on such service accounts as tourism. Because of the breadth of industries affected, fairly small changes relative to other countries' prices may substantially affect payments balances. Furthermore, this minimizes the burden of adjustment on any single industry. Direct trade influence may, however, allow a country to choose the types of products or services to be affected. For example, the importation of luxury items may be curtailed, whereas no change may be made in rules or prices governing imports of needed foodstuffs.
Price-Control Objectives
A few countries hold monopoly or near-monop-oly control of certain resources. To maintain control and pursuant high prices, strict eXp0rt regulations are enforced. South Africa and Colombia pay high prices to prevent diamonds and emeralds, respectively, from flooding world
markets. Australia, for example, has for over 50 years prohibited the export
of Merino rams, considered the top-quality wool producers in the world. Un-
fortunately, this type of policy encourages smuggling and requires high pre-
vention costs. Brazil lost its world monopoly in natural rubber after a
contrabandist brought rubber plants into Malaysia and now has practically
no world sales. A second problem is that if prices are kept too high, substitutes
may be developed. For example, the high price of Chilean natural nitrate led
to the development of a synthetic, and high sugar prices in the mid-1970s led
to the development of a corn-derivative substitute,
A country may also limit exports of a product that is in short supply so
that domestic consumers may buy the good at a lower price than if foreign
purchasers were allowed to bid the price up. In recent years, Argentina has
done this with wheat and the United States with hides and soybeans. The
primary danger in these policies is that the lower prices at home will not
entice producers to expand domestic output, whereas foreign output is expanded. This may lead to long-term market loss.
Countries also fear that foreign producers will price their exports so artificially low that they drive domestic producers out of business, resulting in a costly dislocation for displaced workers and industries from other countries, If entry barriers are high for new domestic firms, the surviving producers may even be able to extract monopoly profits or withhold supplies to help other industries in their own countries. Thus far there is a lack of evidence that monopoly prices result from displacement of domestic producers. For exam low import prices have eliminated most U.S. consumer electronics production, yet in the United States the prices for consumer electronics are among the lowest in the world.10 Nevertheless, there have been allegations that Hitachi, the only producer of a key chip, delayed deliveries to Cray Research, the leading U.S. supercomputer producer, to give Japanese computer makers an advantage.11 The ability to price artificially low abroad may result
from high domestic prices due to a monopoly position at home or from home-government subsidy or sponsorship policies.
The underpricing of exports (usually below cost or below the home-country price) is often referred to as dumping, and most countries have legislation to prevent imports of dumped products. This legislation is usually enforced only if the imported product disrupts domestic production. If there is no domestic production, then the only host-country effect is a subsidy to its consumers. Home-country consumers or taxpayers seldom realize that they are in effect subsidizing foreign sales. The U.S. antidumping legislation is extremely controversial. A foreign firm can be fined if it makes less than an 8 percent profit on its export price. Or it can be fined if its export price is as little as a half percent below its domestic price, even though currency-value fluctuations may account for a much greater difference.12
Price control is also the objective when trade restrictions are used as a means of forcing other countries to bargain away restrictions of their own. In 1988, for example, the United States passed the so-called Super 301 clause in its trade act, which permitted a threat of trade retaliation in negotiations to get other countries to reduce import barriers for U.S. exports. Within two years the United States used the clause successfully against Brazil and Japan, but unsuccessfully against India.13 The danger in this mechanism is that each country may escalate restrictions rather than bargain them away.
A final price argument for governmental influence on trade is the optimum-tariff theory, which holds that a foreign producer will lower its prices if a tax is placed on its products. If this occurs, benefits shift to the importing country. For example, assume that an exporter has costs of $500 per unit and is selling to a foreign market for $700 per unit. With the imposition of a 10 percent tax on the imported price, the exporter may choose to lower the export price to $636.36 per unit, which, with a 10 percent tax of $63.64, would keep the price at $700 for the importer. The exporter may feel that a price higher than $700 would result in lost sales, thus a profit of $136.36 per unit instead of the previous $200 per unit is still better than no profit at all. An amount of $63.64 per unit has thus shifted to the importing country. As long as the foreign producer lowers its price by any amount, some shift goes to the importing country and the tariff is considered to be an optimum one. There are many examples of products whose prices did not rise as much as the amount of the imposed tariffs; however, it is very difficult to predict if exporters will reduce their profit margins.
Fairness
All countries regulate how their companies can produce. The standards they impose—such as requirements for worker safety or the disposal of wastes—reflect the social and environmental values of their citizens. Since standards vary from one country to another, the costs incurred by producers vary as well. Some industries affected by import competition—for example, the U.S. television and steel industries—reason that their own governments should protect them because foreign producers do not have to adhere to the same stringent requirements that raise production costs.14 For example, one of the biggest differences in standards exists between the United States, which has enacted clean-air legislation, and Eastern Europe, which has few laws regulating pollution.15 Some argue that cost differences therefore do not necessarily reflect differences in efficiency; rather, they reflect differences in social and environmental values.
Political Objectives
Much governmental action on trade is not based on economic reasoning. A major consideration is the protection of essential domestic industries during peacetime so that in wartime the country is not dependent on foreign sources of supply. This argument for protection has much appeal in rallying support for barriers to the importation of foreign-produced goods. However, in times of real crisis or military emergency, almost any product could be considered essential. Because of the high cost of protecting an inefficient industry or domestic substitute, the essential-industry argument should not be (but frequently is) accepted without a careful evaluation of costs, real needs, and alternatives. Once an industry is afforded protection, the protection is difficult to terminate. On the basis of this argument, the U.S. government subsidizes domestic production of silicon so that domestic chipmakers will not have to depend entirely on foreign suppliers.16 Defense arguments are also used to prevent exports, even to friendly countries, of strategic goods that might fall into the hands of potential enemies.17 This policy may be valid if a country assumes that there will be no retaliation that prevents it from securing even more essential goods. Even if this assumption is made, it is possible that the importing country may simply find alternative sources of supply or develop a capability of its own. Closely akin to this strategy is the policy of restricting exports of raw materials that could be sold competitively because of fear that essential supplies will become depleted.
Trade controls on nonstrategic goods also may be used as a weapon of foreign policy to try to prevent another country from easily meeting its economic and political objectives. A good example was the international cessation of trade with Iraq after its invasion of Kuwait. Iraq's loss of oil exports was a severe economic loss amounting to 43 percent of the combined gross national products of Iraq and Kuwait. But there were also costs to the countries imposing the sanctions. Oil prices rose, hurting poor countries especially. The United States, formerly the largest exporter to Iraq, lost sales of $1.29 billion a year, which was concentrated within those firms doing business in Iraq. NRM-Steel, for example, had already produced equipment for an export order, and the trade freeze reduced its earnings by about 20 percent.18
There are many other examples of governments influencing trade for political reasons: Aid, credits, and purchases are frequently tied into a political alliance or even to votes within international bodies. Most major powers buy at higher than world prices from certain LDCs in order to maintain their influence on those countries. The United States did this with sugar-producing countries; France, with citrus producers. In country-to-country negotiations, government officials may even trade off some of the economic advantages of their own nations' firms in order to gain political advantages.
Another reason countries restrict trade is that they are concerned with their economic or political positions relative to other countries.
Balance-of-Payments Adjustments
Since the trade account is a major component within the balance of payments for most countries, governments make numerous attempts to modify what would have been an import or export movement in a free-market situation.
Trade influence differs from the other means of balance-of-payments adjustment (deflation of the economy or currency devaluation) primarily because of its greater selectivity. This may be either an advantage or a disadvantage compared to other adjustment mechanisms. If a country is running ;
a deficit, for example, either a devaluation or a domestic deflation can make domestically produced goods and services less expensive than foreign ones. This has a widespread effect on both imports and exports as well as on such service accounts as tourism. Because of the breadth of industries affected, fairly small changes relative to other countries' prices may substantially affect payments balances. Furthermore, this minimizes the burden of adjustment on any single industry. Direct trade influence may, however, allow a country to choose the types of products or services to be affected. For example, the importation of luxury items may be curtailed, whereas no change may be made in rules or prices governing imports of needed foodstuffs.
Price-Control Objectives
A few countries hold monopoly or near-monop-oly control of certain resources. To maintain control and pursuant high prices, strict eXp0rt regulations are enforced. South Africa and Colombia pay high prices to prevent diamonds and emeralds, respectively, from flooding world
markets. Australia, for example, has for over 50 years prohibited the export
of Merino rams, considered the top-quality wool producers in the world. Un-
fortunately, this type of policy encourages smuggling and requires high pre-
vention costs. Brazil lost its world monopoly in natural rubber after a
contrabandist brought rubber plants into Malaysia and now has practically
no world sales. A second problem is that if prices are kept too high, substitutes
may be developed. For example, the high price of Chilean natural nitrate led
to the development of a synthetic, and high sugar prices in the mid-1970s led
to the development of a corn-derivative substitute,
A country may also limit exports of a product that is in short supply so
that domestic consumers may buy the good at a lower price than if foreign
purchasers were allowed to bid the price up. In recent years, Argentina has
done this with wheat and the United States with hides and soybeans. The
primary danger in these policies is that the lower prices at home will not
entice producers to expand domestic output, whereas foreign output is expanded. This may lead to long-term market loss.
Countries also fear that foreign producers will price their exports so artificially low that they drive domestic producers out of business, resulting in a costly dislocation for displaced workers and industries from other countries, If entry barriers are high for new domestic firms, the surviving producers may even be able to extract monopoly profits or withhold supplies to help other industries in their own countries. Thus far there is a lack of evidence that monopoly prices result from displacement of domestic producers. For exam low import prices have eliminated most U.S. consumer electronics production, yet in the United States the prices for consumer electronics are among the lowest in the world.10 Nevertheless, there have been allegations that Hitachi, the only producer of a key chip, delayed deliveries to Cray Research, the leading U.S. supercomputer producer, to give Japanese computer makers an advantage.11 The ability to price artificially low abroad may result
from high domestic prices due to a monopoly position at home or from home-government subsidy or sponsorship policies.
The underpricing of exports (usually below cost or below the home-country price) is often referred to as dumping, and most countries have legislation to prevent imports of dumped products. This legislation is usually enforced only if the imported product disrupts domestic production. If there is no domestic production, then the only host-country effect is a subsidy to its consumers. Home-country consumers or taxpayers seldom realize that they are in effect subsidizing foreign sales. The U.S. antidumping legislation is extremely controversial. A foreign firm can be fined if it makes less than an 8 percent profit on its export price. Or it can be fined if its export price is as little as a half percent below its domestic price, even though currency-value fluctuations may account for a much greater difference.12
Price control is also the objective when trade restrictions are used as a means of forcing other countries to bargain away restrictions of their own. In 1988, for example, the United States passed the so-called Super 301 clause in its trade act, which permitted a threat of trade retaliation in negotiations to get other countries to reduce import barriers for U.S. exports. Within two years the United States used the clause successfully against Brazil and Japan, but unsuccessfully against India.13 The danger in this mechanism is that each country may escalate restrictions rather than bargain them away.
A final price argument for governmental influence on trade is the optimum-tariff theory, which holds that a foreign producer will lower its prices if a tax is placed on its products. If this occurs, benefits shift to the importing country. For example, assume that an exporter has costs of $500 per unit and is selling to a foreign market for $700 per unit. With the imposition of a 10 percent tax on the imported price, the exporter may choose to lower the export price to $636.36 per unit, which, with a 10 percent tax of $63.64, would keep the price at $700 for the importer. The exporter may feel that a price higher than $700 would result in lost sales, thus a profit of $136.36 per unit instead of the previous $200 per unit is still better than no profit at all. An amount of $63.64 per unit has thus shifted to the importing country. As long as the foreign producer lowers its price by any amount, some shift goes to the importing country and the tariff is considered to be an optimum one. There are many examples of products whose prices did not rise as much as the amount of the imposed tariffs; however, it is very difficult to predict if exporters will reduce their profit margins.
Fairness
All countries regulate how their companies can produce. The standards they impose—such as requirements for worker safety or the disposal of wastes—reflect the social and environmental values of their citizens. Since standards vary from one country to another, the costs incurred by producers vary as well. Some industries affected by import competition—for example, the U.S. television and steel industries—reason that their own governments should protect them because foreign producers do not have to adhere to the same stringent requirements that raise production costs.14 For example, one of the biggest differences in standards exists between the United States, which has enacted clean-air legislation, and Eastern Europe, which has few laws regulating pollution.15 Some argue that cost differences therefore do not necessarily reflect differences in efficiency; rather, they reflect differences in social and environmental values.
Political Objectives
Much governmental action on trade is not based on economic reasoning. A major consideration is the protection of essential domestic industries during peacetime so that in wartime the country is not dependent on foreign sources of supply. This argument for protection has much appeal in rallying support for barriers to the importation of foreign-produced goods. However, in times of real crisis or military emergency, almost any product could be considered essential. Because of the high cost of protecting an inefficient industry or domestic substitute, the essential-industry argument should not be (but frequently is) accepted without a careful evaluation of costs, real needs, and alternatives. Once an industry is afforded protection, the protection is difficult to terminate. On the basis of this argument, the U.S. government subsidizes domestic production of silicon so that domestic chipmakers will not have to depend entirely on foreign suppliers.16 Defense arguments are also used to prevent exports, even to friendly countries, of strategic goods that might fall into the hands of potential enemies.17 This policy may be valid if a country assumes that there will be no retaliation that prevents it from securing even more essential goods. Even if this assumption is made, it is possible that the importing country may simply find alternative sources of supply or develop a capability of its own. Closely akin to this strategy is the policy of restricting exports of raw materials that could be sold competitively because of fear that essential supplies will become depleted.
Trade controls on nonstrategic goods also may be used as a weapon of foreign policy to try to prevent another country from easily meeting its economic and political objectives. A good example was the international cessation of trade with Iraq after its invasion of Kuwait. Iraq's loss of oil exports was a severe economic loss amounting to 43 percent of the combined gross national products of Iraq and Kuwait. But there were also costs to the countries imposing the sanctions. Oil prices rose, hurting poor countries especially. The United States, formerly the largest exporter to Iraq, lost sales of $1.29 billion a year, which was concentrated within those firms doing business in Iraq. NRM-Steel, for example, had already produced equipment for an export order, and the trade freeze reduced its earnings by about 20 percent.18
There are many other examples of governments influencing trade for political reasons: Aid, credits, and purchases are frequently tied into a political alliance or even to votes within international bodies. Most major powers buy at higher than world prices from certain LDCs in order to maintain their influence on those countries. The United States did this with sugar-producing countries; France, with citrus producers. In country-to-country negotiations, government officials may even trade off some of the economic advantages of their own nations' firms in order to gain political advantages.
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