Question

(a) Select a newspaper/magazine/Internet article published in 2019-2020 that is related to international trade and/or political economy of trade. Summarize the content of the article. The source of the article should be provided in the reference.

(b) Discuss the article selected in part (a) using relevant economic concepts and theories from

Instruments of Trade Policy

Political Arguments for Intervention

Economic Arguments for Intervention

Managerial Implications

Absolute Advantage Theory

Comparative Advantage Theory

Heckscher-Ohlin Theory

New Trade Theory

Product Life Cycle Theory

Porter’s Diamond Theory

The sources of such additional information, if any, should be provided in the references.

Answer 1

Article is based on the situation after covid

As lockdown measures start to be eased in most countries around the world, the experts of The Conversation’s global network have focused this week on the major trends that are reshaping trade and the global economy.

Just before the pandemic struck, the economy was already losing momentum. However, the crisis is unlikely to put a stop to globalisation: rather, coronavirus is the starting point for a reconfiguration of the global system. Value chains are shortening in some sectors, China is seeking to extend government control over its economy, and global consumption has been undermined by the recession in the US.

Reshuffling the deck

China’s international trade mapped:

In order to understand the magnitude of the economic shock of the Covid-19 pandemic, Jun Du, Agelos Delis, Mustapha Douch and Oleksandr Shepotylo of Aston University mapped China’s recent trade. They showed that worst-affected Chinese imports are machinery and luxury goods. As for exports, goods whose production is labour-intensive, such as furniture, have fallen drastically, as well as capital goods such as nuclear reactors. According to these economists, these trends could be long-lasting, as most countries become aware of the fragility of global value chains – without, however, completely undermining globalisation.

Tensions between Australia and China:

Richard Holden of the Unversity of New South Wales wonders about the new tensions over barley and the impact that the crisis could have on relations between the two countries.

Return of the local economy:

Some countries, faced with the uncertainties of the future, prefer to turn to more local forms of economy. This is the case in Canada, particularly in the area of fisheries. Kristen Lowitt of Brandon University and Charles Z. Levkoe of Lakehead University have looked at policies in north-western Ontario trying to help local people to benefit more from the fish caught in the Thunder Bay area, which are generally destined for export.

Golden days are over:

Before the pandemic, the global economy was already showing signs of fragility against the backdrop of trade tensions between China and the US. Countries had been building up their gold reserves, but then just before the COVID-19 pandemic, demand slowed. “In truth, this was not entirely surprising”, writes Drew Woodhouse (Sheffield Hallam University). “Purchasing bullion at close to a seven-year high, and after a month of prices fluctuating plus or minus about 13%, is no particularly prudent way to consolidate economic and geopolitical power.”

China’s recovery

Protection and control: Chinese Premier Li Keqiang gave a 55-minute speech at China’s National People’s Congress on May 22, which had been postponed for two months due to the pandemic, in which he outlined the government’s recovery strategy. He set out a roadmap, deciphered by Jane Duckett, Holly Snape, Hua Wang, Yingru Li (University of Glasgow), with two watchwords: “protection” and “control”. Li stressed that continued vigilance against the coronavirus will be a core thread determining everything from macro-level strategy down to micro-level policy for the foreseeable future in China.

Hard times

On your own: The economic crisis is hitting the US hard – tens of millions of Americans are now registering for unemployment as companies close and lay off workers. Despite the federal government’s efforts, people are unable to meet their immediate financial needs for food, care and shelter. As Paul Shafer (Boston University) details, the crisis reveals the major flaws in the American social safety net.

Globally, the pandemic has also hit developing countries hard.

Food insecurity: Borja Santos Porras (IE University) is concerned about the poverty and food insecurity that the crisis is causing in low-income countries. They believe that these two factors could kill more people than the disease itself.

Pandemic poverty:

In Indonesia, the poorest are also at the mercy of the virus. Fisca Miswari Aulia (BAPPENAS), Maliki (BAPPENAS) and M Niaz Asadullah (University of Malaya) estimate that an additional 3.6 million people could face poverty as a result of the pandemic.

Refugees struggling:

In East Africa, it is the plight of refugees in Nairobi that interests Naohiko Omata (University of Oxford). He points out that these populations have very low incomes, most often generated by daily street sales, and are directly affected by the disease.

Ans 2.INSTRUMENTS OF TRADE POLICY

Trade policy is a collection of rules and regulations which pertain to trade. Every nation has some form of trade policy in place, with public officials formulating the policy which they think would be most appropriate for their country. The purpose of trade policy is to help a nation's international trade run more smoothly, by setting clear standards and goals which can be understood by potential trading partners. In many regions, groups of nations work together to create mutually beneficial trade policies.

Trade policy uses seven main instruments:

1.    Tariffs
2.    Subsidies
3.    Import Quotas
4.    Voluntary Export Restraints
5.    Local content requirements
6.    Administration policy
7.    Anti dumping duties.

1) Tariff:

An import tariff is a tax collected on imported goods. Generally speaking, a tariff is any tax or fee collected by a government. However, the term is much commonly applied to a tax on imported goods. There are two basic ways in which tariffs may be levied:
1. specific tariffs &
2. Ad valorem tariffs.

1. Specific tariffs:
Are levied as a fixed charge for each unit of a good imported.

2. Ad volorem Tariffs:
Are levied as a proportion of the value of the imported goods.

A tariff raises the cost f imported products. In most causes, tariffs are put in place to protect domestic producers from foreign competiotion.

Gainers:

1. The government gains, because the tariff increases govt. revenues.
2.Domestic producers gain because the tariff affords them some protection against foreign-competitors by increasing the cost of imported foreign goods.

Sufferers:
1.consumers suffer, because they must pay more for certain imports.

2) Subsidies:

A subsidy is a government payment to a domestic producer. Subsidies take many forms including cash grants, low-interest, tax breaks and government equity participation in domestic and government producers in two ways:
   
1. They help producers compete against foreign imports and
2. Subsidies help them gain export markets.

The main gains from subsidies accrue to domestic producers, whose international competitiveness is increased as a result of them.

3) Import Quotas:

An import is a direct restriction on the quantity of some good that may be imported into a country. This restriction is usually enforced by issuing import licenses to a group of individuals or firms.
Import quotas are limitations on the quantity of goods that can be imported into the country during a specified period of time. An import quota is typically set below the free trade level of imports. In this case it is called a binding quota. If a quota is set at or above the free trade level of imports then it is referred to as a non-binding quota.
Goods that are illegal within a country effectively have a quota set equal to zero. Thus many countries have a zero quota on narcotics and other illicit drugs.
There are two basic types of quotas: absolute quotas and tariff-rate quotas. Absolute quotas limit the quantity of imports to a specified level during a specified period of time.
Tariff-rate quotas allow a specified quantity of goods to be imported at a reduced tariff rate during the specified quota period.

4) Voluntary Export Restraints (VERs):

A voluntary export restraint is a restriction set by a government on the quantity of goods that can be exported out of a country during a specified period of time. Often the word voluntary is placed in quotes because these restraints are typically implemented upon the insistence of the importing nations.
Typically VERs arise when the import-competing industries seek protection from a surge of imports from particular exporting countries. VERs are then offered by the exporter to appease the importing country and to avoid the effects of possible trade restraints on the part of the importer.

Example: one of the most famous examples is the limitation on auto exports to the United States enforced by Japanese automobile producer in 1981.

Foreign producers agree to VERs because they fear for more damaging punitive tariffs or import quotas might follow if they do not.

Benefits:
1. Both imports and quotas and VERs benefit domestic producers by limiting competition.

Sufferers:

1. VER always raises the domestic price of an imported goods, so VER do not benefit consumers.


5) Local Content Requirements:

A local content requirement is a requirement that some specific fraction of a good be produce domestically. The requirement may be expressed either in physical terms (75% of component parts for this product must be produced locally) or in value terms (75% of the value of this product must be produced locally). It also tends to benefit producers and not customers. They have been used mainly in developing and developed countries. As due to pandemic of covid, many people are not able to afford even the basic amenities, thus it is produced within the country and distributed amongst the needy.

6) Administrative Policies:

Administrative trade policies are bureaucratic rules that are designed to make it difficult for imports to enter a country. In addition to the formal instruments of trade policy, govt. of all types sometimes uses informal or administrative policies to restrict imports & boost exports. Some would agree that the Japanese are the masters of this kind of trade barrier.
As with all instruments of trade, administrative instruments benefits producers and hurt consumers, who are derived access to possibly superior forign products. In this article, U. S. has banned imports from China which led to a huge decline in the market of China and it is affecting China very badly.

7) Anti-dumping policies:

In the context of international trade, dumping is defined as selling goods in a foreign market at below their costs of productive, or as selling goods in a foreign market at below their “fair” market value. “Fair” market value of a good is normally judged to be greater than the costs of producing that good.

B) POLITICAL ARGUEMENT FOR GOVERNMENT INTERVENTION

Greater equality – redistribute income and wealth to improve equality of opportunity and equality of outcome.

Overcome market failure – Markets fail to take into account externalities and are likely to under-produce public/merit goods. For example, governments can subsidise or provide goods with positive externalities.

Macroeconomic intervention. – intervention to overcome prolonged recessions and reduce unemployment.

Disaster relief – only government can solve major health crisis such as pandemics.

It's Government's job to take care of its people, so thus by making correct policies and taking needed decisions, it helps the people of the country especially in difficult situations like Covid.

C)

Economic Government Intervention

Governments also intervene in trade policy for economic reasons. One of the biggest reasons is to protect new industries from fierce competition. This matter is especially important to the industries in developing countries who might not survive up against larger nations. One problem with this ideology is that protecting infant industries can sometimes create inefficient organizations that are not suited to eventually enter the global business arena. For example, due to protectionism means, Brazil was able to develop the world's tenth largest auto industry, due to tariff barriers and quotas. Unfortunately, when those protectionary means were removed, Brazil's foreign imports dramatically increased, and the auto industry could not compete with their competition's products.

The last economic reason for government intervention is based on the strategic trade policy, which cites that, due to scale economies, only a few large global firms would survive if not for government intervention. Many economists are concerned with this type of intervention, in that it hurts companies that are early entrants into a new product. Also, many economists feel that a government that pushes to have their domestic firm remain in control of an industry is acting selfishly and will end up hurting global competitors and the global economy.

Now as mentioned in the the article and general observation, many people are not able to afford even the basic amenities. So if there's govt won't intervene, then who would fulfill their basic needs. Thus with government's intervention even the lower income group is also able to afford at least the basic amenities and thus survive.

D) ABSOLUTE ADVANTAGE THEORY

The concept of absolute advantage was developed to show how countries can gain from trade by specializing in producing and exporting the goods that they can produce more efficiently than other countries.

Countries with an absolute advantage can decide to specialize in producing and selling a specific good or service and use the funds that good or service generates to purchase goods and services from other countries.

By specializing in the products that they each have an absolute advantage in and then trading the products, can make all countries better off, as long as they each have at least one product for which they hold an absolute advantage over other nations.

As after the Covid pandemic, imports and exports stooped due to lock down, the countries started producing and manufacturing thing their earlier didn't, because of high demand and low supply. Thus, with producing more goods, market increases and it leads to growth and development.