Global Business Today

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Quiz 7 :
Government Policy and International Trade

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Quiz 7 :
Government Policy and International Trade

In 2009 the US imposed protective tariffs on automobile tires being imported from China. This was done on the behest of the US lobby to protect US tire manufacturers and prevent the loss of around 5000 jobs. Initially this was a great success according to the US lobby. The US production rose by 15 percent and the Chinese exports dropped by 34 percent. However this euphoria did not last for long. Other manufacturers from Thailand, Mexico and Indonesia stepped into the void caused by the drop in Chinese exports and soon the situation was back to square one. Therefore the big gainers in this entire exercise were the manufacturers from Thailand, Indonesia and Mexico. Some of the wholesalers and retailers who had lost their business due to the stoppage of Chinese imports could have shifted to handling imports from these three countries and so they also would not be on the losing side. The losers were the wholesalers and retailers who were handling the US sales of the Chinese tires. The consumers who were now paying a higher price of their tires were also losers. Also the Chinese consumers were losers because of the retaliatory tariffs imposed by China on broiler chickens imported from the US. Some US tire manufacturers had set up manufacturing facilities in China for supply to the US.. These were also subjected to the same higher tariffs and were the losers as they too were losing their market in the US. This example gives a clear message that free trade is the best policy in today's globalized world. Protective tariffs do not work in the long run. As is seen in this example in the end everyone involved in the original dispute was a loser. The winner was a third party.

Yes, the government should consider human rights when granting preferential trading rights to countries. Those who support considering human rights when deciding upon trade concessions argue that the benefits of trade can persuade a country to change how it treats their people. Those who oppose argue that tariffs based on human rights are counterproductive. If trade is allowed, then, it will improve the economic condition and the living standard of middle class. Richer societies with a middle class are more pro-democracy, and will therefore demand for a government that treats them better.

Any firm that is building a strategy for international business needs to be acutely aware of the trade barriers, if any that exist, in the target country. The various trade theories suggest that today it is possible to design and engineer a product in one country, source components from many countries, manufacture or assemble the product in a third country and then market it around the world. This assumes a perfect world with no trade barriers. These trade barriers are of two basic categories: 1) Tariff barriers, and 2) Non-tariff barriers Both these trade barriers add to the ultimate cost of the product. The difference is that the tariff barriers have a direct impact on the final price of the product. This is because they are normally loaded on the landed cost of the product in monetary terms. The non-tariff barriers tend to increase the cost of the product and are normally invisible to the ultimate consumer. For example, the pollution regulation in California State in the US, require and additional catalytic convertor to be fitted. This is a cost that would be in the vehicle cost when sold in California. One of the way to circumvent these trade barriers especially quotas, is to locate the production facilities in that country so that one is not at a dis-advantage vis-à-vis the local manufacturers. This may be even at a higher cost. This was the case with Japanese automobile manufacturers setting up production facilities in the US to get around the VER agreement between the US and Japan. This could be to meet any local content regulations or maybe simply to offset the risk of any trade barriers being imposed in the future.