International Trade Protectionism - Book Report/Review Example

? International Trade Protectionism of the of the Table of Contents Table of Contents 2 Trade Protectionism- International Business Context 3 Reference 9 Trade Protectionism- International Business Context Although the concept of international business has been proliferated by research scholars, politicians and business houses in last 100 years but interesting fact is that, nations have been involved in cross border trading since the inception of human civilization. In recent times, cross border and international business have been flourished after the establishment of General Agreement on Tariffs and Trade (GATT). Countries are joining community such as G20, G7 in order to flourish the multilateral trade between nations and bring economic prosperity. Although countries opening their door for business houses of other countries to export goods or enter through foreign direct investment but there are instances such free trade environment is diminishing the competitiveness of domestic players of host countries (Abboushi, 2010). At times, proliferating international business between countries through trading agreement between countries is not free from controversies. For example, Abboushi (2010) has argued that, government should not compromise the national sovereignty and interest of domestic sellers in the name of creating free trade economy. Despite the controversies, there is no doubt that cross border trading has significantly increased in recent times and it has significantly impacted the international business. (Source: Abboushi, 2010) It is evident from the above table that in last few years, not only international trade between countries has been increased but it has also significantly global domestic product growth. Gordon and Cho (2008) have pointed out that international trade policy between countries can strongly impact business policy of companies belong to the country. For example, more than 50% of companies of USA outsource its manufacturing facilities to China, India where Long Run Average Costs (LRAC) is pretty low. In USA, technology companies also take help of low cost suppliers of foreign countries in order to serve the demand of customers (Eurostat, 2012). Majority of countries in European Union (EU) and North America are facing trade deficit while involving in international business with China (Eurostat, 2012). (Source: Eurostat, 2012) Due to increase in dependency of USA and EU nations on low cost export of China, competitiveness of their domestic business companies has been decreased significantly in last 10 years. In such context, government of both USA and EU nations have proposed several trade protectionism measure in order to create barrier for exporters from low cost countries and give breathing ground for domestic companies. Abboushi (2010) has defined protectionism as the summation of trade policies of government in order to protect domestic producers from foreign exporters and foreign investors by using various mechanisms such as raising price of the foreign exported goods, providing subsidy to domestic products, limiting the domestic market access for international investors and manufacturers etc. However, USA government has modified the some protectionism measures in order to create barrier for foreign investors, these measures can be summarized in the following manner. Put tariff tax on import from foreign countries under the GATT provisions. Putting trade quota or restriction on quantity to be exported from foreign countries. Create regulatory hurdle in terms of lists of standards and product classifications imported goods. Subsidize domestic products and provide tax holidays to domestic manufacturers. Manipulating the exchange rate and decrease the access of foreign currencies. Gutierrez and Schwarzenegger (2008) have found that trade protectionism is a cause of concern for USA government. For example, Etter & Hitt (2008) have stated that trade protectionism has punished the low income segment of USA. According to these research scholars, excessive protectionism in terms of income tax surcharge on automobile industry, retail clothing and sugar industry has not only discouraged foreign exporters to export but also raised the cost of importing by 23%. Another important thing is that, UDA government has imposed trade protectionism measures only for industries having revenue more than $100 million hence small revenue industries remain unprotected in USA. (Source: Abboushi, 2010) The above diagram is showing that how lack of trade protectionism in small industries of USA is paralyzing the country. Domestic players in small industries of USA are losing their revenue and efficiency when it comes to competing with the products of low cost foreign exporter. Due to over dependency of exported goods, domestic companies are reducing their manufacturing capacity by laying-off employee and shutting down plants. Hence, the situation can be referred as tricky business challenge for both USA government and domestic small companies (Abboushi, 2006). Although, it is evident from the research work of various research scholars that problems regarding trade protectionism and over dependency on foreign imports cannot be solved in overnight manner but magnitude of the problem can be reduced partially by strategic interventions. In the next section, the study will try to recommend a strategic intervention policy which might protect the interest of domestic industries of USA. Harsh but true fact is that, trade protectionism and enhancement of competitiveness of domestic industry is subjected to political and economic intervention, hence the issue can’t be resolved by itself. However, Government of USA needs to change its trade law in order to discourage domestic industries to import goods from manufacturers who use dumping practices by exporting goods at a price lower than the production cost. Government can use three types of quota policy in order to decrease the inflow of low cost goods from foreign countries. These three measures can be summarized as, Import Quota- issuing import license to selected trading agencies to import goods from foreign countries and creating limit for quantity to be imported by the trading agency, Tariff Rate Quota (TRQ) - offering lower tariff benefits to importers and trading agencies who import food products within the bracket of import quota limit and Voluntary Export Restraint (VER)- negotiating with government of low cost exporters to put import quota or increase tariff in exports (Hill, 2011). Now, the question may arise that how the proposed mechanism can ensure trade off in international trading practices of USA. Well, there is microeconomic justification behind the recommendation. (Source: Carbaugh, 2010) Suppose, USA government has implemented trade quota in order to protect domestic players from excessive amount of low cost imports while the above diagram is showing the situation after implementing the trade protectionism measures. S (U.S) is supply of the goods in USA market before protectionism which has reduced to S (US+Q) after government has imposed trade quota but demand D (U.S) for the product has not changed. As result of decrease in supply of goods or import after the trade protectionism measures, price of the product has increased (in this case, it is $5.00 from $2.50). Due to protectionism measure, production output of domestic player has increased significantly. It is evident from the above diagram that trade protectionism will improve the consumer surplus (area A+ area B+ area C+ area D) which in turn encourage domestic players to produce high priced quality goods because consumers are ready to pay high price for accessing the goods. Hence, overall competitiveness of domestic business will be increase through trade protectionism. Using the concept of Nash equilibrium, proposed by Nash (1996), it can be said that trade protectionism is not a zero sum game because the process always generate greater benefits domestic players in the industry. The researcher wants to finish this discussion by rising two pertinent questions which are needed to be addressed during globalization/international business discussion. These questions can be summarized in the following manner; How equal economic competitiveness of all the players in cross border and international transactions can be ensured? Does trade protectionism really improve national competitiveness and establish trade-off in international business practices of a particular country? Reference Abboushi, S. (2006). US-Canada lumber trade dispute – analysis and projection. Competition Forum, 4(2), 449-55. Abboushi, S. (2010). Trade protectionism: Reasons and outcomes. Competitiveness Review: An International Business Journal, 20(5), 384-394. Carbaugh, R. (2010). International economics. Stamford, Connecticut: Cengage Learning. Etter, L., & Hitt, G. (2008). Farm lobby beats back assault on subsidies. Retrieved from http://online.wsj.com/article/SB120657645419967077.html. Eurostat. (2012). EU27 deficit in trade in goods with China down to 67 bn euro in the first six months of 2012. Retrieved from http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/6-18092012-AP/EN/6-18092012-AP-EN.PDF. Gutierrez, C. M., & Schwarzenegger, A. (2008). Keep America open to trade. Retrieved from http://online.wsj.com/article/SB121055661828684155.html. Hill, C. W. L. (2011). Global business today. (7th ed.). New York City: McGraw-Hill. Nash, J. (1996). Essays on game theory. Camberley: Edward Elgar Publishing. Read More