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South Korea Rice farmers prepare for rough time form free trade

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South Korea Rice farmers prepare for rough time form free trade

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LAST SUMMER FRED HOCHBERG, head of America's government-backed Export-Import Bank, joined the chief of Westinghouse on a sales trip in the Czech Republic. A Czech official, he recalls, told him they would not even consider Westinghouse's bid to expand a nuclear power plant without finance from his bank. Russia's state-owned nuclear-energy company, Rosatom, had already offered to fund half the project. Mr Hochberg promised to do the same if Westinghouse, an American unit of Japan's Toshiba, won the bid.

"It's time to drop the fantasy that a purely free market exists in the world of global trade," Mr Hochberg told an American audience shortly after returning from Prague. "In the real world our private enterprises are pitted against an array of competitors that are often government-owned, government-protected, government-subsidised, government-sponsored or all of the above." Russia was particularly active, pledging $38 billion to finance Rosatom's global ambitions.
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The rival loans from America and Russia to win the Czech Republic's business do not fit the usual definition of protectionism. Indeed, conventional protectionism of the tariff and quota kind has been remarkably, and blessedly, quiescent in recent years. In the past decade the number of incidents when countries have punished dumping (selling below a "fair" price) by slapping tariffs on imports from the offending trade partner has been running at about 200 a year, fewer than in the late 1990s.

One reason for the decline in traditional protectionism is that countries hit by recession are able to let their exchange rates fall. In the 1930s countries on the gold standard did not have that option, so they resorted to tariffs instead to ward off imports. The WTO can also take some credit. Since its creation in 1995 big trading countries have regularly brought cases to it, and have respected its rulings when they have lost.

Beyond tariffs and quotas

But another reason why there is less overt protectionism is that the practice has crept back in other guises, often to avoid running foul of WTO rules. The WTO concentrates on measures designed to keep out imports. Global Trade Alert (GTA), a monitoring service operated by the London-based Centre for Economic Policy Research, defines protectionism more broadly as anything that hurts another country's commercial interests. It thus includes government bailouts of domestic companies, wage subsidies, export and VAT rebates, export credits and financing from state-owned banks. For example, it classifies France's loan guarantee to the financing arm of PSA Peugeot Citroën, a carmaker, as protectionist because, by helping sales of the company's cars, it hurts their competitors' sales. It reckons that at least 400 such "beggar-thy-neighbour" policies have been put in place each year since 2009, and that the trend is on the rise.

GTA's Simon Evenett, who is also a business professor at Switzerland's University of St. Gallen, thinks the WTO undercounts protectionist activity, both because of its narrow definition and because many countries do not complain about covert protectionism because they are guilty of it themselves: "The reaction of many trading partners to illegal subsidies is to have subsidies of their own."

GTA's data start only in 2009, making it hard to prove that such protectionism is on the rise, and some experts are sceptical of Mr Evenett's alarmist take. Researchers at the European Central Bank point out that a small number of countries, accounting for only 13% of G20 imports-Argentina, Brazil, India, Indonesia, Russia, South Africa and Turkey-were responsible for 60% of the measures recorded by GTA since 2009. But GTA's data do make it clear that countries have found ways other than traditional protectionism to help domestic industry, keep out imports and boost exports, often under the guise of industrial policy.

Brazil has perfected the art. Last year, looking for a way to reduce car imports, it introduced a new programme to encourage innovation, Inovar-Auto. Designed to stay within WTO rules, this requires Brazilian car manufacturers (all foreign-owned) to invest in local innovation and engineering and to meet certain fuel-efficiency standards by 2017, or else face higher excise taxes and import tariffs on domestic sales. This has boosted domestic investment in engineering and fuel-saving technology.

Brazil has also used state-controlled companies and banks to encourage domestic innovation and industry. Over the past decade it has required Petrobras, the state-controlled oil company, to meet ever tougher domestic-content requirements. BNDES, the state-owned development bank, has expanded its lending and equity investment since 2007 by 140%. Recepta, a biotech company, has received a grant, a low-interest loan and, last year, a direct equity investment by BNDES worth about $15m. José Fernando Perez, who founded Recepta in 2006, does not like the Brazilian government's propensity to meddle in markets, but he makes an exception for innovation policy, noting that Australia, Britain and America all subsidise basic biotech research. "I could not have survived if I'd paid commercial interest rates." Even so, he complains about the thickets of red tape that make it hard for his company to develop and test its new drug.

It is no surprise that the BRIC countries figure prominently in GTA's record of covert protectionism. Thanks to their embrace of state capitalism, the line between industrial policy and export subsidy is blurred or non-existent. China has long used compulsory joint ventures, technology transfer and access to cheap land and loans from state-owned banks to boost companies in strategic sectors. In the mid-2000s it invited foreign manufacturers, including Germany's Siemens and Japan's Kawasaki, to supply locomotives for its high-speed rail network. Later it switched to Chinese companies, which now compete with Siemens and Kawasaki in foreign markets.

A similar story unfolded in wind power. A decade ago foreign companies such as Spain's Gamesa had a significant share of China's market for wind-power turbines, but now Chinese companies, many using skills acquired as partners or subcontractors to Western suppliers, along with subsidised land and credit, dominate the Chinese market and compete fiercely with those original Western suppliers.

Let the sunshine in

When the same thing started to happen in solar power, China's competitors hit back. In 2012 America, embarrassed by the bankruptcy of Solyndra, which had received federal loan guarantees, slapped tariffs on Chinese solar-panel exporters for offering illegal subsidies and dumping. Karel De Gucht, the EU's trade commissioner, has linked China's illegal exports to its pervasive industrial policy, pointing out that to discover which industries are dumping, "you read the last five-year plan." In June the Commission threatened to impose tariffs of up to 47.6% on Chinese solar panels. But China said it would retaliate and had its hand strengthened when Germany questioned the Commission's case. Eventually the two sides reached a settlement stipulating a minimum price for Chinese solar panels.

The tangle illustrated how difficult it is to identify and punish protectionism in an industry where industrial policy is the rule, not the exception. "Solar energy is subsidised in almost all countries," says He Weiwen, of the China Association of International Trade, a Beijing think-tank. "The important thing is not whether we have subsidies but whether they are illegal," and that question is best determined by negotiation.

Whereas the solar-panel dispute was carried out in the open, the battle over cheap export loans has been fought behind the scenes. For decades rich countries have financed exports within guidelines laid out by the OECD, but in recent years much more business has been conducted outside those guidelines. They do not cover non-OECD countries such as Russia, Brazil and, of greatest concern to the rich world, China, which has used export finance to turn its construction-equipment manufacturers into world leaders. But OECD countries, too, have found ways to offer loans that are not covered by the guidelines, such as floating-rate loans. The ExIm bank reckons that last year export credit regulated by the OECD guidelines amounted to $120 billion, unregulated credit by OECD countries to $110 billion and lending by Russia, Brazil, India and China to $70 billion.

America has been no slouch itself. The ExIm bank made new loans of $31 billion last year, up from $8 billion in 2007, and has been focusing on key industries: oil and gas; mining and agriculture equipment; agribusiness; renewable energy; medical technology; construction; aircraft; and power generation.

Although export promotion and industrial policy are less likely to trigger retaliatory action and trade wars than import suppression, that does not make these subtler methods less distortionary or damaging, says GTA's Mr Evenett. If country A's exports to country B benefit from generous export credit, country B can complain. But he notes the real damage is being done to the exports of other countries that are being hit indirectly.

And just like import tariffs, export subsidies cause many distortions. Delta Air Lines, for example, has complained it was hurt by ExIm Bank's financing of the purchase of Boeing jets by Air India, which competes with Delta on certain routes. And should a loan go bad, taxpayers would have to foot the bill.

Industrial policy also often has unexpected consequences. In 2010 India required central-government solar-power projects that used crystalline modules and, later, cells to source them locally. Since India has a limited capacity for producing such technology, many developers imported American-made thin-film transistor technology instead, taking advantage of low-interest loans from ExIm bank.

Brazil's industrial policy, too, is riddled with problems. Buy-local requirements have hampered Petrobras's ability to exploit new deep-sea oil deposits because the country's capacity for producing oilfield equipment is limited. Idiosyncratic fuel standards mean the new engines spurred by Inovar-Auto have restricted export potential. Brazilian businesses appreciate the help they get from the government but would prefer more growth-friendly policies on taxes, investment and pay.

Earlier this year Romi, a manufacturer of machine tools, plastic processing machinery and castings near São Paulo, got a low-interest loan of 27m real from the Brazilian government to invest in innovation and process design. R&D is integral to the company's success. Its senior managers say it spends 4% of its sales on this, gesturing to the ranks of designers and engineers sitting behind glass walls above a spotless factory floor. But, they add, that R&D would proceed even without the loan. What Romi really needs is stronger investment growth, but the government has put most of its efforts into boosting consumption.

Hidden protectionism and industrial policy may boost specific industries or exports, but that does a country no good if other policies stifle private enterprise and cause underinvestment in human and physical capital. Brazil and India have been held back because their governments funnelled state resources to preferred sectors and constituencies instead of boosting their economies' underlying potential, slowing down their growth.

In China, covert protectionism helped domestic manufacturers achieve formidable market share at home and abroad, but excessive lending by state-owned banks to state-owned enterprises and local government caused investment and property bubbles. The country's leaders say they want to reinvigorate the role of private enterprise, but whether that extends to foreign companies remains to be seen.

Special report: The gated globe More in this special report:

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LAST SUMMER FRED HOCHBERG, head of America's government-backed Export-Import Bank, joined the chief of Westinghouse on a sales trip in the Czech Republic. A Czech official, he recalls, told him they would not even consider Westinghouse's bid to expand a nuclear power plant without finance from his bank.

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This post originally appeared at Campaign for America's Future (CAF) at their Blog for OurFuture as part of the Making It In America project. I am a Fellow with CAF.
"Protectionism" is a very powerful word. In fact, simply evoking the word is capable of ending debate on any subject related to trade. Invoking the magic words, "You can't do that, it would be protectionist," settles all arguments.

Why, exactly, is protectionism so bad? Why can't we have fair trade that lifts workers and protects the environment instead of unregulated free trade that exploits workers and the environment? Well, after spending time looking for evidence to support the "protection is bad" arguments what I find boils down to, basically: "Because it is. Shut up."

Here is how it works, in the current discussions of how to fix the problems that led to the financial crisis there are established discussion-enders. Often the 1930s depression is invoked. For example, if you want to bail out big financial corporations and executives (and their bonuses) you say it was a "credit crunch" that caused the depression so we have to prevent another credit crunch. Booga-booga, end of discussion (even though lending is still declining even a year after the huge bailouts...) If you want to maintain low-cost import pressures to force low wages you say "protectionism caused the depression." For other arguments, you can say it was unions that caused the depression, or perhaps government regulations, or perhaps taxes. You get the picture. Booga-booga, end of discussion.

By the same magical mystique, current trade and economic discussion rules prohibit ever, ever suggesting that the depression and hence the current economic problems (because of course they are exactly the same thing, just as Vietnam was exactly like World War II) happened because of:
* extreme concentration of wealth at the top,
* monopolistic and predatory corporate practices,
* wages and compensation that are too low for regular people to participate in the economy,
* insufficient taxation of the wealthy,
* exporting manufacturing capacity,
* overconsumption,
* unsustainable practices,
* encouraging people and businesses to borrow too much,
* coziness between government and wealthy special interests,
* insufficient regulation of corporations,
* or any argument that might result in people thinking that regular people should participate fairly in the economy or have a degree of control over the government and corporate practices.

So with these rules in mind I would like to address a few of the myths about protectionism that have grown into a "conventional wisdom" that always serves the interests of the wealthiest few.

Myth: Protectionism caused the depression or made it worse. Thom Hartmann addresses this very well, so I'll leave it to him. In 2004's, Democracy - Not "The Free Market" - Will Save America's Middle Class, Thom wrote,

When conservatives rail in the media of the dangers of "returning to Smoot Hawley, which created the Great Depression," all they do is reveal their ignorance of economics and history. The Smoot-Hawley tariff legislation, which increased taxes on some imported goods by a third to two-thirds to protect American industries, was signed into law on June 17, 1930, well into the Great Depression. In the following two years, international trade dropped from 6 percent of GNP to roughly 2 percent of GNP (between 1930 and 1932), but most of that was the result of the depression going worldwide, not Smoot-Hawley. The main result of Smoot-Hawley was that American businesses now had strong financial incentives to do business with other American companies, rather than bring in products made with cheaper foreign labor: Americans started trading with other Americans.

Smoot-Hawley "protectionist" legislation did not cause the Great Depression, and while it may have had a slight short-term negative effect on the economy ("1.4 percent at most" according to many historians) its long-term effect was to bring American jobs back to America. [emphasis added]

Myth: Protectionists are "against trade," and the similar argument protectionism is about creating barriers or just keeping out foreign goods. This is a way to short-circuit the actual arguments that trade should be fair to both sides instead of just unregulated and exploitative. Fair traders want trade to be conducted in ways that are fair and respectful of working people on both sides of the transaction. They want people to be paid fairly and their working conditions to be safe and they want the environment to be protected. When trade is conducted this way everyone benefits in the long run.

Myth: Protectionism costs jobs. This scare-tactic is used by opponents of almost every policy that benefits working people. "Raising the minimum wage costs jobs." "Taxing corporations costs jobs." Etc. Fair trade policies would increase the number of jobs because the workers making the goods that we import would be paid enough to buy the things we make here.

Myth: Protectionism ties up manufacturing resources in outdated uses. This is a valid criticism of protectionist trade policies if those policies were enacted as the result of lobbying by interests seeking to protect themselves from competition that is based on innovation and increased efficiencies. This is a key point and I want to repeat it. Fair trade advocates oppose exploitation of workers or the environment. Fair traders do not oppose fair competition, and it is important that trade regulations reflect this.

There is no question, as I pointed out earlier this week in Myths of Protectionism: Stories You Are Likely to Hear in the Wake of the China Tire Trade Tariff Case that protectionism can be misused by wealthy interests to feather their own bed in ways that harm the rest of us such as by companies that protect their franchise from fair competition. I wrote,

As with all rules they can be manipulated by the currently-powerful. This was done to keep some prices unreasonably high, encourage monopolistic practices, reduce access to localized or regionalized specialties ... So after we built up a manufacturing base the time came to start selling to others. This necessitated back-scratch trade agreements: you scratch my back by lowering your tariffs, we'll scratch yours by lowering ours. Etc. And each country's markets expand - as does the competition.

We always have to protect against wealthy and powerful interests seizing the government's decision-making processes to further their own interests. That is just human nature. It is not an argument against the idea of having government and law, it is the reason it is necessary for us to be eternally vigilant of powerful interests and have systems and procedures in place to protect the rest of us. As with anything trade can be beneficial or harmful depending on how it is managed.

Fair traders want trade managed in ways that lift people and the environment up, increasing our standard of living and protecting the environment. Yes, we want to protect our workers and our manufacturing capacity but this is the key to prosperity and economic power. Wealthy interests are using trade as a way to pressure us to force lower wages, loss of benefits and removal of restrictions on polluting the environment.

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Myths of Protectionism Are Spread to Exploit Workers and the Environment

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This post originally appeared at Campaign for America's Future (CAF) at their Blog for OurFuture as part of the Making It In America project. I am a Fellow with CAF. "Protectionism" is a very powerful word. In fact, simply evoking the word is capable of ending debate on any subject related to trade.

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Certain industries have a possible comparative advantage but have not yet exploited sufficient economies of scale to bring their unit costs down to competitive levels. Short-term protection might allow an infant (or fledgling) industry to develop a cost advantage at which point protection could be relaxed, leaving an industry to trade more freely on the international market. Of course, the risk is that these controls become semi-permanent.
Protection of Strategic Industries
A government may wish to protect employment and investment in strategic industries, although value judgments are involved in determining what a strategic sector is.

Protection against Dumping
Dumping is a type of predatory pricing behaviour and can often be a concern for domestic firms facing overseas competitors who are looking to offload their spare production in international markets at very low prices. Goods are dumped when they are sold for export at less than their normal value. The normal value is usually defined as the price for the like goods in the exporter's home market. In the short term, consumers benefit from lower prices of the foreign goods, but in the longer-term, persistent undercutting of domestic prices can force a home-based industry out of business and then allow the foreign firm to establish itself as a monopoly. Once this is achieved the foreign owned monopoly is free to increase their prices and exploit the consumer. Protection via tariffs on 'dumped' goods can be justified to prevent long-term exploitation of the consumer.

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Arguments in Favour of Protectionism | tutor2u Business

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Certain industries have a possible comparative advantage but have not yet exploited sufficient economies of scale to bring their unit costs down to competitive levels. Short-term protection might allow an infant (or fledgling) industry to develop a cost advantage at which point protection could be relaxed, leaving an industry to trade more freely on the international market.

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The main arguments against protectionism are outlined below:
Market Distortion and loss of Economic Efficiency
Protectionism can be an ineffective and costly means of sustaining jobs and supporting domestic economic growth:
Higher Prices for Consumers
Import tariffs in particular push up prices for consumers and insulate inefficient domestic sectors from genuine competition. They penalise foreign producers and encourage an inefficient allocation of resources both domestically and globally.
Reduction in Market Access for Producers
Export subsidies depress world prices and damage output, profits, investment and jobs in many lower and middle-income developing countries that rely heavily on exporting primary and manufactured goods for their growth.
Extra Costs for Exporters
For goods that are produced globally, high tariffs and other barriers on imports act as a tax on exports, damaging economies, and jobs, rather than protecting them. For example, a tariff on imported steel can lead to higher costs and lower profits for car manufacturers and the construction industry.

Adverse Effects on Poverty
Higher prices from tariffs tend to hit those on lower incomes hardest, because the tariffs (e.g. on foodstuffs, tobacco, and clothing) fall on products that lower income families spend a higher share of their income. Tariffs can therefore lead to a rise in relative poverty.
Retaliation & Trade Wars
There is the danger that one country imposing import controls will lead to retaliatory action by another.

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Arguments Against Protectionism | tutor2u Business

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The main arguments against protectionism are outlined below: Market Distortion and loss of Economic Efficiency Protectionism can be an ineffective and costly means of sustaining jobs and supporting domestic economic growth: Higher Prices for Consumers Import tariffs in particular push up prices for consumers and insulate inefficient domestic sectors from genuine competition.

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The TPP comprises a trading bloc of 12 countries: the US, Japan, Malaysia, Vietnam, Singapore, Brunei, Australia, New Zealand, Canada, Mexico, Chile and Peru. These countries have a collective population of about 800 million - almost double that of the European Union's single market. The 12-nation comprising the TPP are already responsible for 40% of world trade.

The TPP aims to deepen economic ties between these nations, slashing tariffs and fostering trade to boost growth. Member countries are also hoping to develop a closer relationship on economic policies and regulation

The agreement could, therefore, create a new single market something like that of the EU.

The TPP has not yet been formally ratified by the governments involved. To take effect, the deal has to be ratified by February 2018 by at least six countries that account for 85% of the group's economic output, which means that both Japan and the USA will need to ratify the deal.

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Trading Blocs - the Trans-Pacific Partnership (TPP) | tutor2u Business

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The TPP comprises a trading bloc of 12 countries: the US, Japan, Malaysia, Vietnam, Singapore, Brunei, Australia, New Zealand, Canada, Mexico, Chile and Peru. These countries have a collective population of about 800 million - almost double that of the European Union's single market.

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Offshoring involves the relocation of business activities from the home country to a different international location.

It is the changed international location of where the business activity is performed that is key to understanding offshoring.

Offshoring has traditionally been associated with the relocation of manufacturing activities from a domestic economy overseas (e.g. from the US to China, or UK to Poland).

However, offshoring is also increasingly common with business services (e.g. UK financial services using call centres based in India).

The Difference between Offshoring and Outsourcing

Take care with the difference between two similar-sounding terms! They are not (quite) the same thing!

Offshoring is about WHERE the work is done.

Outsourcing is about WHO does the work.

So, offshoring involves changing the international location of WHERE work is done for or by a business.

Outsourcing involves changing WHO does work for a business - away from the business itself to an external supplier.

The table below illustrates some examples of the distinction between offshoring and outsourcing:

Key Reasons for Offshoring

Why might a business decide to change the international location of where its business activities are undertaken? Key reasons include:

To access lower manufacturing costs (particularly in emerging markets which enjoy the advantage of lower labour costs)

To access potentially better skilled & higher quality supply

To makes use of existing capacity overseas

To take advantage of free trade areas and avoid protectionism

To make it easier to supply target international markets (where it is important to be located in, or near to, those markets)

Potential Drawbacks to Offshoring

Like all decisions about where to locate business operations, there are potential drawbacks to offshoring, including:

Longer lead times for supply & risks of poorer quality

Implications for CSR (harder to control aspects of operating long distances away from the home country)

Additional management costs (time, travel)

Impact of exchange rates (potentially significant)

Communication: language & time zones

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Offshoring involves the relocation of business activities from the home country to a different international location. It is the changed international location of where the business activity is performed that is key to understanding offshoring. Offshoring has traditionally been associated with the relocation of manufacturing activities from a domestic economy overseas (e.g.

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Protectionism - Import Dumping | tutor2u Business

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Taking action to protect against import dumping is an argument in favour of protectionism.

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Trading blocs are usually groups of countries in specific regions that manage and promote trade activities. Trading blocs lead to trade liberalisation (the freeing of trade from protectionist measures) and trade creation between members, since they are treated favourably in comparison to non-members.

The World Trade Organisation (WTO) permits the existence of trading blocs, provided that they result in lower protection against outside countries than existed before the creation of the trading bloc .

The most significant trading blocs currently are:

European Union (EU) - a customs union, a single market and now with a single currency

European Free Trade Area (EFTA)

North American Free Trade Agreement (NAFTA) between the USA, Canada and Mexico

Mercosur - a customs union between Brazil, Argentina, Uruguay, Paraguay and Venezuela

Association of Southeast Asian Nations (ASEAN) Free Trade Area (AFTA)

Common Market of Eastern and Southern Africa (COMESA)

South Asian Free Trade Area (SAFTA) created in 2006 with countries such as India and Pakistan

Pacific Alliance - 2013 - a regional trade agreement between Chile, Colombia, Mexico and Peru

Trading Blocs and Trade Creation
Trade creation is the movement from a higher cost source of output to a lower cost source of supply as a result of joining a trade agreement.

Trade creation occurs when a country enters a free trade area / agreement or becomes involved in a customs union in which there is free trade between members but also a common external tariff.
Trade diversion is a switch from a lower-cost foreign source/supplier outside of a customs union towards a higher-cost supplier located inside the customs union.

Trading Blocs and Trade Diversion

Trade diversion is a feature of a country deciding to join a customs union i.e. an area where there is free trade within the customs union but also a common external tariff.

When a country joins a customs union it might initially be trading freely with a low cost supplier in a 3rd party nation.

Once inside a customs union, the country must now adopt a common external tariff which will then increase the cost of importing from the 3rd party nation.

These higher prices might affect consumers directly e.g. higher prices for food.

Or they might affect consumers indirectly because producers now have to pay more for their imports from the 3rd party.

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Trading blocs are usually groups of countries in specific regions that manage and promote trade activities. Trading blocs lead to trade liberalisation (the freeing of trade from protectionist measures) and trade creation between members, since they are treated favourably in comparison to non-members.

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Key Points on the WTO

The World Trade Organisation (WTO) is a multi-lateral organisation based in Geneva, Switzerland

The WTO was established in 1995 and was preceded by the General Agreement on Tariffs and Trade (GATT).

It helps to promote free trade by persuading countries to lower their import tariffs and other barriers to open markets including widespread use of import licences, export subsidies and other non-tariff barriers

Membership of the WTO has expanded with the successful admission of China, India and latterly, Russia to the WTO as events of global significance.

WTO membership accounts for 98 per cent of world trade in 2014 compared with 91 per cent in 1995

Key Challenges Facing the WTO
Complexity of production:
Countries and producers increasingly specialise in certain stages of production depending on their competitive advantage. This incentivises countries to pursue bi-lateral trade agreements (between two countries) rather than agree multi-lateral (between many countres) trade deals
Shifting global economic power:
A big challenge for the WTO is to help meet the aspirations of emerging economies and overcome strains in trade relationships with developed nations
Fragmentation of the global trading system
A big risk for the WTO is that regional trading blocs are by passing attempts to secure a new global trade deal.

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The World Trade Organisation. | tutor2u Business

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The World Trade Organisation (WTO) is a multi-lateral organisation based in Geneva, Switzerland The WTO was established in 1995 and was preceded by the General Agreement on Tariffs and Trade (GATT).

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Free trade is something of a sacred cow in the economics profession.

Moving towards it, rather slowly, has also been one of the dominant features of the post-World War Two global economy.

Now there are new challenges to that development.

The UK is leaving the European Union and the single market - though in her speech this week, British Prime Minister Theresa May promised to push for the "freest possible trade" with European countries and to sign new deals with others around the world.

Most obviously Donald Trump has raised the possibility of quitting various trade agreements, notably Nafta, the North American Free Trade Agreement with Mexico and Canada. Even the World Trade Organization (WTO) has proposed new barriers to imports.

In Europe, trade negotiations with the United States and Canada have run into difficulty, reflecting public concerns about the impact on jobs, the environment and consumer protection.

The WTO's Doha Round of global trade liberalisation talks has run aground.

The case for trade without government imposed barriers has a long history in economics.

Comparative advantage

Adam Smith, the 18th Century Scottish economist who many see as the founding father of the subject, was in favour of it. But it was a later British writer, David Ricardo in the 19th Century, who set out the idea known as comparative advantage that underpins much of the argument for freer trade.

It is not about countries being able to produce more cheaply or efficiently than others. You can have a comparative advantage in making something even if you are less efficient than your trade partner.

When a country shifts resources to produce more of one good there is what economists call an "opportunity cost" in terms of how much less of something else you can make. You have a comparative advantage in making a product if the cost in that sense is less than it is in another country.

If two countries trade on this basis, concentrating on goods where they have a comparative advantage they can both end up better off.

Another reason that economists tend to look askance at trade restrictions comes from an analysis of the impact if governments do put up barriers - in particular tariffs or taxes - on imports.

There are gains of course. The firms and workers who are protected can sell more of their goods in the home market. But consumers lose out by paying a higher price - and consumers in this case can mean businesses, if they buy the protected goods as components or raw materials.

Avoiding protectionism

The textbook analysis says that those losses add up to more than the total gains. So you get the textbook conclusion that it's best to avoid protection.

And this conclusion is regardless of what other countries do. The 19th Century French economist Frederic Bastiat set it out it like this:

"It makes no more sense to be protectionist because other countries have tariffs than it would to block up our harbours because other countries have rocky coasts."

The implication is that unilateral trade liberalisation makes perfect sense.

A more recent theory of what drives international trade looks at what are called economies of scale - where the more a firm produces of some good, the lower cost of each unit.

The associated specialisation can make it beneficial for economies that are otherwise very similar to trade with one another. This area is known as new trade theory and the Nobel Prize winner Paul Krugman was an important figure in developing it.

Post-war trade

The basic idea that it's good to have freer trade has underpinned decades of international co-operation on trade policy since World War Two.

The period since 1945 has been characterised by a gradual lowering of trade barriers. It happened in the General Agreement on Tariffs and Trade, which began life in 1948 as a forum for governments to negotiate lower tariffs.

Its membership was initially small, but by the time it was replaced by the World Trade Organization in 1995, most countries had signed up.

The motivation was to end or reduce the protectionism or barriers to trade that went up in the 1930s. It is not generally thought that those barriers caused the Great Depression, but many do think they aggravated and prolonged it.

The process of post-war trade liberalisation was driven largely by a desire for reciprocal concessions - better access to others' markets in return for opening your own.

But what is the case against free (or at least freer) trade?

First and foremost is the argument that it creates losers as well as winners.

What Ricardo's theory suggested was that all countries engaging in trade could be better off. But his idea could not address the question of whether trade could create losers as well as winners within countries.

Work by two Swedish Nobel Prize winners, Eli Hecksher and Bertil Ohlin, subsequently built on by the American Paul Samuelson developed the basic idea of comparative advantage in a way that showed that trade could lead to some groups losing out.

Putting it very briefly, if a country has a relatively abundant supply of, for example, low-skilled labour, those workers will gain while their low-skilled counterparts in countries where it is less abundant will lose.

There has been a debate about whether this approach fits the facts, but some do see it as a useful explanation of how American industrial workers (for example) have been adversely affected by the rise of competition from countries such as China.

A group of economists including David Autor of the Massachusetts Institute of Technology looked at the impact on areas where local industry was exposed to what they call the China shock.

"Adjustment in local labour markets is remarkably slow, with wages and labour-force participation rates remaining depressed and unemployment rates remaining elevated for at least a full decade after the China trade shock commences.

"Exposed workers experience greater job churning and reduced lifetime income."

Compensating losers

Still if you accept that overall countries gain, then the winners could in principle fully compensate the losers and still be better off.

Such programmes do exist. Countries that have unemployment benefits provide assistance to people who have lost their jobs. Some of those people will have been affected by competition from abroad.

The United States has a programme that is specially targeted for people who lose their jobs as a result of imports, called Trade Adjustment Assistance.

But is it enough? Lawrence Mishel of the Economic Policy Institute, a think-tank in Washington writes: "The winners have never tried to fully compensate the losers, so let's stop claiming that trade benefits us all."

In any case, it is not clear that compensation would do the trick. As Mark Carney, the Bank of England governor noted, they may lose their jobs and also "the dignity of work".

He is keen on maintaining open markets for trade, but recognises the need to do something about what you might call the side effects.

To return to recent political developments - Donald Trump clearly did get support from many of those people in areas of the US where industry has declined.

We don't yet know how he will address those issues when he takes his place in the White House.

Perhaps his threats to introduce new tariffs are just that - threats. But the post-war trend towards more liberalised international trade looks more uncertain than it has for many years.

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Free trade is something of a sacred cow in the economics profession. Moving towards it, rather slowly, has also been one of the dominant features of the post-World War Two global economy. Now there are new challenges to that development.

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'Is Free Trade' good or bad? | tutor2u Business

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Is Free Trade a good thing or a bad thing? On the one hand, in her Brexit speech this week Theresa May promised to push for the "freest possible trade" with European countries and to sign new deals with others around the world, which implies that unfettered trade - with no import tariffs or quotas being applied to raise the cost of buying imported goods - is the most desirable thing for the UK.

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Main Forms of Protectionism

There are many ways in which country can seek to protect a market. The most common are outlined below.
Tariffs
A tariff a tax or duty that raises the price of imported products and causes a contraction in domestic demand and an expansion in domestic supply. For example, until recently, Mexico imposed a 150% tariff on Brazilian chicken. The United States has an 11% import tariff on imports of bicycles from the UK.
Quotas
Quotas are quantitative (volume) limits on the level of imports allowed or a limit to the value of imports permitted into a country in a given time period. For example, until 2014, South Korea maintained strict quotas on imported rice. It has now replaced a quota with import tariffs designed to protect South Korean rice farmers. Quotas do not normally bring in any immediate tax revenue for the government although if they cause domestic production and incomes to expand, there will be a beneficial impact on taxes paid.
Export subsidies
A subsidy is a payment to encourage domestic production by lowering their costs. Soft loans can be used to fund the dumping of products in overseas markets. Well known subsidies include Common Agricultural Policy in the EU, or cotton subsidies for US farmers and farm subsidies introduced by countries such as Russia. In 2012, the US government imposed tariffs on Chinese manufacturers of solar panel cells, judging that they benefited from unfair export subsidies after a review that split the US solar industry.
Domestic subsidies
Domestic subsidies involve government help (state aid) for domestic businesses facing financial problems e.g. subsidies for car manufacturers or loss-making airlines.

More Specialised Kinds of Protectionism

Outlined below are more specialised forms of protectionism, although these can often have significant effects on competition in markets.
Import licensing
In this case, governments grant importers the license to import goods - these can be restricted
Exchange controls
This form of protectionism involves limiting currencies that can move between countries (also known as capital controls)
Financial protectionism
An example of financial protectionsm would be when a national government instructs banks to give priority when making loans at favourable interest rates to domestic businesses
Murky or hidden protectionism
An example of murky or hidden protectionism is government measures that indirectly discriminate against foreign workers, investors and traders. A government subsidy that is paid only when consumers buy locally produced goods and services would count as an example. Deliberate intervention in currency markets e.g. to bring about a currency devaluation might also come under this category.
Voluntary Export Restraint (VER)
This is where two countries make an agreement to limit the volume of their exports to one another over an agreed time period. Sometimes this is enforced by a government for example the USA enforced VER on Japan during the late 1980s

Intellectual property laws e.g. patents and copyright protection protecting domestic ideas and products
Technical barriers to trade
These include product labeling rules and stringent sanitary standards. Technical barriers to trade increase product compliance costs and impose monitoring costs on export agencies. Big vertically integrated transnational businesses can usually cope with these non-tariff barriers but many of the least developed countries do not have the technical sophistication to overcome these non-tariff barriers.
Preferential state procurement policies
This is where a government favour local/domestic producers when finalizing contracts for state spending e.g. infrastructure projects or buying new defence equipment

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What is Protectionism? | tutor2u Business

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Protectionism involves any attempt by a country to to impose restrictions on trade in goods and services. The main aim of protectionism is to cushion domestic businesses and industries from overseas competition and prevent the outcome resulting solely from the interplay of free market forces of supply and demand.

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3 - Protectionism and trading blocs case study

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WASHINGTON (BRAIN) - Representatives from the bike industry and the advocacy group PeopleForBikes are proposing the U.S. tariffs on imported bikes be reduced or eliminated because bikes have a positive effect on the environment.

The Office of the U.S. Trade Representative held a hearing last week to hear from business groups prior to World Trade Organization talks about reducing tariffs for environmentally friendly products.

The WTO already agreed in 2012 to reduce tariffs to 5 percent or less by 2015 on 54 categories of green products. Those categories include solar panels, gas and wind turbines, soot removers and catalytic converters. The U.S. will soon join a new round of negotiations with the WTO members over adding product categories to the Environmental Goods Agreement (EGA).

Bob Margevicius, Specialized's executive vice president and a member of the Bicycle Product Suppliers Association board, testified at the hearing for the BPSA and PeopleForBikes.

Margevicius argued that, in addition to the bicycle's status as a green product, the current U.S. tariffs of up to 11 percent benefit no one since there is so little domestic bike manufacturing.

" The current high tariffs on bicycles and bicycle parts do not protect any significant domestic manufacturing. Rather they impose extra, unnecessary costs to anyone purchasing these products. It particularly impacts low-income individuals who are most likely to adopt bicycle transportation in lieu of more costly automobile transportation," Margevicius said.

Margevicius said bikes and bike products are appropriate for inclusion on the list of green products that will enjoy reduced tariffs under the 2012 agreement.

" The benefits of bicycling are significant, in terms of energy savings, relief of urban congestion and the promotion of a healthier lifestyle. Bicycles represent a zero-emissions form of transportation that offsets use of other, less clean forms of commuting, like the gasoline-engine automobile."

The EGA talks are expected to start next month.

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Industry proposes tariffs be reduced because bikes are green

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WASHINGTON (BRAIN) - Representatives from the bike industry and the advocacy group PeopleForBikes are proposing the U.S. tariffs on imported bikes be reduced or eliminated because bikes have a positive effect on the environment. The Office of the U.S.

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Editor's note: This article was originally published on March 11, 2013, and has been updated to include the latest regulatory changes.
Over the course of 2016, the Chinese government promulgated a series of new regulations affecting companies that import and export taxable goods and services in China. These new regulations expand on previous import and export taxes and duties, which vary depending on the products involved.

However, at the center of this intricate system is a central list of general principles for foreign companies to abide by. Below, we outline the most significant issues relating to these taxes and duties that foreign companies should take note of.

Companies importing products from, or exporting products to, China will generally come into contact with the following three types of taxes:

1. Value-added tax

2. Consumption tax

3. Customs duties

Value-added Tax for imported goods

All goods imported into China are subject to the nation's value-added tax (VAT) of either 13 percent or 17 percent. The 13 percent tax is available for certain goods that fall mainly within the categories of agricultural and utility items, while the 17 percent tax applies to other goods subject to the VAT tax.

The input VAT (Sales x VAT rate), which is the VAT amount paid when purchasing products or taxable services, can often be used for deduction against output VAT, which is the VAT amount charged to the buyer by the seller of a good or taxable service.

RELATED: Sales, Import, and Manufacture of Alcoholic Beverages in China

Consumption Tax for imported goods

China's consumption tax (CT) is imposed on companies and organizations who manufacture and import taxable products, process taxable products under consignment, or sell taxable products.

Imported products taxable under China's consumption tax include those that are harmful to one's health like tobacco or alcohol, luxury goods like jewelry and cosmetics, and high-end products such as passenger cars and motorcycles.

For imported goods, consumption tax varies depending on the type of product being brought into the country. Calculating consumption tax can be done by using either the ad valorem or quantity-based method.

Customs duties

Customs duties include import and export duties, with a total of 8,294 items taxed, according to China's 2016 Customs Tariff Implementation Plan ("2016 Tariff Plan"). Customs duties are computed either on an ad valorem basis or quantity basis.
Import duties
Duty rates on import goods consist of:

Most-favored-nation duty (MFN) rates;

Conventional duty rates;

Special preferential duty rates;

General duty rates;

Tariff rate quota (TRQ) duty rates; and,

Temporary duty rates

MFN duty rates
MFN rates are the most commonly adopted import duty rates. They are much lower than the general rates which apply to non-MFN nations. They apply to the following goods:

Goods imported to China from WTO member countries;

Goods originating from countries or territories which have concluded bilateral trade agreements containing provisions on MFN treatment with China; and,

Goods that originated from China.

Conventional duty rates and special preferential duty rates
Conventional duty rates are applied to imported goods that originate from countries or territories that have entered into regional trade agreements containing preferential provisions on duty rates with China.
Special preferential duty rates
Special preferential duty rates are applied to imported goods originating from countries or territories with trade agreements containing special preferential duty provisions with China. They are generally lower than MFN rates and conventional duty rates.
General duty rates
General duty rates are applied to imported goods originating from countries or territories that are not covered in any agreements or treaties, or of unknown places of origin.
Tariff rate quota duty rates
Under tariff rate quota (TRQ) schemes, goods imported within the quota are subject to a lower tariff rate, and goods imported beyond the quota are subject to higher tariff rates. For example, the TRQ rate for importing wheat within the quota is one percent - substantially lower than the MFN duty rate of 65% and the general duty rate of 130%.
Temporary duty rates
China also sets temporary duty rates for certain imported goods in order to boost imports and meet domestic demand. In 2016, China implemented temporary tax rates, which are even lower than the MFN tariffs on more than 787 imported commodities, including on diapers (2%), sunglasses (6%), kaolin (1%), and skincare products (2%).

What's new this year?

Starting June 1, 2015, China slashed tariffs by 50% for 14 categories of goods. These relaxed tariff rates come at a time when the government is playing with fiscal policy in order to increase domestic consumption.

The new tariff rates for the targeted import goods can be found below:

Cosmetics and Skin Care Products: 2% (from 5%)

Shoes (sports shoes, boots, etc.): 12% (from 22-24%)

Fur Clothing: 10% (from 23%)

Men's and Women's Suits and Outwear: 8-10% (from 17.5-24%)

Kashmir wool, knitted, and crocheted items: 7% (from 14%)

Diapers: 2% (from 7.5%)

Other duty rates

Considerably higher rates may be implemented according to Chinese regulations regarding dumping, anti-subsidies, and safeguard measures. Retaliatory tariffs could also be applied to goods originating from countries or regions that violate trade agreements.
Tax Compliance Sevices from Dezan Shira & Associates
Duty Relief for Key Technical Equipment

China has recently released the "Catalogue of State-supported Key Technical Equipment and Products (2015 version)," which took effect on January 1, 2016. Exporting certain technical equipment and products listed in the catalogue to eligible Chinese domestic enterprises is now exempt from custom duties.

Duty Paying Value for Imported Goods

The amount of import taxes and customs duty payable is calculated based on the price or value of the imported goods. This value is called the duty paying value (DPV). The DPV is determined based on the transacted price of the goods - i.e. the actual price directly and indirectly paid or payable by the domestic buyer to the foreign seller, with certain required adjustments. DPV includes transportation-related expenses and insurance premiums on the goods prior to unloading at the place of arrival in China. Import duties and taxes collected by Customs are excluded from DPV.

Calculating Import Taxes and Duties Payable

Import taxes and duties payable can be calculated after determining the DPV and the tax and tariff rates of the goods. The formulae are:
Duty payable = DPV x Tariff rate
Ad valorem basis:
Duty payable = Quantity of imported goods x Amount of duty per unit
Quantity-based:
Duty payable = DPV x Tariff rate + Quantity of imported goods x Amount of duty per unit
Compound formula:

Import taxes and duty payable should be calculated in RMB using the benchmark exchange rate published by the People's Bank of China.

Export duties are only imposed on a few resource products and semi-manufactured goods. In 2016, China continues to levy temporary tariffs on exports including crude oil, chemical fertilizers and iron alloy in order to conserve resources.
Portions of this article came from the February 2016 issue of China Briefing Guide titled, "Tax, Accounting and Audit in China 2016." This edition of Tax, Accounting, and Audit in China, updated for 2016, offers a comprehensive overview of the major taxes foreign investors are likely to encounter when establishing or operating a business in China, as well as other tax-relevant obligations. This concise, detailed, yet pragmatic guide is ideal for CFOs, compliance officers and heads of accounting who must navigate the complex tax and accounting landscape in China in order to effectively manage and strategically plan their China operations. It is used by the Guanghua School of Management, Peking University as course reference material.
The tax base for export duties are the same as import duties - i.e. the DPV. The DPV for export duties is based on the transacted price, i.e. the lump sum price receivable by the domestic seller exporting the goods to the buyer. Export duties, freight-related expenses and insurance fees after loading at the export spot, and commissions borne by the seller, are excluded.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email china@dezshira.com or visit www.dezshira.com. Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.

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Import-Export Taxes and Duties in China - China Briefing News

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Editor's note: This article was originally published on March 11, 2013, and has been updated to include the latest regulatory changes. Over the course of 2016, the Chinese government promulgated a series of new regulations affecting companies that import and export taxable goods and services in China.