Chapter 3

Trade and Investment

Policies

1
 Learning Objectives
To see how trade and investment policies have
historically been a subset of domestic policies.

To examine how traditional attitudes toward

trade and investment policies are changing.

To see the effects of global links in trade and

investment on policymakers.

To understand that nations must cooperate

closely in the future to maintain a viable global
trade and investment environment.

2
Rationale and Goals of Trade
and Investment Policies
Government policies are designed to regulate,
direct, and protect national activities. The
exercise of these policies is the result of
national sovereignty, which provides a
government with the right to shape the
environment of the country and its citizens.
The domestic policy actions of most
governments aim to increase the standard of
living of citizens and to improve the quality of
life, and to achieve full employment.
These policies affect international trade and
investment indirectly. 3
Rationale and Goals of Trade
and Investment Policies (cont.)
In more direct ways, a country may also
pursue technology transfer from abroad or the
exclusion of foreign industries to the benefit of
domestic infant firms.
Government officials can also develop
regulations on imports to protect citizens.
Nations institute foreign policy measures
designed with domestic concerns in mind but
explicitly aimed to exercise influence abroad.
A major foreign policy goal is national security.

4
 International Organizations

General Agreement on
Tariffs and Trade (GATT)

International Trade World Trade

Organization (ITO) Organization (WTO)

5
 The International Trade
Organization
In 1948, the ITO represented
an agreement among 53
countries to:
Aid in international commercial
policies, restrictive business
practices, commodity
agreements, employment and
reconstruction, and economic
development and international
investment.
It developed a constitution for a
new United Nations agency.
The ITO was never implemented.
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 The General Agreement on
Tariffs and Trade
GATT started in 1947 as a set of rules to
ensure nondiscrimination, transparent
procedures, the settlement of disputes,
and the participation of the lesser-
developed countries in international trade.
GATT used tariff concessions to limit the level of
tariffs that would be imposed on other GATT
members.
The Most Favored Nation clause calls for each
member country to grant every other member
country the same treatment that it accords with
any other country with respect to imports and
exports. 7
The World Trade Organization
The WTO was introduced in
1995 and administers
international trade and
investment accords.
In 2002, the Dola Round ended
the first stage of
implementation. The aim is to
further hasten implementation
of liberalization to help the
impoverished and developing
nations.
8
Changes in the Global Policy
Environment
Three major changes have occurred
over time in the global policy
environment:
a reduction of domestic policy influence;
a weakening of traditional international
institutions;
and a sharpening of the conflict between
industrialized and developing nations.

9
Reduction of Domestic Policy
Influences
Currency flows have increased from an average daily
trade volume of $18 billion in 1980 to $1.2 trillion in
2001.

As a result, currency flows have begun to set the value

of exchange rates independent of trade, which in turn
have now begun to determine the level of trade.

The interactions between global and domestic financial

flows have severely limited the influence of
governments.

To regain influence, some governments have tried to

restrict world trade by erecting barriers, charging
tariffs, and implementing import regulations. 10
Weakening of International
Institutions
The intense links among nations and the new
economic environment resulting from new
market entrants and the encounter of different
economic systems are weakening the WTO.
The International Monetary Fund does not
have the funds available to satisfy the needs
of all struggling nations.
The World Bank has been unsuccessful in
furthering the economic goals of the
developing world and newly emerging market
economies. Some claim that its bank policies
have created more poverty.
11
Conflict Between Industrialized
and Developing Nations
In the past, it was hoped that the gap
between industrialized and developing
nations would gradually be closed.

Although several less-developed nations

have emerged as newly industrialized
countries, even more nations are facing
grim economic futures.

An increase in environmental awareness

has led to a further sharpening of the
conflict.
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 Restrictions of Imports
Many countries including the United States
have passed antidumping laws which help
domestic industries by restricting foreign
products being sold below the cost of
production, or at prices lower than those in the
home market.

Imports are also restricted by nontariff barriers,

such as buy-domestic campaigns. It is difficult
to remove these barriers.

Imports can also be reduced by tightening

market access and entry of foreign products
through involved procedures and inspections.
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Effects of Import Restriction
Import control may mean that the most efficient
sources of supply are not available, resulting in
second-best products or higher costs for
restricted supplies.
Import control may result in the downstream
change in the composition of imports.
Due to inefficiency,
import controls may
cause a lag in
technological
advancements.
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 Restrictions of Exports
Nations control their exports for reasons of
short supply, national security and foreign
policy purposes, or the desire to retain
capital.
National security controls are placed on
weapons and high-technology exports.
Although restriction of exports is a
valuable international relations tool, it
may give a country’s firms the reputation
of being unreliable suppliers and may
divert orders to firms of other nations.

15
 Export Promotion
Export promotion is designed to help firms enter
and maintain their position in international
markets and to match or counteract similar
efforts by other nations.

Various approaches toward export promotion

include:
knowledge transfer
direct or indirect subsidization of export activities
reducing governmental red tape for exporters
export financing and mixed aid credits to
exporters
altered tax legislation for nationals living abroad
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 Import Promotion
Countries that maintain
large balance-of-trade
surpluses use import
promotion measures.
The Japan External Trade
Organization (JETRO) has begun
to focus on the promotion of
imports to Japan.

17
The Impacts of Foreign Direct
Investment on Host Countries
Positive Impact Negative Impact
capital information industrial dominance
technology and technological
management skills
dependence
transfer
regional and sectoral disturbance of
development economic plans
internal competition cultural change
and entrepreneurship interference by home
favorable effect on government of
balance of payments multinational
increased employment corporation

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 Restrictions on Investment
Many nations that lack
necessary foreign exchange
reserves restrict exports of
capital, because capital
flight can be a major problem.
Once governments impose
restrictions on the export of
funds, the desire to transfer
capital abroad increases. This
creates problems for gaining
new outside investors.

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 Investment Promotion

Financial Incentives

Fiscal Incentives Nonfinancial Incentives

20
 Investment Promotion (cont.)
Fiscal incentives are specific tax measures
designed to attract the foreign investor,
including special depreciation allowances, tax
credits or rebates, special deductions for
capital expenditures, tax holidays, and
reduction of tax burdens.
Financial incentives offer special funding for
the investor by providing land or building,
loans, and loan guarantees.
Nonfinancial incentives can consist of
guaranteed government purchases, special
protection from competition, and investments
in infrastructure facilities. 21
 Bargaining Power of Multinational
Corporation and Host Country
Bargaining
Power
Policy Provided/Demanded

Incentives for Investment

Continued Privileged
Treatment
Discriminating Requirements MNC

End of Relationship/
Divestment
Time
22
U.S. Perspective on Trade and
Investment Policies
The U.S. seeks a positive trade policy rather
than reactive, ad hoc responses to specific
situations.

Protectionist legislation can be helpful,

provided it is not enacted into law.

Trade promotion authority gives Congress

the right to accept or reject treaties and
agreements, but reduces the amendment
procedures

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 International Perspective on
Trade and Investment Policies
From an international perspective, trade
and investment negotiations must
continue.

In doing so, trade and investment policy

can take either a multilateral or bilateral
approach:
bilateral negotiations are carried out mainly
between two nations.
multilateral negotiations are carried out among
a number of nations.
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