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Strategic Trade Policies (course 13) Pos M. Hutabarat, PhD Jakarta, 20 April 2010 Economic Department University of Indonesia Trade and Economy Trade Exports Foreign Exchange Imports Economy Technology Production capacity Fix capital Industry Pos M. Hutabarat PhD Machinery Composition of GDP Agriculture GDP Industry Services Pos M. Hutabarat PhD Industrialization Process Export promotion High growth Industrialization Trade policies Import substitution Pos M. Hutabarat PhD Trade and Industrialization Export Promotion model: Develop industrial sector through export oriented industry with example of Korea, Taiwan, RRC, Malaysia and Thailand (instrument : duty draw back, tax incentives, subsidies, devaluation of currency, etc) Import Substitution model: Develop industrial sector by supporting import substitution domestic industries with example of Latin America (instrument: high tariff, quota, nontariff, etc) Pos M. Hutabarat PhD TRADE POLICIES Tariff (percentage increase on import price) Nominal tariff Effective tariff Non-Tariff Quota (limitation of import quantity) Standards Custom procedures Dumping/Subsidy Non-economy (environment, labor and human rights, IPR, etc) Pos M. Hutabarat PhD Value Added Creation (from agriculture to industry) Mill Promosi, restaurant dryer Coffee bean Roasted Powder US$ 600/ton US$ 1200/ton US$ 2500/ton Pos M. Hutabarat PhD Starbuck US$ 2,5/gelas Value Added Creation (from agriculture to industry) Mixed spicy Mill and pengemasan dryer kacang polong Rp 6000/kg kacang kering Kacang pedas Rp 22000/kg Rp 36000/kg Pos M. Hutabarat PhD Peanut butter Rp 52000/kg Value Added Creation (from mining to industry) teknologi proses teknologi produk transportasi Biji besi Biji besi Baja lembaran US$ 20/ton US$ 50/ton US$ 700/ton Pos M. Hutabarat PhD Mesin diesel US$ 5400/ton Trade Policies 1. Developing Countries (developing vs developed countries, agreement on primary commodities) 2. Developed Countries policies, industry vs industry) Pos M. Hutabarat PhD (strategic trade Strategic Trade Policies Trade policies to develop specific industrial sector in world oligopoly market to increase social welfare of a country Government impose protection (by high tariff rates) or subsidize domestic industry to increase its competitiveness versus competitors in domestic and world markets Pos M. Hutabarat PhD Strategic Trade Policies James Brander dan Barbara Spencer (1995) are the first scholars to develop idea of Strategic Trade Policies by using cases of Boeing and Airbus in the form of Game Theory model. Competition rivalry between Boeing and Airbus to become an example of oligopoly competition in many study of business school in the last 20 year. This idea start from Japanese success to develop steel industry (1950’s); semiconductor (1970’s); and Europe for Concorde and Airbus (1970’s). Indonesia developed aircraft industry IPTN (now DI) but failed. Malaysia also tried auto industry Proton (almost fail) Pos M. Hutabarat PhD Game Theory One of important model to analyze modern business competition. When we assume there are only exist 2 companies, therefore profits (or lost) of one company are depend on other company’s decision, though both companies have no information about other competitor’s decision. But both companies understand that the consequences of each competitor’s decision, based on its own decision Pos M. Hutabarat PhD Prisoners Dilemma Case `A B Confessed Confessed 3 0 5 5 0 1 1 Badu Not Ali Confessed Not 3 Badu Not Pos M. Hutabarat PhD Boeing vs Airbus Pos M. Hutabarat PhD Competition and Strategic Trade Policy B discount discount -20 A -20 Airbus don’t 50 0 0 50 20 20 Boeing discount Don’t discount Airbus Don’t Export airplane to the world Pos M. Hutabarat PhD Competition and Strategic Trade Policy M Discount Discount -2.0 I -2.0 Indonesia Don’t 5.0 10 10 5.0 Malaysia Discount Don’t discount Indonesia Don’t Export CPO to the world Pos M. Hutabarat PhD 0 0 Free Trade and Strategic Trade Policy Free Trade Free Trade A B 100 100 50 150 150 50 75 75 country B Protection country A Free Trade Protection country B Protection Pos M. Hutabarat PhD Japan Strategic Trade Policy 1970 : worlds semiconductor industry were dominated by USA 1975 : Japan (through MITI) developed semiconductor industry by granting some facilities to domestic industries such as: 1. Imposing high tariff rates 2. Tax incentives for investment on semiconductor industries 3. R&D financing 1985: Japan become leading in world semiconductor production Pos M. Hutabarat PhD US Strategic Trade Policy 1910-1970 : There are >100 producer of motorcycles in USA 1978 : Harley Davidson the only one producers which survive, others went bankruptcy because they could not compete with imports. 1983 : Government imposed high tariff rates for motorcycles 1984 : Market share of imports declined from 60-70% to 31%. 1987-1991 : Exports of motorcycles from USA increased 31%/per year 1997-2004 : Shares value of Harley Davidson increased from US$ 35 to US$ 236 Pos M. Hutabarat PhD Economic Scale and Duopoly Model (H and F sales to third Country) X* F sales X*2 X*1 A Reaction function H and F, slope negative C B E F H O X2 X1 Pos M. Hutabarat PhD X H sales Economic Scale and Duopoly Model (H and F sales to third Country, export subsidy in H) by subsidy in H, cost of production decrease, production increase, export increase, reaction function shift to the right X* F sales X*E E E’ X*E F H O XE XE Pos M. Hutabarat PhD H’ X H sales Economic Scale and Duopoly Model (H and F sales to third Country, export subsidy in H) by subsidy in H, cost of production decrease, production increase, export increase, reaction function shift to the right X* F sales E’’ X*E X*E E E’ F H O XE XE Pos M. Hutabarat PhD F’ H’ X H sales Strategic Trade Policies (problems) There are some problems of imposing this strategy: 1. It is difficult to choose a certain sector 2. When all developed countries imposing STP, the net effects are not significant 3. When one country success in imposing STP, probably others will retaliate Pos M. Hutabarat PhD