BUSN 3001 Chapters 7-11

location-specific advantages

arise from utilizing resource endowments or assets that are tied to a particular foreign location and that a firm finds valuable to combine with its own unique assets

antidumping policies (countervailing duties)

designed to protect domestic producers from unfair foreign competition

European Parliament

directly elected by the citizens; meets in Strasbourg, France; is primarily a consultative rather than a legislative body

Ricardo

economist that was a key figure in the early free trade movement in Great Britain

Uruguay Round

eighth round of negotiations of GATT to reduce tariffs that started in 1986 and dealt with reducing tariffs on manufactured goods, reducing agricultural subsidies, among others

North American Free Trade Agreement (NAFTA)

enacted in 1988, eliminated all tariffs on bilateral trade between Canada and the US and by 1992 included Mexico

GATT

established in 1947, a multilateral agreement whose objective was to liberalize trade by eliminating tariffs, subsidies, import quotas, and the like

the International Fisher Effect

for any two countries, the spot exchange rate should change in an equal amount but in a opposite direction to the difference in nominal interest rates between the two countries

the European Central Bank (ECB)

formed by the Maastricht Treaty; creates interest rates and determines monetary policy across the euro zone

What are the levels of economic integration, from least to most?

free trade area, customs union, common market, an economic union, a full political union

licensing

granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on every unit sold

market imperfection

imperfections in the operation of the marketing mechanism

the law of one price

in competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in the same currency

resource-transfer effects

includes supplying capital, technology, and management resources

currency speculation

involves short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates

greenfield investment

involves the establishment of a new operation in a foreign country

What are two features of the foreign exchange market?

it never sleeps and it is a single market due to the integration of various trading centers

What are the two drawbacks to government intervention in free trade?

it protects inefficient companies, invites retaliation and trade wars

externalities

knowledge spillovers

The Andean Community

largely based on the EU model, but was far less successful; agreement in 1969 between Chile, Bolivia, Ecuador, Colombia, and Peru

the Buy American Act

law that specifies that government agencies must give preference to American products when putting contracts for equipment out to bid unless the foreign products have a significant price advantage

specific tariff

levied as a fixed charge per unit of a good imported

ad valorem tariff

levied as a proportion of the value of the imported goods

internalization theory

marketing imperfection approach to foreign direct investment

bandwagon effect

movement of traders like a herd, all in the same direction and at the same time, in response to each others' perceived actions

balance-of-payments accounts

national accounts that track both payments to and receipts from foreigners

What are the drawbacks of the euro?

national authorities have lost control over monetary policy; EU is not an optimal currency area

What are other political arguments for the government becoming involved in international trade?

national security, retaliation, to protect consumers, to further foreign policy objectives, to protect human rights,

Doha round

new round of talks between member states aimed at further liberalizing the global trade and investment framework; began in 2001

Fisher effect

nominal interest rates in each country equal the required real rate of interest and the expected rate of inflation over the period of time for which the funds are to be lent

foreign direct investment

occurs when a firm invests directly in facilities to produce or market a product in a foreign country

trade creation

occurs when high-cost domestic producers are replaced by low-cost producers within the free trade area

trade diversion

occurs when the lower-cost external suppliers are replaced by higher-cost suppliers within the free trade area

forward exchange

occurs when two parties agree to exchange currency and execute the deal at some specific date in the future

efficient market

one in which prices reflect all available public information

Mercosur

originated in 1988 as a free trade pact between Brazil and Argentina

exporting

producing goods at home and then shipping them to a foreign country for sale

economic growth, rising living standards

protection of intellectual property can lead to this

the flow of FDI

refers to the amount of FDI undertaken over given time period (normally a year)

optimal currency area

regions in which similarities in the underlying structure of economic activity make it feasible to adopt a single currency and use a single exchange rate as an instrument of macroeconomic policy

the European Council

represents the interests of member-states; the ultimate controlling authority within the EU

local content requirement

requirement that some specific fraction of a good be produced domestically, expressed in physical terms or value terms

What are the host country benefits to FDI?

resource-transfer effects, employment effects, balance-of-payment effects, effects on competition and economic growth

the European Commission

responsible for proposing EU legislation, implementing it, and monitoring compliance with EU laws by member-states

What are the benefits of the euro?

savings from handling one currency; easier to compare prices across Europe

dumping

selling goods in a foreign market at below their costs of production or as selling goods in a foreign market at below their "fair market value"

What are the 7 main instruments of trade policy?

tariffs, subsidies, import quotas, voluntary export restraints, local content requirements, anti-dumping policies, administrative policies

What two agencies are notified if one believes dumping is occurring in the US?

the Commerce Department and the Internal Trade Commission (ITC)

offshore production

the FDI undertaken to serve the home market

foreign exchange risk

the adverse consequences of unpredictable changes in exchange rates

Central American Free Trade Agreement (CAFTA)

the agreement of the member-states of the Central America Common Market, joined by the Dominican Republic to trade freely with the US

What two factors lead to the creation of the European Union?

the devastation of Western Europe during two world wars and the desire for lasting peace; the European nations' desire to hold their own on the world's political and economic stage

quota rent

the extra profit that producers make when supply is artificially limited by an import quota

What are the two main forms of FDI?

the greenfield investment and acquiring or merging with an existing firm in the foreign country

infant industry argument

the oldest economic argument for government intervention in international trade; governments should temporarily support new industries until they have grown strong enough to meet international competition

the Treaty of Lisbon

the power of the European Parliament was increased and the position of president of the European Council was created

arbitrage

the purchase of securities in one market for immediate resale in another to profit from a price discrepancy

spot exchange rates

the rate at which a foreign exchange dealer converts one currency into another currency on a particular day

exchange rate

the rate at which one currency is converted into another

currency swap

the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates

Caribbean Single Market and Economy (CSME)

the six CARICOM members that agreed to lower trade barriers and harmonize macroeconomic and monetary policies

the stock of FDI

the total accumulated value of foreign-owned assets at a given time

purchasing power parity (PPP)

theory predicts that exchange rates are determined by relative prices and that changes in relative prices will result in a change in exchange rates

multipoint competition

when two or more enterprises encounter each other in different regional markets, national markets, or industries

current account

within the balance-of-payment accounts that tracks the export and import of goods and services

What 2 conclusions are usually derived from the economic effect of import tariffs?

1) are generally pro-producer and anti-consumer; 2) reduce the overall efficiency of the world economy

What are the functions of the foreign exchange market?

1) convert the currency of one country into that of another; 2)provide some insurance against foreign exchange risk

What are the four main uses of foreign exchange rates for international businesses?

1) exchange income from foreign countries; 2) to pay a foreign company for goods and services; 3)when investing in money markets; 4) currency speculation

What are the 2 goals of export tariffs?

1) to raise revenue for the government; 2) to reduce exports from a sector, usually for political reasons

What is the most common political argument for the government becoming involved in international trade?

It is necessary for protecting jobs and industries from unfair foreign competition

political union

a central political apparatus coordinates economic, social and foreign policy

import quota

a direct restriction on the quantity of some good that may be imported into a country

European Free Trade Association (EFTA)

a free trade area established in 1960 including Norway, Iceland, Switzerland, and Liechtenstein

subsidy

a government payment to a domestic producer

customs union

a group of countries committed to removing all barriers to the free flow of goods and services between each other, and the pursuit of a common external trade policy

free trade area

a group of countries committed to removing all barriers to the free flow of goods and services between each other, but pursuing independent external trade policies

common market

a group of countries committed to removing all barriers to the free flow of goods, services and factors of production between each other, and the pursuit of a common external trade policy

economic union

a group of countries committed to removing all barriers to the free flow of goods, services and factors of production between each other, the adoption of a common currency, the harmonization of tax rates, and the pursuit of a common external trade policy

tariff rate quota

a hybrid where a lower rate tariff is applied to imports within the quota than those over the quota

carry trade

a kind of speculation that involves borrowing in one currency where interest rates are low and then using the proceeds to invest in another currency where interest rates are high

foreign exchange market

a market for converting the currency of one country into that of another

tariff

a tax levied on imports or exports

voluntary export restraint

a variant on the import quota, a quota on trade imposed by the exporting country, typically at the request of the importing country's government

the Court of Justice

comprised of one judge from each country; is the supreme appeals court for the EU

What impediments are there against regional economic integration?

costs and adjustments

Central America Common Market

Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua

Which of Europe's two trade blocs is more significant in terms of membership and economic and political influence?

European Union

What two trade blocs are in Europe?

European Union (EU) and the European Free Trade Association (EFTA)

Which country in the mid 1800s was the first to officially follow free trade?

Great Britain

What states have not adopted the euro as their currency?

Great Britain, Denmark, and Sweden

What act was passed by Congress in 1930 which led to other countries reacting with similar tariff barriers?

Smoot-Hawley Act

What are the costs to host countries for FDI?

adverse effects on competition, adverse effects on the balance-of-payments, the perceived loss of national sovereignty and autonomy

Maastricht Treaty

agreed to in 1992, committed the 12 member-states of the European Community to a closer economic and political union; committed to a common currency (euro)

regional economic integration

agreements among countries in a geographic region to reduce and ultimately remove tariff and non-tariff barriers to the free flow of goods, services, and factors of production between each other

CARICOM

an association of English-speaking Caribbean states that are attempting to establish a customs union

oligopoly

an industry composed of a limited number of large firms

strategic trade policy argument

argued that the government should help raise national income if it ensures the firm with first-mover advantage is a domestic firm; it may pay a government to intervene in an industry by helping domestic firms overcome barriers to entry

What are the HOME country benefits for FDI?

balance of payments benefits from the inward flow of foreign earnings, employment (exports), valuable skills that can be transferred back to home country

What are the HOME country costs for FDI?

balance of payments, employment effects

administrative trade policies

bureaucratic rules designed to make it difficult for imports to enter a country