CH 7 MGMT 470
U.S. firms that believe a foreign firm is dumping can file
a complaint with the government
Subsidy
a government payment to a domestic producer
The WTO is currently focusing on:
- Anti-dumping policies - Protectionism in agriculture - Protecting intellectual property - Market access for nonagricultural goods and services - A new round of talks: Doha
The infant industry argument has been criticized because:
- It is useless unless it makes the industry more efficient - If a country has the potential to develop a viable competitive position, its firms should be capable of raising necessary funds
The U.S. enacted the Smoot-Hawley Act (1930)
- created significant import tariffs on foreign goods
GATT's membership grew from ____ to more than ____
19 120 nations
The General Agreement on Tariffs and Trade was established in
1947
Import quota
A direct restriction on the quantity of some good that may be imported into a country
Tariff rate quota
A hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than to those over the quota
Subsidies help domestic producers:
Compete against low-cost foreign imports Gain export markets
A new round of talks: Doha - focusing on:
Cutting tariffs on industrial goods and services Phasing out subsidies to agricultural producers Reducing barriers to cross-border investment Limiting the use of anti-dumping laws
In its first fifty years, the framework was known as the
General Agreement on Tariffs and Trade (GATT)
Who benefits from import quotas and voluntary export restraints?
Import quotas and voluntary export restraints benefit domestic producers by limiting import competition, but they raise the prices of imported goods for consumers
The world trading system came under strain during the 1980s and early 1990s because:
Japan's economic success strained what had been more equal trading patterns Persistent trade deficits by the U.S caused significant problems in some industries and political problems for the government Many countries found that although GATT limited the use of tariffs, there were many other forms of intervention that had the same effect that did not technically violate GATT
Furthering foreign policy objectives
Preferential trade terms given to countries that a government wants to build strong relations with Rogue states that do not abide by international laws or norms can be punished
Voluntary export restraint
Quota on trade imposed by the exporting country, typically at the request of the importing country's government
Two situations where restrictions on trade may be inappropriate
Retaliation Domestic policies
The Uruguay Round (1986) focused on:
Services and Intellectual Property The World Trade Organization
There are seven main instruments of trade policy:
Tariffs Subsidies Import quotas Voluntary export restraints Local content requirements Antidumping policies Administrative policies
Why do governments impose tariffs?
Tariffs: Increase government revenues Provide protection to domestic producers against foreign competitors by increasing the cost of imported foreign goods Force consumers to pay more for certain imports
The World Trade Organization
The WTO was established as a more effective policeman of the global trade rules The WTO encompassed GATT and the General Agreement on Trade in Services (GATS) and the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS)
Quota rent
The extra profit that producers make when supply is artificially limited by an import quota
How do governments intervene in international trade?
There are seven main instruments of trade policy: Tariffs Subsidies Import quotas Voluntary export restraints Local content requirements Antidumping policies Administrative policies
Why do governments intervene in trade?
There are two types of arguments: Political arguments - concerned with protecting the interests of certain groups within a nation (normally producers), often at the expense of other groups (normally consumers) Economic arguments - concerned with boosting the overall wealth of a nation (to the benefit of all, both producers and consumers)
Why should international managers care about the political economy of free trade or about the relative merits of arguments for free trade and protectionism?
Trade barriers impact firm strategy Firms can play a role in promoting free trade or trade barriers
Services and Intellectual Property
Trade issues related to services and intellectual property and agriculture were emphasized
Protecting jobs and industries
Typically the result of political pressures by unions or industries that are "threatened" by more efficient foreign producers, and have more political clout than the consumers who will eventually pay the costs
Since 1995, the framework has been known as the
World Trade Organization (WTO)
tariff
a tax levied on imports that effectively raises the cost of imported products relative to domestic products
So far, most countries have
adopted WTO recommendations for trade disputes
The infant industry argument
an industry should be protected until it can develop and be viable and competitive internationally - Accepted as a justification for temporary trade restrictions under the WTO
While there may be short run benefits to having government protection in some situations, in the long run these can
backfire and other governments can retaliate making it more difficult to construct a globally dispersed production system
Market access for nonagricultural goods and services
bring down tariff rates on nonagricultural goods and services, and reduce the scope for the selective use of high tariff rates
Administrative trade polices
bureaucratic rules that are designed to make it difficult for imports to enter a country
Economic arguments
concerned with boosting the overall wealth of a nation (to the benefit of all, both producers and consumers)
Political arguments
concerned with protecting the interests of certain groups within a nation (normally producers), often at the expense of other groups (normally consumers)
Protectionism in agriculture -
concerned with the high level of tariffs and subsidies in the agricultural sector of many economies
Trade barriers raise the
cost of exporting
If the complaint has merit, antidumping duties, also known as _______ may be imposed
countervailing duties
A local content requirement
demands that some specific fraction of a good be produced domestically - Can be in physical terms or in value terms
These polices hurt consumers by
denying access to possibly superior foreign products
Antidumping polices
designed to punish foreign firms that engage in dumping
Classical trade theorists
disagree
Trade barriers can limit a firm's ability to
disperse production globally
Local content requirements benefit domestic producers and jobs, but consumers face higher prices
domestic producers and jobs, but consumers face higher prices
The WTO has emerged as an
effective advocate and facilitator of future trade deals
Tariff reduction was spread over
eight rounds of negotiation
Anti-dumping policies -
encouraging members to strengthen the regulations governing the imposition of antidumping duties
Some critics have argued that the best way to change the internal human rights of a country is to
engage it in international trade - The decision to grant China MFN status in 1999 was based on this philosophy
Quotas limit
exports
International firms have an incentive to lobby for
free trade, and keep protectionist pressures from causing them to have to change strategies
Since World War II, an international trading framework has evolved to
govern world trade
Protecting human rights
governments can use trade policy to improve the human rights policies of trading partners
National security
governments protect industries important for national security Aerospace or semiconductors
All of these can raise costs above what they may
have been in a world of free trade
Strategic trade policy
in cases where there may be important first mover advantages, governments can help firms from their countries attain these advantages -Also suggests that governments can help firms overcome barriers to entry into industries where foreign firms have an initial advantage
The threat of future trade barriers can
influence firm strategy
Protecting the environment
international trade is associated with a decline in environmental quality -Concern over global warming Enforcement of environmental regulations
While many nations are nominally committed to free trade, they tend to
intervene in international trade to protect the interests of politically important groups
The 1999 meeting of the WTO in Seattle demonstrated that
issues surrounding free trade have become mainstream, and dependent on popular opinion
New trade theorists believe government intervention in international trade is
justified
Specific tariffs
levied as a fixed charge for each unit of a good imported
Ad valorem tariffs -
levied as a proportion of the value of the imported good
Some new trade theorists believe that while strategic trade theory is appealing in theory, it
may not be workable in practice - they suggest a revised case for free trade
Firms may have to locate production activities within a country to
meet local content regulations
Protecting intellectual property -
members believe that the protection of intellectual property rights is essential to the international trading system
The approach of GATT (a ___________) was to gradually ___________
multilateral agreement to liberalize trade eliminate barriers to trade
GATT regulations were enforced by a
mutual monitoring system
If threatened governments don't back down, tensions can escalate and
new trade barriers may be enacted
Protecting consumers
protecting consumers from unsafe products - Often involves limiting or banning the import of certain products
A country that attempts to use such policies will probably
provoke retaliation
Dumping
selling goods in a foreign market below their cost of production, or selling goods in a foreign market at below their "fair" market value
Up until the Great Depression of the 1930s, most countries had
some degree of protectionism
Governments can be influenced by
special interest groups
Krugman
strategic trade policies to establish domestic firms in a dominant position in a global industry are beggar-thy-neighbor policies that boost national income at the expense of other countries
May be predatory behavior, with producers using
substantial profits from their home markets to subsidize prices in a foreign market with a goal of driving indigenous competitors out, and later raising prices and earning substantial profits
A government's decision to intervene in a market may appease a certain group, but not necessarily
support the interests of the country as a whole
However, it might cause other countries to
undermine unilateral trade sanctions - The Helms-Burton Act and the D'Amato Act, have been passed to protect American companies from such actions
Dumping enables firms to
unload excess production in foreign markets
Consumers typically absorb
the costs of subsidies
The WTO has brokered negotiations to reform
the global telecommunications and financial services industries
Free trade refers to
to a situation where a government does not attempt to restrict what its citizens can buy from another country or what they can sell to another country
the goal of antidumping polices
to protect domestic producers from "unfair" foreign competition
Retaliation
when governments take, or threaten to take, specific actions, other countries may remove trade barriers
Other nations took similar steps and as the depression deepened,
world trade fell further
A trade war could leave both countries
worse off