International Business: Ch 6

For what political reasons does a government intervene in trade?

(1) Practically every government restricts imports that threaten jobs in the domestic economy. (2) Governments restrict certain imports for national security reasons because the nation must have access to a domestic supply of certain items in the event of war. Agriculture is often protected for national security because a nation importing food could face starvation in war. (3) A government often threatens to restrict imports coming from a nation that restricts its own imports. (4) The largest nations may get involved in trade to gain influence over smaller nations. For example, Japan has influence among many Asian nations because they rely on Japan for a large amount of their imports and exports. (5) Nations restrict exports containing high technology and those with "dual uses." They also restrict imports to protect domestic sources in case of war.

Three main goals of WTO

(1) help free trade; (2) negotiate opening of markets; and (3) settle trade disputes.

Reasons for export quotas

1. A country may wish to maintain supplies in the home market. This is common for countries that export natural resources that are needed in the domestic market. 2. A country may restrict supply on world markets to increase the international price. 3. VER

Preserve national security- Exports

1. Agencies review requests to export technologies or products that have dual uses—meaning they have both industrial and military applications. 2. threaten to close their ports or to impose high tariffs if another nation does not concede on a certain trade issue 3. Governments of the largest nations may become involved in trade to gain influence over smaller nations. Ie: United States wishes to maintain control over Central, North, and South America and the Caribbean basin.

Uruguay Round of Negotiations- revising and updating GATT.

1. General Agreement on Trade in Services (GATS) extended the principle of nondiscrimination to cover international trade in all services ( Cross-border supply, Consumption abroad, Commercial presence; Presence of natural persons) 2. Intellectual property (TRIPS-Trade-Related Aspects of Intellectual Property) 3.Agricultural subsidies- increased exposure of national agricultural sectors to market torces and increased predictability in international agricuiiurai irade. Forces countries to convert nontariff barriers to tariffs and calls for cutting of agricultural tariffs significantly.

Export Financing

1. Governments promote exports by helping companies finance their export activities through loans or loan guarantees. 2. Export-Import Bank & e Overseas Private Insurance Corporation (OPIC).

Reason for import quotas

1. Protects domestic producers by placing a limit on the amount of goods entering the country. This helps domestic producers maintain market shares and prices by retraining competition. 2. Domestic producers win because of market protection, but consumers lose because of higher prices and limited selection.

Cultural Motives for Gov't restriction on Free Trade

1. Unwanted cultural influence causes great distress and can force governments to block imports. 2. Many countries have laws that protect their media programming for cultural reasons. 3. The United States is seen as a threat to national cultures because of its global strength in consumer goods, entertainment, and media.

Foreign Trade Zones (FTZ)

1. designated geographic region in which merchandise is allowed to pass through with lower customs duties (taxes) or fewer customs procedures. Goals are jobs and trade. 2. Customs duties increase production costs and the time it takes to get a product to market. Companies can reduce such costs and time by establishing a facility inside a foreign trade zone.

Political Motives for Gov't restriction on Free Trade

1. governments become involved when trade threatens jobs at home. 2.Industries essential to national security receive government-sponsored protection for both imports and exports.

General Agreement on Tariffs and Trade (GATT)

1947 treaty designed to promote free trade by reducing both tariff and nontariff barriers to international trade. S

Free trade is the pattern of imports and exports that occurs in the what?

: It is the pattern of imports and exports that occurs in the absence of trade barriers.

What are some economic reasons why a government intervenes in trade?

: One economic motive for a nation to intervene in trade is protection of young (infant) industries from competition. According to the infant industry argument, a country's merging industries need protection from international competition during their development phase until they become sufficiently internationally competitive. However, drawbacks of this policy include: (1) Governments may not identify industries worth protecting and those not to protect. (2) Protection from international competition can cause domestic companies to become complacent. (3) It can be political suicide to remove protection once it has been given. (4) Consumers can wind up paying more if domestic companies are protected and do not become highly competitive. (5) A main argument of this policy is that small businesses often cannot obtain financing is less true today than in the past. Another economic motive for intervention is pursuit of a strategic trade policy. The new trade theorists believe government intervention can help companies take advantages result because economies of scale limit the number of companies that an industry can sustain. Supporters of strategic trade policy argue that strategic trade policies result in increased national income. However, drawbacks of this strategy are: (1) because it fosters inefficiencies and high costs, following a strategic trade policy can be very damaging to a nation's economy in hard times; (2) those industries with the best political connections might benefit most from such a policy; and (3) strategic trade policies can spark destructive competition and even trade wars among nations.

: Why might a government impose a quota on a product?

A government may impose an import quota to protect domestic producers by placing a limit on the amount of goods allowed to enter the country. This helps domestic producers maintain their market shares and prices because competitive forces are restrained.

A stipulation that a portion of a product be sourced domestically is called what?

A local content requirement is a law that stipulates a specified amount of a good or service be supplied by producers in the domestic market. It's designed to force for companies to employ local resources in production processes—particularly labor.

Dumping and the WTO

Because dumping is an act by a company, not a country, the WTO cannot punish the country in which dumping is based. WTO allows a nation to retaliate against dumping if it proves dumping charges, calculates the damage, and can show the damage is significant. Nations retaliate by imposing an antidumping duty—an additional tariff placed on an imported product that a nation believes is being dumped on its market.

Protect domestic producers

Because import tariffs raise the cost of an imported good, domestically produced goods appear more attractive to buyers --> But protection may to become lax in increasing efficiency.

Commercial presence:

Company's subsidiary in another country provides a service (e.g., banking operations).

Consumption abroad:

Consumers or companies using a service while in another country (e.g., tourism).

drawbacks to Export Financing

Critics say subsidizing large multinational companies at taxpayer expense is corporate welfare.

Exporting a product at a price that is lower than that normally charged domestically or one that is lower than production costs can expose a firm to charges of what?

Dumping is when a company exports a product at a price that is either lower than the price normally charged in its domestic market or lower than the cost of production.

What are some of the ways that governments provide export financing?

Export financing can help a nation increase exports. A government can offer its companies financing to expand their export activities—financing that they would otherwise be unable to obtain. Governments can also offer to guarantee the loans of its domestic companies that will use the money to expand their exports. Such loans and loan guarantees are often crucial to the export success of small and midsize companies because they often have a far greater need for cash than large, established exporters.

What is the EX-Im Bank?

Finances the export activities of companies in the united states and offers insurance on foreign accounts receivable.

drawbacks to Pursue strategic trade policy

Government assistance to domestic companies caused inefficiency and high costs for South Korean and Japanese companies in the late 1990s. Government support is subject to polifical lobbying and special-interest groups could capture gains with no benefit for consumers.

Financial assistance from a government to domestic producers is called what?

Governments employ the use of subsidies to assist domestic companies in fending off international competitors. One drawback of subsidies is that they can cause companies to become complacent about increasing efficiency and cutting costs. This can cause companies to overuse resources—an especially difficult problem in developing and emerging countries. Because subsidies are generally funded through tax revenues earned from sales and income taxes, critics charge that they amount to corporate welfare on behalf of consumers.

drawback to infant industry argument

Governments may make errors in distinguishing between industries worth protecting and those that are not. Protection can cause domestic firms to grow complacent toward innovation and limit their competitiveness and increase consumer prices.

Subsidies and the WTO

Governments retaliate when the competitiveness is threatened by a subsidy that another country pays domestic producers. countervailing duty

tariff-quota

I lower tariff rate for a certain quantity of imports and a higher rate for quantities that exceed the quota (e.g., agricultural trade).

Presence of natural persons:

Individuals traveling to another country to supply a service (e.g., business consultants).

specific tariff

Is levied as a specific fee for each unit (by number or weight) of an imported product.

Review Free Trade.

Pattern of imports and exports that occurs in the absence of the trade barriers.

Agricultural subsidies

Popular barriers to protect agricultural sectors include import quotas and subsidies paid to farmers.

Economic Motives for Gov't restriction on Free Trade

Protect infant industries & Pursue strategic trade policy

Cross-border supply:

Services supplied fi-om one country to another (e.g., international phone calls).

Generate revenue

Tariffs are a source of government revenue. Less-developed nations have less formal domestic economies that lack the capability to record domestic transactions accurately. y. Because this makes collection of sales taxes difficult, nations raise needed revenue through import and export tariffs.

The first system of multilateral agreements to promote free trade was called what?

The GATT was designed to promote free trade by reducing both tariff and nontariff barriers to trade. The GATT was formed in 1947 and early success began to wane in the 1980s. Between 1947 and 1988, it helped to reduce average tariffs from 40 percent to 5 percent and multiply the volume of international trade by 20 times. But by the middle to late 1980s, rising nationalism worldwide and trade conflicts led to a nearly 50 percent increase in nontariff barriers to trade. Also, services (not covered by the original GATT) had become increasingly important—accounting for between 25 and 30 percent of total world trade. It was clear that a revision of the treaty was necessary, and in 1994 a new round of trade talks were concluded. A more recent round of talks, begun in 2001, has been disappointing and appears deadlocked.

What is NAFTA?

The North American Free Trade Agreement (NAFTA) is an agreement among the United States, Canada and Mexico designed to remove tariff barriers between the three countries.

What are the main goals of the World Trade Organization?

The WTO is the international organization regulating trade among nations. WTO agreements are essentially contracts among member nations that commit them to maintaining fair and open trade policies. The Dispute Settlement Body goes to work as soon as a member nation files a complaint. The rulings of the Body cannot be ignored or blocked by members. Offenders must realign their trade policies according to WTO guidelines or suffer financial penalties and perhaps trade sanctions. Dumping occurs when a company exports its product at a lower price than it normally charges in its domestic market. The WTO cannot punish the country in which the company accused of dumping is based. The WTO can rule only on the retaliatory actions of other nations. The WTO allows a country to retaliate if it can show that dumping is actually occurring, calculate the damage to its own companies, and show that the damage is significant. Finally, because countries, not companies, give subsidies, the WTO regulates and rules on the actions of both parties in a dispute over subsidies.

Why might a government impose a tariff on a product?

There are two main reasons why countries impose tariffs and they are: (1) to protect domestic producers and (2) to generate revenues.

Dispute settlement in the WTO

WTO agreements are contracts among member nations that commit them to maintaining fair and open trade policies When a member files a complaint, the Dispute Settlement Body renders a decision in less than one year. Offenders must realign policies according guidelines or suffer financial penalties and perhaps trade sanctions.

Embargoes

a complete ban on trade (imports and exports) in one or more products with a particular country. It may be placed on one or a few goods or completely ban trade in all goods. It is the most restrictive nontariff trade barrier and often has political goals.

quota

a restriction on the amount (measured in units or weight) of a good that can enter or leave a country during a certain period of time.

countervailing duty

additional tariff placed on an imported product that a nation believes is receiving an unfair subsidy.

compound tariff

calculated partly as a percentage of the stated price of an imported product, and partly as a specific fee for each unit.

What are the four forms of trade according to GATS?

cross-border supply-services supplied from one country to another(e.g., international phone calls) consumption abroad-customers or companies using a service while in another country. (tourism) commercial presence- company's subsidiary in another country provide service(banking operations) presence of natural persons- individuals traveling to another country to supply a service(business consultants)

infant industry argument

emerging industries need protection from international competition during development until they become competitive internationally.

subsidy

financial assistance to domestic producers in the form of cash payments, low-interest loans, tax breaks, product price supports, or some other form intended to help domestic companies fend off international competitors.

Pursue strategic trade policy

government intervention helps firms take advantage of economies of scale and enjoy first-mover advantages. First mover advantages result because economies of scale limit the number of companies in an industry.

Pursue strategic trade policy -chaebol

helped companies survive poor economic times because of the wide range of industries in which they competed; policies had spin-off effects on industries such as transportation.

Mexico's maquiladora zone:

import materials from the United States without duties, process them, and re-export them to the United States, which charges duties only on the value added in Mexico.

OPIC

insures against losses due to: (1) expropriation, (2) currency inconvertibility, and (3) war, revolution, and insurrection.

World Trade Organization (WTO) is

international organization that regulates trade among nations. absorbs the GATT agreements into its own agreements.

What are the hoped-for outcomes of a foreign trade zone?

is a designated geographic region in which merchandise is allowed to pass through with lower customs duties (taxes) or fewer customs procedures. FTZs promote the most trade when they are established as low-cost assembly points for companies manufacturing products that will then be shipped out to other international markets. An example of an FTZ is the location of Japanese car plants in U.S. states that are administered by the U.S. Department of Commerce.

tariff

is a government tax levied on a product as it enters or leaves a country

Local Content Requirements

laws stipulating that producers in the domestic market must supply a specified amount of a good or service. Designed to force companies from other nations to employ local resources in their production processes—particularly labor. May help protect domestic producers from the price advantage of companies based in other, low-wage countries. Developing countries them to boost industrialization.

ad valorem tariff

levied as a percentage of the stated price of an imported product.

WTO and the environment

no separate agreement for environmental issues, but works with international agreements on the environment. has a Committee on Trade and Environment to study the relationship between trade and the environment and to recommend changes in the WTO trade agreements.

Key Component of WTO

normal trade relations: WTO members must extend the same favorable terms of trade to all members that they extend to any single members.

Dumping

occurs when a company exports a product at a price that is either lower than the price normally charged in its domestic market, or lower than the cost of production.

Free trade

pattern of imports and exports that would result in the absence of trade barriers.

Intellectual property

property that results from people's intellectual talent and abilities and is legally protected by copyrights, patents, and trademarks.

Preserve national security- Imports

protect their agricultural sector for national security reasons because a nation that imports its food supplies could face starvation in times of war.

Administrative Delays

regulatory controls or bureaucratic rules designed to impair the rapid flow of imports into a country. Can include government actions such as requiring international air carriers to land at inconvenient airports, requiring inspections that damage the product, understaffing customs offices to cause delays, and requiring special licenses that take time to obtain.

Currency Controls

restrictions on the convertibility of a currency into other currencies. Governments reduce imports by stipulating an exchange rate that is unfavorable to potential importers. Also can give exporters favorable rates to encourage exports.

Smoot-Hawley Act in 1930

shifted nation from free trade to protectionism; S global trade wars it ushered in, crippled industrialized nations and helped spark the Great Depression.

Some people see the products of what country as the greatest threat to local cultures around the world?

some people see the products of the United States as the greatest threat to local cultures around the world. The main cultural motive for government intervention in trade is protection of national identity. For example, France has laws that guarantee French artists a minimum amount of airtime on French radio programs and Canada is considering doing something similar. Governments also block imports of products they think might be harmful to the nation's culture. They also restrict the importation of certain services such as media and entertainment in order to protect budding artists and others in these industries.

Drawbacks of subsidies

subsidies cover costs that competitive industries should absorb. thus encouraging inefficiency and complacency. Because governments pay for subsidies with tax income, it is felt that subsidies benefit companies but harm consumers.

voluntary export restraint (VER)

unique version of export quota that a nation imposes on its exports, usually at the request of an importing nation. If domestic producers do not curtail production, consumers benefit from lower prices due to a greater supply. Export quotas hurt consumers in the importing nation because of reduced selection and higher prices. Export quotas might retain jobs if imports threaten to put domestic producers out of business.