International Business chapter 7

what lead to the protectionist trends from 1980 - 1993 after the establishment of GATT

- economic success of japan during that time - persistent trade deficit in US economy - many countries found ways to get around GATT regulations

politically important interest groups often influence governments

CAP -- common agricultural policy

current round of trade talks

Doha Round

One focus of strategic trade policy is to help domestic companies gain

a first-mover advantage

who loses from tariffs

consumers pay higher prices

Import Quota

direct restriction on the quantity of some good that may be imported into a country (CHEESE in US)

GATT

established in 1947 after the great depression to liberalize trade, tariff reduction was spread over eight rounds

how many trade disputes have came to the WTO between 1995 and 2017

more than 500

what is a tariff

tax levied on imports or exports

Smoot Hawley Act

world slid into the great depression

What is the Smoot-Hawley Act and how did it effect the world ?

- enacted in 1930 by the U.S. Congress - erected a wall of tariff barriers against imports into the United States. - damaging effect on employment abroad - other countries reacted by raising their own tariff barriers. - U.S. exports tumbled in response, world slid further into the great depression

Political arguments for intervention

- protecting jobs and industries form unfair foreign competition - National security reasons - governments should use the threat to intervene in trade policy as a bargaining tool to help open foreign markets and force trading partners to "play by the rules" (could result in retaliation or raising barriers of its own) - protect consumers from unsafe products (US and beef) - support their foreign policy objectives / building strong relations or punch rogue states - protecting human rights, improve the human rights policy for trading partners

trade barriers effect on firm strategy

- tariff barriers raise costs of exporting products to a country - may find it more economical to locate production facilities in that country so it can compete -quotas may limit a firm's ability to serve a country from locations outside of that country

why is intervention sometimes self-defeating

- tends to protect inefficient rather than help firms become efficient global competitors - might trigger a trade war or retaliation - unlikely to be well executed

Doha agenda

-The new round of talks launched by the WTO in 2001 aimed at further liberalizing the global trade and investment framework. -Includes cutting tariffs on industrial goods, services and agricultural products; phasing out subsidies to agricultural producers; reducing barriers to cross-border investment; and limiting the use of anti dumping laws. -Reduction in agricultural subsidies and tariffs would benefit poorer nations the most. -Scheduled to last 3 years, but, as of 2012, the talks were effectively stalled due to opposition from several key nations.

Economic arguments for intervention

-infant industry argument (developing countries/industries should be supported temporarily until they are strong enough to handle foreign competition) -strategic trade policy (a gov't can help raise national income if it can somehow ensure that the firm or firms that gain first mover advantages in an industry are domestic) --boeing (break into world market) -- Airbus

how many members in WTO by 2017

164

The Corn Laws

British parliament repealed high tariffs on imports of foreign corn

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

Dumping

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

General Agreement on Tariffs and Trade (GATT)

A certain number or percentage of the value of a good has to be produced in the US. this is an example of

Local content requirement

What contained the provision that the WTO was to be created to implement the GATT agreement?

The Uruguay Round - July 1, 1995

What led to the establishment of the WTO?

The Uruguay round that went into effect July 1, 1995

Strategic trade policy

Two components: - by appropriate actions, a government can help raise national income if it can somehow ensure that the firm or firms that gain first-over advantages in an industry are domestic rather than foreign - Government should use subsidies to support promising firms that are active in newly emerging industries

Which organization was created to implement the GATT agreement?

WTO

Paul Krugman characterizes strategic trade policy as being

a boost to national income at the expense of other countries

Free trade

a government does not attempt to restrict what its citizens can buy from or sell to another country

What is the GATT?

a multilateral agreement whose objective was to liberalize trade by eliminating tariffs, subsidies etc.. From its foundation in 1947 until it was superseded by the WTO, the GATT's membership grew form 19 to more than 120 nations

What is a VER?

a quota on trade imposed by the exporting country, typically at the request of the importing country's government - Foreign producers agree to VERs because they fear more damaging punitive tariffs or import quotas may follow - Agreeing to a VER is seen as making the best out of a bad situation by appeasing protectionist pressures in a country

Voluntary export restraint (VER)

a quota on trade imposed by the exporting country, typically at the request of the importing country's government - appeases protectionist pressures in a country - fear more damaging punitive tariffs or import quotas may follow if they do not restrain exports

Local content requirement (LCR)

a requirement that some specific fraction of a good be produced domestically, limits foreign competition

What is the WTO

an umbrella organization that encompasses the GATT along with two new sister bodies -- GATS(services) and TRIPS (intellectual property)

four issues at the forefront of WTO

antidumping, the high level of protectionism in agriculture, lack of strong intellectual property rights, and continued high tariff rates on nonagricultural goods and services in many nations

responsibilities of WTO

arbitrating trade disputes and monitoring the trade policies of member countries

Administrative policies

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

protectionism shifts against WTO

financial crisis 2008 and election of donald trump, and the vote for the british to leave the EU

Subsidy

government payment to a domestic producers - cash grants, low interest loans, tax breaks, government equity participation in domestic firms - help producers compete against foreign imports - help producers gain export markets - can help a firm achieve a first-mover advantage in an emerging industry - sometimes tend to be inefficient and lead to excess production (AGRICULTURE)

Who gains from tariffs

government, domestic producers

Tariff rate quota

hybrid of a quota and a tariff - a lower tariff rate is applied to imports within the quota than those over the quota

Export tariffs

less common than import tariffs; two objectives: - raise revenue for government - reduce exports from a sector, often for political reasons

specific tariff

levied as a fixed charge for each unit of a good imported

Ad valorem tariff

levied as a proportion of the value of an imported good

an implication of trade barriers for business practices is that they...

limit a firm's ability to serve a country from locations outside of that country - tariff barriers raise the costs of exporting products to a country. - puts the firm at a competitive disadvantage to indigenous competitors in that country - response by firm might be to set up production facilities in that country

Export ban

partially or entirely restricts the export of a good -- US and crude oil production in 1975, ban lifted in 2015

export tariff

placed on the export of a good, goal is to discriminate against exporting to ensure that there is sufficient supply of a good within a country -- china and grain, china and steel

why tariffs

protect domestic producers from foreign competition produce revenue for government

A tax of 32 cents is levied for each pair of eyeglasses imported into a nation.. this is a

specific tariff

How do the theories of Smith, Ricardo, and Hecksher-Ohlin predict the consequences of free trade

static economic gains (higher level of domestic consumption and more efficient utilization of resources) and dynamic economic gains (because free trade stimulates economic grown and the creation of wealth

Krugman

strategic trade police provokes retaliation and trade war -- establish rules of the game that minimize the use of trade-distorting subsidies (what WTO seeks to do)

What does Paul Krugman argue?

strategic trade policy aimed at establishing domestic firms in a dominant position in a global industry is a beggar-thy-neighbor policy that boosts national income at the expense of other countries

What trade barrier has the GATT and WTO been most successful in limiting

tariffs

if a domestic producer believes that a foreign firm is dumping in the united states...

they can file a petition with the - commerce department - international trade commission (ITC)

Why do foreign producers agree to Voluntary export restraints?

they fear more damaging punitive tariffs or import quotas might follow if they do not