ITF 2
Vertical Diversification
(MNE) : occurs when parent MNE decides to establishing foreign subsidiaries to produce intermediate goods or inputs that go into the production of a finished good
Foreign and direct Investment
(MNE): acquisition of a controlling interest in an overseas company or facility
International Monetary Fund
185 nations, thought of as a bank for the central banks of member nations, funds come from quotas and loans
Tokyo Round
1973-1979 - signatory nations agreed to tariff cuts that took the across-the-board form, tariffs on manufactured goods was cut. Tariff reductions on finished products were deeper than those on raw materials, thus tending to decrease the extent of tariff escalation. After the Tokyo round, tariffs were so low that they were not a significant barrier to trade in industrial countries • They also agreed to remove or lessen many nontariff barriers
Uruguay Round
1986-1993 - achieved across-the-board tariff cuts for industrial countries averaging 40%. Tariffs were eliminated entirely in several sectors. • Made extensive efforts to eliminate quotas on ag. Products and required nations to rely on tariffs
Trade Remedy Laws
Designed to produce a fair trading environment for all parties engaging in international trade.
Persistent Dumping
Goes on indefinitely, in an effort to maximize the economic profits, a producer may consistently sell abroad at lower prices than at home.
Domestic Production Subsidy
Granted to producers of import-competing goods
Countervailing Duty
Importing countries can retaliate against export subsidies by levying these; the purpose is to increase the price of the imported good to its fair market value An antidumping case can be terminated prior to cancelation of the investigation if the exporter of the product to the U.S. agrees to cease dumping, stop exporting the product to the U.S., increase the price to eliminate the dumping, or to negotiate some other agreement that will decrease the quantity of imports. Remedies against dumped and subsidized imports Benefits to consumers if imports are finished goods and to consuming industries that use imports as intermediate inputs into their own production (downstream industry) Costs to the import-competing industry, with workers, and other domestic industries selling intermediate inputs to production of the import-competing industry (upstream industry)
Developing Nation
In order for developing nations to make progress they must displace producers of the least advanced goods that are still being produced in the advanced nations • Many developing nations exports are concentrated in only one or a few primary products • Dependence of selected developing nations on a single primary product
Kennedy Round
J.F.K. initiative calling for negotiations. • Multilateral meeting of GATT participants occurred at which the form of negotiations shifted from a product-by-product format to an across-the-board format • Tariffs were negotiated on broad categories of goods, and a given rate reduction applied to the entire group - a more streamlined approach • Kennedy round cut tariffs on manufactured goods
Conglomerate Diversification
When MNEs diversify into nonrelated markets
Asia Pacific Economic Corporation
barriers to trade and investment in the region would be eliminated by the year 2020. All countries would begin to liberalize at a common date, but the pace of implementation would take into account the differing levels of economic development among APEC economies: the industrialized countries would achieve free trade and investment no later than 2010, and the developing economies no later than 2020.
Commodity Credit Corporation
a government-owned corporation administered by the U.S. Department of Agriculture. It makes available export credit financing for eligible agricultural commodities. The interest rates charged are usually slightly below the prevailing rates charged by private financial institutions.
Import Quota
a physical restriction on the quantity of goods that can be imported during a specific time period; the quota generally limits imports to a level below what would occur under free-trade conditions • Import quotas on manufactured goods have been outlawed by the WTO
Economic Integration
a process of eliminating restrictions on international trade, payments, and factor mobility; results in the uniting of two or more national economies in a regional trading arrangement.
Customs Union
agreement among two or more trading partners to remove all tariff and nontariff trade barriers between themselves; each member nation imposes identical trade restrictions against nonparticipants • EX. Benelux (Belgium, Netherlands, Luxembourg)
Most Favored Nation Clause
agreement between two nations to apply tariffs to each other at rates as low as those applied to any other nation having MFN status • If a country reduced a tariff to one country, it would reduce them to all • Now known as Normal Trade Relations
Export-Import Bank
an independent agency of the U.S. government established to encourage the exports of U.S. businesses. It provides • Guarantees of working capital loans for U.S. exporters to cover pre-export costs • Export credit insurance that protects U.S. exports or their lenders against commercial or political risks of nonpayment by foreign buyers • Guarantees of commercial loans to creditworthy foreign buyers of U.S. goods and services • Direct loans to these foreign buyers when private financing is unavailable • Special programs to promote U.S. exports of environmentally beneficial goods and services • Asset-based financing for large commercial aircraft and other appropriate exports • Project financing to support U.S. exports to international infrastructure projects
Variable Levies
applies tariffs to ag imports entering the EU. Exports of any surplus quantities of EU produce have been assured through the adoption of export subsidies
Free-Trade Area
association of trading nations in which members agree to remove all tariff and nontariff barriers among themselves; however, each member maintains its own set of trade restrictions against outsiders • EX. NAFTA
Social Regulation
attempts to correct a variety of undesirable side effects in an economy that relate to health, safety, and the environment - effects that markets, left to themselves, often ignore. Social regulation applies to a particular issue, say environmental quality, and affects the behavior of firms in many industries such as automobiles, steel, and chemicals Corporate average fuel economy standards (CAFÉ): represent the foundation of U.S. energy conservation policy. Since 1990 the CAFÉ requirements for passenger cars has been 27.5 mpg.
Ministry of Economy, Trade and Industry
attempts to facilitate the shifting of resources into high-tech industries by targeting specific industries for support. Forms a consensus on the best policies to pursue.
Cartel
attempts to support prices higher than they would be under more competitive conditions, thus increasing the profits of its members
Margin of Dumping
calculated as the amount by which the foreign market value exceeds the U.S. price. Foreign market value is defined in one of two ways. • Priced-based definition: dumping occurs whenever a foreign company sells in the home market. When a home-nation price of the good is not available (for example, if the good is produced only for export ant is not sold domestically), an effort is made to determine the price of the good in a third market. • Cost-based definition: the Commerce Department constructs a foreign market value equal to the sum of the cost o manufacturing the merchandise, general expenses, profit on home-market sales, and the cost of packaging the merchandise for shipment to the U.S. o The amount for general expenses must equal at least 10% of the cost of manufacturing, and that amount for profit must equal at least 8% of the manufacturing cost plus general expenses
Transition Economies
commercial and financial practices involving nations making the transition from a centrally planned economy to a market economy
Market Economy
commercial decisions of independent buyers and sellers acting in their own interest govern both domestic and international trade. Market-determined prices value alternatives and allocate scarce resources. This allocation means that prices play rationing and signaling roles that make the availability of goods consistent with buyer preferences and purchasing power.
International Commodity Agreements
created by developing nations to attempt to stabilize export prices and revenues of primary products; these agreements are between leading producing and consuming nations of commodities such as coffee and rubber about matters such as stabilizing prices, assuring adequate supplies to consumers and promoting the economic development of producers
Domestic Content Requirements
created to limit the practice of outsourcing; these requirements stipulate the minimum percentage of a product's total value that must be produced domestically if the product is to qualify for zero tariff rates. The effect of content requirements is to pressure both domestic and foreign firms that sell products in the home country to use domestic inputs (workers) in the production of those products. The demand for domestic inputs thus increases, contributing to higher input prices. Manufacturers generally lobby against domestic content requirements, because they prevent manufacturers from obtaining inputs at the lowest cost, thus contributing to higher product prices and the loss of competitiveness.
Trade Promotion Authority
devised in 1974, under this provision the president must formally notify congress of his/her intent to enter trade negotiations with another country. This notification starts a clock in which congress has 60 legislative days to permit or deny fast-track authority. If fast-track authority is approved, the president has a limited time period in which to complete the trade negotiations; extensions of his time period are permissible with congressional approval. Once the negotiations are completed, their outcome is subject only to a straight up or down vote (without amendment) in both houses of congress within 90 legislative days of submission. In return the president agrees to consult actively with Congress and the private sector throughout the negotiation of the trade agreement.
Tariff-Rate Quota
displays both tariff-like and quota-like characteristics. Allows a specified number of goods to be imported at one tariff rate (within-quota rate), whereas any imports above this level face a higher tariff rate (over-quota rate). Has 2 components; a quota that defines the maximum volume of imports and charges the within-quota tariff, and an over-quota tariff.
Section 301, Trade Act of 1974
gives the U.S. trade representative (USTR) the authority, subject to the approval of the president, and the means to respond to unfair trading practices by foreign nations. Included among these unfair practices are foreign-trade restrictions that hinder U.S. exports and foreign subsidies that hinder U.S. exports to third-country markets. • Purpose of this is to obtain the successful resolution of conflicts. In a large majority of cases, Section 301 has been used to convince foreign nations to modify or eliminate what the U.S. has considered to be unfair trading practices
Export Subsidy
goes to producers of goods that are to be sold overseas • In both cases the government adds an amount to the price the purchaser pays rather than subtracting from it • The net price actually received by the producer equals the price paid by the purchaser plus the subsidy • The subsidized producer is thus able to supply a greater quantity at this price
World Trade Organization
embodies the main provisions of GATT, but its role was expanded to include a mechanism intended to improve Gantt's process for resolving trade disputes among member nations. • Trade without discrimination - a member country should not discriminate between its trading partners • Promoting freer trade - through its role in the settlement of trade disputes. GATT formulated complaint procedures and provided a conciliation panel to which a victimized country could express its grievance • Predictability: through binding and transparency - under GATT when countries agreed to open their markets for goods or services, they would bind their commitments, these bindings amounted to ceilings on import tariff rates for developed countries, the bound rates have generally been the rates actually charged. Also GATT tried to improve predictability and stability by making countries' trade rules as clear and public (transparent) as possible. Countries were required to disclose their trade policies and practices publically within the country or by notifying the GATT secretariat
Safeguards
emergency protection from imports
Brain Drain
emigration of highly educated and skilled people from developing nations Today the world economy is characterized by the international movement of factor inputs • The multinational enterprise plays a central part in this process
Advanced Nation
generally characterized by relatively high levels of GDP per capita, longer life expectancies, higher levels of adult literacy
Strategic Trade Policy
government can assist domestic companies in capturing economic profits from foreign competitors.
Economic Sanctions
government-mandated limitations placed on customary trade or financial relations among nations. They have been used to protect the domestic economy, reduce nuclear proliferation, set compensation for property expropriated by foreign governments, combat international terrorism, preserve national security, and protect human rights.
Buy National Policies
governments extend preference to domestic suppliers trough these. The U.S. government, through explicit laws, openly discriminates against foreign suppliers in its purchasing decisions. • Govt's use closed bidding systems that restrict the number of companies allowed to bid on sales, or they may publicize gov't contracts in such a way as to make it difficult for foreign suppliers to make a bid
Subsidies
granted to producers by national governments to help improve their market position. By providing domestic firms a cost advantage, a subsidy allows them to market their products at prices lower than warranted by their actual cost or profit considerations.
OPEC
group of nations that sells petroleum on the world market; OPEC nations attempt to support prices higher than would exist under more competitive conditions to maximize member-nation profits
Common Market
group of trading nations that permits free movement of goods and services among member nations, initiation of common external trade restrictions against nonmembers, free movement of factors of production across national borders within the economic bloc • EX. European Union
Import Substitution
industrialization strategy, popular in developing nations, involves extensive use of trade barriers to protect domestic industries from import competition. Inward oriented strategy that favors production for the domestic market over the export market.
World Bank
international organization that provides loans to developing nations aimed toward poverty reduction and economic development; lends money to member governments and their agencies and to private firms in the member nations
Antidumping Duty
levied when U.S. Department of Commerce determines a class or king of foreign merchandise is being sold at less than fair value (LTFV) and the U.S. International Trade Commission (ITC) determines that LTFV imports are causing or threatening material injury (such as unemployment and lost sales of profits) to a U.S. industry
Export-led Growth
links the domestic economy to the world economy; involves promoting growth through the export of manufactured goods, trade controls are very low Flying-geese pattern of economic growth: nations gradually move up in technological development by following in the pattern of nations ahead of them in the development process
Generalized System of Preferences
major industrial nations temporarily reduce tariffs on designated manufactured imports from developing nations below the levels applied to imports from other industrial nations
Regional Trade Arrangement
member nations agree to impose lower barriers to trade within the group than to trade with nonmember nations; each member nation continues to determine its domestic policies, but the trade policy of each includes preferential treatment for group members
Multilateral Contracts
method of stabilizing commodity prices; generally stipulate a minimum price at which importers will purchase guaranteed quantities from the producing nations and a maximum price at which producing nations will sell guaranteed amounts to the importers. Such purchases and sales are designed to hold prices within a target range. • If target prices are not set near the long-term equilibrium price discrepancies will occur between supply and demand • Excess demand would indicate a ceiling too low • Excess supply would suggest a floor too high
License on Demand Allocation
most common technique of enforcement for quotas; licenses are required to import at the within-quota tariff. Before the quota period begins, potential importers are invited to apply for import licenses Tariff and Sugar example • The effect of the tariff-rate quota is to restrict the supply of foreign sugar from entering the U.S., thus causing the price of sugar in the domestic market to increase substantially. The U.S. price of sugar has often been twice the world market price because of the tariff-rate quota.
Economic Union
national, social, taxation, and fiscal policies are harmonized and administered by a supranational institution
Sporadic Dumping
occurs when a firm disposes of excess inventories on foreign markets by selling aboard at lower prices than at home
Predatory Dumping
occurs when a producer temporarily reduces the prices charged abroad to drive foreign competitors out of business. When the producer succeeds in acquiring a monopoly position, prices are then raised commensurate with its market power. The new price level must be sufficiently high to offset any losses that occurred during the period of cutthroat pricing. The firm would presumably be confident in its ability to prevent the entry of potential competitors long enough for it to enjoy economic profits.
Nonmarket Economy
one that is centrally planned, there is less regard for market considerations; the central plan often controls the prices and output of goods bought and sold with small recognition given to considerations of cost and efficiently. Trade liberalization has assumed two main forms. • Reciprocal reduction of trade barriers on a nondiscriminatory basis • The other involves the establishment by a group of nations of regional trading arrangements among themselves
Reciprocal Trade Agreements Act
passed by congress in 1934, changed U.S. trade policies by transferring authority from the Congress which generally favored domestic import-competing producers, to the president, who tended to consider the national interest when forming trade policy • Tipped the balance of power in favor of lower tariffs and set the stage for a wave of trade liberalization • President given authority to negotiate bilateral tariff-reduction agreements with foreign governments
Global Quota
permits specified number of goods to be imported each year, but it doesn't specify from where the product is shipped or who is permitted to import. When the specified amount has been imported the quota is filled, additional imports of the product are prevented for the remainder of the year
Nontariff Trade Barriers
policies other than tariffs that restrict international trade, On the rise since 1960s
Economic Interdependence
process of eliminating restrictions on international trade, payments, and factor input mobility; has stages: • Free-trade area • Customs union • Common market • Economic union • Monetary union The welfare implications of economic interdependence can be analyzed from 2 perspectives • The static welfare effects, resulting from trade creation and trade diversion • Dynamic welfare effects that stem from greater competition, economies of scale, and the stimulus to investment spending that economic interdependence makes possible
Escape Clause
provides temporary safeguards (relief) to U.S. firms and workers who are substantially injured from surges in imports that are fairly traded. • To offset surging imports, the escape clause allows the president to terminate or make modifications in trade concessions granted to foreign nations and to levy trade restrictions.
Dumping
recognized as a form of international price discrimination. It occurs when foreign buyers are charged lower prices than domestic buyers for an identical product, after allowing for transportation costs and tariff duties. Selling in foreign markets at a price below the cost of production is also considered dumping
Common Agricultural Policy
replaced the agricultural-stabilization policies of individual member nations, which differed widely before the formation of the EU
Free Trade Area of the Americas
represents the largest trading bloc in the world; it would create a market for more than 850 million consumers with a combined income of more than $14 trillion; it also would level the playing field for U.S. exporters who faced trade barriers more than 3 times higher than exporters to the U.S.
Export Quotas
restrain trade; they typically negotiate a market sharing pact known as a voluntary export restraint agreement. Its main purpose is to moderate the intensity of international competition, allowing less efficient domestic producers to participate in markets that would otherwise have been lost to foreign producers that sell a superior product at a lower price. • They are voluntary in the sense that they are an alternative to more stringent trade restraints that might be imposed by an importing nation
GATT
signed in 1947, crafted as an agreement among contracting parties, the member nations, to decrease trade barriers and to place all nations on an equal footing in trading relations.
Maastricht Treat
signed in 1991, set 2002 as the date to which this process would be complete In 2002, the European Monetary Union (EMU) emerged with a single currency, the euro Convergence criteria: • Price stability: inflation in each prospective member is supposed to be no more than 1.5% above the average of the inflation rates in the three counties with the lowest inflation fates • Low long-term interest rates: long-term interest rates are to be no more than 2% above the average interest rate in those counties • Stable exchange rates: the exchange rate is supposed to have been kept within the target bands of the monetary union with no devaluations for at least 2 years prior to joining the monetary union • Sound public finances: one fiscal criterion is that the budget deficit in a prospective member should be at most 3% of GDP; the other is that the outstanding amount of government debt should be no more than 60% of a year's GDP Besides providing for free trade in industrial goods among its members, the EU has abolished restriction on agricultural products traded internally
Import License
specifies the total volume of imports allowed; requires the importer to spend time filling out forms and waiting for official permission
Buffer Stock
technique for limiting commodity price swings; producers' association (or international agency) is prepared to buy and sell a commodity in large amounts. The buffer stock consists of supplies of a commodity financed and held by the producers' association. • Buffer stock manager buys from the market when supplies are abundant and prices are falling below acceptable levels and sells from the buffer stock when supplies are tight and prices are high
Selective Quota
to avoid discrimination problems of global quotas, these import quotas are allocated to specific countries • Problem: Could lead to domestic monopoly and higher prices because domestic firm realizes that foreign producers cannot surpass their quotas, it may raise prices • Tariffs don't necessarily lead to monopoly power because no limit is established on the amount of goods that can be imported into the nation
Production and Export Controls
used to stabilize export revenues if an ICA accounts for a large share of total world output (exports) of a commodity; they affect the price of commodities by influencing the world supply of the commodity
Horizontal Diversification
when a parent company producing a commodity in the source country sets up a subsidiary to produce an identical product in the host country
