International Business Chapter 7 Review

Antidumping Policies

Protect domestic producers from unfair foreign competition (Vary from country to country). U.S. firms that believe a foreign firm is dumping can file a complaint with the government (If the complaint has merit, antidumping duties, also known as countervailing duties, may be imposed).

Tariffs

A tax levied on imports that effectively raises the cost of imported products relative to domestic products. 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. 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. Tariffs are generally pro-producer and anticonsumer. Import tariffs reduce the overall efficiency of the world economy.

Export Tariff

A tax placed on the export of a good. Goal is to discriminate against exporting.

There has been a rise in nontariff barriers

1. Subsidies 2. Quotas 3. Voluntary export restraints 4. Antidumping duties

Seven main instruments of trade policy

1. Tariffs 2. Subsidies 3. Import quotas 4. Voluntary export restraints 5. Local content requirements 6. Administrative policies 7. Antidumping duties

Import Quota

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

Subsidies

A government payment to a domestic producer. Subsidies help domestic producers: Compete against low-cost foreign imports & Gain export markets. Consumers typically absorb the costs of subsidies.

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.

Export Ban

A policy that partially or entirely restricts the export of a good. Ban of exports of U.S. crude oil in 1975 to ensure sufficient supply of domestic oil at home.

Free Trade

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 (While many nations are nominally committed to free trade, they tend to intervene in international trade to protect the interests of politically important groups).

Economic Arguments for Intervention: The Infant Industry Argument

An industry should be protected until it can develop and be viable and competitive internationally. This 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.

Development of The World Trading System: The Future of the WTO: Unresolved Issues and the Doha Round

Antidumping Actions (Encourage members to strengthen regulations governing the imposition of antidumping duties). Protectionism in Agriculture (Concerned with the high level of tariffs and subsidies in the agricultural sector of many economies). Protection of Intellectual Property (Members believe the protection of intellectual property rights is essential to the international trading system). Market Access for Nonagricultural Goods and Services (Tariffs on services remain higher than on industrial goods). A New Round of Talks: Doha (Ongoing since 2001. Concerned with cutting tariffs on industrial goods and services, phasing out subsidies to agricultural producers, reducing barriers to cross-border investment, and limiting the use of antidumping laws).

Economic arguments are concerned with:

Boosting the overall wealth of a nation (to the benefit of all, both producers and consumers).

Administrative trade polices:

Bureaucratic rules that are designed to make it difficult for imports to enter a country. These polices hurt consumers by denying access to possibly superior foreign products.

Economic Arguments for Intervention: Strategic Trade Policy

By appropriate actions, government can help raise national income if it can ensure that firms that gain first-mover advantages in an industry are domestic. Might be beneficial for a government to intervene in an industry by helping domestic firms overcome barriers to entry created by foreign firms with first-mover advantages.

Local Content Requirements

Demands that some specific fraction of a good be produced domestically (Can be in physical terms or in value terms). Local content requirements benefit domestic producers and jobs, but consumers face higher prices.

U.S. and South Korea Strike a Revised Trade Deal

Donald Trump - 2012 free trade deal between U.S. and South Korea is a "job killer" especially in auto industry. South Korea is an important ally against North Korea and third largest supplier of foreign steel to U.S. (Trump administration put a 25 percent tariff on steel imports). Revised trade deal: South Korea exempt from 25 percent tariff on steel, but will limit exports to 70 percent of 2017 levels, South Korea will extend tariff on exports of light trucks and lift annual quota on imports of U.S. cars, South Korea's agriculture industry remains the same.

Development of The World Trading System: 1980 to 1993: Protectionist Trends

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.

The Revised Case for Free Trade: Domestic Policies

Governments can be influenced by special interest groups (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. Krugman sees this as a further reason for not embracing strategic trade policy).

Development of The World Trading System: Since World War II, an international trading framework has evolved to govern world trade

In its first fifty years, the framework was known as the General Agreement on Tariffs and Trade (GATT). Since 1995, the framework has been known as the World Trade Organization (WTO).

Focus on Managerial Implications: Policy Implications

International firms have an incentive to lobby for free trade, and keep protectionist pressures from causing them to have to change strategies. Three drawbacks to government intervention: Self-defeating as it protects the inefficient. Dangerous as it might invite retaliation. Unlikely to be well-executed as can be captured by special interest groups.

The Revised Case for Free Trade: Retaliation and Trade War

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 (A country that attempts to use such policies will probably provoke retaliation. A trade war could leave both countries worse off. Don't engage in retaliation but help establish rules to minimize the use of trade-distorting subsidies).

Development of The World Trading System: WTO: Experience to Date

Members account for 98% of world trade. It was hoped that it would emerge as an effective advocate and facilitator of future trade deals. Started strong but has fallen off since late 1990s. Brexit and Trump Administration suggest a return to greater protectionism.

The Revised Case for Free Trade

New trade theorists believe government intervention in international trade is justified (Classical trade theorists disagree). 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.

Political Arguments for Intervention

Protecting Jobs and Industries. Protecting National Security. Retaliating (Use intervention as a bargaining tool and force trading partners to "play by the rules of the game"). Protecting Consumers (Ban unsafe products). Furthering Foreign Policy Objectives (Grant preferential trade terms to a country it wants to build relations with. Pressure or punish "rogue" states). Protecting Human Rights.

Political arguments are concerned with:

Protecting the interests of certain groups within a nation (normally producers), often at the expense of other groups (normally consumers). Achieving some political objective such as protecting the environment or human rights.

Voluntary Export Restraint (VER)

Quota on trade imposed by the exporting country, typically at the request of the importing country's government.

Development of The World Trading System: Multilateral and Bilateral Trade Agreements

Reciprocal trade agreements between two or more partners. Trump Administration withdrew from the TPP, while remaining 11 nations continued with revised agreement, and trade agreement with the EU was put on hold. Agreements are designed to capture gain from trade beyond those agreements currently attainable under WTO treaties.

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.

Focus on Managerial Implications: Trade Barriers and Firm Strategy

Tariff barriers raise the costs of exporting. Quotas may limit a firm's ability to serve a country. Firms may need to conform to local content requirements. Future trade barriers can influence firm strategy. Antidumping actions limits ability to use aggressive pricing to gain market share.

Development of The World Trading System: 1947 to 1979: GATT, Trade Liberalization, and Economic Growth

The General Agreement on Tariffs and Trade (GATT) was established in 1947 (Multilateral agreement to liberalize trade and gradually eliminate barriers to trade. Membership grew from 19 to more than 120 nations. Tariff reduction was spread over eight rounds. Very successful in early rounds. Superseded by the World Trade Organization (WTO)).

Quota Rent:

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

Development of The World Trading System: The World Trading System Under Threat

Two events suggest that global consensus on free trade isn't accurate: Decision by the British to withdraw from the EU (Britain still does appear to be committed to free trade). Election of Donald Trump, who seems opposed to free trade deals (Withdrew from Trans Pacific Partnership. Placed tariffs on certain imports. Renegotiated NAFTA. Expressed hostility to the WTO).

Development of The World Trading System: From Smith to the Great Depression

Up until the Great Depression of the 1930s, most countries had some degree of protectionism. U.S. enacted the Smoot-Hawley Act (1930): created significant import tariffs on foreign goods (Damaged employment abroad). Other nations took similar steps, and as the depression deepened, world trade fell further.

Development of The World Trading System: The Uruguay Round and the World Trade Organization

Uruguay Round emphasized services, intellectual property, and agricultural subsidies (Dragged on for seven years). The World Trade Organization (The WTO encompassed GATT, the General Agreement on Trade in Services (GATS), and the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). Procedures subject to strict time limits).