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