International Business-Chapter 5-Political Forces That Affect Global Trade

Country Risk Assessment and Countermeasures to Threats (h3)

FIRST STEP: Learn about the environment.

Subsidies

Financial contributions provided directly or indirectly by a government, that confer a benefit, including grants, preferential tax treatment, and government assumption of normal business expenses.

Protection From Terrorism, Cybercrime, And Other Threats

Four main areas that convern the government the most: terrorism, kidnapping, piracy, and cybercrime.

Protection From Unfair Competition

Governments help protect farming, mining, manufacturing, and other services from robbers, revolutionaries, and terrorists. Negotiations between governments can help coddle unfair competition. Unfair international competition is minimized through a national system of law.

Countervailing duties

additional import taxes levied on imports that have benefited from export subsidies. Imposed by a government.

non-tariff barriers (NTBs)

all forms of discrimination against imports other than import duties. They impose additional costs on producers and exporters, and this on customers, and they discourage trade.

Impose Sanctions

inflict economic damage on other nations, as a way of punishing them or otherwise encouraging them to modify their behavior. Sanctions SELDOM achieve their goal of forcing change in the targeted country; they also tend to produce collateral economic damage to the nations applying them.

official price

determined by government to correct for deficiencies in ad valorem duties.

Economists argue that the best way to protect national security and provide for national defense is through

direct government subsidies.

Voluntary export restraints are export quotas imposed by the

exporting nation

Orderly marketing arrangements

formal agreements between exporting and importing countries.

3. Standards

governmental and private standards to protect the health and safety of a nation's citizens are both certainly desirable, but exporting firms are plagued by many standards that are complex and discriminatory.

Cybercrime

illegal Internet-mediated activity that takes place in electronic networks. hacking, data espionage, and domain or name related offenses. The Internet is borderless, so no on e government or legal system can control it. INTERNATIONAL cooperation. Many managers are unaware of the threats of cybercrime.

specific duty

is a fixed sum of money charged for a specified physical unit of the product. A company importing dynamite in cartridges or sticks suitable for blasting pays $.37 per pound, regardless of the shipment's invoice value.

ad valorem duty

is stated as a percentage of the invoice value of the product. An import duty levied as a percentage of the invoice value of imported goods.

Quantitative Barriers

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Tariff Barriers

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Protect Domestic Jobs

"cheap foreign labor" Foreign exporters can flood the home country's market with low priced goods and eliminate jobs of home country workers. Wages do not account for the entire cost of a good, so focusing on just wages is misleading. The labor cost component can be lower in one country, even though wages there are higher. PRODUCTIVITY PER WORKER is greater in more developed countries because: superior management, more capital per worker, advanced technologies.

Nontariff Barriers

...they impose additional costs of the customer, they impose additional costs on producers, they can be quantitative and nonquantitative, they are forms of discrimination against imports. As a result of WTO agreements, nations have reduced import duties, and nontariff barriers have thus gained greater importance and wider use.

Protect an Infant or Dying Industry

Advocates for the protection of an infant industry claim that in the long run it will have a comparative advantage, but that meanwhile firms need protection from imports until they obtain the required investment capital, train the labor force, master production techniques, ad achieve economies of scale. Those who see it as important to protect infant industry claim that in the long run it will have a COMPARATIVE advantage, but that meanwhile firms need protection from imports.

Stability: Issues With Lack of Peace and Predictability

Business likes peace and predictability. Without predictability, a business cannot adjust.

Government Stability and Protection (h2)

Business prospers most when there is a stable government with policies that are permanent or that change only gradually.

2. Customer and other administrative procedures

Customs (a general term for duties paid on imports) and administrative barriers cover a large variety of government policies and procedures that either discriminate against imports or favor exports.

Privatization: Why Governments Sell Businesses.

Governments sometimes privatize to: run more efficiently, reduce government's size, or to raise money. Example: UK government sold the military's helicopter search and rescue operation to a company in Houston Texas. The motivation for UK privatization, both under Thatcher and recently, was to raise money for the Treasury.

Piracy

Has decreased dramatically over the last few years. Hijacking that includes kidnapping on the seas. Roughly 300 vessels are attacked per year. It has sharply declined due to the increase of naval vessels.

governmental intervention in trade reflect a governmental trade strategy in

Japan.

Nonquantitative NonTariff Barriers.

Many international trade specialists claim that the most significant nontariff barriers today are the nonquantitative type. THREE MAJOR GROUPINGS: direct government participation in trade, customer and other administrative procedures, and standards.

Governments and the Ownership of Business

Nearly every country, regardless of political philosophy, has some government-owned businesses.

Kidnapping

Objective: Collect ransom. Most businesses and governments do not disclose whether they have been a target of a kidnapping or if they have paid ransom. 8,000 - 10,000 kidnappings for random occur every year (generate 500 million). Ecuador's capital, Quito, have seen a 60% rise in kidnappings for ransom in 2012.

Reasons For Restricting Trade

Promote the national defense, to impose santioncs on other countries, to protect domestic infant industries, to create or preserve domestic jobs, to ensure fair competition, and to retaliate for the trade restrictions or unfair practices of other governments. Can also be used as a strategy.

Retaliate

Representatives of an industry whose exports have had import restrictions placed on them by another country may ask their government to retaliate with similar restrictions. Two additional causes for retaliation in trade are dumping and subsidies.

1. Direct government participation in trade.

The most common form of direct government participation in trade is the subsidy. Nearly all government subsidizes agriculture. Policies may also require that products purchased by government agencies have a stipulated minimum LOCAL CONTENT.

Terrorism

Unlawful acts of violence committed to achieve a variety of objectives. Objectives: Collect ransom, overthrow a government, gain the release of imprisoned colleagues, exact revenge for real or imagines wrongs, and punish non believers. Terrorism creates instability.

Government Intervention in Trade (h4)

When government impose trade restrictions, the cost of the traded goods increase. Economists generally agree that barriers like these are detrimental to trade and reduce economic efficiency.

compound duty

a combination of specific and ad valorem duties.

Country risk assessment (CRA)

an assessment of a country's economic situation and politics to determine how much risk to employees, property, and investment exists for the firm doing business there. Often political (wars, revolutions, and coups) The chances for a fair trial in local courts also must be assessed. And there is the risk of terrorism. Can the company protect its people and property. Real time country by country risk analyses are available, as well, so that managers can have a realistic view of the possible dangers in their environment.

variable levy

an important duty set at the difference between world market prices and local government-supported prices. guarantees that the market price of the import will be the same as that of domestically produced goods; the EU has used this levy for imported grains.

Provide for National Defense

certain industries need protection from imports because these industries are vital to security and mus be kep operating, even though they are not competitive with foreign suppliers. Restricts other countries from receiving advanced technologies that would increase their military power. However, this hurts our export revenues by closing down potential foreign markets. Calls to patriotism to gain emotional advantage. Economists advocate for direct subsidies.

instability

characteristic of a government that cannot maintain itself in power or that makes sudden, unpredictable, or radical policy changes.

stability

characteristic of a government that maintains itself in power and whose fiscal, monetary, and political policies are predictable and not sibject to sudden, radical changes

Nationalization: Why Governments Get Involved

nationalize private firms, taking them from private to public ownership, some of the reasons are to extract more money from the firms, if the government suspects they are concealing profits; to increase profitability, if the government believes it can run the firms more efficiently and make more money; to follow an economic or political ideology; to save jobs by propping up dying industries; to control an earlier investment in a firm; and tho enact political goals. Political goals were the motivation behind the Allies' nationalization of German owned firms in Europe following World War II. Nationalization is sometimes called EXPROPRIATION. Top reasons: To extract more money from the firms, to enact political goals, to control an earlier investment in a firm, to increase profitability.

Voluntary export restraints

nations have agreed not to impose quotas unilaterally on goods, excepting agricultural products. Export quotas imposed b the exporting nation.

The requirement that foods sold to the US Department of Agriculture for use in school lunches must be produced in the United States is an example of a

nonquantitative.

quotas

numerical limits placed on specific classes of imports. ABSOLUTE, once the specified amount has been imported, further importation for the rest of the period is prohibited. Quotas are generally GLOBAL; that is, the total amount is FIXED without regard to source. ALLOCATED, in which case the government of the importing nation assigns quantities to specific countries.

Environmental dumping

occurs when an exporter can sell at lower costs due to the country's lax environmental standards.

Social Dumping

occurs when producers have lower wage rates, lower social, costs such as unemployment taxes and environmental regulations to support the general welfare, poor worker benefits, and poor working conditions, all of which undermine social support systems.

Tariffs

or import duties, are taxes levied on imported goods primarily to raise their selling price in order to reduce competition for domestic producers. Smaller nations use them to raise revenue. Imposition of tariffs can result in harmful retaliation. Harm Example: Smoot Hawley Tariff Act IN the US. Caused world trade to go down. Three types of tariffs: ad valorem, spcific, and compound.

dumping

selling a product abroad for less than the cost of production, less than the price in the home market, or less than the price to third party countries. Predatory dumping: A manufacturer may also lower its export price to force the importing nation's domestic producers out of business, expecting to raise prices once that objective has been accomplished. The US was the first nation to prohibit dumping of foreign goods into its own market, in 1916. China holds 60 percent of the solar panel market and is alleged to have forced several US manufacturers out of the business with under market pricing.

nuisance tariffs

tariffs assessed at very low rates. Importers are still required to go through the frequently length process of paying them, even though their low levels may no longer serve the original intention, such as protecting domestic producers.

Ensure Fair Competition

want an import DUTY that will bring the cost of imported good up to the cost of domestically produced goods. This will eliminate any "unfair" advantage a foreign competitor might have because of superior technology, lower raw material costs, lower taxes, lower labor costs, or a combination of these.

Predatory dumping

when a manufacturer lowers its export price to force the importing nation's domestic producers out of business, expecting to raise the price once that objective has been accomplished.