International Business Busi 2490

International Business BUSI 2490

OBJECTIVES •

Describe the political, economic, and cultural reasons nations intervene in trade

•

Identify the methods that nations use to promote trade

•

Describe the methods that nations use to restrict trade

•

Discuss the role of WTO © Prentice Hall, 2008

International Business 4e

Chapter 6 - 2

GOVERNMENTS & TRADE – THE THEORY Free trade: a government does not restrict what its citizens can buy from or sell to another country. •

Smith, Ricardo, Heckscher-Ohlin: free trade enhances economy

Consequence (theory): Higher level domestic consumption and more choice More efficient use of resources – including by exposing domestic firms to competition leading to improved quality and lower cost Freedom for firms to move production to locations that maximize efficiency HENCE (theory): Free trade stimulates growth and wealth creation © Prentice Hall, 2008

International Business 4e

Chapter 6 - 3

GOVERNMENTS & TRADE – THE REALITY

More often governments manage trade (in the name of trying to “level the playing field”)

- Restriction of imports: protectionist

intervention (WHO IS PROTECTED?) - Promotion of exports - FDI incentives Free trade “Good” or “Bad”? - Social issues related to free-trade - Implications for business and individuals © Prentice Hall, 2008

International Business 4e

Chapter 6 - 4

Political Motives

Protect Jobs Protect Consumers (safety, health)

© Prentice Hall, 2008

Preserve national Security • Imports? • Exports?

Respond to “unfair” trade

International Business 4e

Gain influence

Chapter 6 - 5

Economic Motives Potential results Protect infant industries Protect emerging industries during development from global competition

© Prentice Hall, 2008

+ National income increases – – – –

Wrong industries protected Firms grow complacent Consumer prices rise Public funds poorly spent

International Business 4e

Chapter 6 - 6

Economic Motives Potential results Pursue strategic trade policy Help companies achieve economies of scale and gain a firstmover advantage

© Prentice Hall, 2008

+ Global industry created – Firms’ efficiency reduced – Domestic costs increase – Special interests benefit

International Business 4e

Chapter 6 - 7

Cultural Motives Nations block imports deemed harmful

Protect national identity

Usual suspects are US media and consumer goods Result of increased globalization © Prentice Hall, 2008

International Business 4e

Chapter 6 - 8

Trade Promotion and Restriction Trade promotion methods  Subsidies

Trade restriction methods  Tariffs  Subsidies (NTB)

 Export financing

 Quotas (NTB)  Embargoes & VER (NTB)

 Foreign trade zones

 Local content requirements (NTB)  Administrative policies (NTB)

 Special govt. agencies

 Currency controls (NTB) © Prentice Hall, 2008

International Business 4e

Chapter 6 - 9

Trade Restriction       

Tariffs Subsidies (NTB) Quotas (NTB) Embargoes & VER (NTB) Local content requirements (NTB) Administrative policies (NTB) Currency controls (NTB) © Prentice Hall, 2008

International Business 4e

Chapter 6 - 10

Tariffs Government tax levied on a product as it enters or leaves a nation

Potential results  Export tariff  Transit tariff  Import tariff

+ Protect domestic firms from competitors + Generate income for the government

– Reduce competitiveness of home-based firms – Raise consumer prices

© Prentice Hall, 2008

International Business 4e

Chapter 6 - 11

Tariffs most often “ad valorem” (% of goods value) also “specific” and “compound” tariffs

Losers:

Gainers: Governments

Consumers (higher taxes)

Domestic producers (at least in

Consumers again (higher

the short term)

prices)

Employees of protected

Economy – inefficient

industries (maintain their jobs –

Employees of protected

at least in the short term)

industries – do not develop new skills

© Prentice Hall, 2008

International Business 4e

Chapter 6 - 12

Subsidies = Financial Assistance To Domestic Producers Cash Grants, Tax Breaks, Loan Guarantees, Equity Participation, Govt. Orders, R&D Loans Potential results + Increased competitiveness – Encourage inefficient firms – Increased consumer prices – Overuse of resources

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International Business 4e

Chapter 6 - 13

Subsidies Gainers:

Losers:

DOMESTIC PRODUCERS

• Can compete against

for subsidies)

cheap imports

Consumers (goods prices –

• Can export more • First-mover advantage DOMESTIC EMPLOYMENT

© Prentice Hall, 2008

Individual (higher taxes to pay

higher, the after-tax income – lower)

International Business 4e

Chapter 6 - 14

Local Content Requirements Laws that domestic producers must supply a specific amount of a good or service

Forces international companies to employ local resources (usually labor) in production process © Prentice Hall, 2008

International Business 4e

Chapter 6 - 15

Import and Export Quotas (also: Tariff-Quota) Restriction on the amount of a good that can enter or leave a country during a certain period of time Import Quotas

Export Quotas

1. Protect domestic

1. Retain an adequate

producers of a good 2. Force outside firms

to compete for market access & market share © Prentice Hall, 2008

domestic supply of a product 2. Restrict world supply

of a product to raise its price International Business 4e

Chapter 6 - 16

Embargoes Complete ban on trade (imports and exports) in one or more products with a particular country

Most restrictive nontariff trade barrier © Prentice Hall, 2008

Often used to achieve political goals International Business 4e

Can be difficult for a nation to enforce Chapter 6 - 17

Administrative Delays Regulatory controls or bureaucratic rules to slow imports into a country

© Prentice Hall, 2008



Inconvenient ports for imports



Product-damaging inspections



Understaffed customs offices



Lengthy licensing procedures

International Business 4e

Chapter 6 - 18

Currency Controls Restrictions on the convertibility of a nation’s currency

Limit the amount of globally accepted currency available to pay for imports

Set an unfavorable exchange rate when paying for imports Set a favourable exchange rate for payments received for exports © Prentice Hall, 2008

International Business 4e

Chapter 6 - 19

Trade Promotion  Subsidies  Export financing  Foreign trade zones  Special govt. agencies © Prentice Hall, 2008

International Business 4e

Chapter 6 - 20

Export Financing Financing such as low-interest loans and loan guarantees

Export-Import Export-Import Bank Bank of of the the United United States States  Working Workingcapital capitalloan loanguarantees guarantees  Credit Creditinformation informationon onnation nationor orfirm firmabroad abroad  Export Exportcredit creditinsurance insuranceagainst againstloss loss  Loan Loanguarantees guaranteesto tobuyers buyersof ofU.S. U.S.goods goods and andmuch muchmore… more…

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International Business 4e

Chapter 6 - 21

Foreign Trade Zones  Designated geographic region in which merchandise is allowed to pass through with lower customs duties (taxes) and/or fewer customs procedures

 Purpose is to increase employment and trade within the nation © Prentice Hall, 2008

International Business 4e

Chapter 6 - 22

Special Government Agencies Organize trade missions for officials and businesses Operate export-promotion offices at locations abroad Help import products the home nation does not produce © Prentice Hall, 2008

International Business 4e

Chapter 6 - 23

General Agreement on Tariffs and Trade (GATT) Treaty designed to promote free trade by reducing tariffs and nontariff barriers to trade Uruguay Round Extended coverage to services - definitions Improved intellectual property rules Reduced trade barriers in agriculture (tariffication) Established the WTO © Prentice Hall, 2008

International Business 4e

Chapter 6 - 24

General Agreement on Trade in Services GATS Forms: Cross-border supply (e.g., phone calls) Consumption abroad (e.g., tourism) Commercial presence (e.g., bank subsidiary) Presence of natural persons (e.g., architects)

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International Business 4e

Chapter 6 - 25

World Trade Organization (WTO) International organization that regulates trade between nations Normal trade relations (“most-favored-nation status”) Dispute Settlement Body Antidumping & Countervailing Duties Doha Round of trade talks

© Prentice Hall, 2008

International Business 4e

… E L P M A EX

Chapter 6 - 26

Importance of topic • Trade barriers affect firm strategy – – – –

Where to locate company or branches Where to produce How to minimize tariffs impact on costs How to minimize NTB impact on cost (e.g., local content) – How not to be considered as “dumping” product abroad – Domestically, how to protect one’s business from product “dumped” by foreign firms – How to obtain assistance from governments within the WTO rules

EXAMPLES OF PROTECTED or PROMOTED INDUSTRIES IN CANADA and SOME METHODS OF TRADE PROMOTION/RESTRICTION USED THESE INDUSTRIES

© Prentice Hall, 2008

International Business 4e

Chapter 6 - 28

LOOKING FORWARD 

READ CH 7

 PREPARE PRESENTATION ASSIGNMENTS &

WORK CONTINUALLY ON THE PROGRESS REPORT ON TERM PROJECTS – make sure the guidelines are observed!



MIDTERM – Oct 21

15 TO 20 QUESTIONS – SHORT ANSWERS  APPROX. 60% OF THE QUESTIONS – from QUICK STUDY Q.  ONE OR TWO QUESTIONS – FROM “HINTS”  BALANCE: MORE COMPLEX QUESTIONS FROM TEXTBOOK, LECTURE NOTES, HANDOUTS 

 Questions?