business-government trade relations. © prentice hall, 2006international business 3e chapter 6 - 2...

Chapter 6 - 1International Business 3e© Prentice Hall, 2006

Business-Business-Government Trade Government Trade

RelationsRelations

© Prentice Hall, 2006 International Business 3e Chapter 6 - 2

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• 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 main institutions of the global trading system

© Prentice Hall, 2006 International Business 3e Chapter 6 - 3

Political MotivesPolitical Motives

Protect jobs

Preserve national security

Respond to “unfair” trade

Gain influence

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Economic MotivesEconomic Motives

Protect infant industries- Protect emerging industries during

development from global competition

Potential results+ National income increases– Wrong industries protected– Firms grow complacent– Consumer prices rise– Public funds poorly spent

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Economic MotivesEconomic Motives

Pursue strategic trade policy- Help companies achieve economies of

scale and gain a first-mover advantage

Potential results+ Global industry created

– Firms’ efficiency reduced

– Domestic costs increase

– Special interests benefit

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Cultural MotivesCultural Motives

Protect national identity- Nations block imports deemed harmful

- Usual suspects are US media and consumer goods

- Result of increased globalization

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Trade Promotion and Trade Promotion and RestrictionRestriction

Trade promotion methods- Subsidies- Export financing- Foreign trade zones- Special government agencies

Trade restriction methods- Tariffs- Quotas- Embargoes- Local content requirements- Administrative delays- Currency controls

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SubsidiesSubsidies

Financial assistance in the form of cash, tax breaks, price supports, etc.

Potential results- Increased competitiveness

- Encourage inefficient firms

- Increased consumer prices

- Overuse of resources

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Export FinancingExport Financing

Financing such as low-interest loans and loan guaranteesExport-Import Bank of the United States- Working capital loan guarantees- Credit information on nation or firm abroad- Export credit insurance against loss- Loan guarantees to buyers of U.S. goods

and much more…

© Prentice Hall, 2006 International Business 3e Chapter 6 - 10

Foreign Trade ZonesForeign 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

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Special Government Agencies

Organize trade missions for officials and businessesOperate export-promotion offices at locations abroadHelp import products the home nation does not produce

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Tariffs

Government tax levied on a product as it enters or leaves a nation- Export tariff

- Transit tariff

- Import tariff

Potential results- Protect domestic firms from competitors

- Generate income for the government

- Reduce competitiveness of home-based firms

- Raise consumer prices

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Import and Export QuotasImport and Export Quotas

Restriction on the amount of a good that can enter or leave a country during a certain period of time- Import Quotas

• Protect domestic producers of a good• Force outside firms to compete for market access

- Export Quotas• Retain an adequate domestic supply of a product• Restrict world supply of a product to raise its price

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EmbargoesEmbargoes

Complete ban on trade (imports and exports) in one or more products with a particular country- Most restrictive nontariff trade barrier

- Often used to achieve political goals

- Can be difficult for a nation to enforce

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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

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Administrative Delays

Regulatory controls or bureaucratic rules to slow imports into a country- Inconvenient ports for imports- Product-damaging inspections- Understaffed customs offices- Lengthy licensing procedures

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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

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General Agreement onGeneral Agreement onTariffs and Trade (GATT)Tariffs and Trade (GATT)

Treaty designed to promote free trade by reducing tariffs and nontariff barriers to trade

Uruguay Round- Extended coverage to services

- Improved intellectual property rules

- Reduced trade barriers in agriculture

- Established the WTO

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World Trade Organization World Trade Organization (WTO)(WTO)

International organization that regulates trade between nations- Normal trade relations (“most-favored-

nation status”)

- Dispute Settlement Body

- Dumping and antidumping duties

- Doha Round of trade talks