business-government trade relationships 6-1. no country permits unregulated flow of goods and...
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Business-Government Business-Government Trade RelationshipsTrade Relationships
6-1
No country permits unregulated flow of No country permits unregulated flow of goods and services across its bordersgoods and services across its borders
• Governments place restrictions on imports and occasionally on exports
• Governments may provide direct and indirect subsidies to improve the competitive position of some industries
ProtectionismProtectionism• Government action intended to limit foreign
producer’s ability to compete with domestic industry
Rationale for Government Rationale for Government InterventionIntervention
Preserve national identityPreserve national identityImprove position compared to Improve position compared to other countriesother countries
Maintain spheres of influenceMaintain spheres of influencePromote industrializationPromote industrialization
Deal with unfriendly countriesDeal with unfriendly countriesProtect infant industriesProtect infant industries
Maintain essential industriesMaintain essential industriesPrevent unemploymentPrevent unemployment
Non-economic Non-economic RationaleRationale
Economic RationalesEconomic Rationales
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Infant-Industry ArgumentInfant-Industry Argument
• Government should guarantee an emerging industry a large share of the domestic market until it becomes efficient enough to compete against imports
• Initial output costs may make products noncompetitive in world markets
• Over time costs will decrease due to:–greater economies of scale–greater worker efficiency
Problems with argumentProblems with argument
• Hard to identify industries with high probability of success
–even when industries can be identified, not clear that government should provide protection
• Protection may serve as disincentive for managers to adopt innovations needed to become competitive
• Public funds poorly spent• Consumer prices rise
Industrialization ArgumentIndustrialization Argument
Industrialization represents high per capita Industrialization represents high per capita incomeincome
Most developing countries try to emulate Most developing countries try to emulate strategy of developed countriesstrategy of developed countries• Surplus workers can more easily increase Surplus workers can more easily increase
manufacturing output than agricultural outputmanufacturing output than agricultural output• Inflows of foreign investment can promote Inflows of foreign investment can promote
sustainable growthsustainable growth• Prices and sales of agricultural products and Prices and sales of agricultural products and
raw materials fluctuateraw materials fluctuate
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Industrialization Argument, con’tIndustrialization Argument, con’t
• Markets for industrial products grow Markets for industrial products grow faster than markets for agricultural faster than markets for agricultural productsproducts
• Local industry reduces imports and Local industry reduces imports and promotes exportspromotes exports
• Industrial activity helps the nation Industrial activity helps the nation building processbuilding process
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Economic MotivesEconomic Motives
Potential resultsPotential results
+ Global industry createdGlobal industry created
– Firms’ efficiency reducedFirms’ efficiency reduced– Domestic costs increaseDomestic costs increase– Special interests benefitSpecial interests benefit
Pursue Pursue strategic trade strategic trade
policypolicyHelp companies achieve economies of scale and gain a first-mover advantage
Non-economic Rationales for Non-economic Rationales for Government InterventionGovernment Intervention
Maintenance of essential industries Maintenance of essential industries Prevention of shipments to unfriendly Prevention of shipments to unfriendly
countriescountries Maintenance or extension of spheres Maintenance or extension of spheres
of influenceof influence Protecting activities that preserve Protecting activities that preserve
national identitynational identity
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Maintaining Essential IndustriesProtecting domestic industries during peacetime
so that country is not dependent on foreign sources of supply during war
• Popular argument to support import restrictions• Countries must
– determine which industries are essential– consider costs and alternatives– consider political consequences
Dealing with “Unfriendly” countriesPrevention of exports that might be acquired by
potential enemies• May lead to retaliation that prevents securing other
essential goods• Trade controls on nondefense goods also may be
used as a weapon of foreign policy
Maintaining Spheres of InfluenceGovernments may:
• Provide aid and credits to, and encourage imports from, countries that are political allies
• Impose trade restrictions to coerce foreign countries to follow certain political actions
Preserving Cultures and National IdentityCountries have a common sense of identity that
separates them from other nationalities• May limit foreign products and services to
protect their separate identity
Trade Promotion and Trade Promotion and RestrictionRestriction
Trade promotionmethods
Trade restrictionmethods
Subsidies
Export financing
Foreign trade zones
Special government agencies
Tariffs
Quotas
Embargoes
Local content requirements
Administrative delays
Currency controls Antidumping policy
Instruments of Trade Policy:Instruments of Trade Policy:SubsidiesSubsidies
Government payment to a domestic Government payment to a domestic producerproducer• Cash grantsCash grants• Low-interest loansLow-interest loans• Tax breaksTax breaks• Government equity participation in the companyGovernment equity participation in the company
Subsidy revenues are generated from taxesSubsidy revenues are generated from taxes Subsidies encourage over-production, Subsidies encourage over-production,
inefficiency and reduced tradeinefficiency and reduced trade
Potential results
+ Increased competitiveness
– Encourage inefficient firms
– Increased consumer prices
– Overuse of resources
Potential results
+ Increased competitiveness
– Encourage inefficient firms
– Increased consumer prices
– Overuse of resources
SubsidiesSubsidies
• Subsidies—direct government payments to domestic companies to compensate them for losses incurred from selling abroad– other types of government assistance makes it
cheaper or more profitable to sell abroad» potential exporters provided with an array of
services– subsidies to overcome market imperfections are
least controversial– there is little agreement on what a subsidy is– there has been a recent increase in export-credit
assistance
• Aid and loans—given to other countries with the proviso that the funds be spent in the donor country– repayment insurance for exporters
Export FinancingExport Financing
Export-Import Bank of the United StatesExport-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…
Export-Import Bank of the United StatesExport-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…
Financing such as low-interest loans and loan guaranteesFinancing such as low-interest loans and loan guarantees
Designated geographic Designated geographic region in which merchandise region in which merchandise is allowed to pass through is allowed to pass through with lower customs duties with lower customs duties (taxes) and/or fewer customs (taxes) and/or fewer customs proceduresprocedures
Purpose is to increase employment and trade within the nation
Foreign Trade ZonesForeign Trade Zones
Special Government AgenciesSpecial Government Agencies
Organize trade missions for Organize trade missions for officials and businessesofficials and businesses
Operate export-promotion offices Operate export-promotion offices at locations abroadat locations abroad
Help import products the home Help import products the home nation does not producenation does not produce
Instruments of Trade Policy:Instruments of Trade Policy:TariffsTariffs
Tariffs are the oldest form of trade policy; they Tariffs are the oldest form of trade policy; they fall into two categoriesfall into two categories• Specific tariffsSpecific tariffs are levied as a fixed charge for each unit are levied as a fixed charge for each unit• Ad valoremAd valorem tariffs are levied as a proportion of the value tariffs are levied as a proportion of the value
of the imported goodof the imported good Tariffs are good for government because they Tariffs are good for government because they
generate revenuegenerate revenue Tariffs protect domestic producers but they Tariffs protect domestic producers but they
reduce efficiencyreduce efficiency Tariffs are bad for consumers because they Tariffs are bad for consumers because they
increase the cost of goodsincrease the cost of goods
Tariffs
Potential resultsPotential results
+ Protect domestic firms from competitors+ Generate income for the government
– Reduce competitiveness of home-based firms– Raise consumer prices
Potential resultsPotential results
+ Protect domestic firms from competitors+ Generate income for the government
– Reduce competitiveness of home-based firms– Raise consumer prices
Export tariff
Transit tariff
Import tariff
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
1. Protect domestic producers of a good
2. Force outside firms to compete for market access
Export Quotas
1. Retain an adequate domestic supply of a product
2. Restrict world supply of a product to raise its price
EmbargoesEmbargoes
Complete ban on trade (imports and exports)in one or more products with a particular country
Can be difficult for a nation to
enforce
Often used to achieve political
goals
Most restrictive nontariff trade
barrier
Local Content Requirements
Laws that domestic producers must supply a specific amount
of a good or service
Forces international companies toemploy local resources (usually labor)
in production process
Administrative Delays
Regulatory controls or Regulatory controls or bureaucratic rules to slow bureaucratic rules to slow imports into a countryimports into a country
Inconvenient ports for importsInconvenient ports for imports
Product-damaging inspectionsProduct-damaging inspections
Understaffed customs officesUnderstaffed customs offices
Lengthy licensing proceduresLengthy licensing procedures
Currency Controls
Restrictions on theRestrictions on theconvertibility of a nation’s currencyconvertibility 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
Instruments of Trade Policy:Instruments of Trade Policy:Antidumping PoliciesAntidumping Policies
Defined asDefined as• Selling goods in a foreign market below Selling goods in a foreign market below
production costsproduction costs• Selling goods in a foreign market below fair Selling goods in a foreign market below fair
market valuemarket value Result ofResult of
• Unloading excess productionUnloading excess production• Predatory behaviorPredatory behavior
Remedy: seek imposition of tariffsRemedy: seek imposition of tariffs
General Agreement on Tariffs and General Agreement on Tariffs and Trade (GATT)Trade (GATT)
Formed in 1947 by 23 countries to abolish Formed in 1947 by 23 countries to abolish quotas and reduce tariffsquotas and reduce tariffs
Laid the foundation to liberalize world Laid the foundation to liberalize world tradetrade
Required members to open markets Required members to open markets equally to every other memberequally to every other member
However, it could not enforce complianceHowever, it could not enforce compliance The World Trade Organization replaced The World Trade Organization replaced
GATT in 1995GATT in 1995
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World Trade Organization (WTO)World Trade Organization (WTO)
150 current members (>90% of trade)150 current members (>90% of trade) Adopted the principles and trade Adopted the principles and trade
agreements of GATTagreements of GATT Expanded to cover trade inExpanded to cover trade in
• ServicesServices• InvestmentInvestment• Intellectual propertyIntellectual property
Governments bring charges of unfair trade Governments bring charges of unfair trade practices to the WTOpractices to the WTO
WTO rulings are bindingWTO rulings are binding
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Dealing with Governmental Trade Dealing with Governmental Trade InfluencesInfluences
Companies can:Companies can:• Move operations to a lower-cost countryMove operations to a lower-cost country• Concentrate on markets that attract less Concentrate on markets that attract less
international competitioninternational competition• Adopt internal innovationsAdopt internal innovations
Increase efficiencyIncrease efficiency Superior productsSuperior products
• Try to get government protectionTry to get government protection
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