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Chapter 6 - 1International Business 3e© Prentice Hall, 2006
Business-Business-Government Trade Government Trade
RelationsRelations
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© Prentice Hall, 2006 International Business 3e Chapter 6 - 2
Chapter PreviewChapter Preview
• 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
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© 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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© Prentice Hall, 2006 International Business 3e Chapter 6 - 4
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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© Prentice Hall, 2006 International Business 3e Chapter 6 - 5
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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© Prentice Hall, 2006 International Business 3e Chapter 6 - 6
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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© Prentice Hall, 2006 International Business 3e Chapter 6 - 7
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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© Prentice Hall, 2006 International Business 3e Chapter 6 - 8
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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© Prentice Hall, 2006 International Business 3e Chapter 6 - 9
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…
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© 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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© Prentice Hall, 2006 International Business 3e Chapter 6 - 12
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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© Prentice Hall, 2006 International Business 3e Chapter 6 - 14
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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© Prentice Hall, 2006 International Business 3e Chapter 6 - 18
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