Your SlideShare is downloading. ×
InternationalBusiness 7eby Charles W.L. HillMcGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All righ...
Chapter 6The Political Economy ofInternational Trade
6-3IntroductionFree trade occurs when governments do not attempt torestrict what its citizens can buy from another countr...
6-4Instruments Of Trade PolicyThe main instruments of trade policy are:TariffsSubsidesImport QuotasVoluntary Export Re...
6-5TariffsTariffs are taxes levied on imports that effectively raise the cost ofimported products relative to domestic pr...
6-6SubsidiesSubsidies are government payments to domesticproducersConsumers typically absorb the costs of subsidiesSubsi...
6-7Classroom Performance SystemWhen tariffs are levied as a fixed charge for each unit of agood imported, they are calleda...
6-8Import Quotas And VoluntaryExport RestraintsImport quotas directly restrict the quantity of some good that may beimpor...
6-9Local Content RequirementsA local content requirement demands that some specificfraction of a good be produced domesti...
6-10Classroom Performance SystemA ________ demands that some specific fraction of a goodbe produced domesticallya) subsidy...
6-11Administrative PoliciesAdministrative trade polices are bureaucratic rules thatare designed to make it difficult for ...
6-12Antidumping PoliciesDumping refers to selling goods in a foreign market below their costsof production, or selling go...
6-13The Case For Government InterventionArguments for government intervention:Political arguments are concerned with prot...
6-14Political Arguments For Free TradePolitical arguments for government intervention include:protecting jobsprotecting ...
6-15Classroom Performance SystemWhich of the following is not a political argument forgovernment intervention?a) protectin...
6-16Protecting Jobs And IndustriesProtecting jobs and industries is the most commonpolitical reason for trade restriction...
6-17National SecurityIndustries such as aerospace or electronics are oftenprotected because they are deemed important for...
6-18RetaliationWhen governments take, or threaten to take, specificactions, other countries may remove trade barriersIf ...
6-19Protecting ConsumersGovernments may intervene in markets to protectconsumers
6-20Furthering Policy ObjectivesForeign policy objectives can be supported through tradepolicyPreferential trade terms c...
6-21Protecting Human RightsTrade policy can be used to improve the human rightspolicies of trading partnersHowever, unle...
6-22Economic ArgumentsFor InterventionEconomic arguments for intervention include:the infant industry argumentstrategic ...
6-23Classroom Performance SystemWhat is the most common political reason for tradebarriers?a) To protect infant industries...
6-24The Infant Industry ArgumentThe infant industry argument suggests that an industryshould be protected until it can de...
6-25Strategic Trade PolicyStrategic trade policy suggests that in cases where theremay be important first mover advantage...
6-26Revised Case For Free TradeRestrictions on trade may be inappropriate in the cases of:Retaliation and Trade WarDomes...
6-27Retaliation And Trade WarPaul Krugman argues that strategic trade policies aimedat establishing domestic firms in a d...
6-28Domestic PoliciesKrugman argues that since special interest groups caninfluence governments, strategic trade policy i...
6-29Classroom Performance SystemWhich theory suggests that in cases where there may beimportant first mover advantages, go...
6-30Development Of TheWorld Trading SystemHow has the current world trade system emerged?
6-31From Smith To The Great DepressionUntil the Great Depression of the 1930s, most countrieshad some degree of protectio...
6-321947-79: GATT, Trade Liberalization,And Economic GrowthAfter WWII, the U.S. and other nations realized the valueof fr...
6-331980-1993: Protectionist TrendsIn the 1980s and early 1990s, the world trading system was strainedJapan’s economic s...
6-34The Uruguay Round And TheWorld Trade OrganizationThe Uruguay Round of GATT negotiations began in 1986The talks focuse...
6-35WTO: Experience To DateSince its establishment, the WTO has emerged as aneffective advocate and facilitator of future...
6-36WTO: Experience To DateIn 1997, 68 countries that account for more than 90% ofworld telecommunications revenues pledg...
6-37WTO: Experience To DateThe 1999 meeting of the WTO in Seattle was importantnot only for what happened between the mem...
6-38The Future Of The WTO: UnresolvedIssues And The Doha RoundThe current agenda of the WTO focuses on:the rise of anti-d...
6-39The Future Of The WTO: UnresolvedIssues And The Doha RoundThe WTO is encouraging members to strengthen theregulations...
6-40The Future Of The WTO: UnresolvedIssues And The Doha RoundThe WTO launched a new round of talks at Doha, Qatarin 2001...
6-41Classroom Performance SystemAll of the following except _____ are key issues on thetable at the Doha Round.a) Anti-dum...
6-42Implications For ManagersManagers need to consider how trade barriers affect thestrategy of the firm and the implicat...
6-43Trade Barriers And Firm StrategyTrade barriers raise the cost of exporting products to acountryVoluntary export rest...
6-44Policy ImplicationsInternational firms have an incentive to lobby for freetrade, and keep protectionist pressures fro...
Upcoming SlideShare
Loading in...5
×

International business 7e chapter 6

1,161

Published on

Published in: Business
0 Comments
4 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total Views
1,161
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
0
Comments
0
Likes
4
Embeds 0
No embeds

No notes for slide
  • Tariffs are the oldest form of trade policy; they fall into two categories: Specific tariffs are levied as a fixed charge for each unit Ad valorem tariffs are levied as a proportion of the value of the imported good Tariffs are good for government because they generate revenue. But, while they protect domestic producers but they reduce efficiency, and create higher prices for consumers.
  • Subsidies are government payments to domestic producers. They can be in the form of: Cash grants Low-interest loans Tax breaks Government equity participation in the company Subsidy revenues are generated from taxes. Subsidies encourage over-production, inefficiency and reduced trade.
  • The answer is a.
  • The answer is d.
  • Management Focus: U.S. Magnesium Seeks Protection This feature explores the dumping charged levied by U.S. Magnesium against Chinese and Russian producers. According to U.S. Magnesium, the sole American producer of magnesium, Russian and Chinese producers were selling magnesium significantly below market value in an effort to drive U.S. Magnesium out of business. The company failed a complaint with the International Trade Commission (ITC) which ultimately ruled in favor of U.S. Magnesium. Suggested Discussion Questions 1. What is dumping? Were Chinese and Russian producers guilty of dumping? How did U.S. Magnesium justify its claims against Russian and Chinese producers? Discussion Points: Dumping is defined as selling goods in a foreign market below their costs of production, or below their fair market value. In 2004, U.S. Magnesium claimed that China and Russia had been dumping magnesium in the United States. The company noted that in 2002 and 2003, magnesium imports rose, and prices fell. While the ITC ruled in favor of the American company, some students might question whether the fact that the Chinese could sell their product at low prices might simply reflect the country’s significantly lower wage rates. 2. What does the ITC’s ruling mean for American consumers of magnesium? In your opinion, was the ruling fair? Discussion Points: The ITC ruled in favor of U.S. Magnesium finding that indeed China and Russia had been dumping their product in the United States. Fines ranging from 50 to 140 percent on imports were imposed against China, and 19 to 22 percent on Russian companies. Most students will note that while the ITC’s decision is a good one for U.S. Magnesium and its employees. For consumers, the ruling means magnesium prices that are significantly higher than those in world markets. Students will probably argue that this result is unfair, and should be revisited. Teaching Tip: U.S. Magnesium’s web site is available at { http://www.usmagnesium.com /}.
  • The answer is b.
  • The U.S. has use trade policy against countries like Libya, Iran, Iraq, North Korea, and Cuba.
  • Country Focus: Trade in Hormone-Treated Beef This feature describes the trade battle between the United States and the European Union over beef from cattle that have been given growth hormones. It outlines the basic issues that led to the dispute, and shows how the World Trade Organization has treated the case. Suggested Discussion Questions 1. Why is the European Union so concerned about beef from cattle that have been given growth hormones? Discussion Points: Some students may argue that the European Union’s ban on growth hormones in cattle was little more than a thinly veiled form of protectionism. Australia, New Zealand, and Canada, which also use the hormones in their cattle industry, were also affected by the ban. The European Union claimed that it was merely protecting the health of its citizens, however studies showed that the hormones posed no health issues for people. 2. Why did the WTO rule against the EU? Discussion Points: The World Trade Organization ruled against the European Union stating that the European Union’s ban on imported hormone treated beef had no scientific justification. Even so, the European Union refused to lift the ban, which had strong public support, and in the end, the European Union was assessed punitive tariffs. The European Union held on to its principles though, and as of 2006, continued to maintain its restrictions on hormone treated beef despite the resulting punitive tariffs. Teaching Tip: Students can go to the WTO website { www.wto.org } and click on the students icon to see a range of options available to students including the ability to search the site, research countries, and even see a list of internships that are available at the WTO.
  • The answer is c.
  • Oldest argument - Alexander Hamilton, 1792. Protected under the WTO. Only good if it makes the industry efficient. Brazil auto-makers - 10th largest - wilted when protection was eliminated. Requires government financial assistance. Today if the industry is a good investment, global capital markets would invest.
  • Strategic trade policy suggests that: Government should use subsidies to protect promising firms in newly emerging industries with substantial scale economies Governments benefit if they support domestic firms to overcome barriers to entry created by existing foreign firms
  • The answer is b.
  • GATT - multilateral agreement established in 1948 under US leadership. Objective is to liberalize trade by eliminating tariffs, subsidies, and import quotas. Nineteen original members grew to 120. Used ‘rounds of talks’ to gradually reduce trade barriers. Uruguay Round GATT 1986-93 Mutual tariff reductions negotiated. Dispute resolution only if complaints were received.
  • GATT regulations could be circumvented using voluntary export restraints.
  • The WTO: Had 145 members in 2003 Represents 90% of world trade Settles 9 of 10 disputes satisfactorily Reduced tariff from 40% to 5% Saw trade volume of manufactured goods has increased 20 times
  • Because members believe that the protection of intellectual property rights is an essential element of the international trading system, TRIPS obliges WTO members to grant and enforce patents lasting at least 20 years, and copyrights lasting 50 years.
  • Country Focus: Estimating the Gains from Trade for America This feature explores the results of a study by the Institute for International Economics. The study, which estimated the gains to the American economy from free trade, found that America’s GDP was more than 7 percent higher as a result of reductions in trade barriers than it would have been if the barriers remained. The study also estimated that if tariffs were reduced to zero, significant gains would still result. Suggested Discussion Questions 1. What does the Institute for International Economics suggest about the benefits of free trade? Discussion Points: The Institute for International Economics found that thanks to reductions in trade restrictions, America’s GDP was up. The Institute also estimated that even greater gains in the country’s GDP would occur if protectionism was eliminated all together. Students should recognize that these findings follow the principles of Adam Smith and David Ricardo and suggest that free trade is beneficial. 2. According to the Institute for International Economics study, a move toward free trade would cause disruption in employment. Is it still worth pursuing free trade if it means that some people lose their jobs? Discussion Points: This question should prompt a strong debate among students. Some students will probably suggest that the costs in terms of lost wages and benefits associated with free trade outweigh the benefits that would be gained. Other students however, will probably argue that since protectionism typically benefits only a few at the expense of others, while free trade generates greater economic growth and higher wages, a free trade policy should be followed. Teaching Tip: The Web site for Institute for International Economics is available at {http://www.iie.com/}.
  • The answer is d.
  • Transcript of "International business 7e chapter 6"

    1. 1. InternationalBusiness 7eby Charles W.L. HillMcGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
    2. 2. Chapter 6The Political Economy ofInternational Trade
    3. 3. 6-3IntroductionFree trade occurs when governments do not attempt torestrict what its citizens can buy from another country orwhat they can sell to another countryWhile many nations are nominally committed to freetrade, they tend to intervene in international trade to protectthe interests of politically important groups
    4. 4. 6-4Instruments Of Trade PolicyThe main instruments of trade policy are:TariffsSubsidesImport QuotasVoluntary Export RestraintsLocal Content RequirementsAdministrative PolicesAntidumping Policies
    5. 5. 6-5TariffsTariffs are taxes levied on imports that effectively raise the cost ofimported products relative to domestic productsSpecific tariffs are levied as a fixed charge for each unit of a goodimportedAd valorem tariffs are levied as a proportion of the value of theimported goodTariffs increase government revenues, provide protection to domesticproducers against foreign competitors by increasing the cost ofimported foreign goods, and force consumers to pay more for certainimportsSo, tariffs are unambiguously pro-producer and anti-consumer, andtariffs reduce the overall efficiency of the world economy
    6. 6. 6-6SubsidiesSubsidies are government payments to domesticproducersConsumers typically absorb the costs of subsidiesSubsidies help domestic producers in two ways:they help them compete against low-cost foreign importsthey help them gain export markets
    7. 7. 6-7Classroom Performance SystemWhen tariffs are levied as a fixed charge for each unit of agood imported, they are calleda) Specific tariffsb) Ad valorem tariffsc) Tariff rate quotasd) Transit tariffs
    8. 8. 6-8Import Quotas And VoluntaryExport RestraintsImport quotas directly restrict the quantity of some good that may beimported into a countryTariff rate quotas are a hybrid of a quota and a tariff where a lowertariff is applied to imports within the quota than to those over the quotaVoluntary export restraints are quotas on trade imposed by theexporting country, typically at the request of the importing country’sgovernmentA quota rent is the extra profit that producers make when supply isartificially limited by an import quotaImport quotas and voluntary export restraints benefit domesticproducers by limiting import competition, but they raise the prices ofimported goods
    9. 9. 6-9Local Content RequirementsA local content requirement demands that some specificfraction of a good be produced domesticallyLocal content requirements benefit domestic producers,but consumers face higher prices
    10. 10. 6-10Classroom Performance SystemA ________ demands that some specific fraction of a goodbe produced domesticallya) subsidyb) quota rentc) voluntary export requirementd) local content requirement
    11. 11. 6-11Administrative PoliciesAdministrative trade polices are bureaucratic rules thatare designed to make it difficult for imports to enter acountryThese polices hurt consumers by denying access topossibly superior foreign products
    12. 12. 6-12Antidumping PoliciesDumping refers to selling goods in a foreign market below their costsof production, or selling goods in a foreign market below their “fair”market valueDumping enables firms to unload excess production in foreignmarketsSome dumping may be predatory behavior, with producers usingsubstantial profits from their home markets to subsidize prices in aforeign market with a view to driving indigenous competitors out of thatmarket, and later raising prices and earning substantial profitsAntidumping polices (or countervailing duties) are designed to punishforeign firms that engage in dumping and protect domestic producersfrom “unfair” foreign competition
    13. 13. 6-13The Case For Government InterventionArguments for government intervention:Political arguments are concerned with protecting theinterests of certain groups within a nation (normallyproducers), often at the expense of other groups (normallyconsumers)Economic arguments are typically concerned withboosting the overall wealth of a nation (to the benefit of all,both producers and consumers)
    14. 14. 6-14Political Arguments For Free TradePolitical arguments for government intervention include:protecting jobsprotecting industries deemed important for nationalsecurityretaliating to unfair foreign competitionprotecting consumers from “dangerous” productsfurthering the goals of foreign policyprotecting the human rights of individuals in exportingcountries
    15. 15. 6-15Classroom Performance SystemWhich of the following is not a political argument forgovernment intervention?a) protecting jobsb) protecting infant industriesc) protecting industries deemed important for nationalsecurityd) protecting consumers from “dangerous” products
    16. 16. 6-16Protecting Jobs And IndustriesProtecting jobs and industries is the most commonpolitical reason for trade restrictionsUsually this results from political pressures by unions orindustries that are "threatened" by more efficient foreignproducers, and have more political clout than theconsumers that will eventually pay the costs
    17. 17. 6-17National SecurityIndustries such as aerospace or electronics are oftenprotected because they are deemed important for nationalsecurity
    18. 18. 6-18RetaliationWhen governments take, or threaten to take, specificactions, other countries may remove trade barriersIf threatened governments don’t back down, tensions canescalate and new trade barriers may be enacted
    19. 19. 6-19Protecting ConsumersGovernments may intervene in markets to protectconsumers
    20. 20. 6-20Furthering Policy ObjectivesForeign policy objectives can be supported through tradepolicyPreferential trade terms can be granted to countries thata government wants to build strong relations withTrade policy can also be used to punish rogue states thatdo not abide by international laws or normsHowever, it might cause other countries to undermineunilateral trade sanctionsThe Helms-Burton Act and the D’Amato Act, have beenpassed to protect American companies from such actions
    21. 21. 6-21Protecting Human RightsTrade policy can be used to improve the human rightspolicies of trading partnersHowever, unless a large number of countries choose totake such action, it is unlikely to be successfulSome critics have argued that the best way to change theinternal human rights of a country is to engage it ininternational tradeThe decision to grant China MFN status in 1999 wasbased on this philosophy
    22. 22. 6-22Economic ArgumentsFor InterventionEconomic arguments for intervention include:the infant industry argumentstrategic trade policy
    23. 23. 6-23Classroom Performance SystemWhat is the most common political reason for tradebarriers?a) To protect infant industriesb) Strategic trade policyc) To protect jobsd) To protect industries that are important for nationalsecurity
    24. 24. 6-24The Infant Industry ArgumentThe infant industry argument suggests that an industryshould be protected until it can develop and be viable andcompetitive internationallyThe infant industry argument has been accepted as ajustification for temporary trade restrictions under the WTOHowever, it can be difficult to gauge when an industryhas “grown up”Critics argue that if a country has the potential to developa viable competitive position its firms should be capable ofraising necessary funds without additional support from thegovernment
    25. 25. 6-25Strategic Trade PolicyStrategic trade policy suggests that in cases where theremay be important first mover advantages, governments canhelp firms from their countries attain these advantagesStrategic trade policy also suggests that governmentscan help firms overcome barriers to entry into industrieswhere foreign firms have an initial advantage
    26. 26. 6-26Revised Case For Free TradeRestrictions on trade may be inappropriate in the cases of:Retaliation and Trade WarDomestic Politics
    27. 27. 6-27Retaliation And Trade WarPaul Krugman argues that strategic trade policies aimedat establishing domestic firms in a dominant position in aglobal industry are beggar-thy-neighbor policies that boostnational income at the expense of other countriesCountries that attempt to use such policies will probablyprovoke retaliation
    28. 28. 6-28Domestic PoliciesKrugman argues that since special interest groups caninfluence governments, strategic trade policy is almostcertain to be captured by such groups who will distort it totheir own ends
    29. 29. 6-29Classroom Performance SystemWhich theory suggests that in cases where there may beimportant first mover advantages, governments can helpfirms from their countries attain these advantages?a) The infant industry argumentb) Strategic trade theoryc) Comparative advantage theoryd) The Leontief paradox
    30. 30. 6-30Development Of TheWorld Trading SystemHow has the current world trade system emerged?
    31. 31. 6-31From Smith To The Great DepressionUntil the Great Depression of the 1930s, most countrieshad some degree of protectionismThe Smoot-Hawley tariff was enacted in 1930 in the U.Screating significant import tariffs on foreign goodsOther nations took similar steps and as the depressiondeepened, world trade fell further
    32. 32. 6-321947-79: GATT, Trade Liberalization,And Economic GrowthAfter WWII, the U.S. and other nations realized the valueof freer trade, and established the General Agreement onTariffs and Trade (GATT)The approach of GATT (a multilateral agreement toliberalize trade) was to gradually eliminate barriers to trade
    33. 33. 6-331980-1993: Protectionist TrendsIn the 1980s and early 1990s, the world trading system was strainedJapan’s economic strength and huge trade surplus stressed whathad been more equal trading patterns, and Japan’s perceivedprotectionist (neo-mercantilist) policies created intense politicalpressures in other countriesPersistent trade deficits by the U.S., the world’s largest economy,caused significant economic problems for some industries and politicalproblems for the governmentMany countries found that although limited by GATT from utilizingtariffs, there were many other more subtle forms of intervention thathad the same effects and did not technically violate GATT
    34. 34. 6-34The Uruguay Round And TheWorld Trade OrganizationThe Uruguay Round of GATT negotiations began in 1986The talks focused on several areas:Services and Intellectual Property-going beyond manufactured goods to address trade issues relatedto services and intellectual property, and agricultureThe World Trade Organization-it was hoped that enforcement mechanisms would make the WTO amore effective policeman of the global trade rulesThe WTO encompassed GATT along with two sisters organizations,the General Agreement on Trade in Services (GATS) and theAgreement on Trade Related Aspects of Intellectual Property Rights(TRIPS)
    35. 35. 6-35WTO: Experience To DateSince its establishment, the WTO has emerged as aneffective advocate and facilitator of future trade deals,particularly in such areas as servicesSo far, the WTO’s policing and enforcement mechanismsare having a positive effectMost countries have adopted WTO recommendations fortrade disputes
    36. 36. 6-36WTO: Experience To DateIn 1997, 68 countries that account for more than 90% ofworld telecommunications revenues pledged to open theirmarkets to foreign competition and to abide by commonrules for fair competition in telecommunications102 countries pledged to open to varying degrees theirbanking, securities, and insurance sectors to foreigncompetitionThe agreement covers not just cross-border trade, butalso foreign direct investment
    37. 37. 6-37WTO: Experience To DateThe 1999 meeting of the WTO in Seattle was importantnot only for what happened between the member countries,but also for what occurred outside the buildingInside, members failed to agree on how to work towardthe reduction of barriers to cross-border trade in agriculturalproducts and cross-border trade and investment in servicesOutside, the WTO became a magnet for various groupsprotesting free trade
    38. 38. 6-38The Future Of The WTO: UnresolvedIssues And The Doha RoundThe current agenda of the WTO focuses on:the rise of anti-dumping policiesthe high level of protectionism in agriculturethe lack of strong protection for intellectual property rightsin many nationscontinued high tariffs on nonagricultural goods andservices in many nations
    39. 39. 6-39The Future Of The WTO: UnresolvedIssues And The Doha RoundThe WTO is encouraging members to strengthen theregulations governing the imposition of antidumping dutiesThe WTO is concerned with the high level of tariffs andsubsidies in the agricultural sector of many economiesTRIPS obliges WTO members to grant and enforcepatents lasting at least 20 years and copyrights lasting 50yearsThe WTO would like to bring down tariff rates onnonagricultural goods and services, and reduce the scopefor the selective use of high tariff rates
    40. 40. 6-40The Future Of The WTO: UnresolvedIssues And The Doha RoundThe WTO launched a new round of talks at Doha, Qatarin 2001The agenda includes:cutting tariffs on industrial goods and servicesphasing out subsidies to agricultural producersreducing barriers to cross-border investmentlimiting the use of anti-dumping laws
    41. 41. 6-41Classroom Performance SystemAll of the following except _____ are key issues on thetable at the Doha Round.a) Anti-dumping policiesb) Protectionism in agriculturec) Intellectual property rightsd) Infant industry protection
    42. 42. 6-42Implications For ManagersManagers need to consider how trade barriers affect thestrategy of the firm and the implications of governmentpolicy on the firm
    43. 43. 6-43Trade Barriers And Firm StrategyTrade barriers raise the cost of exporting products to acountryVoluntary export restraints (VERs) may limit a firm’sability to serve a country from locations outside that countryTo conform to local content requirements, a firm mayhave to locate more production activities in a given marketthan it would otherwiseAll of these can raise the firm’s costs above the level thatcould be achieved in a world without trade barriers
    44. 44. 6-44Policy ImplicationsInternational firms have an incentive to lobby for freetrade, and keep protectionist pressures from causing themto have to change strategies While there may be short run benefits to havinggovernmental protection in some situations, in the long runthese can backfire and other governments can retaliate

    ×