BUS 305

1. Chapter 06
Political
and Trade Forces
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 6-2
Learning Objectives
• LO1 Discuss expropriation and privatization.
• LO2 Explain the changing sources and reasons for
terrorism and the methods and growing power of
terrorists.
• LO3 Evaluate the importance to business of
government stability and policy continuity.
• LO4 Explain country risk assessment by
international business.
• LO5 Discuss types of trade restrictions.
• LO1 Discuss expropriation and privatization.
• LO2 Explain the changing sources and reasons for
terrorism and the methods and growing power of
terrorists.
• LO3 Evaluate the importance to business of
government stability and policy continuity.
• LO4 Explain country risk assessment by
international business.
• LO5 Discuss types of trade restrictions.

3. 6-3
Why Firms are Nationalized
1. Extract money: government suspects hidden profits
2. Profitability: government seeks to increase firm’s
efficiency and profits
3. Ideology
4. Job preservation: government saves jobs by saving
dying industries
5. Control follows money: subsidized firms often
targets of nationalization
6. Happenstance: nationalization of German firms
after World War II
1. Extract money: government suspects hidden profits
2. Profitability: government seeks to increase firm’s
efficiency and profits
3. Ideology
4. Job preservation: government saves jobs by saving
dying industries
5. Control follows money: subsidized firms often
targets of nationalization
6. Happenstance: nationalization of German firms
after World War II

4. 6-4
Unfair Competition?
Government-owned companies can:
1. cut prices unfairly – don’t have to make profits
2. access cheaper financing
3. access government contracts
4. receive export assistance
5. hold down wages with government assistance
6. receive government subsidies
Government-owned companies can:
1. cut prices unfairly – don’t have to make profits
2. access cheaper financing
3. access government contracts
4. receive export assistance
5. hold down wages with government assistance
6. receive government subsidies

5. 6-5
Privatization
• Transfer of public sector assets to the
private sector
• Transfer of management of state
activities through contracts & leases
• Contracting of activities previously
conducted by the state
• Transfer of public sector assets to the
private sector
• Transfer of management of state
activities through contracts & leases
• Contracting of activities previously
conducted by the state

6. 6-6
Privatization Anywhere
• Need not involve
ownership transfer
from government to
private sector
• Activities can be
contracted out
• Need not involve
ownership transfer
from government to
private sector
• Activities can be
contracted out

7. 6-7
Government Protection
• Historical function of
government is to
protect economic
activities within its
geographic areas of
control:
– Attacks, destruction, or
robbery by bandits,
foreign invaders, or
terrorists
• Aftermath of war
shows influence of
politics on business:
– Solidify Political Alliances
– Solidify Military Alliances
– Gratitude for Support
– Appeasement

8. 6-8
Terrorism
• Unlawful acts of
violence for a variety of
reasons:
– Ransom
– Overthrow government
– Release of imprisoned
colleagues
– Revenge
– Punish religious
nonbelievers
• Unlawful acts of
violence for a variety of
reasons:
– Ransom
– Overthrow government
– Release of imprisoned
colleagues
– Revenge
– Punish religious
nonbelievers
• Situations:
– Kidnapping for ransom
– Paying ransom becomes
counterproductive
– Countermeasures by
industry
– Chemical and biological
terrorism
• Situations:
– Kidnapping for ransom
– Paying ransom becomes
counterproductive
– Countermeasures by
industry
– Chemical and biological
terrorism

9. 6-9
Government Stability
• Stability:
– Characteristic of a government’s ability to
maintain itself in power and keep fiscal,
monetary, and political policies predictable
• Stability:
– Characteristic of a government’s ability to
maintain itself in power and keep fiscal,
monetary, and political policies predictable
• Instability:
– Characteristic of a government’s inability to
maintain power, becomes unpredictable
• Instability:
– Characteristic of a government’s inability to
maintain power, becomes unpredictable

10. 6-10
International Companies (ICs)

11. 6-11
Country Risk Assessment (CRA)
• Evaluation carried out by bank or
business that assesses a country’s
economic situation and policies to
determine how much risk exists of losing
an investment.
• Evaluation carried out by bank or
business that assesses a country’s
economic situation and policies to
determine how much risk exists of losing
an investment.

12. 6-12
Types of Country Risks
• Political
– Wars
– Revolutions
– Coups
– New
governments
hostile to
private or
foreign-owned
business
• Political
– Wars
– Revolutions
– Coups
– New
governments
hostile to
private or
foreign-owned
business
• Economic/
Financial
– BOP Deficits
– High
Inflation
– Low Labor
Productivity
– Militant
Labor
Unions
• Economic/
Financial
– BOP Deficits
– High
Inflation
– Low Labor
Productivity
– Militant
Labor
Unions
• Legal-
related
– Taxes
– Currency
Conversion
– Tariffs
– Quotas
– Labor
Permits
– Fair Trial
• Legal-
related
– Taxes
– Currency
Conversion
– Tariffs
– Quotas
– Labor
Permits
– Fair Trial

13. 6-13
Country Risk Assessment

14. 6-14
Trade Restrictions
• Arguments for:
– National defense
– Sanctions to punish offending nations
– Protection for infant (or dying) industry
– Protection for domestic jobs from cheap foreign
labor
– Scientific tariff or fair competition
– Retaliation
– Dumping
– Subsidies
• Arguments for:
– National defense
– Sanctions to punish offending nations
– Protection for infant (or dying) industry
– Protection for domestic jobs from cheap foreign
labor
– Scientific tariff or fair competition
– Retaliation
– Dumping
– Subsidies

15. 6-15
Arguments For
Trade Restrictions
• National Defense
– Industries vital to
national security
must be kept
operating even
though not
competitive with
foreign suppliers
• National Defense
– Industries vital to
national security
must be kept
operating even
though not
competitive with
foreign suppliers
• Sanctions to Punish
Offending Nations
– Inflict economic
damage to punish or
encourage desired
change
• Sanctions to Punish
Offending Nations
– Inflict economic
damage to punish or
encourage desired
change

16. 6-16
Arguments For
Trade Restrictions
• Protect Infant (or
Dying) Industry
– Protect new industries till
they gain comparative
advantage
– Protect new industries
against lower cost imports
– Protect smooth transition
of dying industry’s
resources to other sectors
• Protect Infant (or
Dying) Industry
– Protect new industries till
they gain comparative
advantage
– Protect new industries
against lower cost imports
– Protect smooth transition
of dying industry’s
resources to other sectors
• Protect Domestic Jobs
from Cheap Foreign
Labor
– Low labor costs bring in
lower priced goods and
eliminate home-country
jobs
• Fallacies:
– Wages not total labor or
production cost
– Productivity rates greater
in developed countries
• Protect Domestic Jobs
from Cheap Foreign
Labor
– Low labor costs bring in
lower priced goods and
eliminate home-country
jobs
• Fallacies:
– Wages not total labor or
production cost
– Productivity rates greater
in developed countries

17. 6-17
Arguments For
Trade Restrictions
• Scientific Tariff/Fair
Competition
– Import duty to bring cost
of imports up to cost of
domestic goods
• Scientific Tariff/Fair
Competition
– Import duty to bring cost
of imports up to cost of
domestic goods
• Retaliation
– Industries facing
restrictions ask their
governments to
retaliate with similar
restrictions
• Retaliation
– Industries facing
restrictions ask their
governments to
retaliate with similar
restrictions

18. 6-18
Dumping
• WTO Definition:
– Selling a product
abroad for less than:
• the average cost of
production in the
exporting nation, or
• the market price in
the exporting nation,
or
• the price to third
countries
• WTO Definition:
– Selling a product
abroad for less than:
• the average cost of
production in the
exporting nation, or
• the market price in
the exporting nation,
or
• the price to third
countries
• Predatory Dumping:
– Lowering export price
to force import
country’s producer
out of business, then
expecting to raise
price
• Predatory Dumping:
– Lowering export price
to force import
country’s producer
out of business, then
expecting to raise
price

19. 6-19
New Types of Dumping
• Social Dumping
– Unfair competition from lower labor costs and poor working
conditions
• Environmental Dumping
– Unfair competition caused by lax environmental standards
• Financial Services Dumping
– Unfair competition caused by low requirements for bank capital-
asset ratios
• Cultural Dumping
– Unfair competition caused by cultural barriers aiding local firms
• Tax Dumping
– Unfair competition cause by different corporate tax rates or special
breaks
• Social Dumping
– Unfair competition from lower labor costs and poor working
conditions
• Environmental Dumping
– Unfair competition caused by lax environmental standards
• Financial Services Dumping
– Unfair competition caused by low requirements for bank capital-
asset ratios
• Cultural Dumping
– Unfair competition caused by cultural barriers aiding local firms
• Tax Dumping
– Unfair competition cause by different corporate tax rates or special
breaks

20. 6-20
Arguments For
Trade Restrictions
• Subsidies
– Financial contributions to encourage
exports or protect against imports:
•Cash payments
•Ownership Participation
•Low cost loans
•Preferential taxes
• Subsidies
– Financial contributions to encourage
exports or protect against imports:
•Cash payments
•Ownership Participation
•Low cost loans
•Preferential taxes

21. 6-21
Tariff Barriers
• Taxes on imports to raise their price to reduce
competition for local producers or to stimulate local
production.
• Taxes on imports to raise their price to reduce
competition for local producers or to stimulate local
production.
• Official Prices:
– guarantees that a minimum import duty is paid
• Variable Levy:
– import duty set at the difference world-market prices and
government-supported local prices
• Lower Duty for More Local Input
– Lower duty on goods requiring local assembly, repackaging, etc.
• Official Prices:
– guarantees that a minimum import duty is paid
• Variable Levy:
– import duty set at the difference world-market prices and
government-supported local prices
• Lower Duty for More Local Input
– Lower duty on goods requiring local assembly, repackaging, etc.

22. 6-22
Nontariff Barriers (NTBs)
• All forms of
discrimination
against imports
other than import
duties
• All forms of
discrimination
against imports
other than import
duties
• Quotas:
– Absolute quota
– Global quota
– Allocated quota
• Voluntary Export
Restraints (VERs)
• Orderly Marketing
Arrangements
• Nonquantitative
Nontariff Barriers
• Quotas:
– Absolute quota
– Global quota
– Allocated quota
• Voluntary Export
Restraints (VERs)
• Orderly Marketing
Arrangements
• Nonquantitative
Nontariff Barriers

23. 6-23
Quantitative NTBs
• Absolute Quota
– When specific quantity of
imports reached, imports
are prohibited for rest of
period (usually 1 year)
• Global Quota
– Total import quantity is
fixed regardless of source
• Allocated Quota
– Importing government
assigns quantities to
specific countries
• Absolute Quota
– When specific quantity of
imports reached, imports
are prohibited for rest of
period (usually 1 year)
• Global Quota
– Total import quantity is
fixed regardless of source
• Allocated Quota
– Importing government
assigns quantities to
specific countries
• Voluntary Export
Restraints (VERs)
– Export quotas imposed by
the exporting nation
• Orderly Marketing
Arrangements
– Formal agreements
between importing &
exporting countries
stipulating quotas for
each country
• Voluntary Export
Restraints (VERs)
– Export quotas imposed by
the exporting nation
• Orderly Marketing
Arrangements
– Formal agreements
between importing &
exporting countries
stipulating quotas for
each country

24. 6-24
Nonquantitative Nontariff Barriers
• Direct government participation in trade:
– Government subsidy – to protect and support targeted
industries (agriculture)
– Government procurement policies – restrict purchases of
imported goods by government agencies
– Local content – domestic manufacturing using local materials
& labor (Buy America Act)
• Customs and other administrative procedures:
– Government policies/procedures that favor exports or
discriminate against imports
• Standards:
– Protect a nation’s citizens’ health and safety, but can be
complex and discriminatory
• Direct government participation in trade:
– Government subsidy – to protect and support targeted
industries (agriculture)
– Government procurement policies – restrict purchases of
imported goods by government agencies
– Local content – domestic manufacturing using local materials
& labor (Buy America Act)
• Customs and other administrative procedures:
– Government policies/procedures that favor exports or
discriminate against imports
• Standards:
– Protect a nation’s citizens’ health and safety, but can be
complex and discriminatory

25. 6-25
Costs of Barriers to Trade

26. 6-26
GLOBAL gauntlet
• Chocolate, Coffee,
and Fair Trade
– When you savor
these, do you
consume a product
made with child
labor?
• Chocolate, Coffee,
and Fair Trade
– When you savor
these, do you
consume a product
made with child
labor?
• What is the extent of
world-wide exploitation
of child labor?
• How do Fair-Trade
Practices factor in to
this situation?
• Should a country’s labor
practices be a relevant
management
consideration in
international trade?
• What is the extent of
world-wide exploitation
of child labor?
• How do Fair-Trade
Practices factor in to
this situation?
• Should a country’s labor
practices be a relevant
management
consideration in
international trade?