This document provides an overview of chapters 5-7 from an international business textbook. Chapter 5 discusses ethics in international business, including issues related to employment practices, human rights, environmental regulations, corruption, and moral obligations of multinational companies. It also examines philosophical approaches to ethics like utilitarianism and deontology. Chapter 6 covers international trade theory, including theories of absolute advantage and comparative advantage. Chapter 7 discusses foreign market entry strategies such as exporting, licensing, and foreign direct investment.

1. MBA 531
Business in Today’s Global
Environment
Overview of Week 2 Textbook Readings:
Chapters 5 – 7

2. Chapter 5
Ethics in
International Business

3. 5-3
What Is Ethics?
 Ethics - accepted principles of right or wrong that
govern
 the conduct of a person
 the members of a profession
 the actions of an organization
 Business ethics - accepted principles of right or
wrong governing the conduct of business people
 Ethical strategy - a strategy, or course of action,
that does not violate these accepted principles

4. 5-4
Which Ethical Issues Are Most
Relevant To International Firms?
 The most common ethical issues in
business involve
1. employment practices
2. human rights
3. environmental pollution
4. corruption
5. moral obligations of multinational
companies

5. 5-5
How Are Ethics Relevant
To Employment Practices?
Suppose work conditions in a host nation
are clearly inferior to those in the
multinational’s home nation
Which standards should apply?
 home country standards
 host country standards
 something in between

6. 5-6
How Are Ethics Relevant
To Employment Practices?
Firms should
 establish minimal acceptable standards that
safeguard the basic rights and dignity of
employees
 audit foreign subsidiaries and subcontractors
regularly to ensure they are meeting the
standards
 take corrective action as necessary

7. 5-7
How Are Ethics Relevant
To Human Rights?
Basic human rights are taken for granted
in developed countries
 freedom of association
 freedom of speech
 freedom of assembly
 freedom of movement
Question: What are the responsibilities of
firms in countries where basic human
rights are not respected?

8. 5-8
How Are Ethics Relevant
To Human Rights?
 Question: Is it ethical for companies to do
business with countries with repressive
regimes?
 Myanmar
 Nigeria
 Question: Does multinational investment actually
help bring change to these countries and
ultimately improve the rights of citizens?
 China

9. 5-9
How Are Ethics Relevant
To Environmental Regulations?
 Some parts of the environment are a public good that no
one owns, but anyone can despoil
 What happens when environmental regulations in host
nations are far inferior to those in the home nation?
 Is it permissible for multinationals to pollute in
developing countries simply because there are no
regulations against it?
 legal versus ethical behavior
 The tragedy of the commons occurs when a resource
held in common by all, but owned by no one, is overused
by individuals, resulting in its degradation

10. 5-10
How Are Ethics Relevant
To Corruption?
 The U.S. Foreign Corrupt Practices Act outlawed
the practice of paying bribes to foreign
government officials in order to gain business
 amended to allow for facilitating payments
 The Convention on Combating Bribery of
Foreign Public Officials in International Business
Transactions was adopted by the Organization
for Economic Cooperation and Development
(OECD)
 obliges member states to make the bribery of
foreign public officials a criminal offense

11. 5-11
How Are Ethics Relevant
To Corruption?
But, is it permissible for multinationals to
pay government officials facilitating
payments if doing so creates local income
and jobs?
 is it ok to do a little evil in order to do a greater
good?
 does grease money actually improve
efficiency and help growth?

12. 5-12
How Are Ethics Relevant
To Moral Obligations?
Social responsibility refers to the idea that
managers should consider the social
consequences of economic actions when
making business decisions
 there should be a presumption in favor of
decisions that have both good economic and
good social consequences
 it is the right way for a business to behave

13. 5-13
How Are Ethics Relevant
To Moral Obligations?
Advocates argue that businesses need to
recognize their noblesse oblige -
honorable and benevolent behavior that is
the responsibility of successful companies
 give something back to the societies that have
made their success possible
But, are multinationals morally required to
use their power to enhance local welfare?

14. 5-14
What Are Ethical Dilemmas?
 Ethical dilemmas - situations in which none of
the available alternatives seems ethically
acceptable
 real-world decisions are complex, difficult to frame,
and involve consequences that are difficult to quantify
 the ethical obligations of an MNE toward employment
conditions, human rights, corruption, environmental
pollution, and the use of power are not always clear
cut
 the right course of action is not always clear

15. 5-15
Why Do Managers
Behave Unethically?
 Several factors contribute to unethical behavior
including
1. Personal ethics - the generally accepted
principles of right and wrong governing the
conduct of individuals
 expatriates may face pressure to violate their
personal ethics because they are away from their
ordinary social context and supporting culture
 managers fail to question whether a decision or
action is ethical, and instead rely on economic
analysis when making decisions

16. 5-16
Why Do Managers
Behave Unethically?
2. Decision-making processes - the values and
norms that are shared among employees of an
organization
 organization culture that does not
emphasize business culture encourages
unethical behavior
2. Organization culture - organization culture can
legitimize unethical behavior or reinforce the
need for ethical behavior
3. Unrealistic performance expectations -
encourage managers to cut corners or act in
an unethical manner

17. 5-17
Why Do Managers
Behave Unethically?
5. Leadership - helps establish the culture of an
organization, and set the examples that others
follow
 when leaders act unethically, subordinates may act
unethically, too
5. Societal culture – firms headquartered in
cultures where individualism and uncertainty
avoidance are strong are more likely to stress
ethical behavior than firms headquartered in
cultures where masculinity and power distance
rank high

18. 5-18
Why Do Managers
Behave Unethically?
Determinants of Ethical Behavior

19. 5-19
What Are The Philosophical
Approaches To Ethics?
There are several different approaches to
business ethics
Straw men approaches deny the value of
business ethics or apply the concept in an
unsatisfactory way
Others approaches are favored by moral
philosophers and are the basis for current
models of ethical behavior

20. 5-20
What Are The Straw Men
Approaches To Business Ethics?
 There are four common straw men approaches
1. Friedman doctrine - the only social responsibility
of business is to increase profits, so long as the
company stays within the rules of law
2. Cultural relativism - ethics are culturally
determined and firms should adopt the ethics of
the cultures in which they operate
 “when in Rome, do as the Romans do”

21. 5-21
What Are The Straw Men
Approaches To Business Ethics?
3. Righteous moralist - a multinational’s home
country standards of ethics should be followed
in foreign countries
4. Naïve immoralist - if a manager of a
multinational sees that firms from other nations
are not following ethical norms in a host nation,
that manager should not either
 All approaches offer inappropriate guidelines
for ethical decision making

22. 5-22
What Are Utilitarian And
Kantian Approaches To Ethics?
 Utilitarian ethics - (David Hume, Jeremy
Bentham, John Stuart Mill) - the moral worth of
actions or practices is determined by their
consequences
 actions are desirable if they lead to the best possible
balance of good consequences over bad
consequences
 but, it is difficult to measure the benefits, costs, and
risks of an action
 the approach fails to consider justice

23. 5-23
What Are Utilitarian And
Kantian Approaches To Ethics?
Kantian ethics - (Immanuel Kant) - people
should be treated as ends and never
purely as means to the ends of others
 people have dignity and need to be respected
 people are not machines

24. 5-24
What Are Rights Theories?
 Rights theories - human beings have
fundamental rights and privileges which
transcend national boundaries and cultures
 establish a minimum level of morally acceptable
behavior
 the Universal Declaration of Human Rights - basic
principles that should always be adhered to
irrespective of the culture in which one is doing
business
 Moral theorists argue that fundamental human
rights form the basis for the moral compass that
managers should navigate by when making
decisions which have an ethical component

25. 5-25
What Are Justice Theories?
 Justice theories focus on the attainment of a just
distribution of economic goods and services
 a just distribution is one that is considered fair and
equitable
 John Rawls argued that all economic goods and
services should be distributed equally except
when an unequal distribution would work to
everyone’s advantage
 impartiality is guaranteed by the veil of ignorance -
everyone is imagined to be ignorant of all his or her
particular characteristics

26. 5-26
How Can Managers
Make Ethical Decisions?
1. Hire and promote people with a well-
grounded sense of personal ethics
 refrain from promoting individuals who have
acted unethically
 try to hire only people with strong ethics
 prospective employees should find out as
much as they can about the ethical climate in
an organization prior to taking a position

27. 5-27
How Can Managers
Make Ethical Decisions?
2. Build an organizational culture that places a
high value on ethical behavior
 articulate values that place a strong
emphasis on ethical behavior
 emphasize the importance of a code of
ethics - formal statement of the ethical
priorities a business adheres to
 implement a system of incentives and
rewards that recognize people who engage
in ethical behavior and sanction those who
do not

28. 5-28
How Can Managers
Make Ethical Decisions?
3. Make sure that leaders within the
business articulate the rhetoric of ethical
behavior and act in a manner that is
consistent with that rhetoric
 give life and meaning to words
 make sure that leaders emphasize the
importance of ethics verbally and through
their actions

29. 5-29
How Can Managers
Make Ethical Decisions?
4. Put decision-making processes in place that
require people to consider the ethical
dimensions of business decisions
 Ask whether
 decisions fall within the accepted values of
standards that typically apply in the
organizational environment
 decisions can be communicated to all
stakeholders affected by it
 if colleagues would approve of decisions

30. 5-30
How Can Managers
Make Ethical Decisions?
 Managers can also use a five-step process to
think through ethical problems:
Step1: Identify which stakeholders (the individuals
or groups who have an interest,
stake, or claim in the actions and overall
performance of a company) a
decision would affect and in what
ways
 internal stakeholders are people who work for or who own
the business such as employees, the board of directors,
and stockholders
 external stakeholders are the individuals or groups who
have some claim on a firm such as customers, suppliers,
and unions

31. 5-31
How Can Managers
Make Ethical Decisions?
Step 2: Determine whether a proposed decision
would violate the fundamental rights of any
stakeholders
Step 3: Establish moral intent - place moral
concerns ahead of other concerns in
cases where either the fundamental rights
of stakeholders or key moral principles
have been violated

32. 5-32
How Can Managers
Make Ethical Decisions?
Step 4: Engage in ethical behavior
Step 5: Audit decisions and review them to
make sure that they are consistent
with ethical principles
 this step is often overlooked even
though it is critical to finding out
whether a decision process is working

33. 5-33
What Is An Ethics Officer?
Many firms now have ethics officers to
ensure
 all employees are trained in ethics
 ethics is considered in the decision-making
process
 the company’s code of conduct is followed

34. 5-34
How Can Managers
Make Ethical Decisions?
5. Develop moral courage
 enables managers to walk away from a decision
that is profitable, but unethical
 gives an employee the strength to say no to a
superior who instructs her to pursue actions that are
unethical
 gives employees the integrity to go public to the
media and blow the whistle on persistent unethical
behavior in a company

35. 5-35
How Can Managers
Make Ethical Decisions?
In the end, there are clearly things that an
international business should do, and
there are things that an international
business should not do
But, it is important to remember that not all
ethical dilemmas have a clean and
obvious solution
 in these situations, firms must rely on the
decision-making ability of its managers

36. Chapter 6
International
Trade Theory

37. 5-37
Why Is Free Trade Beneficial?
Free trade - a situation where a
government does not attempt to influence
through quotas or duties what its citizens
can buy from another country or what they
can produce and sell to another country
Trade theory shows why it is beneficial for
a country to engage in international trade
even for products it is able to produce for
itself

38. 5-38
Why Is Free Trade Beneficial?
International trade allows a country
 to specialize in the manufacture and export of
products and services that it can produce
efficiently
 import products and services that can be
produced more efficiently in other countries
 limits on imports may be beneficial to
producers, but not beneficial for consumers

39. 5-39
Why Do Certain
Patterns Of Trade Exist?
Some patterns of trade are fairly easy to
explain
 it is obvious why Saudi Arabia exports oil,
Ghana exports cocoa, and Brazil exports
coffee
But, why does Switzerland export
chemicals, pharmaceuticals, watches, and
jewelry?
Why does Japan export automobiles,
consumer electronics, and machine tools?

40. 5-40
What Role Does
Government Have In Trade?
 The mercantilist philosophy makes a crude case
for government involvement in promoting
exports and limiting imports
 Smith, Ricardo, and Heckscher-Ohlin promote
unrestricted free trade
 New trade theory and Porter’s theory of national
competitive advantage justify limited and
selective government intervention to support the
development of certain export-oriented
industries

41. 5-41
What Is Mercantilism?
Mercantilism (mid-16th
century) suggests
that it is in a country’s best interest to
maintain a trade surplus—to export more
than it imports
 advocates government intervention to achieve
a surplus in the balance of trade
Mercantilism views trade as a zero-sum
game—one in which a gain by one country
results in a loss by another

42. 5-42
What Is Smith’s Theory
Of Absolute Advantage?
Adam Smith (1776) argued that a country
has an absolute advantage in the
production of a product when it is more
efficient than any other country in
producing it
 countries should specialize in the production
of goods for which they have an absolute
advantage and then trade these goods for
goods produced by other countries

43. 5-43
How Does The Theory
Of Absolute Advantage Work?
 Assume that two countries, Ghana and South
Korea, both have 200 units of resources that
could either be used to produce rice or cocoa
 In Ghana, it takes 10 units of resources to
produce one ton of cocoa and 20 units of
resources to produce one ton of rice
 Ghana could produce 20 tons of cocoa and no rice,
10 tons of rice and no cocoa, or some combination of
rice and cocoa between the two extremes

44. 5-44
How Does The Theory
Of Absolute Advantage Work?
In South Korea it takes 40 units of
resources to produce one ton of cocoa
and 10 resources to produce one ton of
rice
 South Korea could produce 5 tons of cocoa
and no rice, 20 tons of rice and no cocoa, or
some combination in between

45. 5-45
How Does The Theory
Of Absolute Advantage Work?
Without trade
 Ghana would produce 10 tons of cocoa and 5
tons of rice
 South Korea would produce 10 tons of rice
and 2.5 tons of cocoa
With specialization and trade
 Ghana would produce 20 tons of cocoa
 South Korea would produce 20 tons of rice
 Ghana could trade 6 tons of cocoa to South
Korea for 6 tons of rice

46. 5-46
How Does The Theory
Of Absolute Advantage Work?
After trade
 Ghana would have 14 tons of cocoa left, and
6 tons of rice
 South Korea would have 14 tons of rice left
and 6 tons of cocoa
If each country specializes in the
production of the good in which it has an
absolute advantage and trades for the
other, both countries gain
 trade is a positive sum game

47. 5-47
How Does The Theory
Of Absolute Advantage Work?
Absolute Advantage and the Gains from Trade

48. 5-48
What Is Ricardo’s Theory
Of Comparative Advantage?
 David Ricardo asked what happens when one
country has an absolute advantage in the
production of all goods
 The theory of comparative advantage (1817)—
countries should specialize in the production of
those goods they produce most efficiently and
buy goods that they produce less efficiently from
other countries
 even if this means buying goods from other
countries that they could produce more
efficiently at home

49. 5-49
How Does The Theory Of
Comparative Advantage Work?
Assume Ghana is more efficient in the
production of both cocoa and rice
In Ghana, it takes 10 resources to
produce one ton of cocoa, and 13 1/2
resources to produce one ton of rice
So, Ghana could produce 20 tons of
cocoa and no rice, 15 tons of rice and no
cocoa, or some combination of the two

50. 5-50
How Does The Theory Of
Comparative Advantage Work?
In South Korea, it takes 40 resources to
produce one ton of cocoa and 20
resources to produce one ton of rice
So, South Korea could produce 5 tons of
cocoa and no rice, 10 tons of rice and no
cocoa, or some combination of the two

51. 5-51
How Does The Theory Of
Comparative Advantage Work?
 With trade
 Ghana could export 4 tons of cocoa to South
Korea in exchange for 4 tons of rice
 Ghana will still have 11 tons of cocoa, and 4
additional tons of rice
 South Korea still has 6 tons of rice and 4 tons
of cocoa
 if each country specializes in the production of
the good in which it has a comparative
advantage and trades for the other, both
countries gain

52. 5-52
How Does The Theory Of
Comparative Advantage Work?
Comparative advantage theory provides a
strong rationale for encouraging free trade
 total output is higher
 both countries benefit
Trade is a positive sum game

53. 5-53
How Does The Theory Of
Comparative Advantage Work?
Comparative Advantage and the Gains from Trade

54. 5-54
Is Unrestricted Free Trade
Always Beneficial?
 Unrestricted free trade is beneficial, but the gains may
not be as great as the simple model of comparative
advantage would suggest
 immobile resources
 diminishing returns
 dynamic effects and economic growth
 the Samuelson critique
 But, opening a country to trade could increase
 a country's stock of resources as increased supplies become
available from abroad
 the efficiency of resource utilization and so free up resources for
other uses
 economic growth

55. 5-55
Could A Rich Country Be
Worse Off With Free Trade?
 Paul Samuelson - the dynamic gains from trade
may not always be beneficial
 free trade may ultimately result in lower
wages in the rich country
 The ability to offshore services jobs that were
traditionally not internationally mobile may have
the effect of a mass inward migration into the
United States, where wages would then fall
 but, protectionist measures could create a
more harmful situation than free trade

56. 5-56
What Is The
Heckscher-Ohlin Theory?
Eli Heckscher (1919) and Bertil Ohlin
(1933) - comparative advantage arises
from differences in national factor
endowments
 the extent to which a country is endowed with
resources like land, labor, and capital
The more abundant a factor, the lower its
cost

57. 5-57
What Is The
Heckscher-Ohlin Theory?
The pattern of trade is determined by
factor endowments
 Heckscher and Ohlin predict that countries
will
 export goods that make intensive use of
locally abundant factors
 import goods that make intensive use of
factors that are locally scarce

58. 5-58
Does The Heckscher-Ohlin
Theory Hold?
 Wassily Leontief (1953) theorized that since the
U.S. was relatively abundant in capital compared
to other nations, the U.S. would be an exporter
of capital intensive goods and an importer of
labor-intensive goods.
 However, he found that U.S. exports were
less capital intensive than U.S. imports
 Since this result was at variance with the
predictions of trade theory, it became known as
the Leontief Paradox.

59. 5-59
What Is The
Product Life-Cycle Theory?
The product life-cycle theory - as products
mature both the location of sales and the
optimal production location will change
affecting the flow and direction of trade
 proposed by Ray Vernon in the mid-1960s
 At this time most of the world’s new products were
developed by U.S. firms and sold first in the U.S.

60. 5-60
What Is The
Product Life-Cycle Theory?
 According to the product life-cycle theory
 the size and wealth of the U.S. market gave U.S.
firms a strong incentive to develop new products
 initially, the product would be produced and sold in
the U.S.
 as demand grew in other developed countries, U.S.
firms would begin to export
 demand for the new product would grow in other
advanced countries over time making it worthwhile for
foreign producers to begin producing for their home
markets

61. 5-61
What Is The
Product Life-Cycle Theory?
U.S. firms might set up production facilities
in advanced countries with growing
demand, limiting exports from the U.S.
As the market in the U.S. and other
advanced nations matured, the product
would become more standardized, and
price would be the main competitive
weapon

62. 5-62
What Is The
Product Life-Cycle Theory?
 Producers based in advanced countries where
labor costs were lower than the United States
might now be able to export to the United States
 If cost pressures were intense, developing
countries would acquire a production advantage
over advanced countries
 Production became concentrated in lower-cost
foreign locations, and the U.S. became an
importer of the product

63. 5-63
What Is The
Product Life-Cycle Theory?
The Product Life-Cycle Theory

64. 5-64
Does The Product Life-
Cycle Theory Hold?
 The product life-cycle theory accurately explains
what has happened for products like
photocopiers and a number of other high
technology products developed in the United
States in the 1960s and 1970s
 mature industries leave the U.S. for low cost
assembly locations

65. 5-65
Does The Product Life
Cycle Theory Hold?
But, the globalization and integration of
the world economy has made this theory
less valid today
 the theory is ethnocentric
 production today is dispersed globally
 products today are introduced in multiple
markets simultaneously

66. 5-66
What Is New Trade Theory?
 New trade theory suggests that the ability of
firms to gain economies of scale (unit cost
reductions associated with a large scale of
output) can have important implications for
international trade
 Countries may specialize in the production and
export of particular products because in certain
industries, the world market can only support a
limited number of firms
 new trade theory emerged in the 1980s
 Paul Krugman won the Nobel prize for his
work in 2008

67. 5-67
What Is New Trade Theory?
1. Through its impact on economies of scale, trade
can increase the variety of goods available to
consumers and decrease the average cost of
those goods
 without trade, nations might not be able to produce
those products where economies of scale are
important
 with trade, markets are large enough to support the
production necessary to achieve economies of scale
 so, trade is mutually beneficial because it allows for
the specialization of production, the realization of
scale economies, and the production of a greater
variety of products at lower prices

68. 5-68
What Is New Trade Theory?
2. In those industries when output required to
attain economies of scale represents a
significant proportion of total world demand,
the global market may only be able to support
a small number of enterprises
 first-mover advantages - the economic and
strategic advantages that accrue to early
entrants into an industry
 economies of scale
 first movers can gain a scale based cost
advantage that later entrants find difficult to
match

69. 5-69
What Are The Implications Of
New Trade Theory For Nations?
 Nations may benefit from trade even when they
do not differ in resource endowments or
technology
 a country may dominate in the export of a good
simply because it was lucky enough to have one or
more firms among the first to produce that good
 Governments should consider strategic trade
policies that nurture and protect firms and
industries where first-mover advantages and
economies of scale are important

70. 5-70
What Is Porter’s Diamond Of
Competitive Advantage?
 Michael Porter (1990) tried to explain why a
nation achieves international success in a
particular industry
 identified four attributes that promote or
impede the creation of competitive
advantage
1. Factor endowments - a nation’s position in
factors of production necessary to compete in
a given industry
 can lead to competitive advantage
 can be either basic (natural resources, climate,
location) or advanced (skilled labor, infrastructure,
technological know-how)

71. 5-71
What Is Porter’s Diamond Of
Competitive Advantage?
2. Demand conditions - the nature of home
demand for the industry’s product or service
 influences the development of capabilities
 sophisticated and demanding customers pressure
firms to be competitive
3. Relating and supporting industries - the
presence or absence of supplier industries and
related industries that are internationally
competitive
 can spill over and contribute to other industries
 successful industries tend to be grouped in clusters
in countries

72. 5-72
What Is Porter’s Diamond Of
Competitive Advantage?
4. Firm strategy, structure, and rivalry - the
conditions governing how companies are
created, organized, and managed, and the
nature of domestic rivalry
 different management ideologies affect the
development of national competitive advantage
 vigorous domestic rivalry creates pressures to
innovate, to improve quality, to reduce costs, and to
invest in upgrading advanced features

73. 5-73
What Is Porter’s Diamond Of
Competitive Advantage?
Determinants of National Competitive Advantage: Porter’s Diamond

74. 5-74
Does Porter’s Theory Hold?
 Government policy can
 affect demand through product standards
 influence rivalry through regulation and antitrust laws
 impact the availability of highly educated workers and
advanced transportation infrastructure.
 The four attributes, government policy, and
chance work as a reinforcing system,
complementing each other and in combination
creating the conditions appropriate for
competitive advantage
 So far, Porter’s theory has not been sufficiently
tested to know how well it holds up

75. 5-75
What Are The Implications Of
Trade Theory For Managers?
1. Location implications - a firm should disperse its
various productive activities to those countries where
they can be performed most efficiently
 firms that do not may be at a competitive
disadvantage
1. First-mover implications - a first-mover advantage can
help a firm dominate global trade in that product
2. Policy implications - firms should work to encourage
governmental policies that support free trade
 want policies that have a favorable impact on each
component of the diamond

76. 5-76
What Is The
Balance Of Payments?
 A country’s balance-of-payments accounts
keep track of the payments to and receipts
from other countries for a particular time period
 double entry bookkeeping
 sum of the current account balance, the
capital account and the financial account
should be zero

77. 5-77
What Is The
Balance Of Payments?
 There are three main accounts
1. The current account records transactions of goods,
services, and income, receipts and payments
 current account deficit - a country imports more
than it exports
 current account surplus – a country exports more
than it imports
2. The capital account records one time changes in the
stock of assets
3. The financial account records transactions that involve
the purchase or sale of assets
 net change in U.S. assets owned abroad
 foreign owned assets in the U.S.

78. 5-78
What Is The
Balance Of Payments?
United States Balance-of-Payments Accounts, 2011

79. 5-79
Is A Current
Account Deficit Bad?
 Question: Does current account deficit in the
United States matter?
 A current account deficit implies a net debtor
 so, a persistent deficit could limit future
economic growth
 But, even though capital is flowing out of the
U.S. as payments to foreigners, much of it flows
back in as investments in assets
 Yet, suppose foreigners stop buying U.S. assets
and sell their dollars for another currency
 a dollar crisis could occur

80. Chapter 7
The Political Economy
of International Trade

81. 5-81
What Is The Political Reality
Of International Trade?
Free trade occurs when governments do
not attempt to restrict what citizens can
buy from another country or what they can
sell to another country
 many nations are nominally committed to free
trade, but intervene to protect the interests of
politically important groups

82. 5-82
How Do Governments
Intervene In Markets?
 Governments use various methods to
intervene in markets including
1. Tariffs - taxes levied on imports that
effectively raise the cost of imported
products relative to domestic products
 Specific tariffs - levied as a fixed charge
for each unit of a good imported
 Ad valorem tariffs - levied as a proportion
of the value of the imported good

83. 5-83
How Do Governments
Intervene In Markets?
 Tariffs
 increase government revenues
 force consumers to pay more for certain
imports
 are pro-producer and anti-consumer
 reduce the overall efficiency of the world
economy

84. 5-84
How Do Governments
Intervene In Markets?
2. Subsidies - government payments to
domestic producers
 Subsidies help domestic producers
 compete against low-cost foreign imports
 gain export markets
 Consumers typically absorb the costs of
subsidies

85. 5-85
How Do Governments
Intervene In Markets?
3. Import Quotas - restrict the quantity of some
good that may be imported into a country
 Tariff rate quotas - a hybrid of a quota and a
tariff where a lower tariff is applied to
imports within the quota than to those over
the quota
 A quota rent - the extra profit that producers
make when supply is artificially limited by an
import quota

86. 5-86
How Do Governments
Intervene In Markets?
4. Voluntary Export Restraints - quotas on
trade imposed by the exporting country,
typically at the request of the importing
country’s government
 Import quotas and voluntary export
restraints
 benefit domestic producers
 raise the prices of imported goods

87. 5-87
How Do Governments
Intervene In Markets?
5. Local Content Requirements - demand
that some specific fraction of a good be
produced domestically
 benefit domestic producers
 consumers face higher prices
6. Administrative Policies - bureaucratic
rules designed to make it difficult for
imports to enter a country
 polices hurt consumers by limiting choice

88. 5-88
How Do Governments
Intervene In Markets?
7. Antidumping Policies–also called
countervailing duties–punish foreign firms that
engage in dumping and protect domestic
producers from “unfair” foreign competition
 dumping - selling goods in a foreign market below
their costs of production, or selling goods in a
foreign market below their “fair” market value
 enables firms to unload excess production in
foreign markets
 may be predatory behavior - producers use
profits from their home markets to subsidize
prices in a foreign market to drive competitors
out of that market, and then later raise prices

89. 5-89
Why Do Governments
Intervene In Markets?
 There are two main arguments for government
intervention in the market
1. Political arguments - concerned with protecting
the interests of certain groups within a nation
(normally producers), often at the expense of
other groups (normally consumers)
2. Economic arguments - concerned with boosting
the overall wealth of a nation – benefits both
producers and consumers

90. 5-90
What Are The Political Arguments
For Government Intervention?
1. Protecting jobs - the most common
political reason for trade restrictions
 results from political pressures by unions or
industries that are "threatened" by more
efficient foreign producers, and have more
political clout than consumers

91. 5-91
What Are The Political Arguments
For Government Intervention?
2. Protecting industries deemed important
for national security - industries are often
protected because they are deemed
important for national security
 aerospace or semiconductors

92. 5-92
What Are The Political Arguments
For Government Intervention?
3. Retaliation for unfair foreign competition
- when governments take, or threaten to
take, specific actions, other countries
may remove trade barriers
 if threatened governments do not back
down, tensions can escalate and new trade
barriers may be enacted
 risky strategy
4. Protecting consumers from “dangerous”
products – limit “unsafe” products

93. 5-93
What Are The Political Arguments
For Government Intervention?
5. Furthering the goals of foreign policy -
preferential trade terms can be granted
to countries that a government wants to
build strong relations with
 trade policy can also be used to punish
rogue states

94. 5-94
What Are The Political Arguments
For Government Intervention?
6. Protecting the human rights of individuals in
exporting countries – through trade policy
actions
7. Protecting the environment – international
trade is associated with a decline in
environmental quality
 concern over global warming
 enforcement of environmental regulations

95. 5-95
What Are The Economic Arguments
For Government Intervention?
1. The infant industry argument - an
industry should be protected until it can
develop and be viable and competitive
internationally
 accepted as a justification for temporary
trade restrictions under the WTO

96. 5-96
What Are The Economic Arguments
For Government Intervention?
 Question: When is an industry “grown up” ?
 Critics argue that if a country has the potential
to develop a viable competitive position, its
firms should be capable of raising necessary
funds without additional support from the
government

97. 5-97
What Are The Economic Arguments
For Government Intervention?
2. Strategic trade policy – first-mover
advantages can be important to success
 governments can help firms from their
countries attain these advantages
 governments can help firms overcome
barriers to entry into industries where foreign
firms have an initial advantage

98. 5-98
When Should Governments
Avoid Using Trade Barriers?
 Paul Krugman argues that strategic trade
policies aimed at establishing domestic firms in
a dominant position in a global industry are
beggar-thy-neighbor policies that boost national
income at the expense of other countries
 countries that attempt to use such policies will
probably provoke retaliation
 Krugman argues that since special interest
groups can influence governments, strategic
trade policy is almost certain to be captured by
such groups who will distort it to their own ends

99. 5-99
How Has The Current World
Trading System Emerged?
Until the Great Depression of the 1930s,
most countries had some degree of
protectionism
 Smoot-Hawley Act (1930)
After WWII, the U.S. and other nations
realized the value of freer trade
 established the General Agreement on Tariffs
and Trade (GATT) - a multilateral agreement
to liberalize trade

100. 5-100
How Has The Current World
Trading System Emerged?
In the 1980s and early 1990s protectionist
trends emerged
 Japan’s perceived protectionist (neo-
mercantilist) policies created intense political
pressures in other countries
 persistent trade deficits by the U.S
 use of non-tariff barriers increased

101. 5-101
How Has The Current World
Trading System Emerged?
 The Uruguay Round of GATT
negotiations began in 1986 focusing on
1. Services and intellectual property
 going beyond manufactured goods to address
trade issues related to services and intellectual
property, and agriculture
1. The World Trade Organization
 it was hoped that enforcement mechanisms
would make the WTO a more effective policeman
of the global trade rules

102. 5-102
How Has The Current World
Trading System Emerged?
The WTO encompassed GATT along with
two sisters organizations
 the General Agreement on Trade in Services
(GATS)
 working to extend free trade agreements to
services
 the Agreement on Trade Related Aspects of
Intellectual Property Rights (TRIPS)
 working to develop common international
rules for intellectual property rights

103. 5-103
How Has The Current World
Trading System Emerged?
 The WTO has emerged as an effective advocate
and facilitator of future trade deals, particularly in
such areas as services
 159 members in 2013
 so far, the WTO’s policing and enforcement
mechanisms are having a positive effect
 most countries have adopted WTO
recommendations for trade disputes
 a magnet for various groups protesting free
trade

104. 5-104
What Is The Future Of The
World Trade Organization?
The 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 rights in many nations
 continued high tariffs on nonagricultural goods
and services in many nations

105. 5-105
What Is The Future Of The
World Trade Organization?
The WTO launched a new round of talks
at Doha, Qatar in 2001 that have already
gone on for 12 years and are currently
stalled.
The 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

106. 5-106
What Do Trade Barriers
Mean For Managers?
 Managers need to consider how trade
barriers affect the strategy of the firm and
the implications of government policy on
the firm
1. Trade barriers raise the cost of exporting
products to a country
2. Voluntary export restraints (VERs) may
limit a firm’s ability to serve a country
from locations outside that country

107. 5-107
What Do Trade Barriers
Mean For Managers?
3. To conform to local content
requirements, a firm may have to locate
more production activities in a given
market than it would otherwise
 Managers have an incentive to lobby for
free trade, and keep protectionist
pressures from causing them to have to
change strategies