2. closely related to trade theories and to enable them to
understand the forces behind global business operations. They
offer the students the opportunity to develop their skill in
analyzing the possible implications of cross-border business
decisions. Further, they serve an integrative function as well as
to allow the faculty member and the students to examine global
business management problems and issues more closely.
Finally, they highlight the nature of the ethical dilemma and
social responsibility concerns of host countries. Closing cases
will be worked up by teams; each individual will complete their
analysis paper on weeks 2, 4 and 6. Make sure that you touch on
the important aspects of the case as it relates to the material in
the chapter. Chapters selected by the team must be from the
current week’s or the immediately preceding week’s chapter
readings. Thus for week four analysis, you can select a closing
case from the following chapters: 6, 7, 8, 10, 11 & 12; earlier or
later chapters cannot be used.
General Guidelines for Closing Case Analysis
1. Synopsis: briefly state the story (or the focus of the case;
what is the problem)
2. Case objectives: what are the objectives of the case?
3. Relate the case to the subject matter of the chapter (i.e. how
relevant to the content of the chapter / how are the concepts in
the chapter reflected?).
4. Answer the case questions.
5. Identify the problem in the case and suggest alternative
solutions to the problem (if any).
6. Select the best solution and discuss your solution (if any).
7. Identify ethical implications in the case (if any).
8. What lessons, as a potential multinational corporate
managers, did you personally learn from the case?
4. metals, which are key components in the manufacture of high-
technology products including wind turbines, iPhones, and
batteries used in hybrid cars. China claims it lowered the export
quotas because several of its manufacturers didn’t meet
environmental standards; however, developed countries saw this
move as an opportunity for China to give its domestic
manufacturers a cost advantage and to encourage foreign
manufacturers to move production to China—to gain access to
lower-cost supplies of rare earth metals.
7-*
How Do Governments
Intervene In Markets?Governments use various methods to
intervene in markets including
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
*
LO 1: Identify the policy instruments used by governments to
influence international trade flows.
Tariffs are the oldest form of trade policy; they fall into two
categories:Specific tariffs are levied as a fixed charge for each
unitAd valorem tariffs are levied as a proportion of the value of
the imported good
7-*
How Do Governments
5. Intervene In Markets?Tariffs increase government
revenuesforce consumers to pay more for certain importsare
pro-producer and anti-consumerreduce the overall efficiency of
the world economy
*
Tariffs are good for government because they generate revenue.
But, while they protect domestic producers, they reduce
efficiency and create higher prices for consumers.
7-*
How Do Governments
Intervene In Markets?
Subsidies - government payments to domestic
producersSubsidies help domestic producerscompete against
low-cost foreign importsgain export marketsConsumers
typically absorb the costs of subsidies
*
Subsidies are government payments to domestic producers.
They can be in the form of:Cash grantsLow-interest loansTax
breaksGovernment equity participation in the company
Subsidy revenues are generated from taxes.
Subsidies encourage over-production, inefficiency, and reduced
trade.
7-*
How Do Governments
6. Intervene In Markets?
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
*
7-*
How Do Governments
Intervene In Markets?
Voluntary Export Restraints - quotas on trade imposed by the
exporting country, typically at the request of the importing
country’s governmentImport quotas and voluntary export
restraintsbenefit domestic producers raise the prices of imported
goods
*
7-*
How Do Governments
Intervene In Markets?
Local Content Requirements - demand that some specific
fraction of a good be produced domestically benefit domestic
producersconsumers face higher prices
7. Administrative Policies - bureaucratic rules designed to make it
difficult for imports to enter a country polices hurt consumers
by limiting choice
*
7-*
How Do Governments
Intervene In Markets?
Antidumping Policies–also called countervailing duties–punish
foreign firms that engage in dumping and protect domestic
producers from “unfair” foreign competitiondumping - 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
*
Management Focus: U.S. Magnesium Seeks Protection 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.
8. 7-*
Why Do Governments
Intervene In Markets?There are two main arguments for
government intervention in the market
Political arguments - concerned with protecting the interests of
certain groups within a nation (normally producers), often at the
expense of other groups (normally consumers)
Economic arguments - concerned with boosting the overall
wealth of a nation – benefits both producers and consumers
*
LO 2: Understand why governments sometimes intervene in
international trade.
7-*
What Are The Political Arguments For Government
Intervention?
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
*
7-*
What Are The Political Arguments For Government
Intervention?
9. Protecting industries deemed important for national security -
industries are often protected because they are deemed
important for national securityaerospace or semiconductors
*
7-*
What Are The Political Arguments For Government
Intervention?
Retaliation for unfair foreign competition - when governments
take, or threaten to take, specific actions, other countries may
remove trade barriersif threatened governments do not back
down, tensions can escalate and new trade barriers may be
enactedrisky strategy
Protecting consumers from “dangerous” products – limit
“unsafe” products
*
Country Focus: Trade in Hormone-Treated Beef 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.
7-*
What Are The Political Arguments For Government
Intervention?
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
10. rogue states
*
The U.S. has used trade policy against countries like Libya,
Iran, Iraq, North Korea, and Cuba.
7-*
What Are The Political Arguments For Government
Intervention?
Protecting the human rights of individuals in exporting
countries – through trade policy actions
Protecting the environment – international trade is associated
with a decline in environmental qualityconcern over global
warmingenforcement of environmental regulations
*
7-*
What Are The Economic Arguments For Government
Intervention?
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
*
Oldest argument - Alexander Hamilton, 1792.
Protected under the WTO.
Only good if it makes the industry efficient.
Brazil automakers - 10th largest - wilted when protection was
eliminated.
11. Requires government financial assistance.
Today if the industry is a good investment, global capital
markets would invest.
7-*
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
*
7-*
What Are The Economic Arguments For Government
Intervention?
Strategic trade policy – first-mover advantages can be important
to successgovernments 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
*
Strategic trade policy suggests that: government should use
subsidies to protect promising firms in newly emerging
industries with substantial scale economiesgovernments benefit
if they support domestic firms to overcome barriers to entry
created by existing foreign firms
12. 7-*
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
countriescountries that attempt to use such policies will
probably provoke retaliationKrugman 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
*
LO 3: Summarize and explain the arguments against strategic
trade policy.
7-*
How Has The Current World Trading System Emerged?Until the
Great Depression of the 1930s, most countries had some degree
of protectionismSmoot-Hawley Act (1930)After WWII, the U.S.
and other nations realized the value of freer tradeestablished the
General Agreement on Tariffs and Trade (GATT) - a
multilateral agreement to liberalize trade
*
LO 4: Describe the development of the world trading system
13. and the current trade issues.
GATT - multilateral agreement established in 1948 under U.S.
leadership.
Objective is to liberalize trade by eliminating tariffs, subsidies,
and import quotas.
Nineteen original members grew to more than 120 nations.
7-*
How Has The Current World Trading System Emerged?In the
1980s and early 1990s protectionist trends emergedJapan’s
perceived protectionist (neo-mercantilist) policies created
intense political pressures in other countriespersistent trade
deficits by the U.Suse of non-tariff barriers increased
*
7-*
How Has The Current World Trading System Emerged?The
Uruguay Round of GATT negotiations began in 1986 focusing
on
Services and intellectual propertygoing beyond manufactured
goods to address trade issues related to services and intellectual
property, and agriculture
The World Trade Organizationit was hoped that enforcement
mechanisms would make the WTO a more effective policeman
of the global trade rules
14. *
GATT 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.
7-*
How Has The Current World Trading System Emerged?The
WTO encompassed GATT along with two sisters
organizationsthe 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
*
7-*
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 2013so far, the WTO’s policing and enforcement
mechanisms are having a positive effectmost countries have
adopted WTO recommendations for trade disputes a magnet for
various groups protesting free trade
15. *
The WTO:
--had 159 in early 2013
--resolved more than 400 disputes between 1995 and 2012
--three fourths of the disputes are settled by informal
consultation
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.
7-*
What Is The Future Of The World Trade Organization?The
current agenda of the WTO focuses on the rise of anti-dumping
policiesthe high level of protectionism in agriculturethe lack of
strong protection for intellectual property rights in many
nationscontinued high tariffs on nonagricultural goods and
services in many nations
*
7-*
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 includescutting tariffs on industrial goods and
16. servicesphasing out subsidies to agricultural producersreducing
barriers to cross-border investmentlimiting the use of anti-
dumping laws
*
Country Focus: Estimating the Gains from Trade for America
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.
7-*
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
Trade barriers raise the cost of exporting products to a country
Voluntary export restraints (VERs) may limit a firm’s ability to
serve a country from locations outside that country
*
LO 5: Explain the implications for managers of developments in
the world trading system.
7-*
What Do Trade Barriers
17. Mean For Managers?
To conform to local content requirements, a firm may have to
locate more production activities in a given market than it
would otherwiseManagers have an incentive to lobby for free
trade, and keep protectionist pressures from causing them to
have to change strategies
*
*
*
*
The Opening Case: China Limits Exports of Rare Earth Metals
explores China’s decision to the limit the export of rare earth
metals, which are key components in the manufacture of high-
technology products including wind turbines, iPhones, and
batteries used in hybrid cars. China claims it lowered the export
quotas because several of its manufacturers didn’t meet
environmental standards; however, developed countries saw this
move as an opportunity for China to give its domestic
manufacturers a cost advantage and to encourage foreign
manufacturers to move production to China—to gain access to
lower-cost supplies of rare earth metals.
*
LO 1: Identify the policy instruments used by governments to
influence international trade flows.
Tariffs are the oldest form of trade policy; they fall into two
categories:Specific tariffs are levied as a fixed charge for each
unitAd valorem tariffs are levied as a proportion of the value of
the imported good
*
Tariffs are good for government because they generate revenue.
18. But, while they protect domestic producers, they reduce
efficiency and create higher prices for consumers.
*
Subsidies are government payments to domestic producers.
They can be in the form of:Cash grantsLow-interest loansTax
breaksGovernment equity participation in the company
Subsidy revenues are generated from taxes.
Subsidies encourage over-production, inefficiency, and reduced
trade.
*
*
*
*
Management Focus: U.S. Magnesium Seeks Protection 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.
*
LO 2: Understand why governments sometimes intervene in
international trade.
*
*
*
Country Focus: Trade in Hormone-Treated Beef describes the
19. 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.
*
The U.S. has used trade policy against countries like Libya,
Iran, Iraq, North Korea, and Cuba.
*
*
Oldest argument - Alexander Hamilton, 1792.
Protected under the WTO.
Only good if it makes the industry efficient.
Brazil automakers - 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 economiesgovernments benefit
if they support domestic firms to overcome barriers to entry
created by existing foreign firms
*
LO 3: Summarize and explain the arguments against strategic
trade policy.
*
LO 4: Describe the development of the world trading system
and the current trade issues.
GATT - multilateral agreement established in 1948 under U.S.
leadership.
20. Objective is to liberalize trade by eliminating tariffs, subsidies,
and import quotas.
Nineteen original members grew to more than 120 nations.
*
*
GATT 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 159 in early 2013
--resolved more than 400 disputes between 1995 and 2012
--three fourths of the disputes are settled by informal
consultation
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
explores the results of a study by the Institute for International
21. 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.
*
LO 5: Explain the implications for managers of developments in
the world trading system.
*
Case Analysis on Closing Cases: The purpose of closing
cases is to give the students the opportunity as a to apply
business concepts to real life situations regarding international
business management. Case studies are designed to introduce
the students to specific and real international business situations
closely related to trade theories and to enable them to
understand the forces behind global business operations. They
offer the students the opportunity to develop their skill in
analyzing the possible implications of cross-border business
decisions. Further, they serve an integrative function as well as
to allow the faculty member and the students to examine global
business management problems and issues more closely.
Finally, they highlight the nature of the ethical dilemma and
social responsibility concerns of host countries. Closing cases
will be worked up by teams; each individual will complete their
analysis paper on weeks 2, 4 and 6. Make sure that you touch on
the important aspects of the case as it relates to the material in
the chapter. Chapters selected by the team must be from the
current week’s or the immediately
