Chapter 7 International Business

What is Free Trade?

Absence of barriers to the free flow of goods and services between countries.

• Government does NOT attempt to restrict what its citizens can buy from another country or what they can sell to another country

General Agreement on Tariffs and Trade (GATT)

International treaty that committed signatories to lowering barriers to the free flow of goods across national borders and led to the WTO.

What are the main instruments of Trade Policy

1. Tariffs

2. Subsidies

3. Import quotas

4. Voluntary export restraints

5. Local content requirements

6. Administrative policies

7. Antidumping duties

Rise in Non-tariff Barriers

1. Subsidies

2. Quotas

3. Voluntary

4. Antidumping duties

What are tariffs?

A tax levied on imports that effectively raises the cost of imported products relative to domestic products.

What are specific tariffs?

Levied as fixed charge for each unit of an imported good.

What is Ad Valorem Tariffs?

Levied as a proportion of the value of an imported good.

What is a subsidy?

A government payment to a domestic producer

How can Subsidies help domestic producers?

• Compete against low cost foreign imports

• Gain export markets

What is an import quota?

A direct restriction on the quantity of some good that may be imported into a country

What is a tariff rate quota?

A hybrid of a quota and tariff; a lower tariff is applied to imports within the quota than those over the quota

What is voluntary export restraint (VER)?

Quota on trade imposed by the exporting country, typically at the request of the importing countrys government

• i.e. Mexico VER on autos to brazil

What are export tariffs?

A tax placed on the export of a good

• Goal is to discriminate against exporting to ensure supply

What is a export ban?

Policy that partially or entirely restricts the export of a good

• Ban of exports of U.S. crude oil in 1975 to ensure sufficient supply of domestic oil at home

What are local content requirements? (LCR’s)

Demands that some specific fraction of a good be produced domestically

• Can be in physical terms or in value terms

What is Administrative trade policies?

Bureaucratic rules designed to make it difficult for imports to enter a country

• Hurts consumers by denying access to possibly superior foreign products

What are the countries that important the most amount of cars from the U.S.?

Mexico

Japan

Canada

South Korea

Germany

Slovakia

United Kingdom

Italy

Sweden

Belgium

What is dumping?

Selling goods in a foreign fair market below their cost of production or below their “Fair” market value.

What is Japans Auto Market looking like?

95% Domestic vehicles

5% international vehicles

1% U.S. Vehicles

What is the U.S. Automarket

31% Domestic vehicles

69% import vehicles

Why use antidumping policies?

Punish foreign firms that engage in dumping, thus protecting domestic producers from unfair foreign competition

• Vary from country to country

What are political arguments for government interventions

Protecting the interests of certain groups within a nation (Normally producers) often at the expense of other groups (normally consumers)

• Achieving some political objective such as protecting the environment or human rights

What are some economic arguments of government intervention

Boosting the overall wealth of a nation (to the benefit of both producers and consumers)

What is the infant industry argument?

An industry should be protected until it can develop and be viable and competitive internationally

• However it is useless unless it make the industry more efficient

• If a country has potential to develop a viable competitive position, its firms should be capable of raising necessary funds

What is strategic trade policy?

By appropriate actions government can help raise national income if it can ensure firms that gain first mover advantages in an industry are domestic.

What do new trade theorists believe in?

Government intervention in international trade is justified

• Adam Smith and David Ricardo

What is Krugmans stance on Free trade?

Strategic trade policies to establish 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

What are domestic policies?

Governments can be influenced by special interest groups

• Governments decision to intervene in a market

What was the Smoot-Hawley Act (1930)?

Created significant import tariffs on foreign goods

• Damaged employment abroad