International Business - Chapter 7

Import Tariff

Financial charge imposed by the importing government on incoming goods.

Ad Valorem Tariff

A tariff charged as a percentage of the good’s total value.

Tariff Effect on Consumers

Consumers may pay higher prices for products because imported goods become more expensive.

Tariff Effect on Domestic Producers

Domestic producers face less foreign competition, but may pay more for imported materials.

Tariff Effect on Government Revenue

The government collects tariff revenue, although revenue may fall if imports decrease significantly.

Tariff Effect on Businesses Using Imported Inputs

Imported materials become more expensive, increasing production costs.

Export Restrictions

Government policies that limit what or how much a country exports to other nations.

Unintended Consequences of Export Restrictions

Price changes, higher production costs, counter-tariffs, trade-balance changes, and currency-rate changes.

Subsidy

Government help that lowers production costs or market prices to promote competition.

Local Content Requirement

Rule requiring part of a product or its value to be produced domestically.

Purpose of Subsidies

Lower costs and make an industry more attractive for firms to enter.

Purpose of Local Content Requirements

Concentrate investment locally and help protect or build domestic industries.

Long-Term Risk of Government Protection

Industries may become dependent on protection, resulting in inefficiency and higher costs.

Import Quota

Direct restriction on the quantity of a good that may be imported.

Import License

Permission given to selected firms or individuals to import goods under a quota.

Voluntary Export Restraint (VER)

A trade restriction in which an exporting country agrees to limit the quantity of goods it exports to another country.

Tariff vs. Quota

A tariff affects price and money; a quota directly restricts the quantity of a product.

Who Gains from an Import Quota?

Importers that receive licenses to import the restricted product.

Who Receives Tariff Revenue?

The importing country’s government.

Tariff-Rate Quota

A low tariff applies within a set quota; once the quota is exceeded, a much higher tariff applies.

Administrative Barrier

Regulations or slow processes designed to make foreign goods more difficult to import.

Dumping

Selling goods in a foreign market for less than the cost of producing them.

Why Low Prices Do Not Prove Dumping

Economies of scale may allow firms to mass-produce goods at a lower cost per unit.

Countervailing Duty — as presented in the slides

Special tariff placed on an offending foreign import when dumping is proven.

Legitimate Consumer Protection

A genuine safety requirement applied equally to domestic and foreign goods.

Disguised Protectionism

A regulation that appears protective but is actually used to restrict foreign competition.

Protecting Jobs Argument

Trade restrictions may protect domestic jobs threatened by unfair foreign competition.

Cost of Protecting Jobs

Restrictions may increase costs for domestic firms and consumers that benefit from cheaper imports.

National Security Argument

Trade restrictions may be justified when dependence on foreign suppliers threatens access to critical goods or technology.

When National-Security Restrictions May Be Justified

When protecting critical industries provides benefits greater than higher prices, retaliation, and other costs

Infant-Industry Argument

Government intervention may be necessary to help new industries survive against established foreign competitors.

Why Support Infant Industries?

New industries may need time to gain expertise, technology, and experience through learning by doing.

Benefits of Infant-Industry Protection

Jobs, technological capabilities, economic diversification, and reduced dependence on foreign suppliers.

Risk of Infant-Industry Protection

Permanent protection can reduce innovation and create inefficient, dependent industries.

Strategic Trade Policy

Government support aimed at helping domestic firms compete in industries dominated by a few global competitors.

Economies of Scale in Strategic Trade Policy

High costs may mean only a small number of firms can operate profitably.

First-Mover Advantage

Firms that enter an industry first may dominate and lock up the market.

Risk of Strategic Trade Policy

Government support may be costly, cause retaliation, encourage lobbying, and become difficult to stop.

World Trade Organization (WTO)

International organization that establishes rules and a framework for international trade.

General Agreement on Tariffs and Trade (GATT)

Created in 1948 to reduce tariffs and trade barriers for goods.

WTO Expansion Beyond GATT

The WTO expanded trade rules to services, intellectual property, and stronger dispute settlement.

WTO Challenges

Enforcement problems, agricultural-subsidy disagreements, and conflicting national interests make agreements difficult.

Bilateral and Regional Trade Agreements

Smaller trade deals countries may pursue to avoid lengthy WTO negotiations.

Jones Act

U.S. law requiring goods shipped between U.S. ports to use qualifying U.S.-built, U.S.-owned, U.S.-flagged, and predominantly U.S.-crewed vessels. It reflects protectionism by limiting foreign competition.

Managerial Response to Changing Trade Barriers

1. Firms can recheck costs and prices, change suppliers, change production locations, work politically, and remain flexible.