MGMT 425. Exam 2. SELU. Budden.

International trade

The purchase, sale, or exchange of goods and services across national borders

Trade surplus

A nation's exports are greater than its imports

Trade deficit

A nation's imports are greater than its exports

Benefits of International Trade

-Creates jobs

-Obtain goods and services

-Obtain higher quality products

$1 billion increase in exports approximately _______ jobs are created in the US

22,800

60% - High income nations

39% - Europan Union

34% - High income and low and middle-income

6% - Low income and middle income

Who trades with whom?

Trade dependence

Developing nations are dependent on developed neighbors

Theory 1 of International Trade: Mercantilism (1500's)

-Accumulate wealth by encouraging exports and discouraging imports

-Benefits mother nation

-Example is British Empire

Theory 2 of International Trade: Absolute Advantage (1700's)

-Ability of a nation to produce a good more efficiently than any other nation

-Productivity

-Positive-sum game

Theory 3 of International Trade: Comparative Advantage (1800's)

-Ability to produce a good more efficiently than any other good

-Positive sums game

-Productivity

Theory 4 of International Trade: Factor proportions (1900's)

-Produce and export goods that require resources that are abundant

-Import foods that require resources that are in short supply

Theory 5 of International Trade: International Product Life Cycle Theory (1900's)

-New product stage

-Maturing product stage

-Standardized product stage

New product stage

Producing; importing

Maturing product stage

Competition; exporting a lot

Standardized product stage

Producing the product in the market where it can happen most efficiently

Theory 6 of International Trade: New Trade Theory (1900's)

-Specialization and increasing economies of scale

-First movers

-Government role

Theory 7 of International Trade: National Competitive Advantage (1900's)

A nations competitiveness depends on ability to innovate and upgrade

Why do governments intervene in trade?

-Cultural Motives

-Political motives

-Economic motives

Cultural motives

-It has an impact on culture

-We are the biggest threat of other people's cultures

Political motives

-Protect jobs

-Preserve national security

-Respond to unfair trade

-Gain influence

Economic motives

-Protect infant industries

-Pursue strategic trade policy

-Subsidies

-Export financing

-Foreign trade zones

-Special government agencies

Methods of promoting trade:

Foreign trade zones

-Lower customs taxes

-Fewer customs procedures

Special government agencies

JETRO & Pro Chile

-Tariffs (Export, Transit and Import)

-Quotas

-Embargoes

-Local content requirement

-Administrative delays

-Currency controls

Methods of restricting trade:

US Smooth-Hawley Act in 1930

Shift toward "protectionism"

General agreement on Tariffs and Trade (GATT)

-Formed in 1947 by 23 nations

-Promotes free trade

World Trade Organization (WTO) 1955

-Successor to GATT; came after GAPP

-Predecessor Is BEFORE

-International organization that regulated trade between nations

-Normal trade relations

Features of WTO

-Dispute settlement

-Dumping

-Subsidies

Dumping

-Lowering price to get into a market
-Antidumping

Subsidies

Countervailing duty

Foreign Direct Investment

The purchase of physical assets or a significant amount of ownership (stock) of a company in another country to gain some management control.; It can be an inflow or outflow

Outflow

America can invest In other countries

Inflow

Other countries can invest in ours (inflow)

1st Explanation of FDI:

International Product Life Cycle

International Product Life Cycle Stages

-New Product Stage

-Maturing Product Stage

-Standardized Product Stage

2nd Explanation of FDI: Market Imperfections

-Trade Barriers

-Specialized Knowledge (Technical Expertise)

3rd Explanation of FDI

Eclectic Theory

Eclectic Theory

• Location Advantage

• Ownership Advantage

• Internationalization Advantage

4th Explanation of FDI: Market Power

-Create a dominant market presence

-"Rule of three"

Current account

National account of import & export receipts on assets abroad & payments on foreign assets (Surplus/Deficit)

Capital account

National account of purchase or sale of assets

Host country methods for promotion

- Financial Incentives

- Infrastructure improvements

Host country methods for restrictions

- Ownership restrictions

- Performance Demands

Home country methods for promotion

- Insurance

- Loans

Home country methods for restriction

-Differential Taxes

- Impose sanctions

Regional Economic Integration

The process whereby countries in a geographic location cooperate with one another to reduce or eliminate barriers to international trade

Regional Trading Blocks

A type of intergovernmental agreement, often part of a regional intergovernmental organization, where barriers to trade (tariffs and others) are reduced or eliminated among the participating states

Levels of Regional Integration:

-Free trade area

-Customs union

-Common market

-Economic union

-Political union

Free trade area

They come together and sign an agreement to remove most of trading tariffs and customize how they treat non member countries; they decide how one country wants to treat another (America can do a 15% trade on Germany and Mexico could do a 20% trade)

Customs union

Same as free trade but for non member countries they agree together on what they will do

Common market

Same thing but you add in free movement of money; more integrated

Economic union

Labor and money moves freely and you add in economic issues; agree to have the same taxes and interest rates

Political union

• Add in a political framework

• Most integrated

Benefits of Regional Integration:

-Trade Creation

-Greater Consensus

-Political Cooperation

-Greater Employment Opportunities

Drawbacks of Regional Integration:

-Trade Diversion

-Shifts in Employment

-Loss of National Sovereignty

European Coal and Steel Community (1951)

Allow trade between the countries

European Economic Community (EEC)

1957 Treaty of Rome

European Union (EU) 1994

EEC became the European Union

Maastricht Treaty - (1993)

Created European Monetary Union and Euro in1999; Not everyone uses the Euro

Copenhagen Criteria

-Stable institutions

-Functioning market economy (competitive economy)

-Able to assume membership obligations

-Able to adopt rules and regulations of the community

-US-Canada Free Trade Agreement 1989;

-North American Free Trade Agreement (NAFTA) 1994; included US, Mexico, Canada

-Central American Free Trade Agreement (CAFTA-DR) 2006

Integration in the Americas

-Association of Southeast Asian Nations 1967

-Asian Pacific Economic Cooperation 1989

Integration in Asia

-Gulf Cooperation Council -1980

-African Union - 2002

Integration in the Middle East and Africa

Current account surplus

when a country's exports and income are greater than its imports and outgoings

Current Account Deficit

when a country imports more than it exports