Global Business Exam Chapter 6-9

International Trade

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

Euro

Adopted by 19 countries (euro zone)

Europe monetary union

Established by Maastricht Treaty

USMCA (formerly known as NAFTA)

• increases North American auto content and wage requirements

• Guarantees workers the right to collective bargaining

• Guarantees free flow of data internationally

• Maintains 0 tariff structures in the dairy industry and opens markets further

Blockchain

A distributed digital database that stores information and creates a secure record of transactions

Mercantilism

The trade theory that nations should accumulate financial wealth usually in the form of gold by encouraging exports and discouraging imports

trade surplus

the condition that results when the value of a nation’s exports is greater than the value of its imports

trade deficit

the opposite condition of trade surplus—one that results when the value of a country’s imports is greater than the value of its exports

zero-sum game

the belief that a nation could increase its share of wealth only at expense of others

absolute advantage

the ability of a nation to produce a good more efficiently than any other nation

positive-sum game

gains to be had by both countries party to a exchange, international trade

comparative advantage (most efficient use of resources)

when a country is unable to produce a good more efficiently than other nations but produces the good more efficiently than it does any other good

Political motives for why government intervene in trade

• protect jobs

• Preserve national security

• Respond to unfair trade

• Gain influence

Economic motives why government intervene in trade

• protect infant industries: young industries need protections from international competition during development

• Pursue strategic trade policy: in favor of domestic firms

Why government intervene in trade Cultural reasons

• achieve cultural objectives

• Protective of national identity

WTO (regulated trade among nations )

Main goals were

• help free flow of trade

• Help negotiate further opening of markets

• Settle trade disputes

Drivers of FDI

• Globalization- technology advancements have created a global market place

• Mergers and Acquisitions- easier to go global

• Entrepreneurs- innovation spurs investment

Market imperfections

When an imperfection in the market makes a transaction less efficient than it could be a company will undertake fdi to internalize the transaction

Why do Governments intervene in FDI

Balance of payments

intervention by the host country

Intervention by home country

Purchase or build

A merger with or acquisition of ongoing business provides facilities equipment and personnel needed to operate

What do Regional efforts do

Encourage free trade and investment

Regional integration benefits

• trade creation

• Greater consensus

• Political cooperation

• Employment opportunities

• Cooperate savings

Regional integration drawbacks

• trade diversion

• Shifts in employment

• Loss of national sovereignty(culture/history)

Integration in Europe

• rebuild itself and avoid further conflict

• Increase industrial strength to stay competitive with UsA

• European Union-27 members, population of 450M GDP of 16T

Factor proportions theory

states that countries produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply

international product life cycle

theory that states that a company begins by exporting its product and later undertakes foreign direct investment as the product moves through its life cycle

new trade theory

states that 1. there are gains to be made from specialization and increasing economies of scale 2. the companies first to market can create barriers to entry 3. government may play a role in assisting its home companies

first mover advantage

is the economic and strategic advantage gained by being the first company to enter an industry

national competitive advantage theory

states that a nations competitiveness in an industry depends on the capacity of the industry to innovate and upgrade

free trade

the pattern of imports and exports that occurs in the absence of trade barriers

dual-use products

goods, software, or technologies that have both civilian uses and military applications

infant industry arguement

young industries need protection from international competition during their development until they grow sufficiently competitive

managed trade

government efforts to achieve trade objectives pertaining to market shares or quantities of specific products 

subsidy

financial assistance to domestic producers in the form of cash payments, low interest loans, tax breaks, product price supports or other forms

foreign trade zone (FTZ)

a designated geographic region through which merchandise is allowed to pass with lower customs duties (taxes) and/or fewer customs procedures

ad valorem tarriff

levied as a percentage of the stated price of an imported product

specific tarriff

levied as a specific fee for each unit measured by number, weight etc. of an imported product

quota

a restriction on the amount measured in unit or weight of a good that can enter or leave a country during a certain period of time

voluntary export restraint (VER)

a unique version of the export quota that a nation imposes on its own exports usually at the request of another nation

tariff quota (tariff-rate quota)

a hybrid form of trade restriction—a lower tariff rate for a certain quantity of imports and a higher rate for quantities that exceed the quota

embargo

a complete ban on trade (imports and exports) in one or more products with a particular country

administrative delays

regulatory controls or bureaucratic rules designed to impair the flow of imports into a country

currency controls

restrictions on the convertibility of a currency into other currencies

normal trade relations

a requirement that WTO members extend the same favorable terms of trade to all members that they extend to any single member

dumping

when a company exports a product at a price that is either lower than the price normally charged in its domestic market or lower than the cost of production

antidumping

an additional tariff placed on an imported product that a nation believes is being dumped on its market

countervailing duty

an additional tariff placed on an imported product that a nation believes is receiving an unfair subsidy

foreign direct investment (FDI)

the purchase of physical assets or significant stock ownership of a company in another country to obtain management control

portfolio investment

an investment that does not involve obtaining management control in a company

greenfield investment

a company can purchase land in another country and build new facilities or an entire subsidiary from the ground up

international product life cylce

theory that states that a company begins by exporting its product and later undertakes foreign direct investment as product moves through its life cycle

market imperfections

states that when an imperfection in the market makes a transaction less efficient than it could be, a company will undertake FDI to internalize the transaction and thereby remove the imperfection

vertical intergration

the extension of company activities into stages of production that provide a firms inputs (backward integration) or that absorb its output (forward integration)

rationalized production

a system of production in which each of a products components is produced where the cost of producing that component is lowest

balance of payments

a national accounting system that records all receipts coming into the nation and all payments to entities in other countries

current account

a national account that records transactions involving the export and import of goods and services, income receipts on assets abroad, and income payments on foreign assets inside the country

current account surplus

(positive balance) occurs when a country exports more goods and services and receives more income from abroad than it imports and pays abroad

current account deficit

(negative balance) occurs when a country imports more goods and services and pays more abroad than it exports and receives abroad

capital account

a national account that records transactions involving the purchase and sale of assets

regional economic integration (regionalism)

the process by which countries in a geographic region cooperate to reduce or eliminate barriers to the international flow of products, people, or capital 

free trade area (lowest level)

economic integration by which countries remove all barriers to trade among themselves but where each country determines its own barriers against nonmembers. Lowest level that is possible between 2 or more countries

customs union

economic integration by which countries remove all barriers to trade among themselves and set common trade policy against nonmembers. Members agree to treat trade with all nonmember nations in a similar matter

common market

economic integration by which countries remove all barriers to trade and to the movement of labor and capital among themselves and set a common trade policy against nonmembers. Integrates the elements of free trade areas and customs unions and adds the free movement of important factors of production—people and cross border investment.

economic union

economic integration by which countries remove barriers to trade and the movement of labor and capital among members set a common trade policy against nonmembers and coordinate their economic policies. Goes beyond the demands of a common market by requiring member nations to harmonize their tax, monetary, and fiscal policies to create common currency

political union

economic and political integration by which countries coordinate aspects of their economic and political systems. Requires member nations to accept a common stance on economic and political matters regarding nonmember nations

trade creation

The increase in the level of trade between nations that results from regional economic integration 

trade diversion

the diversion of trade away from nations not belonging to a trade bloc and toward member nations

Europe monetary union

The Maastricht Treaty plan that established the EU’s central bank and currency

Qualities of Trade

• Globalization and increased competition cause companies to move operations to locations where they can be performed most efficiently (lowest cost)

• allows companies to maximize efficiency and boost competitiveness

• Consumers benefit from lower prices

• Producers benefit from inward flow of revenue

• Producing countries benefit from jobs and investment

Primary benefits of trade

• greater choice of goods and services

• Job creation

• Greater consumption possibilities and higher standards of living

Importance of Trade

• we measure trade by examining its trading activity relative to gross domestic product

• Trade as a share of GDP = sum of exports and imports divided by GDP

Government intervention

• tarrifs and quotas

Colonialism

• acquire territory to supply essential raw materials