International Trade & FDI – Exam 2 Review

100 vocabulary flashcards covering key theories, policies, institutions, and terms from the lecture notes on international trade, FDI, and regional economic integration.

Foreign Direct Investment (FDI)

Capital investment that establishes or acquires lasting control (≥10 % ownership) of productive assets in another country.

Greenfield Investment

Form of FDI that builds an entirely new operation abroad from the ground up.

Merger and Acquisition (M&A)

FDI achieved by buying or combining with an existing foreign firm.

Portfolio Investment

Cross-border purchases of stocks or bonds that do not confer managerial control (<10 % ownership).

Ownership Restrictions

Host-country rules that limit the equity stake foreigners may hold in local firms or sectors.

Performance Demands (Requirements)

Host-country conditions on FDI—e.g., export targets, local content, technology transfer.

Dumping

Selling a product abroad below cost or below home-market price to gain market share.

Quota Rent

Extra profits earned by importers or foreign producers when a quota artificially limits supply.

Tariff

Tax levied on an import (or export) that raises its domestic price.

Ad Valorem Duty

Tariff calculated as a percentage of the item’s customs value.

Specific Duty

Tariff charged as a fixed amount per physical unit imported.

Compound Duty

Tariff that combines ad valorem and specific components.

Subsidy

Government payment to domestic producers to lower costs or boost competitiveness.

Import Quota

Direct limit on the volume of a good that can be imported.

Voluntary Export Restraint (VER)

Quota imposed by the exporting country at the importing country’s request.

Local Content Requirement

Rule that a defined % of a product’s value be produced domestically.

Antidumping Policy

Law allowing duties (countervailing duties) to neutralize injury from dumped imports.

Administrative Trade Policies

Bureaucratic rules that make it difficult or costly for imports to enter a country.

Free Trade

Absence of government barriers to the cross-border flow of goods and services.

Trade Barrier

Any government policy—tariff, quota, subsidy, etc.—that distorts free trade.

Mercantilism

16th-century doctrine advocating trade surplus via export promotion and import limits.

Absolute Advantage

Ability of a country to produce a good more efficiently than any other country.

Comparative Advantage

David Ricardo’s idea that nations should specialize in goods they produce relatively most efficiently, even if they lack absolute advantage.

Factor Endowments

Nation’s relative supply of land, labor, and capital that shapes trade patterns.

Heckscher-Ohlin Theory

Trade theory stating countries export goods using abundant factors intensively and import goods using scarce factors intensively.

Leontief Paradox

Empirical finding that U.S. exports were less capital-intensive than its imports, contrary to Heckscher-Ohlin predictions.

Product Life-Cycle Theory

Vernon’s view that production location for new products shifts from innovating country to others as the product matures.

New Trade Theory

Model emphasizing economies of scale and first-mover advantages as causes of trade even when countries have similar resources.

Economies of Scale

Unit-cost reductions achieved when output volume rises.

First-Mover Advantages

Economic and strategic benefits accruing to early entrants in an industry.

Porter’s Diamond Model

Framework explaining national competitive advantage through factor endowments, demand, related industries, and firm rivalry.

Basic vs Advanced Factors

Porter’s distinction between natural resources & climate (basic) and skilled labor & infrastructure (advanced).

Demand Conditions (Porter)

Sophisticated home-market buyers that pressure firms to innovate.

Related & Supporting Industries

Local supplier and complementary industries that foster competitiveness.

Firm Strategy, Structure & Rivalry

Domestic managerial styles, organization, and vigorous local competition that shape competitive edge.

Strategic Trade Policy

Government actions to help domestic firms gain first-mover advantages and economies of scale in high-tech industries.

Infant Industry Argument

Case for temporary protection of emerging domestic industries until they become competitive.

Samuelson Critique

Warning that off-shoring services can lower rich-country wages and offset trade gains.

Balance of Payments

Record of a nation’s international transactions; includes current and capital accounts.

Current Account

Part of balance of payments tracking trade in goods, services, income, and transfers.

Greenfield vs Acquisition FDI

Choice between building new facilities abroad (greenfield) or buying existing ones (acquisition).

Knickerbocker Theory

Idea that oligopolistic firms imitate rivals’ FDI moves (follow-the-leader behavior).

Internalization Theory

Explains why firms prefer FDI over licensing to control know-how and reduce transaction costs.

Location-Specific Advantages

Resources or assets tied to a foreign location that make it attractive for FDI.

Radical View of FDI

Marxist position that MNEs exploit host nations; rejects FDI.

Pragmatic Nationalism

Middle stance evaluating FDI case-by-case to maximize national benefits and minimize costs.

Free Market View of FDI

Belief that international production should follow comparative advantage with minimal restrictions.

Resource-Transfer Effect

Host-country gain from FDI bringing capital, technology, or management skills.

Employment Effect (FDI)

Jobs created directly and indirectly by foreign investors in the host economy.

Sovereignty & Autonomy Loss

Host concern that key economic decisions move to foreign MNE headquarters.

Flow of FDI

Amount of new FDI capital moving in a period (usually a year).

Stock of FDI

Total accumulated value of foreign-owned assets at a point in time.

Gross Fixed Capital Formation

Total domestic investment in plant, equipment, and structures; boosted by FDI inflows.

World Trade Organization (WTO)

Global body policing trade rules, settling disputes, and hosting new trade negotiations.

General Agreement on Tariffs and Trade (GATT)

1947 multilateral treaty aimed at tariff reduction; precursor to the WTO.

Uruguay Round

1986-94 GATT negotiations that created WTO and agreements on services (GATS) and intellectual property (TRIPS).

TRIPS Agreement

WTO pact requiring members to provide minimum 20-year patents and 50-year copyrights.

GATS

General Agreement on Trade in Services governing cross-border service trade.

Doha Round

Current, yet stalled, WTO negotiations focusing on agriculture, services, and antidumping rules.

Anti-Dumping (Countervailing) Duties

Tariffs imposed to neutralize injurious dumped imports.

Treaty of Rome

1957 pact creating the European Economic Community, forerunner of the EU.

Single European Act

1987 legislation committing EU members to complete a single market by 1992.

Maastricht Treaty

1991 agreement establishing the EU and roadmap to the euro and political union.

Treaty of Lisbon

2007 reform treaty strengthening EU parliament and creating a long-term president.

European Union (EU)

27-nation economic and political union with common market and (partly) common currency.

European Commission

EU executive body that proposes legislation and enforces EU law.

Council of the European Union

Main decision-making body where member-state ministers pass EU laws.

European Parliament

Directly elected body that co-legislates and supervises EU institutions.

Court of Justice of the EU

Supreme court ensuring uniform interpretation of EU law.

European Central Bank (ECB)

Independent institution setting monetary policy for euro-zone members.

Euro

Single currency used by 20 EU countries (euro-zone) facilitating price transparency and trade.

Optimal Currency Area

Region where similar economic structures allow effective use of a single currency and monetary policy.

European Free Trade Association (EFTA)

Free trade area of Norway, Iceland, Liechtenstein, and Switzerland.

Levels of Regional Economic Integration

Free trade area, customs union, common market, economic union, political union—each deeper than the last.

Free Trade Area

Bloc with zero internal tariffs but individual external trade policies.

Customs Union

Free trade area with a common external tariff schedule.

Common Market

Customs union plus free movement of labor and capital.

Economic Union

Common market with harmonized economic policies and often a common currency.

Political Union

Full economic union combined under a central government.

NAFTA (USMCA)

1994 free trade area joining the United States, Canada, and Mexico (updated 2020 as USMCA).

MERCOSUR

South American customs union of Argentina, Brazil, Paraguay, Uruguay, and others.

Andean Community

Customs union of Bolivia, Colombia, Ecuador, and Peru.

Association of Southeast Asian Nations (ASEAN)

10-member group aiming for economic integration in Southeast Asia.

ASEAN Free Trade Area (AFTA)

Tariff-reduction scheme covering intra-ASEAN trade in goods.

Asia-Pacific Economic Cooperation (APEC)

21-member forum promoting open trade and investment around the Pacific Rim.

Central American Free Trade Agreement (CAFTA-DR)

Free trade pact linking the U.S. with six Central American & Caribbean nations.

Free Trade Area of the Americas (FTAA)

Proposed hemisphere-wide free trade zone stretching from Alaska to Argentina (not yet realized).

Trade Creation

Lower-cost intra-bloc production replaces higher-cost domestic production after integration.

Trade Diversion

Higher-cost intra-bloc production replaces lower-cost imports from outside the bloc.

Protectionism

Policies that shelter domestic industries from foreign competition.

“Protecting Jobs” Argument

Political rationale for trade barriers to shield domestic employment from imports.

National Security Argument

Justification for restricting imports crucial to defense industries.

Retaliation Argument

Threatening trade barriers to force trading partners to lower theirs.

Consumer Protection Argument

Banning or restricting imports deemed unsafe for citizens.

Foreign Policy Objectives Argument

Using trade restrictions or preferences to influence another nation’s behavior.

Human Rights Argument

Trade measures aimed at improving human rights practices in exporting countries.

Customs Union vs Free Trade Area

Unlike FTAs, customs unions share a common external tariff.

Quota vs Tariff

Quota limits quantity; tariff raises price but not quantity of imports.

Greenfield Investment Advantages

Full control, custom-built facilities, and avoidance of inheriting old liabilities.

Acquisition Advantages

Speed, access to existing market share, and purchase of established assets.