Global Business- Ch 6-9

What does trade do?

Trade provides a country’s people with a greater choice of goods and services, is an important engine for job creation, and can increase consumption possibilities.

How much is exported each year?

Nations export $17.6 trillion of merchandise and $4.9 trillion of services each year, with trade flows roughly following the pace of world economic output.

What is the distribution of trade?

High-income nations account for around 60 percent of world merchandise trade. Trade between high-income nations and low- and middle-income countries accounts for around 34 percent. Trade between low- and middle-income nations accounts for around 6 percent.

Mercantilism

nations should accumulate financial wealth in the form of gold by encouraging exports and discouraging imports.

How did mercantilism work?

Governments believed that they should intervene actively in international trade in order to maintain a trade surplus, mainly by acquiring colonies to serve as sources of inexpensive raw materials and as markets for higher-priced finished goods.

What are the flaws with mercantilism?

it assumes that a nation increases its wealth only at the expense of other nations (a zero-sum game), and it restricts the economic development of colonies—thus, limiting the volume of purchases that colonies could make from the mercantilist nation.

Absolute advantage

The ability of a nation to produce a good more efficiently than any other nation, which advocates letting market forces dictate trade flows.

What does absolute advantage do?

Allows a country to produce goods in which it holds an absolute advantage and trade with other nations to obtain goods it needs but does not produce (a positive-sum game).

Comparative advantage

A nation is unable to produce the good more efficiently than other nations but can produce it more efficiently than it can any other good.

Factor proportion theory

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

Factor proportions theory predicts...

A country will specialize in products that require labor if its cost is low relative to the cost of land and capital, and vice versa.

Leontief paradox

a country with higher capital per worker has a lower capital/labor ratio in exports than in imports.

International product life cycle theory

A company will begin exporting its product and later undertake foreign direct investment as the product moves through its life cycle.

What are the stages of the international product life cycle theory?

In the new product stage, production remains based in the home country; in the maturing product stage, production begins in countries with the highest demand; and in the standardized product stage, production moves to low-cost locations to supply a global market.

New trade theory

As specialization and output increase, companies realize economies of scale that push the unit costs of production lower.

The model developed by these economists suggested that it might benefit countries with an advantage in producing certain goods to initially protect the trade of such goods. By doing so, the economic advantage for the producing company might be more greatly realized, especially in the future.

New Trade Theory

Potential new entrants to an industry are forced to produce a similar level of output if they want to be competitive in their pricing. 6.6

Economies of scale

The economies of scale in production help a firm to gain a first-mover advantage—the economic and strategic advantage gained by being the first company to enter an industry. 6.6

National competitive advantage theory

A nation’s competitiveness in an industry (and, therefore, trade flows) depends on the capacity of the industry to innovate and upgrade.

what is the Porter diamond four main elements that form the basis of national competitiveness?

(1) factor conditions (basic and advanced), (2) demand conditions, (3) related and supporting industries, and (4) firm strategy, structure, and rivalry.

What are additional elements that can affect the basis of national competitiveness?

The actions of governments and the occurrence of chance events (unprecedented events such as political events or natural disasters)

Political reasons for trade intervention

Protect jobs, preserve national security, respond to other nations’ unfair trade practices, and gain influence over other nations.

Economic reasons for trade intervention

Protect infant industries, protect employment, prevent overdependence, fix marketing issues.

Cultural reasons for trade intervention

Protection of national identity.

Subsidy

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

Pros-Cons of subsidies

Subsidies can fend off international competitors but may cause complacency.

Export assistance

Loans at below-market interest rates, loans that are otherwise unavailable, and loan guarantees that a government will repay a loan if a company defaults.

Foreign trade zone (FTZ)

Allows merchandise to pass through a geographic region with lower customs duties (taxes) and/or fewer customs procedures.

Special government agencies

Organize international trips for trade officials and businesspeople and create offices abroad to promote home country exports.

Tariff

A government tax levied on a product that enters, transits across, or leaves a country.

Different types of import tariffs

ad valorem tariff, a specific tariff, or a compound tariff.

Quotas

Restrict the amount of a good that can enter or leave a country during a certain period of time. Import quotas protect domestic producers. Export quotas maintain adequate supplies domestically or raise the global price of a product.

Import quotas

Import quotas protect domestic producers.

Export quotas

Export quotas maintain adequate supplies domestically or raise the global price of a product.

Embargo

Completely bans trade with a country

Local content requirements

Stipulate that a good or service be supplied by domestic producers.

Imports can also be discouraged with what?

administrative delays or currency controls (restrictions on currency convertibility).

General Agreement on Tariffs and Trade (GATT)

Promoted free trade by reducing tariffs and nontariff barriers.

The Uruguay Round of GATT negotiations

Covered trade in services, defined intellectual property rights, reduced trade barriers in agriculture, and created the World Trade Organization (WTO).

Three goals of WTO

To help the free flow of trade, to help negotiate further opening of markets, and to settle trade disputes among its members.

Normal trade relations

The principle of nondiscrimination which requires WTO members to treat all members equally.

Dumping

Said to occur if a company exports a product at a price either lower than the price it normally charges in its domestic market or lower than the cost of production.

Foreign direct investment

A substantial, lasting investment made by a company or government into a foreign concern

FDI takes two main forms:

(1) A company can purchase land in another country and build new facilities from the ground up, or (2) it can merge with or acquire an existing company abroad.

FDI inflows

Grew significantly over the years but declined during economic crises. FDI inflows suffered a severe setback from the Covid-19 pandemic and its recovery could take several years.

Biggest recipients of FDI

Developed nations are historically the biggest recipients of FDI. Although they dominate the existing global stock of FDI, developing nations are attracting an increased portion of the world’s FDI inflows.

Biggest sources of FDI

Developed nations are also the long-time sources of most FDI. Yet developing countries are rising sources of FDI outflows as their companies seek growth and market share worldwide.

International product life cycle theory

A company begins by exporting its product and then later undertakes FDI as the product moves through its life cycle.

Market imperfections theory

firms engage in foreign direct investment (FDI) to exploit advantages that arise due to imperfections in markets, such as barriers to trade

The eclectic theory

Ownership (O) of unique assets, Location (L) benefits in a foreign market, and Internalization (I) to control operations and reduce transaction costs.

Market power theory

States that a firm tries to establish a dominant market presence in an industry by undertaking FDI.

greenfield investment

A type of foreign direct investment in which a company establishes a subsidiary in another nation and builds its operations from the ground up.

Why might firms engage in FDI?

When it gives them valuable knowledge of local buyer behavior, or when it locates them close to client firms and rival firms.

When might a company undertake greenfield investment?

when adequate facilities are unavailable in a market.

Acquisition of an existing business is preferred when…

It has updated equipment, good relations with workers, and a suitable location.

A host nation can accept FDI to…

Acquire advanced technology, to invite individuals with management and technical skills to train locals, and to boost domestic employment.

Host nations benefits and disadvantages

Receive a balance-of-payments boost from initial FDI and from any exports the FDI generates, but they see a decrease in balance of payments when a company sends profits to the home country.

How do host countries promote FDI inflows?

by offering companies tax incentives, extending low interest loans, and making local infrastructure improvements.

How do host countries restrict FDI inflows?

by imposing ownership restrictions, and by creating performance demands that influence how a company operates.

How do home countries promote FDI outflows?

Insurance, loans, tax breaks, special treaties, and political pressure on other nations

How do home countries restrict FDI?

imposing differential tax rates that charge income from earnings abroad at a higher rate than domestic earnings, and by imposing sanctions that prohibit domestic firms from making investments in certain nations.

What are the five levels of regional economic integration?

free trade area, customs union, common market, economic union, and political union.

Arguments for free trade within blocs

(1) trade creation expands buyer selection, decreases prices, increases productivity, and boosts national competitiveness; (2) It is easier for a smaller group of countries to agree (3) political cooperation can enhance negotiating power, and reduce potential military conflict; and (4) corporate savings can arise from modifying strategies and eliminating duplicate factories.

Arguments against free trade within blocs

(1) trade diversion can result in increased trade with a less-efficient producer within the trading bloc; (2) jobs are lost when factories close and jobs move to lower-wage nations; and (3) cultural identity and national sovereignty are diminished.

The European Coal and Steel Community

The European Coal and Steel Community formed in 1951 to remove trade barriers for coal, iron, steel, and scrap metal among members. Now called the European Union (EU) and currently has 27 members.

The European Free Trade Association (EFTA)

Has four members and was created to focus on trade in industrial goods.

The United States-Mexico-Canada Agreement (USMCA)

A revision of the earlier North American Free Trade Agreement (NAFTA) that began in 1994. Eliminates all tariffs and nontariff trade barriers on goods originating from within North America.

The Andean Community (CAN)

calls for tariff reduction for trade among member nations, a common external tariff, and common policies in transportation and certain industries.

The Central American Free Trade Agreement (CAFTA-DR)

was established in 2006 between the United States and six Central American nations to boost the efficiency of trade.