International Business and Trade Prelims (MODULE 2)

THE GLOBAL TRADE ENVIRONMENT

Mercantilism

A theory of international trade that supports the

premise that a nation could only gain from trade if it had a trade

surplus, that is, more exporting than importing

Mercantilism

oldest form of trade theory

Mercantilism

Practiced during the 1500-1750 period as Europe emerged from

the feudal systems of the Middle Ages and moved toward

nationalism

ADAM SMITH

the father of free market and open trade systems,

recognized the absurdity of mercantilism during the mid-18th century.

International trade theory was his belief that free trade

encourages countries to specialize in the production of those goods and services that they most efficiently produce.

ADAM SMITH

ABSOLUTE ADVANTAGE

the ability of one country to produce a good or service more efficiently than another

ABSOLUTE ADVANTAGE

a producer can produce a good or service in greater

quantity for the same cost or the same quality at a lower cost or

the producer can produce the same quantity of product/service for

a lesser quantity of inputs, and, therefore, lower marginal costs that

other producers without compromising the quality.

COMPARATIVE ADVANTAGE

the ability of one country that has an

absolute advantage in the production of two or more goods (or

services) to produce one of them relatively more efficiently than the

other.

COMPARATIVE ADVANTAGE

Refers to the country’s capability to produce specific goods or

manufacture multiple types of goods with limited resources at lower

marginal cost and opportunity cost compared to other countries.

FACTOR ENDOWMENT

the quantity and quality of factors of production (land, labor, capital, and technology) that a country owns

Eli Heckscher and Bertil Ohlin

Two Swedish economists who refined David Ricardo’s theory of comparative advantage and showed that nations primarily export goods and services that intensely use their abundant factors of production.

HECKSCHER-OHLIN (H-O)

theory attributes the comparative advantage of a nation to its factor endowments: land (quantity, quality, and mineral resources beneath it), labor (quantity and skills), capital (cost), and technology (quality).

FACTOR PRICE EQUALIZATION THEORY

states that when factors are allowed to move freely among trading nations, efficiency further increases, which leads to superior allocation of the production of goods and services among countries.

PORTER’S “DIAMOND” MODEL

a “diamond” that consists of four groups of company-specific and

country-specific characteristics positioned at the edge of a diamond.

TRADE POLICY

refers to all government actions that seek to alter the size of merchandise and/or service flows from and to a country.

TARIFFS

taxes on impots; also known as custom duties in some countries.

an import tax that assigns a fixed dollar amount per physical unit

Specific Tariff

Ad Valorem

a tax on imports levied as a constant percentage of the monetary value of one unit of the imported good

PREFERENTIAL DUTIES

an especially advantageous or low import tariff established by a nation for all or some goods of certain countries and not applied to same goods of other countries.

TYPES OF PREFERENTIAL DUTIES

• Bilateral or Regional preferences

• Unilateral preferences

GENERALIZED SYSTEM OF PREFERENCES (GSP)

an agreement where a large number of developed countries permit duty-free imports of a selected list of products that originate from specific countries

EXPORT SUBSIDY

refer to a negative tariff or tax break aimed at boosting exports.

Types of Export Subsidy

TYPES:

1. Direct Cash Payment

2. Tax Incentive

3. Low-Interest Loans

4. Subsidized Inputs

EXPORT TAXES

taxes meant to raise export cost and divert production for home consumption.

MOST FAVORED NATION (MFN)

an agreement among WTO countries in which any tariff concession granted by one member to any other country will automatically be extended to all other countries of WTO

IMPORT QUOTAS

regulations that limit the amount or number of units of products that can be imported to a country.

EXPORT QUOTA

a government-imposed limit on the quantity or value of specific goods that a country can export within a given period. Unlike import quotas, which protect domestic industries from foreign competition

QUANTITATIVE RESTRICTION (QR)

a trade policy tool where a country imposes a strict limit on the quantity or value of specific goods that can be imported or exported during a given period. This includes import quotas and export quotas.

CHARACTERISITICS OF QUANTITATIVE RESTRICTION

1. Directly limits trade volume

2. More restrictive than tariffs

3. Used to protect domestic industries or manage scare resources

VOLUNTARY EXPORT RESTRAINT

a nontariff barrier in which an efficient exporting nation agrees to limit exports of a product to another country for a temporary period.

DOMESTIC CONTENT PROVISIONS

regulations requiring that a certain percentage of the value of imports be sourced domestically

MANAGED TRADE

refers to agreements, sometimes temporary, between countries (or group of countries) that aim to achieve certain trade outcomes for the countries involved.

MANAGED TRADE

Aims to replace global market or economic forces with government actions to determine trade outcomes.

SOCIOECONOMICS

explores the relative negative impact of open trade upon society’s welfare, as well as government policy measures that are implemented to minimize the negative outcomes to society in a country.

COUNTERTRADE

an agreement in which an exporter of goods or services to another country commits to import goods or services of corresponding value from that country.

EXPORT CARTELS

a group of countries that could effectively control export volume to keep their export prices, revenues, and economic growth stable or high.

INFANT INDUSTRY ARGUMENT

a temporary provision of protection to nascent industries that have good prospects of becoming globally competitive in the medium term.

EMBARGOES

trade sanctions that are imposed upon a nation to restrict trade with that country.

EMBARGOES

meant to “punish” a country for perceived unacceptable international behavior.

Trade facilitation

refers to the simplification, modernization, and harmonization of trade processes to reduce barriers and costs in international commerce.

Key Elements of Trade Facilitation

1. Customs Modernization

2. Harmonization of Standards

3. Infrastructure Development

4. Transparency and Predictability