Ed Imm INTB 3080 Exam 3 FULL

Free trade

The absence of barriers to the free flow of goods and services between countries

General Agreement on Tariffs and Trade (GATT)

international treaty that committed signatories to lowering barriers to the free flow of goods across national borders and led to the WTO.

tariffs, subsidies, import quotas, voluntary export restraints, local content requirements, administrative policies, and antidumping duties

Trade Policies 7 main instruments

tariff

a tax levied on imports, also the oldest and simplest instrument of trade policy

specific tariff

Tariff levied as a fixed charge for each unit of good imported. ($3 per barrel of oil)

ad valorem tariff

A tariff levied as a proportion of the value of an imported good (25% tax on foreign steel by pres trump are paid for by importers in America)

2 conclusions about tariffs

1) pro-producer and anti-consumer and 2) import tariffs reduce the overall efficiency of the world economy

Subsidies

Government financial assistance to a domestic producer

subsidies help domestic producers by

1) helping compete against foreign imports 2)gaining export markets

Largest beneficiary of subsidies in most countries

agriculture

import quota

A direct restriction on the quantity of a good that can be imported into a country.

tariff rate quota

Lower tariff rates applied to imports within the quota than those over the quota.

voluntary export restraint (VER)

A quota on trade imposed from the exporting country's side, instead of the importer's; usually imposed at the request of the importing country's government.

how do VERs and import quotas benefit domestic producers

limiting import competition

export tariff

A tax placed on the export of a good.

goal of export tariff:

discriminate against exporting in order to ensure that there is sufficient supply of goods within a country

export ban

A policy that partially or entirely restricts the export of a good.

local content requirement (LCR)

A requirement that some specific fraction of a good be produced domestically. either physically (component parts are produced locally) or value wise (% of the value of the product was produced locally)

Buy America Act

Specifies that government agencies must give preference to American products when putting contracts for equipment out to bid unless the foreign products have a significant price advantage. (51% american)

administrative trade policies

policies, typically adopted by government bureaucracies, that can be used to restrict imports or boost exports.

dumping

Selling goods in a foreign market for less than their cost of production or below their "fair" market value

antidumping policies (countervailing duties)

Designed to punish foreign firms that engage in dumping and thus *protect domestic producers from unfair foreign competition.*

political arguments for intervention

concerned with protecting the interests of certain groups within a nation (normally producers), often at the expense of other groups (normally consumers). Namely protecting Jobs and Industries from unfair competition

economic arguments for intervention

concerned with boosting the overall wealth of a nation (to the benefit of all, both producers and consumers)

infant industry argument

New industries in developing countries must be temporarily protected from international competition to help them reach a position where they can compete on world markets with the firms of developed nations.

strategic trade policy

Government policy aimed at improving the competitive position of a domestic industry and/or domestic firm in the world market.

Smoot-Hawley Act

erected a wall of tariff barriers against imports into the United States

multilateral or bilateral trade agreements

Reciprocal trade agreements between two or more partners.

FDI (Foreign Direct Investment)

occurs when a firm invests directly in facilities to produce a good or service in a foreign country

Flow of FDI

The amount of foreign direct investment undertaken over a given time period (normally one year).

Stock of FDI

*total accumulated value* of foreign-owned assets at a given time

Outflows of FDI

flow of FDI out of a country

Inflows of FDI

flow of FDI into a country

Vertical FDI

up or down a supply chain

horizontal FDI

enter a new country in the same supply chain position

Platform

invest as a staging area at the same place in the supply chain

Two main forms of FDI

greenfield investment and acquiring or merging with an existing firm in the foreign country

Greenfield Investment

Establishing a new operation in a foreign country

Eclectic Paradigm

Argument that combining location-specific assets or resource endowments and the firm's own unique assets often requires FDI; it requires the firm to establish production facilities where those foreign assets or resource endowments are located.

Exporting

Sale of products produced in one country to residents of another country.

licensing

granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on every unit sold

internalization theory

Marketing imperfection approach to foreign direct investment.

3 Limitations of Licensing

1) may be giving away valuable technological know-how to a potential foreign competitor 2)does not allow for a firm to have tight control over production, marketing, and strategy in a foreign country that may be required to maximize profits 3) firms competitive advantage is not the product but rather management, marketing and manufacturing

oligopoly

An industry composed of a limited number of large firms.

multipoint competition

Arises when two or more enterprises encounter each other in different regional markets, national markets, or industries.

location-specific advantages

Advantages that arise from using resource endowments or assets that are tied to a particular foreign location and that a firm finds valuable to combine with its own unique assets

externalities

Knowledge spillovers.

Radical View

see multinational enterprise (MNE) as a tool for exploiting host countries to benefit their home country

Free Market View

International production among countries should be based on competitive advantage

Pragmatic Nationalism

policies should always be based on benefit vs. cost

balance-of-payments accounts

national accounts that track both payments to and receipts from foreigners

current account

In the balance of payments, records transactions involving the export or import of goods and services.

trade deficit

when a country is importing more goods and services than it is exporting

offshore production

FDI undertaken to serve the home market.

2 Functions of the foreign exchange market

1) convert currency into currency of another 2) provide some insurance against foreign exchange risk

foreign exchange risk

The risk that changes in exchange rates will hurt the profitability of a business deal.

4 uses if Foreign Exchange

1) payments from exports 2)Convert USD into currency you are buying in 3)Invest Spare money for short term gain 4)Currency speculation

currency speculation

Involves short-term movement of funds from one currency to another in hopes of profiting from shifts in exchange rates.

carry trade

A kind of speculation that involves borrowing in one currency where interest rates are low and then using the proceeds to invest in another currency where interest rates are high.

hedging

when a firm insures itself against foreign echange risk

spot exchange rate

The exchange rate at which a foreign exchange dealer will convert one currency into another that particular day.

forward exchange

When two parties agree to exchange currency and execute a deal at some specific date in the future.

forward exchange rate

The exchange rate governing a forward exchange transaction.

currency swap

Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.

the us dollar is involved in \_______% of all foreign transactions

87%

arbitrage

The purchase of securities in one market for immediate resale in another to profit from a price discrepancy. (imperfection in the market)

law of one price

In competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in the same currency.

Purchasing Power Parity

A basket of goods should not cost roughly the same when adjusted for exchange rate

efficient market

A market where prices reflect all available information.

inefficient market

One in which prices do not reflect all available information.

international Fisher effect (IFE)

For any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between countries.

freely convertible currency

when the government of that country allows both residents and nonresidents to purchase unlimited amounts of foreign currency with the domestic currency

externally convertible currency

Limitations on the ability of residents to convert domestic currency, though nonresidents can convert their holdings of domestic currency into foreign currency

nonconvertible currency

A currency is not convertible when both residents and nonresidents are prohibited from converting their holdings of that currency into another currency

capital flight

Converting domestic currency into a foreign currency.

countertrade

The trade of goods and services for other goods and services.

transaction exposure

The extent to which income from individual transactions is affected by fluctuations in foreign exchange values.

translation exposure

The extent to which the reported consolidated results and balance sheets of a corporation are affected by fluctuations in foreign exchange values.

economic exposure

The extent to which a firm's future international earning power is affected by changes in exchange rates.

lead strategy

Collecting foreign currency receivables early when a foreign currency is expected to depreciate and paying foreign currency payables before they are due when a currency is expected to appreciate.

lag strategy

Delaying the collection of foreign currency receivables if that currency is expected to appreciate and delaying payables if that currency is expected to depreciate.