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.
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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.