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Copyright © 2014 Pearson Education, Inc. 6 Business- Government Trade Relations.

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1 Copyright © 2014 Pearson Education, Inc. 6 Business- Government Trade Relations

2 6 - 2 Copyright © 2014 Pearson Education, Inc. Describe the political, economic, and cultural motives behind governmental intervention in trade List and explain the methods governments use to promote international trade List and explain the methods governments use to restrict international trade Discuss the importance of the World Trade Organization in promoting free trade Chapter Objectives

3 Time Warner Global leader in media and entertainment Nations protect their traditional values Time Warner must tread carefully worldwide Copyright © 2014 Pearson Education, Inc.

4 6 - 4 Copyright © 2014 Pearson Education, Inc. Political Motives Protect jobs Preserve national security Respond to “unfair” trade Gain influence

5 6 - 5 Copyright © 2014 Pearson Education, Inc. Economic Motives I Potential results + National income increases – Wrong industries protected – Firms grow complacent – Consumer prices rise – Public funds poorly spent Protect infant industries Protect emerging industries during development from global competition

6 6 - 6 Copyright © 2014 Pearson Education, Inc. Economic Motives II Potential results + Global industry created – Firms’ efficiency reduced – Domestic costs increase – Special interests benefit Pursue strategic trade policy Help companies to achieve economies of scale and gain a first- mover advantage

7 6 - 7 Copyright © 2014 Pearson Education, Inc. Cultural Motives Result of increased globalization Nations block imports deemed harmful Usual suspects are U.S. media and consumer goods Protect national identity

8 6 - 8 Copyright © 2014 Pearson Education, Inc. Discussion Question What are some of the political, economic, and cultural reasons why countries intervene in trade?

9 6 - 9 Copyright © 2014 Pearson Education, Inc. Answer to Discussion Question Political motives include to protect domestic jobs, preserve national security, respond to “unfair” trade, and gain influence over other nations. Economic motives include to protect infant industries from competition and to pursue strategic trade policy. Cultural motives include to protect national identity, block imports thought culturally harmful, and protect budding artists.

10 Copyright © 2014 Pearson Education, Inc. Trade Promotion and Restriction Trade promotion methods Trade restriction methods  Subsidies  Export financing  Foreign trade zones  Special government agencies  Tariffs  Quotas  Embargoes  Local content requirements  Administrative delays  Currency controls

11 Copyright © 2014 Pearson Education, Inc. Financial assistance in the form of cash, tax breaks, price supports, etc. Subsidies Potential results + Increased competitiveness – Encourage inefficient firms – Increased consumer prices

12 Copyright © 2014 Pearson Education, Inc. Export Financing Export-Import Bank of the United States  Working capital loan guarantees  Credit information on nation or firm abroad  Export credit insurance against loss  Loan guarantees to buyers of U.S. goods and much more… Export-Import Bank of the United States  Working capital loan guarantees  Credit information on nation or firm abroad  Export credit insurance against loss  Loan guarantees to buyers of U.S. goods and much more… Financing such as low-interest loans and loan guarantees

13 Copyright © 2014 Pearson Education, Inc.  Designated region in which merchandise is allowed to pass through with lower customs duties (taxes) and/or fewer customs procedures  Purpose is to increase employment and trade within the nation Foreign Trade Zones

14 Copyright © 2014 Pearson Education, Inc. Special Government Agencies Organize trade missions for officials and businesses Operate export-promotion offices at locations abroad Help import products the home nation does not produce

15 Copyright © 2014 Pearson Education, Inc. Discussion Question A geographic region within a nation and in which merchandise passes through with lower customs duties or fewer customs procedures is called a __________. a. No subsidy zone b. Special quota zone c. Foreign trade zone

16 Copyright © 2014 Pearson Education, Inc. Answer to Discussion Question A geographic region within a nation and in which merchandise passes through with lower customs duties or fewer customs procedures is called a __________. a. No subsidy zone b. Special quota zone c. Foreign trade zone

17 Copyright © 2014 Pearson Education, Inc. Tariffs Potential results + Protect domestic firms from competitors + Generate income for the government – Reduce competitiveness of home-based firms – Raise consumer prices  Export tariff  Transit tariff  Import tariff Government tax levied as a product enters or leaves a nation

18 Copyright © 2014 Pearson Education, Inc. Import and Export Quotas Restriction on the amount of a good that can enter or leave a country during a certain period of time Import Quotas 1. Protect domestic producers of a good 2. Force outside firms to compete for market access Export Quotas 1. Retain adequate domestic supply of a product 2. Restrict world supply of a product to raise its price

19 How a Tariff-Quota Works Copyright © 2014 Pearson Education, Inc.

20 Copyright © 2014 Pearson Education, Inc. Embargoes Complete ban on trade (imports and exports) in one or more products with a particular country Can be difficult for a nation to enforce Often used to achieve political goals Most restrictive nontariff trade barrier

21 Copyright © 2014 Pearson Education, Inc. Local Content Requirements Laws that domestic market must supply a specific amount of a product Forces international companies to employ local resources in production process

22 Copyright © 2014 Pearson Education, Inc. Administrative Delays Regulatory controls or bureaucratic rules to slow imports into a country  Inconvenient ports for imports  Product-damaging inspections  Understaffed customs offices  Lengthy licensing procedures

23 Copyright © 2014 Pearson Education, Inc. Currency Controls Restrictions on the convertibility of a currency Limit the amount of globally accepted currency available to pay for imports Set an unfavorable exchange rate when paying for imports

24 Copyright © 2014 Pearson Education, Inc. Discussion Question What are some of the methods that governments use to restrict international trade?

25 Copyright © 2014 Pearson Education, Inc. Answer Discussion Question To restrict trade, governments can use methods such as tariffs, quotas, embargoes, local content requirements, administrative delays, and currency controls.

26 Copyright © 2014 Pearson Education, Inc. General Agreement on Tariffs and Trade (GATT) Early Success: Tariffs down 35% Trade up 2,000% Then Problems: Nontariff barriers Services left out

27 Completed Rounds of GATT Copyright © 2014 Pearson Education, Inc.

28 Copyright © 2014 Pearson Education, Inc. Uruguay Negotiations Improved intellectual property rules Extended coverage to services Created World Trade Organization Reduced agriculture barriers

29 Copyright © 2014 Pearson Education, Inc. World Trade Organization (WTO) Dispute settlement body Doha trade talks Normal trade relations status Dumping and antidumping

30 Copyright © 2014 Pearson Education, Inc. Discussion Question The World Trade Organization principle that calls for nondiscrimination among trading partners is called __________. a. Least favored status b. Normal trade relations c. Countervailing relations

31 Copyright © 2014 Pearson Education, Inc. Answer to Discussion Question The World Trade Organization principle that calls for nondiscrimination among trading partners is called __________. a. Least favored status b. Normal trade relations c. Countervailing relations

32 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2014 Pearson Education, Inc


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