2. Business-Government Trade Relations Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

3. Development of the World Trading System Intellectual arguments for free trade: - Adam Smith and David Ricardo. Free trade as government policy: - Britain’s (1846) repeal of the Corn Laws. 5-20

4. Absolute Advantage Adam Smith –Wealth of Nations (1776) A country s hould specialize in production of and export products for which it has absolute advantage; import other products Has absolute advantage when it is more productive than another country in producing a particular product

5. Comparative Advantage David Ricardo - Principles of Political Economy, 1817 Country should specialize in the production of those goods in which it is relatively more productive... even if it has absolute advantage in all goods it produces Absolute Advantage is a special case of Comparative Advantage

6. http://www.youtube.com/MyIBVideos#p /c/104B89261AEF0C68/4/iVHJ3_FJZKg Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 6 - 5

7. World War I to World War II 1918 - 1939 Great Depression - US stock market collapse - Smoot-Hawley (1930) US had positive trade balance with world Foreign response was to impose own barriers US exports tumbled 5-21

8. General Agreement on Tariffs and Trade WWII allies want international organization in trade arena similar to UN in political arena. GATT proposed by US in 1947 as step toward ITO. - 1948: Havana Conference. - Failed charter for the International Trade Organization. 5-22

9. GATT Multilateral agreement: objective is to liberalize trade by eliminating tariffs, subsidies, import quotas, etc. Used ‘rounds’ to gradually reduce trade barriers. 5-23

10. Most comprehensive trade agreement in history. Created the World Trade Organization. Impacted: - Agriculture subsidies (stumbling block: US/EU). - Applied GATT rules to services and intellectual property. - Strengthened GATT monitoring and enforcement. Uruguay Round 5-27

11. GATT Criticisms Economic theories don’t fit the ‘real world’ model. US global preeminence has declined. Shift from cutting tariffs to eliminating non-tariff barriers angered countries. ‘National Treatment’ or ‘Most Favored Nation’ status results in inequalities. 5-29

12. Impact of GATT Currently, >120 members. Represents 90% of world trade. 9 of 10 disputes satisfactorily settled. Tariff reduction from 40% to 5%. Trade volume of manufactured goods has increased 20 times. 5-30

13. Umbrella organization for: - GATT - Services - Intellectual property Responsibility for trade arbitration: - Reports adopted unless specifically rejected. - After appeal, fail to comply can result in compensation to injured country or trade sanctions. World Trade Organization

14. Seattle - 1999

18. Why the riots? WTO overrides sovereignty of people Loss of trade barriers loses jobs Fear of a global organization that has no laws

19. Where do they meet? Headquarters is in Geneva Switzerland

20. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 5 - 19 Trade and World Output World trade 80% merchandise 20% services World output impacts trade Growing output = growing trade Sluggish output = sluggish trade World trade grows faster than world output

21. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 5 - 20 World’s Top Exporters

22. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 5 - 21 Trade Patterns Merchandise trade among: Western European trade is mostly intra- regional trade Low- and middle-income nations High-income nations High-income and low- and middle-income nations North America imports twice as much from Asia as it exports to Asia

23. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 5 - 22 Who Trades with Whom?

24. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 5 - 23 National Competitive Advantage Nation’s competitiveness in an industry depends on the industry’s capacity to innovate and upgrade, which in turn depends on four main determinants (plus government and chance) Nation’s competitiveness in an industry depends on the industry’s capacity to innovate and upgrade, which in turn depends on four main determinants (plus government and chance) Factor conditions Demand conditions Firm strategy, structure, and rivalry Related and supporting industries

25. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 5 - 24 Factor Conditions Basic factorsAdvanced factors Nation’s resources (large workforce, natural resources, climate, and surface features) Nation’s resources (large workforce, natural resources, climate, and surface features) Result of investing in education and innovation (skill of workforce segments, technological infrastructure) Basic factors can spark initial production, but advanced factors account for sustained competitive advantage

26. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 5 - 25 Demand Conditions Sophisticated home-market buyers drive companies to improve existing products and develop entirely new products and technologies This should improve the competitiveness of the entire group of companies in a market

27. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 5 - 26 Related and Supporting Industries Companies in an internationally competitive industry do not exist in isolation Supporting industries form “clusters” of economic activity in the geographic area Each industry reinforces the competitiveness of every other industry in the cluster

28. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 5 - 27 Mapping U.S. Clusters

29. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 6 - 28 Political Motives ProtectjobsPreservenationalsecurity Respond to “unfair”tradeGaininfluence

30. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 6 - 29 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

31. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 6 - 30 Economic Motives II Potential results + Global industry created – Firms’ efficiency reduced – Domestic costs increase – Special interests benefit Pursue strategic trade policy Help companies achieve economies of scale and gain a first- mover advantage

32. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 6 - 31 Cultural Motives Result of increased globalization Nations block imports deemed harmful Usual suspects are U.S. media and consumer goods Protect national identity

33. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 6 - 32 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

34. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 6 - 33 Financial assistance in the form of cash, tax breaks, price supports, etc. Potential results + Increased competitiveness – Encourage inefficient firms – Increased consumer prices – Overuse of resources Subsidies

35. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 6 - 34 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

36. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 6 - 35  Designated geographic 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 Foreign Trade Zones

37. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 6 - 36 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

38. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 6 - 37 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 on a product as it enters or leaves a nation

39. Tariffs Oldest, easiest to recognize forms of trade policy Specific = amount on each unit - $10/ton of tea Ad valorem = percentage of value - 5% of import value Raise cost of foreign goods for consumers

40. Harley-Davidson 1983 International Trade Commission put a 49.4% duty on Japanese heavy motorcycles at request when Harley could not compete Allowed Harley to enact new management strategies without pressure from imports Within 4 years Harley was back on feet and had highest market share 1987 policy lifted one year early

41. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 6 - 40 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 an adequate domestic supply of a product 2. Restrict world supply of a product to raise its price

42. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 6 - 41 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

43. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 6 - 42 Local Content Requirements Laws that domestic producers must supply a specific amount of a good or service Forces international companies to employ local resources (usually labor) in production process

44. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 6 - 43 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

45. Porta-bote International $ 895 motorized or sailing craft that folds to 4 inches flat and can be carried on top of a car Japanese safety test - Japanese Coast Guard filled one boat with 600 pounds of concrete and dropped it 20 feet into the water - Boat examined for structural damage - Done twice more

46. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 6 - 45 Currency Controls Restrictions on the convertibility of a nation’s currency Limit the amount of globally accepted currency available to pay for imports Set an unfavorable exchange rate when paying for imports

47. How do I know what barriers exist in a country? Country Commercial GuidesCountry Commercial Guides (Ch 5) US Department of Commerce – International Trade Administration

48. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 6 - 47 General Agreement on Tariffs and Trade (GATT) Treaty designed to promote free trade by reducing tariffs and nontariff barriers to trade Uruguay Round Extended coverage to services Improved intellectual property rules Established the WTO Reduced trade barriers in agriculture

49. Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall International Business 5e Chapter 6 - 48 World Trade Organization (WTO) International organization that regulates trade between nations Dumping and antidumping duties Doha Round of trade talks Normal trade relations (“most-favored-nation status”) Dispute Settlement Body