1 CHAPTER VI BUSINESS- GOVERNMENT TRADE RELATIONS INTERNATIONAL BUSINESS

2 Learning Objectives 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.

3 I. WHY DO GOVERNMENTS INTERVENE IN TRADE? Free Trade Pattern of imports and exports that would result in the absence of trade barriers.

4 Political Motives Economic Motives Cultural Motives I. WHY DO GOVERNMENTS INTERVENE IN TRADE?

5 I.1 Political Motives To Protect Jobs To Preserve National Security National Security and Imports National Security and Exports To Respond to “Unfair ” Trade To Gain Influence

6 To Protect Infant Industries To Pursue Strategic Trade Policy Benefits of Strategic Trade Policy Drawbacks of Strategic Trade Policy I.2 Economic Motives

7 Nations often restrict trade in goods and services to achieve cultural objectives, the most common being protection of national identity. The problem with such restrictions is that they reduce the selections of products available to consumers. Cultural Influence of the United States is more than any other nations. I.3 Cultural Motives

8 II. METHODS OF PROMOTING TRADE Subsidies Export Financing Foreign Trade Zones Special Government Agencies

9 II.1 Subsidies Financial assistance to domestic producer in the form of cash payments, low-interest loans, tax breaks, product price supports, or some other form.

10 II.1 Subsidies This can mean becoming more competitive in the home market or increasing competitiveness in international market through exports. The W.T.O is often called on to settle arguments over charges of unfair subsidies

11 Subsidies in Media and Entertainment Media and entertainment are common subsidies in many countries. Drawback of Subsidies Subsidies cover costs that truly competitive industries should be able to absorb on their own II.1 Subsidies

12 II.2 Export Financing Government often promote exports by helping companies finance their export activities. Many nations have special agencies dedicate to helping their domestic companies gain export financing.

13 II.3 Foreign Trade Zones (FTZ) Most countries promote trade with other nations by creating what is call Foreign Trade Zones Designated geographic region in which merchandise is allowed to pass through with lower customs duties (taxes) and/or fewer customs procedures

14 II.4 Special Government Agencies The government of most nations have special agencies responsible for promoting exports. Can be particularly helpful to small and midsize businesses that have limited financial resources. Governments not only promote trade by encouraging exports but also can encourage imports.

15 III. METHODS OF RESTRICTING TRADE Tariffs Quotas Embargoes Local Content Requirements Administrative Delays Currency Controls

16 III.1 Tariffs Tariffs: Government tax levied on a product as it enters or leaves a country Ad valorem tariff : tariff levied as a percentage of the stated price of an imported product Specific Tariffs: Tariff levied as a specific fee for each unit ( measured by number, weight, etc.) of an imported product Compound tariff: Tariff levied on an imported product and calculated partly as a percentage of its stated price and partly as a specific fee for each unit

17 Why Countries Levy Tariffs? To Protect Domestic Producers Tariffs are a way of protecting domestic producers  Domestically produced goods more attractive to buyers. To Generate Revenue Tariffs are a source of government revenue

18 III.2 Quotas Restriction on the amount of a good that can enter or leave a country during a certain period of time.

19 III.2 Quotas Reason for Import Quotas Reason for Export Quotas Tariff- Quotas

20 III.2 Quotas Reason for Import Quotas To protect its domestic producers. Help domestic producers maintain their market shares and prices

21 III.2 Quotas Reason for Export Quotas To maintain adequate supplies of a product in the home market. Increasing the international price of the good

22 III.2 Quotas Voluntary Export Restraint (VER) Unique version of export quota that a nation imposes on its export, usually at the request of an importing nation

23 III.2 Quotas Tariff- Quotas Lower tariff rate for a certain quantity of imports and a higher rate for quantities that exceed the quota

24 III.3 Embargoes Complete ban on trade ( imports and exports ) in one or more products with a particular country

25 III.4 Local Content Requirement Be laws stipulating that producers in the domestic market must supply a specified amount of a good or service. Force companies from other nations to use local resources in their production processes- particularly labor.

26 III.5 Administrative Delays Regulatory controls or bureaucratic rules designed to impair the rapid flow of imports into a country

27 III.6 Currency Controls Restrictions on the convertibility of a currency into other currencies

28 IV. GLOBAL TRADING SYSTEM General Agreement on Tariffs & Trade (GATT) World Trade Organization (WTO)

29 Agreement on Services Agreement on Intellectual Property Agreement on Agricultural Subsidies IV.1 General Agreement on Tariffs & Trade (GATT)

30 The international organization that regulates trade between nations. To help the free flow of trade To help negotiate further opening of markets To settle trade disputes between its members. IV.2 World Trade Organization (WTO)

31 Normal Trade Relations Requirement that WTO members extend the same favorable terms of trade to all members that they extend to any single member IV.2 World Trade Organization (WTO)

32 Dispute Settlement in the WTO Dumping and the WTO Subsidies and the WTO New Round of Negotiations The WTO and the Environment IV.2 World Trade Organization (WTO)

33 Dumping Practice of exporting a product at a price either lower than the price that the product normally commands in its domestic market or lower than the cost of production IV.2 World Trade Organization (WTO)

34 Antidumping Duty Additional tariff placed on an imported product that a nation believes is being dumped on its market IV.2 World Trade Organization (WTO)

35 Countervailing Duty Additional tariff placed on an imported product that a nation believes is being dumped on its market IV.2 World Trade Organization (WTO)

36 THE END