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Business- Government Trade Relations6 Business- Government Trade Relations Welcome to Chapter 6, Business—Government Trade Relations Copyright © 2014 Pearson Education, Inc.
Chapter 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 In this chapter, you will explore business-government trade relations. You will also: Examine the political, economic, and cultural reasons why governments intervene in trade. Learn about the instruments that countries use to restrict and promote trade. And understand how the global trading system promotes trade. Copyright © 2014 Pearson Education, Inc.
Time Warner Global leader in media and entertainmentNations protect their traditional values Time Warner must tread carefully worldwide Time Warner is a global leader in media and entertainment. People in almost every nation on the planet view its media creations. But some governments fear that big-budget Hollywood productions will drown out their own nations’ entertainment industry. Some nations also fear the replacement of their traditional values with those depicted in imported entertainment. For these and other reasons, Time Warner must tread carefully as it expands its reach across the world. Copyright © 2014 Pearson Education, Inc. 6 - 3 3
Political Motives Protect jobs Preserve national security Respond to“unfair” trade Gain influence Sometimes, governments intervene in trade to achieve political motives. Lawmakers often try to protect jobs in the domestic economy to protect their own job in office. Trade in industries vital to national security are protected by governments to guarantee a domestic supply in emergencies. Another motive for intervention is to respond to the perceived unfair trade practices of another country. Governments also get involved in trade to gain influence over other nations. Copyright © 2014 Pearson Education, Inc.
Protect infant industriesEconomic 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 Governments sometimes protect infant industries from international competition during their development. But there can be drawbacks to this policy. First, governments may make errors in identifying the industries that are worth protecting. Second, protection can make domestic firms less innovative, less competitive, and more likely to increase prices. Third, this may not be the best use of public funds because small, promising ventures should be able to find private financing. Copyright © 2014 Pearson Education, Inc.
Pursue strategic trade policyEconomic 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 Governments may also intervene in trade to pursue a strategic trade policy. This involves governments helping firms gain economies of scale and first-mover advantages. A potential benefit of a strategic trade policy is higher corporate profits resulting from solidified global market positions. A potential drawback is that government assistance can cause corporate inefficiency and higher costs. Assistance can also be subject to political lobbying whereby special-interest groups benefit most and consumers benefit little. Copyright © 2014 Pearson Education, Inc.
Protect national identityCultural Motives Nations block imports deemed harmful Protect national identity Usual suspects are U.S. media and consumer goods Governments also intervene in trade for cultural reasons. Naturally, a culture slowly changes when it is exposed to the people and products of other countries. Unwanted cultural influence can cause distress for a people and can force governments to block imports. The expanded influence of the United States due to globalization causes some nations to view U.S. products and media as threats to their culture. As we saw earlier, Time Warner is sometimes opposed in countries that fear the loss of their own national media. Result of increased globalization Copyright © 2014 Pearson Education, Inc.
Discussion Question What are some of the political, economic, and cultural reasons why countries intervene in trade? What are some of the political, economic, and cultural reasons why countries intervene in trade? Copyright © 2014 Pearson Education, Inc.
Answer to Discussion QuestionPolitical 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. Answer: 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. Copyright © 2014 Pearson Education, Inc.
Trade Promotion and Restrictionmethods Trade restriction Subsidies Export financing Foreign trade zones Special government agencies Tariffs Quotas Embargoes Local content requirements Administrative delays Currency controls Now that we understand why governments decide to promote or restrict trade with other nations, let’s take a look at each of the methods that nations use to accomplish these goals. Copyright © 2014 Pearson Education, Inc.
Subsidies Potential resultsFinancial assistance in the form of cash, tax breaks, price supports, etc. Potential results Increased competitiveness Encourage inefficient firms Increased consumer prices A subsidy is financial assistance to domestic producers in the form of cash payments, low-interest-rate loans, tax breaks, product price supports, or some other form. Although it is intended to increase the competitiveness of domestic companies, a subsidy can have drawbacks. Subsidies may cause firms to grow inefficient and complacent because they receive help covering costs that efficient firms should be able to absorb. Subsidies can benefit companies in the short term and harm consumers in the long term if governments use tax revenue to pay for subsidies. Copyright © 2014 Pearson Education, Inc.
Export Financing Export-Import Bank of the United StatesFinancing such as low-interest loans and loan guarantees 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… Governments can finance domestic companies’ export activities with low-interest-rate loans or loan guarantees. Two agencies that help U.S. companies obtain export financing are the Export-Import Bank of the United States and the Overseas Private Insurance Corporation (OPIC). The practice of financing small businesses just starting to export is widely supported. But financing large multinational companies at taxpayer expense is criticized as corporate welfare. Copyright © 2014 Pearson Education, Inc.
Foreign Trade Zones Designated region in which merchandise is allowed to pass through with lower customs duties (taxes) and/or fewer customs procedures The main goals of a foreign trade zone are to create jobs and increase trade flows. Foreign trade zones reduce customs duties that typically increase production costs and lengthen the time needed to get a product to market. Companies often use such zones for final product assembly. China established large manufacturing regions and Mexico has the maquiladora zone along its border with the United States. Purpose is to increase employment and trade within the nation Copyright © 2014 Pearson Education, Inc.
Special Government AgenciesOrganize trade missions for officials and businesses Operate export-promotion offices at locations abroad Help import products the home nation does not produce Governments also have special agencies that promote exports through trips abroad for trade officials and businesspeople and through trade offices in other countries. Such agencies not only promote a nation’s exports but can also encourage needed imports. 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 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 Copyright © 2014 Pearson Education, Inc.
Answer to Discussion QuestionA 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 The correct answer is c. Foreign Trade Zone Copyright © 2014 Pearson Education, Inc.
Government tax levied as a product enters or leaves a nationTariffs Government tax levied as a product enters or leaves a nation 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 Tariffs can take the form of an export tariff, a transit tariff, or an import tariff. Tariffs protect domestic producers because they raise the cost of imports relative to domestically produced goods. Tariffs also generate government revenue. Less-developed nations impose import and export tariffs but tend to reduce them as it generates more revenue from taxes on income, capital gains, and other economic activities. Drawbacks of tariffs include making domestic producers less competitive and less efficient and increasing consumer prices. Copyright © 2014 Pearson Education, Inc.
Import and Export QuotasRestriction on the amount of a good that can enter or leave a country during a certain period of time Import Quotas Protect domestic producers of a good Force outside firms to compete for market access Export Quotas Retain adequate domestic supply of a product Restrict world supply of a product to raise its price Import quotas limit the quantity of an import and thereby protect domestic producers. Import quotas can force foreign firms to compete for market access by lowering prices or by offering other concessions. Consumers often suffer higher prices and fewer product choices because of import tariffs. Companies that rely on imported goods to manufacture their products can also suffer from import quotas. Export quotas increase supplies of a product in a home market, such as when a country blocks the export of a natural resource. Export quotas can also be used to restrict a product’s supply on world markets and thereby increase its global price. Consumers can benefit from export quotas if increased supply of a product causes prices to fall. But an export quota can cause buyers in other markets that rely on the product to experience reduced supply and higher prices. Copyright © 2014 Pearson Education, Inc.
How a Tariff-Quota WorksA tariff-quota charges a lower tariff rate for a certain quantity of imports and a higher rate for quantities that exceed the quota. Imports under a quota limit of, say, 1,000 tons are charged a 10-percent tariff. Subsequent imports over the quota limit of 1,000 tons would be charged a tariff of 80 percent. Tariff-quotas are used extensively in the trade of agricultural products and their use is permitted by the World Trade Organization. Copyright © 2014 Pearson Education, Inc. 6 - 19 19
Embargoes Complete ban on trade (imports and exports)in one or more products with a particular country An embargo is a complete ban on trade in one or more products with a particular country. It is the most restrictive nontariff trade barrier available and it is often used to achieve political goals. An embargo can be imposed by individual nations or by organizations such as the United Nations. Most restrictive nontariff trade barrier Often used to achieve political goals Can be difficult for a nation to enforce Copyright © 2014 Pearson Education, Inc.
Local Content RequirementsLaws that domestic market must supply a specific amount of a product Local content requirements are designed to force companies from other nations to employ local resources in their production processes—particularly labor. Such requirements may help protect domestic producers in countries with low production costs, or be used to boost industrialization in developing nations. Forces international companies to employ local resources in production process Copyright © 2014 Pearson Education, Inc.
Administrative DelaysRegulatory controls or bureaucratic rules to slow imports into a country Inconvenient ports for imports Product-damaging inspections Understaffed customs offices Lengthy licensing procedures Administrative delays are regulatory controls or bureaucratic rules designed to impair the rapid flow of imports into a country. They can include forcing international air carriers to land at inconvenient airports, requiring inspections that damage the product, understaffing customs offices to cause delays, and requiring special licenses that take a long time to obtain. Copyright © 2014 Pearson Education, Inc.
convertibility of a currencyCurrency Controls Restrictions on the convertibility of a currency Limit the amount of globally accepted currency available to pay for imports Currency controls are restrictions on the convertibility of a currency. A government can discourage imports by setting an exchange rate that is unfavorable to potential importers. On the other hand, it can encourage exports by setting an exchange rate that is favorable to potential exporters. Set an unfavorable exchange rate when paying for imports Copyright © 2014 Pearson Education, Inc.
Discussion Question What are some of the methods that governments use to restrict international trade? What are some of the methods that governments use to restrict international trade? Copyright © 2014 Pearson Education, Inc.
Answer Discussion QuestionTo restrict trade, governments can use methods such as tariffs, quotas, embargoes, local content requirements, administrative delays, and currency controls. Answer: To restrict trade, governments can use methods such as tariffs, quotas, embargoes, local content requirements, administrative delays, and currency controls. 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 The General Agreement on Tariffs and Trade was a 1947 treaty designed to promote free trade by reducing tariffs and nontariff trade barriers. Over nearly 40 years, the Agreement reduced tariffs globally by 35 percent and helped grow world trade by 2,000 percent. But nontariff trade barriers grew rapidly in the 1980s and the Agreement failed to address trade in services, which comprised an ever-greater portion of world trade. Copyright © 2014 Pearson Education, Inc.
Completed Rounds of GATTThe ground rules of the GATT resulted from periodic rounds of negotiations among its members. Though straightforward in the early years, negotiations later became protracted as issues grew more complex. Note that whereas tariffs were the only topic of the first five rounds of negotiations, other topics were added in subsequent rounds. Copyright © 2014 Pearson Education, Inc. 6 - 27 27
Uruguay Negotiations Improved intellectual property rulesExtended coverage to services Created World Trade Organization Reduced agriculture barriers The Uruguay Round of negotiations revised the original General Agreement on Tariffs and Trade in four ways. The Agreement on Trade-Related Aspects of Intellectual Property standardized the intellectual-property rules used in trade. The General Agreement on Trade in Services extended the principle of nondiscrimination to cover trade in services. Further opened national agricultural sectors to market forces and lowered barriers, including import quotas and subsidies paid to farmers. Perhaps most importantly, the Uruguay Round created the World Trade Organization. Copyright © 2014 Pearson Education, Inc.
World Trade Organization (WTO)Dispute settlement body Doha trade talks Normal trade relations status Dumping and antidumping The World Trade Organization is the international organization that regulates trade between nations. WTO rules force members to follow the nondiscrimination principle called normal trade relations. This principle says that WTO members must extend the same favorable terms of trade to all members that they extend to any single member. The WTO settles disputes that involve the granting of subsidies and the practice of “dumping”—which occurs when a company exports a product at a price that is either lower than the price normally charged in its domestic market, or lower than the cost of production. WTO rules let a nation retaliate against proven dumping by imposing an antidumping duty—which is an additional tariff placed on an imported product that is being dumped on a market. WTO agreements are contracts between member nations that commit them to fair and open trade policies. The Doha Round of Negotiations began in Doha, Qatar, in 2001 but progress has been disappointingly slow. 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 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 Copyright © 2014 Pearson Education, Inc.
Answer to Discussion QuestionThe World Trade Organization principle that calls for nondiscrimination among trading partners is called __________. a. Least favored status b. Normal trade relations c. Countervailing relations The correct answer is b. Normal trade relations Copyright © 2014 Pearson Education, Inc.
Copyright © 2014 Pearson Education, Inc.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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