International Business Class 3 Trade Policy Foreign Direct Investment

Previous class question Propagated in the 16th and 17th centuries, _____ advocated that countries should simultaneously encourage exports and discourage imports. A.Ethnocentrism B. Capitalism C. Collectivism D. Mercantilism

Previous class question Which of the following is an assumption of the Heckscher-Ohlin theory? A.Countries have varying endowments of the various factors of production B.Gold and silver were the mainstays of national wealth and essential to vigorous commerce C.It is in a country's best interests to maintain a trade surplus D. Trade is a zero-sum game

Previous class question Identify the incorrect statement pertaining to Raymond Vernon's product life-cycle theory. A. Early in their life cycle, most new products are produced in and exported from the country in which they were developed B. As a new product becomes widely accepted internationally production starts in other countries C. A product in the early stage of the product life cycle is imported by the country where it was innovated D. A product may ultimately be exported back to the country of its original innovation

Firm Strategy, Structure & Rivalry Related & Supportin g Industries Demand Conditio ns Demand Conditio ns Factor Endow ments

Case: Trade in Information Technology and US Economic Growth What are the implications of the theory and data for: a.)government policy in advanced nations such as the United States? b.)the strategy of a firm in the computer industry, such as Dell or Apple Computer?

Instruments of Trade Policy

Limitations of Trade State ambivalence: incentives for international trade and domestic producers’ protection Balance of payment protection – import limitations Tariff and non tariff regulation

Tariffs Subsidies Import Quotas & Voluntary Export Restraints Local Content Requirements Administrative Policies Instruments of Trade Policy

Tariffs Tariffs may be defined as “surcharges that an importer must pay above and beyond taxes levied on domestic goods and services” “tax imposed on imports (or exports)”

Tariffs May be: Specific Tariffs, which are a fixed charge for each unit imported; Ad Volerm Tariffs, which are a fixed percentage of the invoice value of the goods imported

Consequences of tariffs + Government – budget input + internal producers - consumers - stimulation of non effective production, some products could be produced more efficiently abroad General inefficiency

Instruments: Subsidies A subsidy is a financial contribution provided directly or indirectly by government and which provides a benefit to a domestic producer. They take the form of cash grants, low interest loans, government equity participation and tax breaks.

Subsidies Are essentially made to improve the competitiveness of domestic producers within the global economy in order to assist domestic producers in competing against foreign imports and facilitate participation in export markets. The agricultural sector tends to be the largest beneficiary of subsidies.

Consequences of subsidies Costs decrease, increase in competitiveness of local producers, help in entrance to foreign markets Important in industries with scale economy with limited market potential Usually support inefficient producers (agriculture) Result – employment, taxes

Subsidies in form of grants, end of 1980-s, share of industrial output CountryLevel of subsidy, % USA0,5 Japan1 Britain, Germany less than 2 Sweden, Ireland6-7

Instruments: Import Quotas quantitative limitations on the importation of goods typically spelled in terms of units (e.g. 10,000 shirts) or value (ad valorem) Quotas are commonly enforced through the issuing of import licences to certain organisations. Quotas – trade control Above – either high tax, or prohibition. Limitation of import + for local producers Artificial limitation of supply Result – high prices

Instruments: Voluntary Export Restraints VER quota on trade imposed by the exporting country, typically at the request of the importing country’s government Example – automobiles export from Japan to USA: 1981 – 1,68 million units, 1984 – 1,85 In 1985 restraint was declined Less strict regulation comparing to tariffs and quotas

Instruments: Local Content Requirements a requirement that some specific fraction of a good should be produced domestically. It may be expressed in physical terms (e.g. 25% of the component parts of the product) or in value terms (e.g. 50% of the value of the product). Local content requirements are utilised in developed countries to protect local jobs and industries from foreign competition. In developing countries, local content requirements have been used to move from the simple assembling of parts manufactured elsewhere in the world, to the local manufacture of component parts of a product Protect domestic producers from foreign competition. While the domestic producer benefits, consumers do not, due to a higher price of the final product and imported parts;

Instruments: Administrative Policies bureaucratic rules designed to make it difficult for imports to enter a country Limiting complex custom procedures – Japan: tulips from Holland are exported to all countries except Japan as custom rules require cutting stem at the middle. International coding systems

Instruments: Anti-dumping policies Administrative trade policies often take the form of “anti-dumping policies” Dumping - selling a product at an unfairly low price, with the “fair price” defined as the domestic price, the price charged by an exporter in another market, or a calculation of production costs The first step to enter the market Anti-dumping policies seek to punish foreign firms that engage in dumping, in an effort to protect the domestic producers

Anti-dumping policies Calculating the extent of the dumping does not provide sufficient grounds for action to be taken – anti dumping measures may only be applied if there is an evidence that the dumping is having a significant negative impact on the industry of the importing country.

What are the reasons for state regulation?

Government Intervention Number of instruments; What is the reason of GI? From a political perspective GI contributes to the protection of a particular actors within a country (usually the producers), often at the expense of another group (usually the consumers). Economic arguments for GI are focused on boosting the wealth of the nation, benefiting both producers and consumers ;

POLITICAL ARGUMENTS Protecting Jobs & Industries Protecting Jobs & Industries National Security National Security Retaliation Furthering Foreign Policy Objectives Protecting Consumers Protecting Consumers Protecting Human Rights

Political reasons Protecting Jobs and Industries: This is the most common argument for government intervention in international trade. For example, the US government placed tariffs on imports of foreign steel in 2002 in an attempt to protect local jobs and the domestic steel industry National Security: Certain nations see it as important to protect industries are that contribute to national security. Such industries are usually defence related and include aerospace and advanced electronics industries Retaliation: Government intervention may be used to as a bargaining tool to open up foreign markets and to liberalise trade through placing pressure on trading partners. For example, the United States government has put pressure on the Chinese government through the threat of trade sanctions, in an attempt to get China to enforce its intellectual property laws

Political reasons Protecting Consumers: Imports may be restricted in the interests of protecting the consumer, particularly with respect to products which are not safe. For example the European Union banned the importation of hormone- treated beef so as to protect European consumers Furthering Foreign Policy Objectives: Governments may use trade policy to achieve their foreign policy objectives. For example, preferential trade terms may be put in place for a country with which a national government wishes to build strong relations Protecting Human Rights: Governments may use trade policy to address human rights issues within the countries with whom they trade. This may involve limiting trade with a country until such time that they improve their human rights policies and practices

Strategic Trade Policy Infant Industry Argument Infant Industry Argument ECONOMIC ARGUMENTS

Infant Industry Argument an industry new to a country, especially a developing one, needs to be protected...or it could be squashed by established global players before it is given a chance to grow and develop” Temporary support of a new industry by a country’s government through quotas, tariffs and subsidies Till they are sufficiently strong to compete with international players

Infant Industry Argument The only way to survive for emerging industries; Limitation of foreign competition; Brazil – automobile industry was supported for 30 years, Argument against – strong industries could survive by using credits;

Strategic Trade Policy National income can be raised through the government ensuring that the firm(s) gaining first mover advantage in an industry are domestic rather than foreign companies It may be beneficial for a government to intervene in an industry to assist domestic companies in overcoming the barriers of entry put in place by foreign firms

Assignment Discuss the perspectives of each instrument under conditions of: А) developing country Б) developed country В) post socialist country