MGRECON401 Economics of International Business and Multinationals LECTURE 3 Multinationals and Global Trade Agreements

5-2 Lecture Focus What are the instruments and effects of trade policy? What is the history of trade agreements? What are the implications of trade agreements for multinationals?

5-3 The 7 Instruments of Trade Policy Antidumping Duties Local Content Requirements Tariffs Voluntary Exports Restraints Subsidies Administrative Policies Import Quotas

5-4 Tariffs Specific Fixed charge per unit Ad Valorem Charge is a proportion of the goods value Oldest form of protection. Tariffs

5-5 Tariffs

5-6 Tariffs and Florida OJ +Florida: 40 percent of the World OJ market. +Brazil: 45 percent of the World OJ market. Brazil controls World market except the US cent per gallon tariff on Brazilian OJ concentrate.

5-7 Subsidies Government payment to a domestic producer Cash Grants Tax Breaks Low Interest Loans Government Equity Participation

5-8 Agricultural Subsidies Very common in North America, Europe and Japan Keeps inefficient farmers in business. Encourages production of products that can be grown more cheaply elsewhere. Reduces world trade. Perpetuates global poverty.

5-9 Trends in Agricultural Development

5-10 EU Sugar Subsidies Radical French Farmer Jose Bove is Arrested by French Gendarmes in the South Western Village of Solomiac

5-11 EU Sugar Subsidies

5-12 US Cotton Subsidies – Impact on Mali

5-13 Import Quotas and Voluntary Export Restraints Direct restriction on the quantity of a good that can be imported into a country. Import Quotas Quota on trade imposed by the exporting country at the request of the importing countrys government. VERs Hurts consumers Raises domestic prices on imported goods (and possibly imported good) Helps producers Quota rent

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5-15 The MultiFibre Agreement The MultiFibre Agreement (MFA) sets quotas limiting the amount of imports of textiles and clothing from developing to developed countries. Will be phased out during the ten year period Will have major implications for exports from China and India. Will also have major implications for countries, such as Sri Lanka, Indonesia, and Mauritius, who would not otherwise have developed a textile industry.

5-16 Dumping & Antidumping Policies Dumping = Selling goods into a foreign market below production costs, or selling below fair market value. Antidumping = policies enacted to punish foreign firms and protect local industry from unfair trading practices.

5-17 Domestic Demand D DOM Foreign Demand D FOR MR = P FOR Profit Max at Q MONOPOLY MC = P FOR Domestic Sales Q DOM Exports Q MONOPOLY - Q DOM

5-18 U.S. Vietnam Catfish Dispute

5-19 Development of the World Trading System Intellectual arguments for free trade: Adam Smith and David Ricardo. Free trade as government policy: Britains (1846) repeal of the Corn Laws. Britain continued free trade policy. Fear of trade war.

5-20 World War I to World War II Great Depression US stock market collapse Smoot-Hawley Act (1930) US had positive trade balance with world Act imposes tariffs to protect U.S. firms. Foreign response was to impose own barriers US exports tumbled

5-21 General Agreement on Tariffs and Trade (GATT) WWII allies want international organization in trade arena similar to UN in political arena. GATT proposed by US in original members grew to 120 nations by the time it was superceded by the WTO. GATT members agree not to raise tariffs above negotiated rates.

5-22 Average Reduction in US Tariff Rates Index Pre-Geneva Tariff = 100 GATT Negotiating Rounds

5-23 WTO Created by Uruguay round of GATT. 141 members and 28 candidates. Between 1995 and 2000, 213 disputes brought before the WTO. Significant victories: Telecommunications Financial Services Intellectual Property Protection

5-24 Regional Trade Agreements EU: Complete elimination of restrictions on goods flows, capital flows, and labor flows within Europe. NAFTA: Free trade among Canada, US, Mexico. Andean Pact: Bolivia, Colombia, Ecuador, Peru, Venezuela. Mercosur: Argentina, Brazil, Paraguay, Uruguay. Free Trade Area of the Americas (FTAA): 34 nations from Alaska to Argentina, planned start by ASEAN: Brunei, Indonesia, Laos, Malaysia, the Philippines, Myanmar, Singapore, Thailand and Vietnam. APEC: US, Canada, Japan, China, many in S.E. Asia, Australia. African trade blocs: 9 different trade blocs.

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5-27 ASEAN

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5-30 Regional Economic Integration and Firm Strategy What does NAFTA (or EU, etc.) mean for a firms strategy? A larger market raises profits due to economies of scale. Larger profits encourages new entrants; provides an incentive for firms to erect entry barriers: Introduce new variety Expand capacity

5-31 Toyota Motor Manufacturing USA What are the political motivations behind Toyota moving production facilities from Japan to the US? What are the economic motivations behind Toyota moving production facilities from Japan to the US? What is the source of Toyotas comparative advantage in producing automobiles? Why is it so hard for another company to fully replicate the Toyota Production System (TPS)? In what sense was the creation of TPS a response to some primitive characteristics of automobile production and to a perceived weakness of U.S. automotive companies and addressing these characteristics?