Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 6 Business- Government Trade Relations

6 - 2 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Political Motives Protect jobs Preserve national security Respond to “unfair” trade Gain influence

6 - 3 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 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

6 - 4 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Economic 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

6 - 5 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Cultural Motives Result of increased globalization Nations block imports deemed harmful Usual suspects are U.S. media and consumer goods Protect national identity

6 - 6 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 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

6 - 7 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Financial assistance in the form of cash, tax breaks, price supports, etc. Subsidies Potential results + Increased competitiveness – Encourage inefficient firms – Increased consumer prices – Overuse of resources

6 - 8 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 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

6 - 9 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall  Designated 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

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 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

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 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

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 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 adequate domestic supply of a product 2. Restrict world supply of a product to raise its price

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 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

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Local Content Requirements Laws that domestic market must supply a specific amount of a product Forces international companies to employ local resources in production process

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 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

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Currency Controls Restrictions on the convertibility of a currency Limit the amount of globally accepted currency available to pay for imports Set an unfavorable exchange rate when paying for imports

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall General Agreement on Tariffs and Trade (GATT) Early Success: Tariffs down 35% Trade up 2,000% Then Problems: Nontariff barriers Services left out

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Uruguay Negotiations Improved intellectual property rules Extended coverage to services Created World Trade Organization Reduced agriculture barriers

Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall World Trade Organization (WTO) Dispute settlement body Doha trade talks Normal trade relations status Dumping and antidumping