Chapter 06 Political and Trade Forces McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Why Firms are Nationalized 1. Extract money: government suspects hidden profits 2. Profitability : government seeks to increase firm’s efficiency and profits 3.Ideology 4. Job preservation: government saves jobs by saving dying industries 5. Control follows money: subsidized firms often targets of nationalization 6. Happenstance: nationalization of German firms after World War II 1. Extract money: government suspects hidden profits 2. Profitability : government seeks to increase firm’s efficiency and profits 3.Ideology 4. Job preservation: government saves jobs by saving dying industries 5. Control follows money: subsidized firms often targets of nationalization 6. Happenstance: nationalization of German firms after World War II LO1 6-2

Unfair Competition? Government-owned companies can: 1.cut prices unfairly – don’t have to make profits 2.access cheaper financing 3.access government contracts 4.receive export assistance 5.hold down wages with government assistance 6.receive government subsidies Government-owned companies can: 1.cut prices unfairly – don’t have to make profits 2.access cheaper financing 3.access government contracts 4.receive export assistance 5.hold down wages with government assistance 6.receive government subsidies LO1 6-3

Privatization LO1 6-4

Terrorism Unlawful acts of violence for a variety of reasons: –Ransom –Overthrow government –Release of imprisoned colleagues –Revenge –Punish religious nonbelievers Unlawful acts of violence for a variety of reasons: –Ransom –Overthrow government –Release of imprisoned colleagues –Revenge –Punish religious nonbelievers Situations: –Kidnapping for ransom –Paying ransom becomes counterproductive –Countermeasures by industry –Chemical and biological terrorism Situations: –Kidnapping for ransom –Paying ransom becomes counterproductive –Countermeasures by industry –Chemical and biological terrorism LO2 6-5

Government Stability Stability: Characteristic of a government’s ability to maintain itself in power and keep fiscal, monetary, and political policies predictable Stability: Characteristic of a government’s ability to maintain itself in power and keep fiscal, monetary, and political policies predictable Instability: Characteristic of a government’s inability to maintain power, becomes unpredictable Instability: Characteristic of a government’s inability to maintain power, becomes unpredictable LO3 6-6

Country Risk Assessment (CRA) An evaluation carried out by a bank or business that assesses a country’s economic situation and policies to determine how much risk exists of losing an investment LO4 6-7

Types of Country Risks Political: –Wars –Revolutions –Coups –New governments hostile to private or foreign-owned business Political: –Wars –Revolutions –Coups –New governments hostile to private or foreign-owned business Economic/ Financial: –BOP Deficits –High Inflation –Low Labor Productivity –Militant Labor Unions Economic/ Financial: –BOP Deficits –High Inflation –Low Labor Productivity –Militant Labor Unions Legal related: –Taxes –Currency Conversion –Tariffs –Quotas –Labor Permits –Fair Trial Legal related: –Taxes –Currency Conversion –Tariffs –Quotas –Labor Permits –Fair Trial LO4 6-8

Trade Restrictions Arguments for include: –National Defense –Sanctions to Punish Offending Nations –Protect Infant (or Dying) Industry –Protect Domestic Jobs from Cheap Foreign Labor –Scientific Tariff or Fair Competition –Retaliation –Dumping –Subsidies Arguments for include: –National Defense –Sanctions to Punish Offending Nations –Protect Infant (or Dying) Industry –Protect Domestic Jobs from Cheap Foreign Labor –Scientific Tariff or Fair Competition –Retaliation –Dumping –Subsidies LO5 The details are on pages 109 – 113 in the text. 6-9

Dumping WTO Definition: –Selling a product abroad for less than: The average cost of production in the exporting nation, or The market price in the exporting nation, or The price to third countries WTO Definition: –Selling a product abroad for less than: The average cost of production in the exporting nation, or The market price in the exporting nation, or The price to third countries Predatory Dumping: –Lowering export price to force import producer out of business, expecting to raise price when company is out of business Predatory Dumping: –Lowering export price to force import producer out of business, expecting to raise price when company is out of business LO5 6-10

New Types of Dumping Social Dumping –Unfair competition from lower labor costs and poor working conditions Environmental Dumping –Unfair competition caused by lax environmental standards Financial Services Dumping –Unfair competition caused by low requirements for bank capital- asset ratios Cultural Dumping –Unfair competition caused by cultural barriers aiding local firms Tax Dumping –Unfair competition cause by different corporate tax rates or special breaks Social Dumping –Unfair competition from lower labor costs and poor working conditions Environmental Dumping –Unfair competition caused by lax environmental standards Financial Services Dumping –Unfair competition caused by low requirements for bank capital- asset ratios Cultural Dumping –Unfair competition caused by cultural barriers aiding local firms Tax Dumping –Unfair competition cause by different corporate tax rates or special breaks LO5 6-11

Tariff Barriers Taxes on imports to raise their price to reduce competition for local producers or to stimulate local production. Official Prices: –guarantees that a minimum import duty is paid Variable Levy: –import duty set at the difference world-market prices and government-supported local prices Lower Duty for More Local Input –Lower duty on goods requiring local assembly, repackaging, etc. Official Prices: –guarantees that a minimum import duty is paid Variable Levy: –import duty set at the difference world-market prices and government-supported local prices Lower Duty for More Local Input –Lower duty on goods requiring local assembly, repackaging, etc. LO5 6-12

Nontariff Barriers (NTBs) All forms of discrimination against imports other than import duties Quotas: –Absolute quota –Global quota –Allocated quota Voluntary Export Restraints (VERs) Orderly Marketing Arrangements Nonquantitative Nontariff Barriers Quotas: –Absolute quota –Global quota –Allocated quota Voluntary Export Restraints (VERs) Orderly Marketing Arrangements Nonquantitative Nontariff Barriers LO5 6-13

Quantitative NTBs Absolute Quota –Once a specific quantity has been imported, additional imports are prohibited for the rest of the period (usually 1 year) Global Quota –A total import quantity is fixed regardless of source Allocated Quota –Importing government assigns quantities to specific countries Absolute Quota –Once a specific quantity has been imported, additional imports are prohibited for the rest of the period (usually 1 year) Global Quota –A total import quantity is fixed regardless of source Allocated Quota –Importing government assigns quantities to specific countries Voluntary Export Restraints (VERs) –Export quotas imposed by the exporting nation Orderly Marketing Arrangements –Formal agreements between importing & exporting countries stipulating quotas for each country Voluntary Export Restraints (VERs) –Export quotas imposed by the exporting nation Orderly Marketing Arrangements –Formal agreements between importing & exporting countries stipulating quotas for each country LO5 6-14

Nonquantitative Nontariff Barriers Direct government participation in trade: –Government Subsidy – to protect and support targeted industries (agriculture) –Government Procurement Policies – restrict purchases of imported goods by government agencies –Local Content – domestic manufacturing using local materials & labor (Buy America Act) Customs and other administrative procedures: –Government policies/procedures that favor exports or discriminate against imports Standards: –Protect a nation’s citizens’ health and safety, but can be complex and discriminatory Direct government participation in trade: –Government Subsidy – to protect and support targeted industries (agriculture) –Government Procurement Policies – restrict purchases of imported goods by government agencies –Local Content – domestic manufacturing using local materials & labor (Buy America Act) Customs and other administrative procedures: –Government policies/procedures that favor exports or discriminate against imports Standards: –Protect a nation’s citizens’ health and safety, but can be complex and discriminatory LO5 6-15