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 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 Chapter Objectives

6 - 3 Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Political Motives Protect jobs Preserve national security Respond to “unfair” trade Gain influence

6 - 4 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 - 5 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 - 6 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 - 7 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 - 8 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

Who gets subsidies? - Agriculture Agriculture - Energy Energy Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall

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

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

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

Harley-Davidson 1983 International Trade Commission put a 49.4% duty on Japanese heavy motorcycles at request when Harley could not compete Allowed Harley to enact new management strategies without pressure from imports Within 4 years Harley was back on feet and had highest market share 1987 policy lifted one year early

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 Examples

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

Porta-bote International $ 895 motorized or sailing craft that folds to 4 inches flat and can be carried on top of a car Japanese safety test - Japanese Coast Guard filled one boat with 600 pounds of concrete and dropped it 20 feet into the water - Boat examined for structural damage - Done twice more

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

How do I know what barriers exist in a country? Country Commercial GuidesCountry Commercial Guides (Ch 5) US Department of Commerce – International Trade Administration

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

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Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall Answer to Discussion Question Political motives include to protect domestic jobs, to preserve national security, to respond to “unfair” trade by another nation, and to gain influence over other nations. Economic motives include to protect infant industries from competition and to pursue strategic trade policy. And Cultural motives include to protect national identity, to block imports thought culturally harmful, and to protect budding artists.