1. Global Trade Environment3
chapter
Global Trade Environment
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

2. Global Trade Environment
INTRODUCTION
Free trade refers to a situation where a government does not attempt to restrict what its citizens can buy from another country or what they can sell to another country.
National Sovereignty is the supreme right of nations to determine national policies; freedom from external control.

3. Global Trade Environment
Domestic Policy. Public policy concerned with national issues but that may have direct or indirect bearing on foreign trade and investment. Foreign Policy The area of public policy concerned with relationships with other countries.

4. Global Trade Environment
Stimulate
Protect
Domestic Policy
Quality of Life
Standard of Living
Government Policies
Direct
Regulate
Employment
National Development
Foreign Policy
Foreign Influence

5. Global Trade Environment
: GATT, Trade Liberalization, and Economic Growth
After WWII, the U.S. and other nations realized the value of freer trade, and established the General Agreement on Tariffs and Trade (GATT)
The approach of GATT (a multilateral agreement to liberalize trade) was to gradually eliminate barriers to trade
Most Favored Nation
A term describing a GATT clause that calls for member countries to grant other member countries the same most favorable treatment they accord any country concerning imports and exports, now also known as normal trade relations.

6. Global Trade Environment
: Protectionist Trends
During the 1980s and early 1990s, the world trading system was strained
Japan’s economic strength and huge trade surplus stressed what had been more equal trading patterns, and Japan’s perceived protectionist (neo-mercantilist) policies created intense political pressures in other countries
Persistent trade deficits by the U.S., the world’s largest economy, caused significant economic problems for some industries and political problems for the government
Many countries found that although limited by GATT from utilizing tariffs, there were many other more subtle forms of intervention that had the same effects and did not technically violate GATT

7. Global Trade Environment
The World Trade Organization
The institution that supplanted GATT in 1995, Its mission, is the facilitation of international trade and investment, while ensuring that an effective forum exists to afford a hearing and subsequent changes for concerns.
By establishing the WTO, it was hoped that enforcement mechanisms would make the WTO a more effective policeman of the global trade rules
The WTO encompassed GATT along with two sisters organizations, the General Agreement on Trade in Services (GATS) and the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS)

8. Global Trade Environment
WTO: Experience to Date
Since its establishment, the WTO has emerged as an effective advocate and facilitator of future trade deals, particularly in such areas as services
WTO as Global Police
So far, the WTO’s policing and enforcement mechanisms are having a positive effect. In general, countries have adopted WTO recommendations for trade disputes
Internet Extra: The WTO site { provides a wealth of information on current trade issues. Go to the site, and click on Trade Topics.
Browse down the menu to explore the current situation at the Doha Round, the status of talks on electronic commerce, or the WTO’s current efforts regarding trade and the environment.

9. The Political Economy of International Trade
The Future: Unresolved Issues and the Doha Round
Three issues on the current agenda of the WTO are:
the rise of anti-dumping policies,
the high level of protectionism in agriculture,
and the lack of strong protection for intellectual property rights in many nations.

10. Global Trade Environment
The Case for Government Intervention
There are two types of arguments for government intervention: political and economic.
Political arguments are concerned with protecting the interests of certain groups within a nation (normally producers), often at the expense of other groups (normally consumers)
Economic arguments are typically concerned with boosting the overall wealth of a nation (to the benefit of all, both producers and consumers)

11. Global Trade Environment
Political Arguments for Intervention
protecting jobs
protecting industries deemed important for national security
retaliating to unfair foreign competition
protecting consumers from “dangerous” products
furthering the goals of foreign policy
protecting the human rights of individuals in exporting countries

12. Global Trade Environment
Economic Arguments for Intervention
The infant industry argument suggests that an industry should be protected until it can develop and be viable and competitive internationally.
The infant industry argument has been accepted as a justification for temporary trade restrictions under the WTO
However, it can be difficult to gauge when an industry has grown up

13. Reduction of Domestic Policy Influences
Effects of growing global influences on domestic economies have been significant.
It is difficult to isolate domestic economic activity from international market events.

14. Global Trade Environment
International Monetary Fund (IMF)
A specialized agency of the United Nations established in An international financial institution for dealing with balance of payment problems; the first international monetary authority with a least some degree of power over national authorities.
World Bank
International institution set up to promote general economic development in the world’s poorer nations.

15. Global Trade Environment
Non Tariff Barriers
Barriers to trade, other than tariffs. (Ex. Buy domestic campaigns, restrictions to market entry overwhelming inspection procedures)
Trade Barriers
(See table 3.1 Page 59)

16. Global Trade Environment
Tariffs & Quotas
A tariff is a tax on imported goods and services, instituted by governments as a means to raise revenue and as a barriers to trade.
Specific tariffs are levied as a fixed charge for each unit of a good imported
Ad valorem tariffs are levied as a proportion of the value of the imported good
Tariffs are unambiguously pro-producer and anti-consumer, and tariffs reduce the overall efficiency of the world economy

17. Global Trade Environment
Import Quotas and Voluntary Export Restraints
Quotas are legal restrictions on the import quantity of particular goods, impose by governments as barriers to trade.
voluntary export restraints are quotas on trade imposed by the exporting country, typically at the request of the importing country’s government
Import quotas and voluntary export restraints benefit domestic producers by limiting import competition, but they raise the prices of imported goods

18. Global Trade Environment
Subsidies
A subsidy is a government payment to a domestic producer.
Subsidies help domestic producers in two ways:
they help them compete against low-cost foreign imports
they help them gain export markets
Consumers typically absorb the costs of subsidies.

19. Global Trade Environment
Local Content Requirements
A local content requirement demands that some specific fraction of a good be produced domestically.
local content requirements benefit domestic producers, but consumers face higher prices
Administrative Policies
Administrative trade polices are bureaucratic rules that are designed to make it difficult for imports to enter a country.
these polices hurt consumers by denying access to possibly superior foreign products

20. Global Trade Environment
Antidumping Policies
Dumping is defined as selling goods in a foreign market below their costs of production, or as selling goods in a foreign market at below their “fair” market value.
Some dumping may be predatory behavior, with producers using substantial profits from their home markets to subsidize prices in a foreign market with a view to driving indigenous competitors out of that market, and later raising prices and earning substantial profits
Punitive Tariffs A tax on an imported good or service intended to punish a trading partner.
Management Focus: U.S. Magnesium Seeks Protection
Summary
This feature explores the dumping charged levied by U.S. Magnesium against Chinese and Russian producers. According to U.S. Magnesium, the sole American producer of magnesium, Russian and Chinese producers were selling magnesium significantly below market value in an effort to drive U.S. Magnesium out of business. The company failed a complaint with the International Trade Commission (ITC) which ultimately ruled in favor of U.S. Magnesium.
Suggested Discussion Questions
1. What is dumping? Were Chinese and Russian producers guilty of dumping? How did U.S. Magnesium justify its claims against Russian and Chinese producers?
2. What does the ITC’s ruling mean for American consumers of magnesium? In your opinion, was the ruling fair?

21. Reasons for Export Restrictions
National security
Foreign policy
Short supply
Desire to retain capital/opportunities

22. Foreign Direct Investment
Foreign direct investment (FDI) occurs when a firm invests directly in new facilities to produce and/or market in a foreign country.
It becomes a multinational enterprise.
FDI takes on two main forms:
A greenfield investment (the establishment of a wholly new operation in a foreign country)
Acquisition or merging with an existing firm in the foreign country

23. Foreign Direct Investment
Pros
Improved capital flows
Technology transfer
Regional development
Increased competition, benefiting economy
Favorable balance of payments
Increased employment opportunities
Cons
Low levels of research and development
Risk of increased capital outflows
Restriction of domestic competition and entrepreneurship
Erosion of host culture
Disruption of domestic business practices
Risk of interference by foreign governments

24. Home-Country Perspective on Investment Policies
Foreign direct investment:
Facilitated by fiscal, financial, and nonfinancial incentives offered by policymakers.
Addition to GDP through profits, royalties and fees.
Means to stimulate economic growth.
Employment is negatively affected in the home-country.
Unintended technological transfers may occur.

25. Foreign Direct Investment
FDI Flows by Region are shown in Figure 7.2.

26. Foreign Direct Investment
Balance-of-Payments Effects
A country’s balance-of-payments account is a record of a country’s payments to and receipts from other countries.
The current account is a record of a country’s export and import of goods and services
Governments typically prefer to see a current account surplus than a deficit

27. Foreign Direct Investment Policies
Capital Flight
Fiscal Incentives
Financial Incentives
Nonfinancial incentives