6 Business Government Trade Relations Chapter Objectives Describe

6 Business. Government Trade Relations

Chapter Objectives 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 6 -2

Time Warner • Global leader in media and entertainment • Nations protect their traditional values • Time Warner must tread carefully worldwide 6 -3

Political Motives Protect jobs Preserve national security Respond to “unfair” trade Gain influence 6 -4

Economic Motives I Potential results Protect infant industries Protect emerging industries during development from global competition + National income increases – – Wrong industries protected Firms grow complacent Consumer prices rise Public funds poorly spent 6 -5

Economic Motives II Potential results Pursue strategic trade policy Help companies to achieve economies of scale and gain a firstmover advantage + Global industry created – Firms’ efficiency reduced – Domestic costs increase – Special interests benefit 6 -6

Cultural Motives Nations block imports deemed harmful Protect national identity Usual suspects are U. S. media and consumer goods Result of increased globalization 6 -7

Discussion Question What are some of the political, economic, and cultural reasons why countries intervene in trade? 6 -8

Answer to Discussion Question Political motives include to protect domestic jobs, preserve national security, respond to “unfair” trade, and gain influence over other nations. Economic motives include to protect infant industries from competition and to pursue strategic trade policy. Cultural motives include to protect national identity, block imports thought culturally harmful, and protect budding artists. 6 -9

Trade Promotion and Restriction Trade promotion methods § Subsidies § Export financing § Foreign trade zones § Special government agencies Trade restriction methods § § § Tariffs Quotas Embargoes Local content requirements Administrative delays Currency controls 6 - 10

Subsidies Financial assistance in the form of cash, tax breaks, price supports, etc. Potential results + Increased competitiveness – Encourage inefficient firms – Increased consumer prices 6 - 11

Export Financing such as low-interest loans and loan guarantees Export-Import Bank of the United States Ø Ø 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… 6 - 12

Foreign Trade Zones Ø Designated region in which merchandise is allowed to pass through with lower customs duties (taxes) and/or fewer customs procedures Ø Purpose is to increase employment and trade within the nation 6 - 13

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 6 - 14

Discussion Question A geographic region within a nation and in which merchandise passes through with lower customs duties or fewer customs procedures is called a _____. a. No subsidy zone b. Special quota zone c. Foreign trade zone 6 - 15

Answer to Discussion Question A geographic region within a nation and in which merchandise passes through with lower customs duties or fewer customs procedures is called a _____. a. No subsidy zone b. Special quota zone c. Foreign trade zone 6 - 16

Tariffs Government tax levied as a product enters or leaves a nation Potential results Ø Export tariff + Protect domestic firms Ø Transit tariff + Ø Import tariff – Reduce competitiveness – from competitors Generate income for the government of home-based firms Raise consumer prices 6 - 17

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 Export Quotas 1. Protect domestic producers of a good 1. Retain adequate domestic supply of a product 2. Force outside firms to compete for market access 2. Restrict world supply of a product to raise its price 6 - 18

How a Tariff-Quota Works 6 - 19

Embargoes Complete ban on trade (imports and exports) in one or more products with a particular country Most restrictive nontariff trade barrier Often used to achieve political goals Can be difficult for a nation to enforce 6 - 20

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 6 - 21

Administrative Delays Regulatory controls or bureaucratic rules to slow imports into a country v Inconvenient ports for imports v Product-damaging inspections v Understaffed customs offices v Lengthy licensing procedures 6 - 22

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 6 - 23

Discussion Question What are some of the methods that governments use to restrict international trade? 6 - 24

Answer Discussion Question To restrict trade, governments can use methods such as tariffs, quotas, embargoes, local content requirements, administrative delays, and currency controls. 6 - 25

General Agreement on Tariffs and Trade (GATT) Early Success: • Tariffs down 35% • Trade up 2, 000% Then Problems: • Nontariff barriers • Services left out 6 - 26

Completed Rounds of GATT 6 - 27

Uruguay Negotiations Improved intellectual property rules Extended coverage to services Reduced agriculture barriers Created World Trade Organization 6 - 28

World Trade Organization (WTO) Normal trade relations status Dumping and antidumping Dispute settlement body Doha trade talks 6 - 29

Discussion Question The World Trade Organization principle that calls for nondiscrimination among trading partners is called _____. a. Least favored status b. Normal trade relations c. Countervailing relations 6 - 30

Answer to Discussion Question The World Trade Organization principle that calls for nondiscrimination among trading partners is called _____. a. Least favored status b. Normal trade relations c. Countervailing relations 6 - 31