International Business Ch. 7 Midterm Vocab/Ideas Flashcards Preview

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Flashcards in International Business Ch. 7 Midterm Vocab/Ideas Deck (18):
1

Free Trade

-occurs when governments do not attempt to restrict what citizens can buy from another country or what they can sell to another country
many nations are nominally committed to free trade, but intervene to protect the interests of politically important groups

2

Tariff

taxes levied on imports that effectively raise the cost of imported products relative to domestic products

Tariffs:
-increase government revenues
-force consumers to pay more for certain imports
-are pro-producer and anti-consumer
-reduce the overall efficiency of the world economy

3

Specific Tariffs

levied as a fixed charge for each unit of a good imported

4

Ad Valorem Tariffs

levied as a proportion of the value of the imported good

5

Subsidies

-government payments to domestic producers
-Subsidies help domestic producers
compete against low-cost foreign imports
-gain export markets
-Consumers typically absorb the costs of subsidies

-Subsidies are government payments to domestic producers. -They can be in the form of:
--Cash grants
--Low-interest loans
--Tax breaks
--Government equity participation in the company

-Subsidy revenues are generated from taxes.

-Subsidies encourage over-production, inefficiency and reduced trade.

6

Import Quotas

-restrict the quantity of some good that may be imported into a country

-Tariff rate quotas - a hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than to those over the quota
-A quota rent - the extra profit that producers make when supply is artificially limited by an import quota

7

Tariff Rate Quotas

a hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than to those over the quota

8

Quota Rent

- the extra profit that producers make when supply is artificially limited by an import quota

9

Voluntary Export Restraint (VER)

-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
--raise the prices of imported goods

10

Local Content Requirements

-demand that some specific fraction of a good be produced domestically

-benefit domestic producers
-consumers face higher prices

11

Administrative Trade Policies

bureaucratic rules designed to make it difficult for imports to enter a country

-polices hurt consumers by limiting choice

12

Anti-Dumping Policies

aka COUNTERVAILING DUTIES - punish foreign firms that engage in DUMPING and protect domestic producers from “unfair” foreign competition

DUMPING - selling goods in a foreign market below their costs of production, or selling goods in a foreign market below their “fair” market value

-enables firms to unload excess production in foreign markets
-may be predatory behavior - producers use profits from their home markets to subsidize prices in a foreign market to drive competitors out of that market, and then later raise prices

13

Dumping

selling goods in a foreign market below their costs of production, or selling goods in a foreign market below their “fair” market value

-enables firms to unload excess production in foreign markets
-may be predatory behavior - producers use profits from their home markets to subsidize prices in a foreign market to drive competitors out of that market, and then later raise prices

14

Helms-Burton Act

enacted by Congress; allows Americans to sue foreign firms that use property in Cuba confiscated after the 1959 revolution.

-D'Amato Act- similar to the Helms-Burton Act, but aimed at Libya and Iran.

15

Political Arguments for Government Intervention in Markets:

1) Protecting jobs - the most common political reason for trade restrictions
-results from political pressures by unions or industries that are "threatened" by more efficient foreign producers, and have more political clout than consumers

2) Protecting industries deemed important for national security - industries are often protected because they are deemed important for national security
-aerospace or semiconductors

3) Retaliation for unfair foreign competition - when governments take, or threaten to take, specific actions, other countries may remove trade barriers
if threatened governments do not back down, tensions can escalate and new trade barriers may be enacted
-risky strategy

4) Protecting consumers from “dangerous” products – limit “unsafe” products

5) Furthering the goals of foreign policy - preferential trade terms can be granted to countries that a government wants to build strong relations with
-trade policy can also be used to punish rogue states
-the Helms-Burton Act and the D’Amato Act, have been passed to protect American companies from such actions

6) Protecting the human rights of individuals in exporting countries – through trade policy actions
-the decision to grant China MFN status in 1999 was based on this philosophy

7) Protecting the environment – international trade is associated with a decline in environmental quality
-concern over global warming
-enforcement of environmental regulations



16

Economic Arguments for Government Intervention in Markets:

1) The infant industry argument - an industry should be protected until it can develop and be viable and competitive internationally
-accepted as a justification for temporary trade restrictions under the WTO

2) Strategic trade policy - first mover advantages can be important to success
-governments can help firms from their countries attain these advantages
-governments can help firms overcome barriers to entry into industries where foreign firms have an initial advantage

17

Infant Industry Argument
(For Gov't Intervention)

(Hamilton 1792) Developing countries have a potential comparative advantage in manufacturing, but new manufacturing industries cannot initially compete with established industries in developed countries.
-an industry should be protected until it can develop and be viable and competitive internationally
-accepted as a justification for temporary trade restrictions under the WTO

18

Implications of Trade Barriers on Managers:

Managers need to consider how trade barriers affect the strategy of the firm and the implications of government policy on the firm:

1) Trade barriers raise the cost of exporting products to a country

2) Voluntary export restraints (VERs) may limit a firm’s ability to serve a country from locations outside that country

3) To conform to local content requirements, a firm may have to locate more production activities in a given market than it would otherwise

4) Managers have an incentive to lobby for free trade, and keep protectionist pressures from causing them to have to change strategies