Exam 2 Study GuideChapter 6 - Going Global: Trade Barriers and Regulation The Evolution of Trade • Globalization has 3 major components: social, political, and economical• Trade between countries dates back before recorded history • Major globalization could not take place until technology allowed for world exploration. • Transatlantic Cable: Telegraph cable laid in 1866 on ocean floor o Permitted first “real time” communication from New York to London to Paris; before then it took at least a weeko Alexander Graham Bell invented the telephone in 1875.• First half of 20th centuryo 1915-1945 WWI, the Great Depression, and WWIIo Keynesian economics (Keynes was an economist whose major policy view was that the way to stabilize the economy is to stabilize the price level, and that to do that the government’s central bank must lower interest rates when prices tend to rise and raise them when prices tend to fall.)Trade Policy Official objectives, laws, and actions designed to influence the flow of exports and imports of goods and services; a political institution designed to stimulate or control the exchange of goods between nations • Export policy: a set of political determinations designed to regulate which types of products can leave a country for another market, and when and under what conditions those products can leave; selling domestic goods and services in foreign markets• Import policy: availability of foreign-made goods and services in domestic markets; a political institution that determines what types of products and services can enter the domestic economy from another country, when, and under what conditions. • Protectionism: uses trade barriers to minimize imports; creates trade barriers to protect domestic producers (but raises prices) • Free Trade: unrestricted exchange of goods among nations; lowers prices but can create a trade imbalance • Protected Trade: Prevents domestic companies from having to compete with foreign companies in their own domestic markets o Allows domestic companies to charge higher prices, increase job availability, and pay higher wageso Consumers pay higher prices and have more limited selection of goods and serviceso Source of government revenueCustoms Services• Regulates trade barriers; Role of customs (CBP – Customs and Border Protection: the U.S. customs service) in most countries consists of:o Monitoring imports and exportso Assessing and collecting duties on select goodso Reporting imports and/or exports against quotao Protecting country’s borders against illegal entry• Requires international standard of accounting• Customs service: a government agency responsible for monitoring imported goods, assessing and collecting duties, and reporting imports against quotas Harmonized System • Global classification system used to describe trade goods• Based on a 6-digit system (similar to NAICS) (specific items use up to 10 digits)• Classifies product categories, description, standard unit of measurement, and rates of duty• 98% of world trade (179 countries) use HSTariffs and Duties • Tariff: a tax on imported or exported goodso Specific tariff: fixed amount of tax per physical unit of imported product; degree of protection varies inversely with changes in import prices, which helps to keep market from being flooded by a lot of inexpensive goods – calculated by physical unit (by number or by kilogram weight; formula for duty due: units of goods x tariff) – based on units or weight; value is not calculated* o Ad valorem tariff: a tax set as a fixed percent of the value of an imported product; degree of protection is constant – based on value of product (like a sales tax) – formula for duty due: value of product x duty rateo Combined tariff: item is charged both specific and ad valorem tariff • Duty: the payment made (based on tariff schedule) – increases the selling price in the importing country • Effective tariff: the economic impact of a nominal tariff; total amount of tariff paid by final consumer; tariff amount becomes part of product value, subject to markups. • Nominal tariff: rates published in each country’s tariffs schedule-Tariffs reduce the volume of trade, increase the cost of imported goods, make it possible for domestically produced goods to be sold for competitive prices, and they are a source of government revenue. How is value determined? • Transaction value: price actually paid for goods when sold for export• Should cost of shipping be included? U.S. uses FOB (Free on Board) – value of goods at the time they are loaded onto the carrier (the time they leave the exporting country)• European Union uses CIF (cost, insurance, freight) – value of goods at the time they arrive in the importing country. The EU therefore pays more tariff on the same value of goods than the U.S. The final cost of retail goods will be higher. Businesses in the EU have more protection from outside competition. Free Trade Zones A site within a nation where goods from another nation can be brought in duty-free to be displayed, stored, and/or used for manufacturing (for eventual export, not domestic use). Goods are shipped to a third country (not sold domestically). • Normally in developing countries with low labor costs. Raw goods are turned into finished products and exported. • Free Trade Area: two or more countries eliminate or reduce trade barriers (ex: NAFTA – North America Free Trade Area (Canada, U.S., and Mexico))• Duty-Free sales enterprise: Retailer is allowed to sell goods without duty assessed – located near point of entry (airports and cruise ships) Non-Tariff Trade Barriers: the quota, quality standards, or other regulations or conditions that restrict the flow of goods between countries, not including taxes on imports or exports Restrict trade by means other than tariffs:• Exchange rates: ratio at which one currency can be exchanged for another, says how much one country’s money is worth in another country, and determines the relative cost of imports • Quotas: restrict the quantities of goods that can be imported or exported; importing countries can give or sell license for quota to exporting country (selling generates revenue), and countries with licenses can sell the quota rights to other countries • Voluntary Export Restraints: one country agrees to voluntarily restrict the amount they export to another country Trade Agreements GATT: General Agreement on