CHAPTER 7 POLITICAL ECONOMY OF INTERNATIONAL TRADE Why do governments intervene in international trade o Political reasons Weapon to influence other countries Local stakeholders o Economic reasons Helping local firms Enhancing competitiveness o Protecting local employment o Retaliation Friendly Unfriendly o Protecting consumers o Industrialization argument Comparable or fair access to other country s markets o Foreign policy and political relationships with other countries Agrarian economies need protection to industrialize o Essential industry argument Protect important national industries o Infant industry argument Protect new industry until it becomes more competitive o Promoting investment inflows o Balance of payments objectives Import restrictions make foreign firms invest locally Import substitution don t import make locally Export promotion only make products for export How do governments control trade o Different instruments to control trade Quantity of goods non tariff barriers Price of goods tariffs o Tariffs duties may be levied On good entering leaving or passing through a country For protection or revenue On a per unit specific or a value basis ad valorem o Many more types of non tariff barriers than types of tariffs Non tariff barriers Import quotas to limit amount can be voluntary VERs Embargo to eliminate export of item Subsidies or assistance to local firms Customs delays paperwork or red tape Imposition of higher standards Buy local laws in favor of domestically produced goods local content laws Reciprocal requirements for trade What is the world trading organization o GATT was the world s major trade liberalization organization after WWII Multilateral negotiations with 120 countries Eight rounds of negotiations Monitored enforcement o Most favored nation clause MFN MFN country must be granted to all other MFN countries if a tariff reduction granted to one o Most countries still made exceptions to MFN due to trade alliances or other reasons o WTO created by the Uruguay Round 1986 1993 taking effect in 1995 Intellectual property rights Trade services not just goods Telecommunications and financial services Better settlement of disputes Reduced agricultural subsidies textiles protection Criticisms Labor the environment national sovereignty As of January 2015 the WTO has 160 members accounting for 23 applicants are negotiating to become members don t have over 95 of world trade to be countries Russia became a member in December 2011 China is a member as are Vietnam and Cuba Current round is Doha Round since 2001 Proliferation of anti dumping actions particularly in very Iran and Iraq are not members competitive industries metals plastics chemicals machinery and electrical equipment Difficult to protect intellectual property Tariffs for agricultural products and services high NEWS ARTICLES o Iran deal spurs foreign applications for Tehran s stocks Iran can expand export sales of oil Once sanctions are lifted foreign investors want to sell to Iran or invest in Iran getting rid of sanctions and enhancing free trade is good for host and away country o Russia responds to western sanctions Western countries put sanctions on Russia because it invaded Ukraine ban certain imports Bad effect on Russia Russia responds by banning imports from parts of Europe and the U S CHAPTER 8 FDI Countries that are the recipients of sanctions respond with bans of their own trade is weapon used by countries to influence other countries political goals o WTO is like a trade police China to WTO China is dumping to other countries countries taking o Involves ownership of productive assets o Concept of control Direct investment usually implies an ownership of at least 10 o Need for control in investment To transfer technology and other competitive assets as necessary To control production process o Terms amount of FDI over a period of time one year total accumulated value of foreign owned assets amount of FDI from a country amount of FDI entering a country Flow Stock Outflow Inflow Host country Home country the country receiving the FDI the country in which the MNC is headquartered o Types of FDI Greenfield FDI Acquisition FDI country Joint venture FDI in another country Horizontal FDI Ex countries establishment of a new operation in a foreign new operation in host country host country company pairs with a company the same step in multiple places Honda assembles parts cars in many different Vertical FDI different steps in multiple places Ex produce materials in China produce a part in Brazil assemble the product in Japan and distribute the product in the U S Developing nations are catching up with developed nations in FDI Gross Fixed Capital Formation GFCF capital invested in factories stores office buildings and the like a summary of the total amount of o All things being equal the greater the capital investment in an economy the more favorable its future growth prospects are likely to be o FDI helps to develop GFC in countries When is FDI preferable to trade o Transportation costs too high for exporting o Tariff and non tariff barriers very high o Lack of excess domestic capacity o Scale economies not significant in competitiveness especially when products are more differentiated o Location specific advantages When is FDI preferable to licensing technological firm the control for maximizing mgmt mktg can use abroad price domestically o Licensing limitations may result in a firm giving away valuable o Know how to a potential foreign competitor licensing doesn t give a o They normally exercise over manufacturing marketing and strategy o Profitability licensee may be able to recreate product but not the o And manufacturing capabilities used to produce the product What makes FDI successful o Firms must have some unique advantage for competing which they o Local firms do not have this advantage or it is unavailable at the same o FDI experience makes firms more successful in competing o More stable profits and earnings Governmental concerns o MNCs operate in multiple countries decisions made in one can have a negative repercussion on another o The sheer size of MNCs is an issue o MNCs take market share away from local firms causing bankruptcy Radical view Free market approach o Marxist view MNEs enslave less developed countries o FDI is a way to disperse production and flow of goods and services in o Governments should maximize national benefits and minimize costs the most efficient manner
View Full Document
Unlocking...