Chapter 6

Report
6
BusinessGovernment
Trade Relations
Copyright © 2014 Pearson Education, Inc.
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
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Time Warner
• Global leader in media and entertainment
• Nations protect their traditional values
• Time Warner must tread carefully worldwide
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Political Motives
Protect
jobs
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Preserve
national
security
Respond to
“unfair”
trade
Gain
influence
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Economic Motives I
Potential results
Protect infant
industries
Protect emerging
industries during
development from
global competition
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+ National income increases
–
–
–
–
Wrong industries protected
Firms grow complacent
Consumer prices rise
Public funds poorly spent
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Economic Motives II
Potential results
Pursue strategic
trade policy
Help companies to
achieve economies of
scale and gain a firstmover advantage
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+ Global industry created
– Firms’ efficiency reduced
– Domestic costs increase
– Special interests benefit
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Cultural Motives
Nations block imports
deemed harmful
Protect national
identity
Usual suspects
are U.S. media and
consumer goods
Result of increased
globalization
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Discussion Question
What are some of
the political,
economic, and
cultural reasons
why countries
intervene in
trade?
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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.
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Trade Promotion and Restriction
Trade promotion
methods
 Subsidies
Trade restriction
methods
 Tariffs
 Quotas
 Export financing
 Embargoes
 Foreign trade zones
 Local content requirements
 Special government agencies
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 Administrative delays
 Currency controls
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Subsidies
Financial assistance in the form of cash, tax
breaks, price supports, etc.
Potential results
+ Increased competitiveness
– Encourage inefficient firms
– Increased consumer prices
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Export Financing
Financing such as low-interest loans and loan guarantees
Export-Import Bank of the United States




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…
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Foreign Trade Zones
 Designated region in which
merchandise is allowed to
pass through with lower
customs duties (taxes) and/or
fewer customs procedures
 Purpose is to increase
employment and trade
within the nation
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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
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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
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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
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Tariffs
Government tax levied as a product enters or leaves a nation
Potential results
 Export tariff
+ Protect domestic firms
 Transit tariff
+
 Import tariff
– Reduce competitiveness
–
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from competitors
Generate income for the
government
of home-based firms
Raise consumer prices
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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
1. Retain adequate domestic
2. Force outside firms to
2. Restrict world supply of a
of a good
compete for market access
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supply of a product
product to raise its price
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How a Tariff-Quota Works
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Embargoes
Complete ban on trade (imports and exports)
in one or more products with a particular country
Most restrictive
nontariff trade
barrier
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Often used to
achieve political
goals
Can be difficult
for a nation to
enforce
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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
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Administrative Delays
Regulatory controls or
bureaucratic rules to slow
imports into a country
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
Inconvenient ports for imports

Product-damaging inspections

Understaffed customs offices

Lengthy licensing procedures
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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
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Discussion Question
What are some of
the methods that
governments use
to restrict
international
trade?
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Answer Discussion Question
To restrict trade,
governments can use
methods such as
tariffs, quotas,
embargoes, local
content requirements,
administrative delays,
and currency controls.
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General Agreement on
Tariffs and Trade (GATT)
Early Success:
• Tariffs down 35%
• Trade up 2,000%
Then Problems:
• Nontariff barriers
• Services left out
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Completed Rounds of GATT
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Uruguay Negotiations
Improved intellectual property rules
Extended coverage to services
Reduced agriculture barriers
Created World Trade Organization
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World Trade Organization (WTO)
Normal trade relations status
Dumping and antidumping
Dispute settlement body
Doha trade talks
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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
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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
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