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International BusinessSession 6
National Trade PoliciesProtectionist PoliciesEconomic Development Programs
◦Export promotion strategy◦Import substitution strategy
Industrial Policy◦Key domestic industries chosen,
protected, and promotedRegional Agreements
Trade Intervention
Should a national government intervene to protect the country’s domestic firms by taxing foreign goods entering the domestic market or constructing other barriers against imports?
Should a national government directly help the country’s domestic firms increase their foreign sales through export subsidies, government-to-government negotiations, and guaranteed loan programs?
Two Types of Rationale for Protectionism
Defensive barriers safeguard industries, workers, special interest groups, protect infant industries and to promote national security (export controls).
Offensive barriers pursue a strategic or public policy objective, such as increasing employment or generating taxes.
International Business: Strategy, Management, and the New Realities 4
National Defense ArgumentCountry must be self-sufficient in
critical raw materials, machinery, and technology or else be vulnerable to foreign threats
Appeals to general publicProtects steel, electronics, and
machine tools industries, and merchant marines
Infant Industry Argument
Imposition of tariffs to give U.S. firms temporary protection from foreign competition until firms are fully established
Powerful economic development strategy
Which industries should be protected? For how long?
Maintenance of Existing JobsJobs in high-wage countries
threatened by imports from low-wage countries
Forms of assistance◦Tariffs◦Quotas
Protection of the National Economyadvanced economies cannot compete
with those in developing countries that employ low-cost labor, thus governments should impose trade barriers to block imports
Preserving National Culture and IdentityGovernments seek to protect certain occupations,
industries, and public assets central to national culture:
Switzerland imposed trade barriers to preserve its long-established tradition in watch making.
Japanese restrict the import of rice because it is central to the nation’s diet and food culture.
U.S. opposed Japanese investors’ purchase of the Pebble Beach golf course in California, New York’s Rockefeller Center, and the Seattle Mariners baseball team, all considered to be part of the national heritage.
France does not allow significant foreign ownership of its TV stations because of concerns that foreign influences will taint French culture.
National Strategic PrioritiesIntervention encourages the
development of industries that bolster the nation’s economy.
Countries with many high-value-adding industries —such as IT, pharma, automotive, or financial services — create better jobs and higher tax revenues.
Deciding which industries to support is challenging; it is difficult to predict which industries will produce comparative advantages. May result in continuous subsidization of underperforming industries.
Barriers to International Trade
Tariff barriers◦ Export tariff◦ Transit tariff◦ Import tariffs
Ad valorem Specific Compound
Non-tariff barriers◦ Quotas◦ Product and testing standards◦ Restricted access to
distribution networks◦ Public-sector procurement
policies◦ Regulatory controls◦ Local-purchase requirements
Tariffs
Export tariffs- taxes on products exported by domestic firms- ◦ Example- Russia charges a duty on oil exports,
intended to generate government revenue and maintain higher stocks of oil within Russia.
Import tariff (most common) - tax levied on imported products. 1. Ad valorem - tariffs are assessed as a percentage of
the value of the imported product. 2. Specific tariff—a flat fee or fixed amount per unit of
the imported product—based on weight, volume, or surface area (such as barrels of oil or square meters of fabric).
Revenue tariff - intended to raise money for the government, e.g. by taxing cigarette imports.
Protective tariff - protects domestic industries from foreign competition.
Prohibitive tariff - is so high that no one can import any of the items. International Business: Strategy,
Management, and the New Realities 12
World Trade OrganizationStarted in 1947 as General Agreement
on Tariffs and Trade (GATT)Goal: to promote a free and
competitive international trading environment
Method: multilateral negotiationsBecomes WTO in 1995Added: Services, IP, Investment, and
Enforcement powersCurrently 153 member countries
Success in Reducing Tariffs
Doha Round
Started in 2001, aim for conclusion 2011Aims for developing countries:
◦ reforming agricultural subsidies◦ improving the access to global markets◦ ensuring that new liberalisation in the global economy
respects the need for sustainable economic growth in developing countries
General Agreement on Trade in Services (GATS)
Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)
Harmonized Tariff ScheduleMost countries have adopted a
detailed classification scheme for imported goods called the harmonized tariff schedule (HTS). Because of its complexity, the HTS can sometimes be difficult to use.
Sample Import Tariffs
TARIC – Info on Tariffs
http://ec.europa.eu/taxation_customs/dds2/taric/taric_consultation.jsp?Lang=en 18
20
Degrees of International Integration
nationalInter-
ofForms
Inte-gration
RemovalInternalTariffis
CommonExternalTariffs
Free FlowCapital &Labour
HarmoniseEconomicPolicy
PoliticalIntegration
FreeTradeArea
CustomUnion
CommonMarket
EconomicUnion
PoliticalUnion
Source: SUDER
Why Nations Pursue Economic Integration?
1. Expand market size◦ Regional integration greatly increases the scale of the
marketplace for firms inside the economic bloc. ◦ Example- Belgium has a population of just 10 million;
the EU gives Belgian firms easier access to a total market of roughly 490 million.
◦ Consumers also gain access to a greater selection of products and services.
2. Achieve scale economies and enhanced productivity ◦ Expansion of market size within an economic bloc gives
member country firms the opportunity to gain economies of scale in production and marketing.
◦ Internationalization inside the bloc helps firms learn to compete more effectively outside the bloc as well.
◦ Labor and other inputs are allocated more efficiently among the member countries- leading to lower prices for consumers.
Why Nations Pursue Economic Integration?
3. Attract direct investment from outside the bloc◦ Compared to investing in stand-alone countries,
foreign firms prefer to invest in countries that are part of an economic bloc as they receive preferential treatment for exports to other member countries.
◦ Examples- General Mills, Samsung, and Tata- have invested heavily in the EU to take advantage of Europe's economic integration.
◦ By establishing operations in a single EU country, these firms gain free trade access to the entire EU market.
4. Acquire stronger defensive and political posture ◦ Provide member countries with a stronger
defensive posture relative to other nations and world regions- this was one of the motives for the initial creation of the European Community (precursor to the EU).
International Trade Groups
Trade Group Comparison
Trade Group Comparison 2
Producers’ Alliances and ICCAs
Producers’ Alliances ◦ Membership agreements between producing and exporting
countries.◦ OPEC (Producers’ Cartel), Diamonds, Wool, Bananas◦ Quota system
International Commodity Control Agreements◦ Agreements between producing and consuming countries.◦ Aim is to counteract price instability.◦ ICCO: International Cocoa Organization
42 countries + EU Represents 80% of production and 70% of consumption
Doing Business in the EU
EU Competencies
28
29
30
Development of the EU
31
Political Union
Economic Union
Common Market
Customs Union
Free Trade Area
Lisbon
EMS
EURO
Single Europe
Coal and Steel
European Economic Community
EU Trade - Export
32
Exports - percentage
33
EU Trade - Import
34
Imports - percentage
35
Main Trade Partners
Export Import
United States (18.7%)Switzerland (8.1%)China (7.5%)Russia (6%)Turkey (4%)
Top 5 total: 44.3%
China (17.9%)United States (13.3%)Russia (9.6%)Switzerland (6.2%)Norway (5.7%)
Top 5 total: 52.7%
36
Main Industries by Country• Automobiles - France, Italy, UK, Germany, Czech
Republic, Slovakia, Spain• Fashion- Italy and France and other western
European countries• Aircraft- France and Germany• Machinery- The entire continent• Electronics- Italy, The Netherlands, Germany• Food products such as wine, beer, cheeses,
chocolates- Western Europe• Pharmaceuticals- Switzerland• Military equipment- UK, France, Italy, Germany,
Russia• Industrial chemicals- Most countries
37
Single European MarketFree Movement of:
1. Goods2. Services3. Labor4. Capital
SEM principlesHarmonisation = common rules
◦time consuming, complex, inflexibleMutual recognition - Cassis de
Dijonhome country controlnew approach to standards -
‘essential requirements’liberalisation
Free Movement of GoodsMost of the SEM reforms of 1992
involved goodsSuccessResults
◦Ever increasing intra-EU trade◦Reduction in consumer prices (est
11%)
40
Free Movement of ServicesServices currently represent two-
thirds of the EU's GDP and employment, they only make up for around one-fifth of total intra-EU trade.
Why?
41
Barriers to Exporting Services
42
Services Directiveto ease freedom of establishment
for providers and the freedom of provision of services in the EU;
to strengthen rights of recipients of services as users of the latter;
to promote the quality of services;
to establish effective administrative cooperation among the Member States.
43
Freedom of LaborHow mobile is labor?Are some professions more
mobile?How diverse is labor?
◦Productivity◦Wages
44
Non-nationals (EU)
Non-nationals (All)
Mobility by Profession
47
48
The Neighborhood
49
EU and the USA
They are the two largest economies in the world
They enjoy the world's biggest bilateral trading and investment relationship
Common goals and interests worldwide
Common concerns on security and political issues
US FDI is the greatest in the EU
The US receives one quarter of EU exports and supplies 20% of its imports.
50
EU USA
Population (million): 494 307
Area (1000km2) 4422 9826
Population density (inh./km2)
112 34
The Lisbon Criteria
In 7 out of 8 Lisbon dimensions, the EU is less competitive than the US. These include:
“An Information Society for All”, “Innovation, Research and Development”, “Liberalization”, “Network Industries”, “Efficient and Integrated Financial Services”, “Enterprise Environment” and “Social Inclusion”.
The EU outperforms the US in “Sustainable Development” and in the subcategories “Telecommunications” and “Modernising Social Protection”.
51
EU View of the World
52
Biggest trade partner
Oil And Gas
Reaching EastNeighborhood
Regional RealationsRegional Realations