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Serving Foreign Marketsby
ExportingThe International Business Environment
(Mg211)London School of Economics, Summer School 2013
Emanuel Ornelas
LSE Summer School, Mg211
Benefits of exporting New markets, greater demand Scale economies Hedging Others?
LSE Summer School, Mg211
What are the determinants of the volume of bilateral trade?
The answers to those questions shed light on the costs and the facilitators of trade.
Is exporting for everyone?
LSE Summer School, Mg211
France’s Exports
• Dependent variable: volume of trade between countries i and j• 92 countries, annual data for almost 3 decades
[Baxter and Kouparitsas (2008)]
LSE Summer School, Mg211
So, is exporting for everyone?
LSE Summer School, Mg211
Exporting: relatively rare activity Exporting firms are in the minority
• US: 5.5 million of firms; 4% export.• Among manufacturing firms, 18% export.
The ‘rareness’ of exporting vary by sector • Electric equipment industry: 38% export.• Furniture industry: 7% export.
Even for those firms that export, foreign markets are often not the main focus: on average, only 14% of their output is exported. This varies by sector, too:
• Computers industry: 21% of output is exported.• Beverage and tobacco industry: 7% of output is exported.
Despite the rareness of exporting, there are exporters in every manufacturing sector:
LSE Summer School, Mg211
LSE Summer School, Mg211
Costs of exporting
1. Transportation costs
Bigger impact on products with low value relative to weight
What implications for quality of exported vs. domestically sold products?
LSE Summer School, Mg211
Example:Brazilian coffee, “basic” and “premium” Cost to sell coffee in Brazil:
Basic: £1 per kg Premium: £2 per kg Cost of premium relative to basic in Brazil: £2/£1 = 2
Transportation cost to the UK: £3 per kg Cost to sell each in the UK:
Basic: £4 per kg Premium: £5 per kg Cost of premium relative to basic in the UK: £5/£4 = 1.25
LSE Summer School, Mg211
As a producer of coffee in Brazil, which type of coffee should you prioritize when exporting to the
UK?
LSE Summer School, Mg211
Caveats “Shipping the good apples out” best when
all other things are equal—but often they are not Scale economies can differ depending on quality
of product; Demand can be more sensitive to quality in
domestic market.
LSE Summer School, Mg211
Costs of exporting
2. Tariffs, quotas, and other policy-driven trade barriers
LSE Summer School, Mg211
Import tariffs Wedge between export price and domestic
price of a product
pd = pe (1+)
pe = pd/(1+)
LSE Summer School, Mg211
Import quotas Ceiling on how much can be imported of a
product
E ≤ Q
LSE Summer School, Mg211
Tariffs vs. quotas Tariffs: defines wedge between export and
domestic prices Given wedge, market adjusts import volume
Quotas: defines import volume Given volume of imports, prices adjust
Does it matter whether the protection is through tariffs or quotas?
LSE Summer School, Mg211
price
quantity
pw
pw+t
imports (free trade)
imports (tariff)
S
D
tariff t:
LSE Summer School, Mg211
price
quantity
pw
p(Q)
imports (free trade)
Q
S
D
quota Q:
LSE Summer School, Mg211
So, does it matter whether the protection is through tariffs or quotas?
LSE Summer School, Mg211
Application: textiles and clothing Long history of discriminatory, unregulated quotas
Since the early 1970s, the Multi-Fibre Agreement (MFA) Estimated net loss for the U.S. with the quotas: $7
billion Or $63 per household (~ 5% of the median apparel
budget). Or $9,500 per job (~ 30% of the annual salary in the
industry). Uruguay Round of multilateral trade negotiations:
plan to eliminate quotas by 1 January, 2005.
LSE 2004-2005
LSE Summer School, Mg211
LSE Summer School, Mg211
LSE Summer School, Mg211
Also changes in quality: With the elimination of the MFA quotas, the price
dropped the most for the lower-priced items An inexpensive T-shirt had a greater drop in price than a
more expensively priced item. China’s producers promoted a “quality
downgrading” in their exports to the US and the EU.
When a quota like the MFA is applied, producers tend to upgrade quality; the opposite happens when the quota is abolished.
LSE Summer School, Mg211
Change in qualityChange in qualityChange in quality
The changes in quality:
LSE Summer School, Mg211
Who sets protection levels? Governments.
Are governments free to adjust their tariffs as they wish?
Domestic pressures External commitments
LSE Summer School, Mg211
Domestic pressures for protection Suppose government faces no external
commitments.
Why would a government protect the economy?
LSE Summer School, Mg211
Effects of protection1. Domestic price of protected sectors ↑2. Variety of goods available for domestic
consumers ↓ Effects of protection on individual groups:
Hurts consumers Hurts companies buying imported inputs Benefits companies that compete with imports Benefits workers in protected sectors
LSE Summer School, Mg211
Effects of protection
There are always losers and winners Net effect from protection?
(almost) always such that [total loss > total gain]
As the country moves away from the goods and sectors in which the country is relatively good at
LSE Summer School, Mg211
Domestic pressures for protection Suppose government faces no external
commitments.
Again: why would a government protect the economy?
LSE Summer School, Mg211
Entrepreneurs: 2 perspectives1. Import-competing firms2. Exporters
“Lobbying” plays a central role in shaping protection levels International businesspeople must be aware of
that, regardless of which category above they belong to.
LSE Summer School, Mg211
Application: the end of the MFA and the China factor We have seen that, with the end of the
MFA in early 2005, there was a surge in textile imports in developed countries, especially from China.
Because of commitments at the World Trade Organisation, new quotas could not be imposed. Really?
LSE Summer School, Mg211
Sequence of events: End of MFA on January 1, 2005 Numerous retailers switched purchases to China due to low
labour cost (relative to the quality of labour) Massive increase in imports of textiles and clothing from
China Pressure from Italian and French competitors for “action”
against China July, 2005: the EU (and soon after the US) imposed new
quantitative restrictions on Chinese imports of textiles and clothing While many retailers had multiple orders (including of bras)
already under way to Europe Orders had to wait at European ports until a solution was reached
LSE Summer School, Mg211
Could the EU and the US re-impose quotas on China? Yes, because China joined the WTO after
the agreement to dismantle the MFA had already been concluded.
“Temporary” restraint on Chinese imports of textiles and clothing for 3 years, renewable for other 3 years Import growth limited to 7.5% per year during
that period.
LSE Summer School, Mg211
Winners and losers? Losers?
Most high street retailers In the UK mainly Marks & Spencer (largest share
of the UK lingerie market) Consumers
Winners?
LSE Summer School, Mg211
Who sets protection levels? Governments.
Are governments free to adjust their tariffs as they wish?
Domestic pressures External commitments
LSE Summer School, Mg211
External commitments on governments’ trade policies
The World Trade Organisation
Preferential trade agreements