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INTERNATIONAL BUSINESS
ENVIRONMENT
SESSION 3
Political Economy of International
exchange
CAUTION!
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SLIDES ARE NOT ENOUGH TO FULLY GRASP THE
COURSE CONTENTS
YOU ARE ADVISED TO:
Take notes and participate during the class
Read reference textbooks and other materials as
recommended
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The environment of international business (reminder)
INTERNATIONAL ENVIRONMENT
National trade
policies
Global economic regulation
Intl. monetary
system
Regional agreements
DOMESTIC / FOREIGN ENVIRONMENT
Culture
Political/legal systems
Economic system
Economic policies
FIRM
Structure Strategy Operations
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Preliminary statement
"Perhaps, no area of economics displays such a gap between what policy makers practice and what economists preach as
does international trade.
The superiority of free trade is one of the most cherished beliefs, yet international trade is rarely free".
Dani RODRIK, Political Economy of Trade Policy (1955)
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INTRODUCTION CASE STUDY
Section 1
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China and the European Trade Policy
1. What are the various types of restrictive measures imposed on European textile, light bulb or candle imports from China?
2. What is the case for removing them?
3. What are the various official and actual reasons for nonetheless imposing such measures?
4. Which theories of international trade and investment would best apply to each case?
5. What are the objectives and means of the European Trade Policy? Is it still justified in today's global economy (please explain)?
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POLITICAL ECONOMY OF INTERNATIONAL TRADE
Section 2
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Rationales of government intervention
Political issues
Social issues
Strategic issues
Economic issues
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Goals can be intertwined or in conflictGoals are dynamic: objectives may change over time (homeostasis)
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Economic rationale (1): the export-promotion strategy
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Export promotion (e.g. Sth Korea, 1970-80s)
Import restrictions
Support to export-
oriented industries
Savings / investment supported at the expense of domestic consumption
International competitiveness of national industry
Export-driven growth
Job creation
Foreign exchange reserves
The Asian model
The growth champions of the past few decades – Japan in the 1950s and 1960s, South Korea from the 1960s to the 1980s, and China
since the early 1980s – have all had activist governments collaborating closely with large business. All aggressively promoted investment and exports while discouraging (or remaining agnostic
about) imports.
China's pursuit of a high-saving, large-trade-surplus economy in recent years embodies mercantilist teachings.
http://www.europeanceo.com/news/commentaries//article672.html
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Mercantilism redux?
Neo-mercantilism is a term used to describe a policy regime which encourages exports, discourages imports, controls capital movement and centralises currency decisions in the hands of a central government
The objectives of neo-mercantilist policies are to
→ Increase the level of foreign reserves held by the government, allowing more effective monetary and fiscal policy
→ Support GDP and employment growth at home.
It is called "neo" because of the change in emphasis from classical mercantilism on military development, to economic development. It also accepted a greater level of price fixing based on market mechanisms
Adapted from: http://en.allexperts.com/q/Economics-2301/Differences-Mercantilist-Neo-Mercantilist-1.htm
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Food for thought …
What are the limitations of neo-mercantilist like policies
"Beggar-thy-neighbour" policies, carried-out at the expense of trade partners
Will lead to global depression if applied by all players
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Other economic motives (1)
Protecting infant industries (dynamic theory of comparative advantage) (http://internationalecon.com/Trade/Tch100/T100-4.php)
Strategic trade policy, supporting the development of strategic industries and technologies
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Protecting infant industries: the US case
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Alexander Hamilton(January 11, 1755 – July 12, 1804)
Thomas Jefferson (April 13, 1743 – July 4, 1826)
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Strategic trade policies (Krugman)
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Advantage to first mover
Oligopolistic markets
Barriers to entry
Capital intensive industries
Government's strategic trade policy
Trade promotion Trade restriction
Strategic trade policies: the Airbus case
No subsidies
Airbus
Enters Does not enter
BoeingEnters -5 / -5 10 / 0
Does not enter 0 / 10 0 / 0
Subsidies (Airbus)
Airbus
Enters Does not enter
BoeingEnters -5 / 5 10 / 0
Does not enter 0 / 20 0 / 0
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Import substitution (India, Latin America)
Import restrictions
Keynesian demand-
side policies
Development of national infant industries
(economies of scale)
Expansion of domestic markets
Foreign direct investment promotion
The case of import substitution strategies
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Inward-looking economic growth
Maturing of internationally competitive industries
Other economic motives (2)
National self-interest, non-cooperative strategies
Promoting foreign direct investment
The "large country" argument
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COUNTRY A
FREE-TRADE PROTECTION
COUNTRY B
FREE-TRADE 100 / 100 70 / 120
PROTECTION 120 / 70 90 / 90
What is the optimal solution ? What is the most likely one (Nash equilibrium)?
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Non-economic rationale to trade policy
Furthering the goals of foreign policy (i.e. embargo)
Protecting consumers from "dangerous" products
Protecting jobs (i.e. in declining industries)
Protecting "sensitive" industries (deemed important for national security)
Protecting human rights in exporting countries
Retaliating to unfair foreign competition (subsidies, dumping)
Addressing demands from powerful interest groups (public choice)
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Free vs. "fair" (managed) trade
Partisans of a "managed trade" (or fair trade) consider that national governments should actively intervene in international trade to ensure that :
Domestic firms are offered an equitable share of foreign markets
Imports are controlled to minimize losses of domestic jobs and market share in specific industries
"Fair traders" also argue that a government should ensure a level playing field on which foreign and domestic firms get the same opportunity to compete
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TRADE RESTRICTION/PROMOTION MEASURES
Section 3
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Trade restriction measures
Quantitative barriers
Tariffs(Incl. anti-dumping)
Quotas Voluntary export
restraintsDomestic subsidies
Qualitative barriers
Local content requirements
Norms and standards
Administrative obstacles
Exchange rate manipulation
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Food for thought …
Why do intergovernmental organisations like the WTO consider
that custom duties are preferable to quotas and other non-tariff barriers, especially currency manipulation
Tariffs ...
... Are transparent
... Create less distortion than quotas
... Are easier to lift than non-tariff obstacles such as norms or standards
… Generate revenue for the government
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The effects of tariffs ("small" country)
D
S
d1
d2
q1q2
P1Worldprice
P2WorldPrice+ tariff
P*Domesticprice
P
Q
E*
q*
s1
s2
c2c1
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A question ...
DBS
P1Worldprice
P2WorldPrice+ tariff
P
Q
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What is the differences between the curves DA and DB? What are the implications thereof for the government?
DA
d'Bd'As2s1 dAB
The effects of quotas
D
SD
q'
PwWorldprice
P*Domesticprice
P
Q
E*
q*
PqDom.
Price w.
quota
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SD+Q
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The effects of currency manipulation
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Trade balance
Time
Currency devaluation /depreciation
0
Price effect > Volume effectVolume effect > Price effect
X
X
P
P
M
M
P
P
+ > 1| | | |
Trade restriction: business implications
Generally speaking, trade barriers raise export costs
Antidumping actions limit a firm's ability to pursue aggressive pricing to gain market share
Voluntary export restraints (VERs) and quotas limit a firm's ability to serve a country from locations outside that country
To conform to local content requirements, a firm may have to locate more production activities in a given market than it would otherwise
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The other side of trade policy: trade promotion
Export subsidies
Cash, tax breaks, price supports(e.g. former US foreign sales
corporations)
Export financing programmes
Low-interest loans, loan guarantees(e.g. French COFACE)
Foreign trade zones
Products are subject lower customs duties and/or fewer customs
procedures(e.g. Mexican maquiladoras)
Government agencies
Trade missions for officials and businesses, export-promotion offices,
help import products the home nation does not produce
(e.g. Japanese JETRO)
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Export promotion bodies: the US case
Export-Import Bank of the United States (http://www.exim.gov): official export credit agency of the United States. Assists in financing the export of U.S. goods and services to international markets
Overseas Private Investment Corporation (http://www.opic.gov): helps U.S. businesses invest overseas by managing risks associated with foreign direct investment
US government export portal (http://www.export.gov): brings together resources from across the U.S. Government to assist American businesses in planning their international sales strategies
International Trade Administration (http://trade.gov/about.asp): strengthens the competitiveness of U.S. industry, promotes trade and investment, and ensures fair trade through the rigorous enforcement of our trade laws and agreements.
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Foreign trade zones: the maquiladoras
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Maquiladoras are Mexican assembly plants that manufacture finished goods for export to the United States. The maquiladoras are generally owned by
non-Mexican corporations. They take advantage of plentiful lower-cost Mexican labor, advantageous tariff regulations (lessened somewhat as a
result of the North American Free Trade Agreement), and close proximity to U.S. markets to produce such items as home appliances and automobiles.
from: http://www.answers.com/topic/maquiladora
http://geo-mexico.com/?tag=urban&paged=3
Export restrictions (http://www.wto.org/english/res_e/publications_e/wtr10_oecd_e.htm)
Export restrictions include: export duties, taxes and other charges, quotas, bans, minimum prices and non-automatic licensing requirements
Export restrictions are usually imposed on raw materials
May be justified for a number of reasons
Fiscal revenue
Development and social policies
Environmental protection (reduce negative externalities pollution)
Conservation of natural resources (for future generations)
The aim of such restrictions is generally to improve the competitive position of domestic processing industries vis-à-vis their foreign competitors
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Import promotion (http://www.encyclopedia.com/doc/1G2-3045301092.html)
Import-promotion policies are measures intended to increase the volume of a country’s imports from a particular trading partner or group of trading partners.
Such policies may include bilateral agreements, bureaucratic directives, import subsidies, or procedures to improve foreign exporters’ information about domestic market opportunities
Voluntary import expansion (VIE) agreements
Preferential access to market
Import-promotion agencies
Import promotion is employed to smooth out political tensions arising from large bilateral trade imbalances (i.e. record trade surpluses of Japan and other East Asian countries during the 1980s)
More recently, advanced countries have used import promotion policies to assist potential exporters in developing and transition economies.
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Conclusion: from theory to reality
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Most nations are nominally committed to
free trade
In practise, governments intervene to protect the interests of specific
groups
TRADE POLICY
Trade restriction Trade promotion
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POLITICAL ECONOMY OF FOREIGN DIRECT INVESTMENT
Section 4
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Governments' attitudes towards FDI
Pragmatic nationalism
FDI is favoured if its benefits prevail over its costs
Laissez-faire
Comparative advantage shapes
the distribution of international production
Radical criticism
FDI is blamed as an instrument of economic domination
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The radical view
MNCs are an instrument of imperialist / colonial domination.
Profits are repatriated to the home country and nothing is given to the host country in exchange.
Technology is tightly controlled by MNEs and expertise is denied the host country.
Senior jobs are held by expatriates.
These devices are meant to keep less-developed countries in a backward and dependent position with regards to developed (capitalist) countries as far as investment, jobs and technology are concerned.
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The pragmatic view: FDI benefits and costs (host country)
BENEFITS
Impact on the balance of payments
Contribution to domestic GDP and employment
Contribution to economic and social change
Positive externalities (e.g. technology transfers)
COSTS
Repatriation of earnings
Dependency foreign decision-makers
Loss of sovereignty and autonomy
Competition to local corporations
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The pragmatic view: FDI benefits and costs (home country)
BENEFITS
Repatriation of earnings
Contribution to domesticGDP and employment
Contribution to economic and social change
Positive externalities
COSTS
Capital outflow
Job losses (relocations)
Trade deficit (export substitution, import
generation)
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Measures affecting FDI
Fiscal measures
Structural measures
Financial measures
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Measures affecting FDI
FDI Promotion FDI Restriction
Host country
Tax incentives
Low interest loans
Infrastructureimprovement
Ownership restrictions
Local contents requirements
Technology transfer requirements
Home country
Insurance
Loans
Tax breaks
Political pressure
Differential tax rates
Sanctions
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The example of investment promotion
Fiscal incentives: specific tax measures designed to attract the foreign investor Special depreciation allowances
Tax credits or rebates
Special deductions for capital expenditures
Tax holidays
Reduction of tax burden
Financial incentives: special funding for the investor Land or buildings
Loans, loan guarantees
Non financial incentives Guaranteed government purchases
Special protection from competition
Investment in infrastructure facilities
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