Transcript Slide 1

This chapter covers:
3
•Why goods are
traded internationally
•Arguments for
imposing trade
restrictions
Theories of International
Trade and Investment
•Kings of import
restrictions
•Weakness of
GNP/capita as
economic indicator
•Characteristics of
developing nations
•Theories of foreign
direct investment
International Business
by Ball, McCulloch, Frantz,
Geringer, and Minor
McGraw-Hill/Irwin
Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Objectives
 Understand the theories of international trade.
 Comprehend the arguments of imposing trade restrictions.
 Explain the two basic kinds of import restrictions.
 Appreciate the relevance of the changing status of tariff and
non tariff barriers.
 Recognize the weaknesses of GNP/capita as an economic
indicator.
 Understand the new definition of economic development.
 Understand why governments change from import
substitution to export promotion.
 Explain some of the theories of foreign direct investment.
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International Trade Theory
 Mercantilism
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Believed nation’s welfare
was in accumulation of
stock of precious metals.
Trade surplus created by
import restrictions and
government subsidies to
exporters.
Mercantilist era ended in
1700s.
Modern Day Mercantilism
 Economic Nationalism
 Industrial policy based on state intervention
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France nationalized key industries and banks to use
the power of the state as
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Japan called “fortress of mercantilism” by some
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Stockholder and financier
Customer and marketer to revitalize the nation’s base
In 1986, little growth and high unemployment led
government to reverse “mercantilist” policy
Nearly impenetrable market
Effort to maintain a cheap yen
Theory of Absolute Advantage
 “The capacity of one nation to produce more of a good with
the same amount of input than another country.”
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Each nation should specialize in producing goods it could
produce most efficiently
 In absolute advantage, both nations would gain from trade.
Assumptions
 Perfect competition and no transportation costs in a world
of two countries and two products.
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Adam Smith claimed that market forces, not government
controls should determine the direction, volume, and
composition of international trade.
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Theory of Comparative Advantage
 “A nation having absolute
disadvantages in the
production of two goods
compared to another nation,
 has a comparative
advantage in producing
the good in which its
absolute disadvantage is
less.”
 Theory of comparative
advantage demonstrated
by Ricardo in 1817.
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Production Possibility Frontiers
 The following two graphs
illustrate Chinese and U.S.
production possibility
frontiers using constant cost
for simplicity.
 These curves, in the absence
of trade, also illustrate the
possible combinations of
goods for consumption.
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Offshoring Service Jobs to India
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Approximately 1 Billion people
Comparative advantage in production of goods or
services that require large amounts of labor
 Citizens speak English
 Low labor costs due to large workforce
 Internet and telephone communications much less
expensive
 Industries offshoring include software engineering,
telemarketing, banking, medical services, claims
processing, IT jobs, financial services, insurance
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Jobs created overseas generate jobs at home
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Heckscher-Ohlin Theory of Factor
Endowment
 States that international and
interregional differences in
production costs occur
because of differences in the
supply of production factors.
Therefore,
 India should export
labor intensive goods.
 Germany, with
relatively more capital
than labor should
specialize in capital
intensive products.
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Assumptions
 The price of factors
depend only on the factor
endowment.
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Not a perfect market
Legislated wages and
benefits
Tax credits
Given technology is
universally available.
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Always a lag between
intro of new technology
and world application
Leontief Paradox
 Study in 1953 by economist
Wassily Leontief disputed
the usefulness of the
Heckscher-Ohlin Theory as
a predictor of the direction
of trade.
 Found that the U.S.,
one of the most
capital-intensive
countries in the world,
was exporting labor
intensive products.
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Effect of Money on Trade
 Exchange Rate
 The price of one country’s currency stated in terms of
the other.
 Influence of Exchange Rates
 European companies pressured to incraese prices of
exports to maintain Euro profits
 Currency devaluation
 Lowering of a country’s currency in terms of other
currencies.
 Example is tourism and currency rates in Mexico during
1980s
Newer Explanations of the Direction of
Trade
 Economies of Scale and the
Experience Curve
 As output increases cost
per unit decreases
 Larger and more
efficient equipment
 Volume discounts
 Fixed cost allocation
 Drop in learning curve
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 First Mover Theory
 Gain market share
 Discourage foreign entrants
 The Linder Theory of
Overlapping Demand
 Customers’ tastes
determined by income levels
 Trade greater between
nations with similar per
capital incomes
International Product Life Cycle (IPLC)
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Four stages of the IPLC
in the U.S.
1) U.S. exports
2) Foreign production
begins
3) Foreign competition
in export markets
4) Import competition
in the U.S
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Stages of the International Product Life
Cycle
 Exports
 May be only manufacturer
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of new product
Overseas customers learn of
product, export market
develops
 Foreign production
 Export volume grows
 Production technology
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becomes stable
Reduced costs for
transportation
Exports diminish
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Foreign competition
 Foreign manufacturers
gain experience
 Compete in export
markets
Import competition
 Foreign producers obtain
economies of scale
 Compete in quality and
undersell domestic
company in domestic
market
International Technology Life Cycle
Initial Stage
 Development of new technology in an
industrialized country
 Subsequently exported to other developed countries
 Increasing cost of labor make it no longer
profitable to use in developed nation
 Technology exported to developing nation
 Technology produced abroad for domestic
consumption
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Porter’s Competitive Advantage of
Nations
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Porter claims that four kinds
of variables will impact a
local firm’s ability to use a
country’s resources to gain a
competitive advantage.
 Demand conditions
 Factor conditions
 Related and supporting
industries
 Firm strategy, structure,
rivalry
Porter’s Competitive Advantage of
Nations
 Demand Conditions
 Nature of domestic demand.
 If customers are
demanding, firms will
produce high-quality and
innovative products
gaining competitive
advantage
 Factor Conditions
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Level and consumption of
factors of production
Lack of natural endowments
has caused nations to invest
in the creation of advanced
factors
 Related and supporting
industries
 Suppliers and industry
support services tend to
form a cluster in a given
location
 Firm Strategy, Structure,
Rivalry
 Extent of domestic
competition,
 The existence of barriers to
entry
 The firm’s management
style and organization.
Trade Restrictions
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Arguments for
 National Defense
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Sanctions to Punish Offending Nations
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Inflict economic damage to encourage to modify behavior
Protect Infant or Dying Industry
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Certain industries need protection
Imports may not be available during wartime
Prevent valuable technologies from being used to strengthen
competition, especially militarily
In the long run will have a comparative advantage
Meant to be temporary for emerging industry or to protect jobs
of dying industry
Trade Restrictions
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Arguments for
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Protect Domestic Jobs from Cheap Foreign Labor
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Scientific Tariff or Fair Competition
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Productivity per worker greater in developed countries
Fails to consider cost of other factors of production
Bring cost of imported goods up to domestically
produced goods to prevent unfair advantage
Retaliation
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Import restrictions placed by another country may result
in similar restrictions by domestic government
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EU ban on hormone treated U.S. beef
Other Reasons for Retaliation
Dumping is the selling of a
product abroad for less than
 The average cost of
production in the exporting
nation
 The market price in the
exporting nation
 The price to third countries
 Result of
 Excess production
 Cyclical or seasonal factors
 Attempt to force domestic
producers out of business
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Sanctions Justified
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Dumping for which sanctions are considered justified
 Social dumping
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Environmental dumping
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Cultural barriers aid local firms
Tax dumping
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Low requirements for bank capital/asset ratios
Cultural dumping
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Lax environmental standards
Financial services dumping
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Lower labor costs and poorer working conditions
Differences in corporate tax rates or special breaks
Other Reasons for Retaliation
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Subsidies
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Government provides to domestic firm to encourage exports or
protect from imports
Can be
 Cash payment
 Government participation in ownership
 Low-cost loans
 Preferential tax treatment
Countervailing Duties
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Set by importing nation to offset effects of subsidy
Equal to the subsidy amount
Types of Restrictions - Tariffs
Ad Valorem
 Percentage of
invoice value
 Specific
 Fixed sum of
money per unit
 Compound duty
 Combination of
the above
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Official Prices
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Minimum import duty
regardless of invoice
price
Variable Levy
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Calculated daily based
on world market price
Lower Duties for Local
Input
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Encourages some local
production
Types of Restrictions - Nontariff
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Quantitative
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Nonquantitative Nontariff
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Quotas
Voluntary Export Restraints
Orderly Marketing
Arrangements
Direct government
participation in trade
Customs and other
administrative procedures
Government and private
standards
Levels of Economic Development
 Developed
 Classification for all industrialized nations, which are
mostly technologically developed.
 Developing
 Classification for world’s lower income nations, which are
less technically developed.
 Newly Industrialzing Countries (NICs)
 Fast-growing, middle-income or higher economies
 Heavy concentration of foreign investment
 Exported large quantities of manufactured goods, including
high-tech products
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Levels of Economic Development
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Newly Industrialized Economies (NIEs)
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Primarily used to refer to the four tigers
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Taiwan, Hong Kong, Singapore, South Korea
IMF combines NIEs with Industrialized Nations to
form “advanced economies
 Emerging Market Economies
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Chile, Malaysia, China, Thailand, Indonesia
Transition Countries or Eastern Europe
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Former communist countries
The World Bank Classification System
 Based on GNP/capita
 Low income ($735 or less)
 Lower middle income
($736 - $2935)
 Upper middle income
($2,936 - $9,075)
 High income ($9,076 or
more)
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GNP/Capita as an Indicator
 Concerns
 GNP/Capital data does not include Underground Economy
 Undeclared legal production
 Production of illegal goods and services
 Concealed income – barter
 Underground Economy larger if
Higher level of taxation
 Oppressive government red tape
Currency conversion
 Local currency converted to the dollar by using exchange rate
 Conversions do not reflect domestic purchasing powers of
currencies, must use purchasing power parity (PPP)
 World Bank uses Atlas methodology
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Characteristics of Developing Nations
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GNP/capital less than $9,075
Unequal distribution of
income
Technological dualism
Regional dualism
Majority of population
working in agricultural
sector
Disguised unemployment or
underemployment
High population growth
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High rate of illiteracy and
insufficient educational
facilities
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Widespread malnutrition and
health problems
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Political instability
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High dependence on a few
products
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Inhospitable topography
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Low savings rates and
inadequate banking facilities
Human Needs Approach to Economic
Development
 Defines economic development as the reduction of poverty,
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unemployment, and inequality in the distribution of income.
 Less illiteracy, less malnutrition, less disease and early
death, shift from agricultural to industrial production
Human Development Index (HDI) based on
 A long and healthy life
 Ability to acquire knowledge
 Access to resources for a decent standard of living
 Measured by life expectancy, adult literacy, and GDP/capita
adjusted for PPP
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Development Theory
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No generally accepted
theory
Economists concentrating on
 Population growth
 Income distribution
 Unemployment
 Transfer of technology
 Role of government
 Investment in human
capital
 The education of
people
Contemporary Theories of FDI
 Monopolistic Advantage Theory
 FDI occurs largely in oligopolistic industries
 Product and Factor Market Imperfections
 FDI typically from companies with heavy product research
and marketing efforts
 International Product Life Cycle
 FDI normal state in life of a product
 Other Theories
 Follow-the-leader theory
 Cross investment
 Internalization theory
 Theory of International production
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Current U.S. Trade Sanctions
Balkans
 Burma (Myanmar)
 Cuba
 Diamond Trading
 Iran
 Iraq
 Liberia
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Source: www.treas.gov
Libya
 Narcotics Trafficking
 Nonproliferation
 North Korea
 Sudan
 Syria
 Terrorists
 Zimbabwe
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Export Screening Guidelines
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Screening Elements
Element 1: Denied Persons Screen
Element 2: Product Classification/License Determination
Screen
Element 3: Diversion Risk Screen
Element 4: Sensitive Nuclear End-Uses/End-Users Screen
Element 5: Missile End-Use/End-Users Screen
Element 6: Chemical and Biological Weapons EndUses/End-Users Screen
Element 7: Antiboycott Screen
Element 8: Informed Letter/Entity List Screen
Source: www.bxa.doc.gov
Department of Commerce
Transshipment Country Export Control Initiative
(TECI)
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TECI is a multi-faceted,
cooperative initiative that
seeks to strengthen the trade
compliance and export
control systems of those
countries and companies
that constitute global
transshipment hubs. By
working to strengthen those
systems, the DOC seeks to
enhance security and
confidence in international
trade flows.
Source: www.bxa.doc.gov
GDP Growth
Source: www.globalpolicy.org
AIDS Crisis
Source: www.globalpolicy.org
Antidumping Measures
The United States maintains 54 of its outstanding
288 antidumping measures against products from
China.
 In 2003, new cases against China were initiated at
the brisk pace of one per month. These actions hit
consumable products like honey, apple juice
concentrate, mushrooms, and pencils, as well as raw
material inputs like creatine monohydrate,
polyvinyl alcohol, barium carbonate and
ferrovanadium.
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Source: www.freetrade.org