Transcript Chapter 2

CHAPTER 2
TRADE AND
INVESTMENT
POLICIES
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Copyright © 2011 John Wiley & Sons
Chapter 2
Learning
Objectives
1. To see how trade and investment policies
have historically been a subset of domestic
policies
2. To examine how traditional attitudes
toward trade and investment policies is
changing
3. To see the effects of global links in trade and
investment on policymakers
4. To understand that nations must cooperate
closely in the future to maintain a viable
global trade and investment environment
5. To understand what policies are needed to
achieve a growing, viable global trade and
investment environment
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Introduction
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All nations have international trade and investment
policies
 Some
are transparent while others are kept secret
 Some are disjointed while others are coordinated
 They may be applied consciously or determined by a laissezfaire attitude
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Trade policy actions become evident when measures
taken by governments affect the flow of trade and
investment across national borders
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Rationale and Goals
 Government policies are designed to regulate,
stimulate, direct, and protect national activities,
resulting in national sovereignty
 The domestic actions of most governments aim to
increase the standard of living and improve the
quality of life of its citizens.
 Additional goals include stimulating national
development and achieving full employment
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Foreign Policy Goals
 Nations develop foreign policy to exercise
influence abroad and to provide domestic benefits
such as:
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National security
Improved trade and investment opportunities
Aid to develop markets and increase influence
 Each country develops its own domestic policies,
so policy aims vary from nation to nation
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Global Trade Regulation Since 1945
General Agreement on
Tariffs and Trade (GATT)
International Trade
Organization (ITO)
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Signed in 1948 with 53
nation members
Purpose: facilitate
international trade
Never implemented
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Purpose: facilitate trade and
settle disputes
Member nations agree to
limit tariffs on other
members
Each member grants every
other member MostFavored Nation (MFN)
status
Since the ITO never came
into being, the GATT became
a permanent governing body
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Global Trade Regulation Since 1945
 World Trade Organization (WTO)
 Replaced GATT in 1995
 Purpose:
Administer international trade and investment accords
 Gradually reduce government subsidies to industries
 Convert nontariff barriers into more transparent tariff barriers
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2001 – 2010 Doha Round of WTO Negotiations
Further hasten implementation of liberalization to particularly
help impoverished and developing nations
 A difficult series of negotiations – significant disagreements
between developed nations and developing WTO members
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WTO Mission
The World Trade Organization — the WTO — is the international
Organization whose primary purpose is to open trade for the
benefit of all.
The WTO provides a forum for negotiating agreements aimed at reducing
obstacles to international trade and ensuring a level playing field for all,
thus contributing to economic growth and development.
The WTO also provides a legal and institutional framework for the
implementation and monitoring of these agreements, as well as for settling
disputes arising from their interpretation and application.
Source:
WTO Web Site: http://www.wto.org/english/thewto_e/whatis_e/wto_dg_stat_e.htm
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Limits of Domestic Policy Influences
 You cannot isolate domestic economic activity from
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international market events
Growing interdependencies among nations and a closer
links between industries around the world
Currency flows set the exchange rates independent of
trade
A result of the global financial crisis: increased
coordination of economic policy by governments
Domestic decisions often have major international
repercussions
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Focus on Politics:
What’s Your Beef?
In 2003, over 30 countries including Japan and Korea imposed a
ban on most imports of U.S. And Canadian beef follow ing
reported cases of mad cow disease in both countries.
This w as a serious setback for north American beef grow ers, as
Australian beef grow ers quickly took advantage and seized a
sizable chunk of the market in Japan.
Although U.S. beef trade resumed by 2006 in Japan, it has yet to
regain its former strength. In 2009, the united states became the
number tw o beef exporter to Korea, trailing Australia.
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Revitalizing the WTO
 The WTO should focus on its core mission, which
is the support of international trade and
investment
The WTO has been so successful in reducing tariffs Other trade disputes may be more difficult to resolve
 A greater challenge may be the future of the overall
multilateral trading system
 Trying to solve social causes can cause divisiveness
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Revitalizing the IMF
 Lending policies are seen as austere and inflexible
 Some believe that the IMF does not consider
situations and needs of individual members
 There is a lack of authority and resources to
manage imbalances in financial and trade flows
 IMF does not have enough funds for all needs
 At the 2009 G-20 Summit, international financial
institutions were strengthened via a tripling of the
IMF’s lending capacity
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Current Challenges of the IMF
The IMF is helping many emerging market countries tackle the
problems brought on by the current global economic crisis.
As part of its response, the IMF has more than doubled its financial
assistance to low-income countries in 2009.
Current areas of focus for the IMF include:
• Emergency lending to emerging markets
• Helping low-income countries fight the economic crisis
• Advocating global fiscal stimulus
• Reforming the international financial system
Source:
IMF Web Site: http://www.imf.org/external/about/onagenda.htm
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Revitalizing the World Bank
 The World Bank is not completely successful in
helping the developing world and former Soviet
bloc nations
 Some claim that its policies may have created
poverty
 The G-20 has committed to strengthening
international institutions for the new array of
economic challenges emanating from a more
globalized world
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World Bank Reform
What the World Bank Is Doing
The World Bank Group is advancing multiple reforms to promote
inclusiveness, innovation, efficiency, effectiveness, and accountability.
Reforms include:
• Access to information policy finalized
• Increasing voice and participation to developing and transition countries
• Promoting accountability and good governance
• Modernizing financial services
• Increasing transparency and access to information
• Reviewing internal governance
Source:
World Bank Web Site: http://www.worldbank.org/html/extdr/worldbankreform/
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Industrialized v. Developing Nations
 With increased transfer of technology and major
infusions of funds, it was once hoped that the
developmental gap between industrialized and lessdeveloped nations would gradually be closed
 Many nations remain in debt with political instability
and very fragile economies
 An increase in environmental awareness has
contributed to a further sharpening of the conflict
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Tariffs
Quotas
Restrictions
of
Imports
AntiDumping
Laws
Voluntary
Restraint
Agreements
Non-Tariff
barriers
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Focus on Politics:
Mexican Trucks and American
Safety
U n d e r N A F TA , t h e U . S . A n d M e x i c a n g o v e r n m e n t s a g r e e d t o
give trucks from each country equal access to deliver goods in
t h e n e i g h b o r i n g c o u n t r y.
But American labor unions, environmentalists, and other
activists objected to this provision, citing safety issues,
environmental risks, and threats to American jobs. In
September 2007,
A one year pilot study w as announced, but w hen the study
ended in 2009, Mexico retaliated by imposing $2.4 billion in
tariffs on 89 U.S. Products entering Mexico.
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Effects of Import Restriction
 Controls exact a huge price from domestic consumers
 A downstream change in the composition of imports that
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may result
Controls may lead to inefficiency because they create a
cushion of increased income, which may cause the
industry to lag behind
Governments may retaliate against restrictions by
erecting similar barriers at home
Corporations can make strategic use of such barriers by
incorporating them into business plans
Corporations can use foreign direct investment to
circumvent restrictions
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Restrictions of Exports
Short
Supply
Why restrict
exports?
Desire to
Retain
Capital
Foreign
Policy
Purposes
National
Security
In addition, local consumers have access to
agricultural products and commodities at lower prices
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Export and Import Promotion
 Export promotion helps domestic firms enter and
maintain their position in international markets
 Most governments supply some support to their firms
participating or planning to participate in international
trade
 Export promotion approaches include:
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Knowledge transfer
Direct or indirect subsidization of export activities
Reduction of government red tape
 Import Promotion is primarily used to allay fears of other
nations over continued imbalances
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Foreign Direct Investment:
The Host Country Perspective
Positive Impacts:
Negative Impacts:
 Capital formation
 Industrial dominance
 Technology and
 Technological dependence
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management skills transfer
Regional and sectoral
development
Internal competition and
entrepreneurship
Favorable effect on balance
of payments
Increased employment
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 Disturbance of economic
plans
 Cultural change
 Interference by home
government of
multinational corporation
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Foreign Direct Investment:
The Home Country Perspective
 Addition to gross domestic product
 Stimulant to economic growth
 Access to raw materials and other factors of
production
 Job loss is possible
 Transfer of technology and knowledge to other
countries
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Focus on Politics:
Money Buys Investments
T h e s o u t h e r n s t a t e s o f A l a b a m a , Te n n e s s e e , a n d M i s s i s s i p p i
offered millions of dollars in incentives to attract foreign
automobile manufacturers to locate in their states.
To c o n t r o l c o m p e t i t i o n a m o n g E u r o p e a n c o u n t r i e s , t h e E U h a s
passed regulations to prevent member nations from unfairly
a t t r a c t i n g i n ve s t m e n t s f r o m e a c h o t h e r. T h e o f f e r i n g o f
financial incentives has spread to other industries as w ell.
To d a y, g o v e r n m e n t s c o m p e t e f o r g r e e n i n d u s t r i e s a n d h i g h tech computer and electronic companies.
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Investment Restriction and Promotion
 Some nations restrict investment because
capital flight can be a major problem
 Investment promotions to attract foreign direct
investment include:
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Fiscal incentives—tax measures
Financial incentives—special funding for the investor
Nonfinancial incentives—such as guaranteed government
purchase and protection measures
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Management of the Policy Relationship
 The bargaining positions and power of the
multinational corporation and the host country
change over time
 Bargaining power can be strengthened by:
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Developing a local support system through local financing,
procurement, and business contracts
Maintaining control over access to technology and markets
 Host countries try to enhance their role by instituting
control policies and performance requirements
 Host country policies on intellectual property rights
can have an important influence on foreign direct
investment
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Figure 2.2 -- Bargaining Position over Time
Bargaining Position of Multinational Corporation (MNC) and Host
Country
Bargaining
Power
Policy Provided/Demanded
Incentives for Investment
Continued Privileged Treatment
Discriminating Requirements
End of Relationship/Divestment
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U.S. Perspective
on Trade and Investment
 Positive rather than reactive trade policy
 Proposals for protectionist legislation can be helpful as
bargaining chips
 Trade policy must become more domestically oriented
while domestic policy must become more international in
vision
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Improve the quality and amount of information shared
Encourage collaboration among companies in technologies
Overcome export reluctance and short-term financial orientation
Invest in training and education
Executive branch needs trade promotion authority
 More collaboration is needed between all trading parties
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International Perspective
on Trade and Investment
 Trade and investment negotiations must continue
 Bilateral negotiations—two nations
 Multilateral negotiations—several nations
 Emphasize long-term goals
 New mechanisms to evaluate restraint measures are
needed
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