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207 terms

International Business Unit 2

STUDY
PLAY
free trade
a situation where a government does not attempt to restrict what its citizens can buy from another country or what they can sell to another country
tariffs, administrative policies, subsidies, VERs, antidumping policies, import quotas, local content requirements
Seven Main Instruments of Trade Policy (TASVAIL)
tariff
a tax levied on imports that effectively raises the cost of imported products relative to domestic products
specific tariffs
are levied as a fixed charge for each unit of a good imported
ad valorem tariffs
are levied as a proportion of the value of the imported good
subsidy
a government payment to a domestic producer
import quota
a direct restriction on the quantity of some good that may be imported into a country
tariff rate quotas
a hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than to those over the quota
voluntary export restraints
quotas on trade imposed by the exporting country, typically at the request of the importing country's government
quota rent
the extra profit that producers made when supply is artificially limited by an import quota
local content requirement
demands that some specific fraction of a good be produced domestically, can be in physical terms or in value terms.
administrative trade policies
bureaucratic rules that are designed to make it difficult for imports to enter a country
dumping
selling goods in a foreign market below their cost of production or selling goods in a foreign market at below their fair market value
antidumping policies
designed to punish foreign firms that engage in dumping. goal is to protect domestic producers from unfair foreign competition
countervailing duties aka antidumping duties
U.S. firms that believe a foreign firm is dumping can file a complaint with the government and if the complaint has merit, these can be imposed
political arguments (why governments intervene in trade)
concerned with protecting the interests of certain groups within a nation (normally producers), often at the expense of other groups (normally consumers)
economic arguments (why governments intervene in trade)
concerned with boosting the overall wealth of a nation (to the benefit of all, both producers and consumers)
protecting: JOBS, CONSUMERS from "dangerous products", HUMAN RIGHTS of individuals in exporting countries, IMPORTANT INDUSTRIES for NATIONAL SECURITY, ENVIRONMENT. RETALIATING to UNFAIR foreign competition, FURTHERING the GOALS of FOREIGN POLICY.
Political Arguments for Government Intervention [JC HI E Ru Fg]
protecting jobs and industries (political arguments for intervention)
the most common political reason for trade restrictions
important industries for national security (political arguments for intervention)
governments protect certain industries such as AEROSPACE or ADVANCED ELECTRONICS because they are important for this. this argument is LESS COMMON TODAY than in the past
retaliation (political arguments for intervention)
when governments take, or threaten to take, specific actions, other countries may remove trade barriers.
protecting consumers (political arguments for intervention)
protecting consumers from unsafe products is also an argument for restricting imports. often involves LIMITING OR BANNING the import of CERTAIN PRODUCTS
furthering foresight policy objectives (political arguments for intervention)
trade policy can be used to support these. PREFERENTIAL TRADE TERMS can be granted to countries that a government wants to BUILD STRONG RELATIONS WITH. roge states that do not abide by international laws or norms can be punished
Helms Burton Act and D'Amato Act
have been passed to PROTECT American companies from other countries that try to UNDERMINE UNILATERAL TRADE SANCTIONS (ban on trade)
protecting human rights (political arguments for intervention)
governments can use trade policy to improve the ______ ________ policies of trading partners. unless a large number of countries choose to take such action, however, it is unlikely to prove successful.
1) infant industry argument 2) strategic trade policy
Economic Arguments for Government Intervention in International Trade
infant industry argument (economic argument for government intervention)
suggests that an industry should be protected until it can develop an be viable and competitive internationally. this has been accepted as a justification for temporary trade restrictions under the WTO.
strategic trade policy (economic argument for government intervention)
suggests that in cases WHERE there may be important FIRST MOVER ADVANTAGES, GOVERNMENT CAN HELP firms from their countries attain these advantages. also suggests that governments can help firms OVERCOME BARRIERS to entry into industries where foreign firms have an initial advantage.
is
MOST new trade theorists believe government intervention in international trade is/isn't justified.
retaliation, domestic policies
Two situations where restrictions on trade may be inappropriate
Krugman
STRATEGIC TRADE POLICIES aimed at establishing domestic firms in a dominant position in a global industry are BEGGAR-THY-NEIGHBOR policies that BOOST NATIONAL INCOME AT THE EXPENSE of other countries
1995
Since ______ the framework known as GATT has been known as the WTO.
1846
Britain adopts free trade in ______.
Smoot-Hawley act (US)
1930 act aimed at employment protection in the U.S.
1947 Havana conference
conference led to GATT
CONSENSUS APPROACH, created FORUM (economic ministers), created PROCESS ("rounds of meetings- approximately 7), FOCUS on TARIFFS (vs non tariff barriers), FOCUS on MANUFACTURED ITEMS (vs services)
Notable Aspects of the GATT [CCCFF]
153
# of members in the GATT
EMPHASIS on TARIFFS (versus non-tariff barriers), EMPHASIS on MANUFACTURED PRODUCTS (vs. services), ECONOMIC STRAINS in global economy (1980-1993: U.S. and Japanese BOP/currency values), FUZZY WORDING/interpretation of barriers, INHERENT CONFLICTS, NO WAY TO ENFORCE compliance (no enforcement), SPOTTY COMPLIANCE
Downside of the GATT [EEE FINS]
JOBS (whose labor grows or decreases?), CAPITAL/EXCHANGE CONTROLS (who has "right" to profit?), LEGAL JURISDICTION (whose VALUES/LAWS apply?), TARIFF LEVELS (what is "fair" rate?) , OVERRIDING OBJECTIVES (better global economy or better domestic economy?), TECHNOLOGY (who has right to IP?)
Inherent Conflicts of the GATT [JCL TOT]
1) JAPAN'S ECONOMIC SUCCESS strained what had ten more equal trading patterns 2) U.S. TRADE DEFICITS caused significant problems in some industries and political problems for the government 3) many countries found that although GATT limited the use of tariffs, THERE WERE MANY OTHER FORMS OF INTERVENTION that had the same effect that DID NOT TECHNICALLY VIOLATE GATT
The world trading system came under strain during the 1980's and early 1990s because of 3 reasons
WTO CREATED, AGRICULTURAL POLICY Modified, SERVICES given PROMINENCE, TARIFFS CUT further, IP PROTECTED further, DISMANTLED MULTI-FIBER AGREEMENT
What the Uruguay Round of GATT Negotiations Did [WASTID]
ARBITRATES trade DISPUTES, IMPLEMENTS RESULTS of Rounds and other agreements and negotiations, MONITORS the TRADE POLICIES of its MEMBERS ("police"), ENFORCES GATT AGREEMENTS (enforces time limits and approves sanctions on violations aka permits tariffs by trade partners)
Role of the WTO [AIME]
153; 30
# of members in WTO; # of observers in WTO
ANTI-DUMPING POLICIES, PROTECTIONISM in AGRICULTURE, PROTECTING IP, A NEW ROUND of TALKS: DOHA, MARKET ACCESS for NONAGRICULTURAL goods and services
What the WTO is currently focusing on: [APPAM]
CUTTING TARIFFS on INDUSTRIAL GOODS and SERVICES, REDUCING BARRIERS to cross-border investment, PHASING OUT SUBSIDIES to agricultural producers, LIMITING the USE of ANTIDUMPING LAWS
DOHA is focusing on: [CRPL]
1) they RAISE THE COST of EXPORTING 2) QUOTAS limit EXPORTS 3) firms may have to LOCATE PRODUCTION ACTIVITIES within a country to MEET LOCAL CONTENT REGULATIONS 4) THE threat of FUTURE TRADE BARRIERS can INFLUENCE FIRM STRATEGY
Trade Barriers limit a firm's ability because:
foreign direct investment [[beg. of CH.7]]
occurs when a firm invests directly in new facilities to produce and/or market in a foreign country. one a firm undertakes this its becomes a multinational enterprise.
greenfield investment (form of FDI)
the establishment of a wholly new operation in a foreign country
acquisition/merging (form of FDI)
joining with an existing firm in the foreign country
flow (1/2 ways to look at FDI)
the AMOUNT of FDI undertaken over a given time
stock (1/2 ways to look at FDI)
the TOTAL ACCUMULATED VALUE of FOREIGN OWNED ASSETS at a given time
outflows of FDI
the flows of FDI out of a country
inflows of FDI
the flows of FDI into a country
have
The flow and stock of FDI in the world economy have/haven't increased over the last 20 years.
1) FIRMS still FEAR the THREAT OF PROTECTIONISM 2) GLOBALIZATION of the world economy is PROMPTING FIRMS TO UNDERTAKE FDI to ENSURE they have a significant PRESENCE in many regions of the world. 3) SHIFT toward DEMOCRATIC POLITICAL INSTITUTIONS and FREE MARKET ECONOMIES
3 Reasons why FDI has grown more rapidly than world trade and world output [FGS]:
A: They still DON'T ALLOW a lot of FDI. They make you do JOINT VENTURES in order to enter their country.
Why is Japan low in FDI?
China
South, East and Southeast Asia and particularly _____ are now seeing an increase of FDI inflows.
gross fixed capital formation
the TOTAL AMOUNT of CAPITAL INVESTED IN FACTORIES, STORES, OFFICE BUILDINGS, and the like. all else being equal, the greater this is, the more favorable its future prospects are likely to be.
U.S.
Since WW2, _________ has been the largest source country for FDI. (also, U.K., the Netherlands, France, Germany, Japan) All these also predominate in the world's largest multinationals.
U.S., but it is starting to change.
______ currently has the most FDI.
MERGERS AND ACQUISITIONS
Most cross border investment involves greenfield investments/mergers and acquisitions.
QUICKER to execute than greenfield investments, EASIER and LESS RISKY to ACQUIRE desired ASSETS than build them from ground up, BELIEVE they can INCREASE the EFFICIENCY OF AN ACQUIRED UNIT by TRANSFERRING: CAPITAL, TECHNOLOGY, MANAGEMENT SKILLS
Acquisitions are Attractive Because: [QEB]
licensing
granting a FOREIGN ENTITY the RIGHT to PRODUCE and SELL the firm's product in return for a ROYALTY FEE on every unit the foreign entity sells
exporting
PRODUCING GOODS AT HOME and then shipping them to the receiving country for sale
1) Limitations of Exporting 2) Limitations of Licensing 3) Advantages of Foreign Direct Investment
Theories of FDI
limitations of exporting (theory of FDI)
an EXPORTING strategy can be LIMITED by TRANSPORTATION COSTS and TRADE BARRIERS
1) may lead to firm GIVING AWAY TECH KNOWLEDGE to a potential FOREIGN COMPETITOR 2) LACK of CONTROL over : manufacturing, marketing and strategy 3) DIFFICULT if firm's COMPETITIVE ADVANTAGE is NOT AMENDABLE TO LICENSING
Limitations of Licensing (theory of FDI) 3 Major Drawbacks as suggested by INTERNALIZATION THEORY AKA MARKET IMPERFECTIONS
advantages of foreign direct investment (theory of FDI)
a firm will favor FDI OVER EXPORTING when TRANSPORTATION COSTS are HIGH or TRADE BARRIERS are high
1) it wants CONTROL over its TECH KNOW HOW 2) it wants CONTROL over OPERATIONS and BUSINESS STRATEGY 3) it's CAPABILITIES are NOT AMENDABLE to LICENSING
A Firm Will Favor FDI over Licensing When:
1) transportation costs are high or 2) trade barriers are high
A Firm Will Favor FDI over Exporting When:
1) strategic behavior (is similar) 2) the product life cycle (direct their investment activities towards certain locations at certain stages in the PLC)
2 Phenomena in The Pattern of FDI
oligopolistic industries
industries composed of a LIMITED NUMBER of LARGE FIRMS
strategic behavior [theory] (1/2 patterns of FDI)
Knickerbocker explored the RELATIONSHIP between FDI and RIVALRY in OLIGOPOLISTIC INDUSTRIES. FDI FLOWS are a REFLECTION of STRATEGIC RIVALRY between firms in the global marketplace. this theory can be extended to embrace the concept of MULTIPOINT COMPETITION.
multipoint competition
when two or more enterprises ENCOUNTER EACH OTHER in DIFFERENT REGIONAL MARKETS, NATIONAL markets or INDUSTRIES
the product life cycle [theory] (1/2 patterns of FDI)
Vernon- firms undertake FDI at PARTICULAR STAGES in the life cycle of a product they have PIONEERED. firms INVEST IN OTHER ADVANCED COUNTRIES when LOCAL DEMAND in those countries GROWS LARGE enough to support local production. firms THE SHIFT PRODUCTION to LOW COST developing countries when PRODUCT STANDARDIZATION and MARKET SATURATION give rise to PRICE COMPETITION and cost pressure.
eclectic paradigm [theory]
Dunning- in addition to the various factors discussed in PLC theory and strategic behavior theory, 2 ADDITIONAL FACTORS must be considered when explaining both the rational for and the direction of FDI: LOCATION SPECIFIC ADVANTAGES and EXTERNALITIES
location specific advantages
arises from using RESOURCE ENDOWMENTS or ASSETS that are TIED to a PARTICULAR LOCATION and that a firm finds VALUABLE to combine with its own unique assets
externalities
KNOWLEDGE SPILLOVERS that occur when companies in the SAME INDUSTRY locate in the same area
radical view
the MNE is an instrument of IMPERIALIST DOMINATION and a TOOL for EXPLOITING HOST COUNTRIES to the exclusive benefit of their capitalist-imperialist home countries
POOR ECONOMIC PERFORMANCE of the countries that adopted it, COLLAPSE of COMMUNISM in EASTERN EUROPE, STRONG ECONOMIC PERFORMANCE of developing countries that EMBRACE CAPITALISM
The Radical View has Been in Retreat Because of: [PCS]
free market view
INTERNATIONAL PRODUCTION should be DISTRIBUTED among countries ACCORDING to the THEORY OF COMPETITIVE ADVANTAGE. MNE increases the overall efficiency of the world economy.
pragmatic nationalist view
FDI has BOTH BENEFITS, such as inflows of capital, technology, skills and jobs AND COSTS, such as repatriation of profits to the home country and a negative balance of payments effect. FDI should ONLY be ALLOWED IF the BENEFITS OUTWEIGH THE COSTS.
BALANCE of PAYMENTS effect, RESOURCE TRANSFER effect, EMPLOYMENT effect, COMPETITION and ECONOMIC GROWTH effect
The 4 Main HOST COUNTRY Benefits of Inward FDI [BREC]
resource transfer effects (host country benefits)
FDI can bring CAPITAL, TECHNOLOGY and MANAGEMENT RESOURCES that would otherwise not be available
employment effects (host country benefits)
FDI can bring jobs that wold otherwise not be created there
balance-of-payments effects
FDI can help achieve a CURRENT ACCOUNT SURPLUS if the FDI is a SUBSTITUTE for IMPORTS OF GOODS and SERVICES. and if the MNE uses a FOREIGN SUBSIDIARY to EXPORT goods and services to OTHER COUNTRIES.
balance of payments account
a RECORD of a COUNTRY'S PAYMENTS to and RECEIPTS from other countries
current account
a RECORD of a COUNTRY'S EXPORT and IMPORT of goods and services. a current account SURPLUS is usually FAVORED over a deficit
effect on competition and economic growth (host country benefits)
FDI in the form of GREENFIELD investment: INCREASES the LEVEL OF COMPETITION in a market, DRIVES DOWN PRICES, IMPROVES THE WELFARE of consumers. Increased competition can lead to: increased productivity growth, product and process innovation, greater economic growth.
BALANCE of PAYMENTS effect, LOSS of NATIONAL SOVEREIGNTY and AUTONOMY, COMPETITION WITHIN HOST NATION adverse effect
3 Main HOST COUNTRY Costs of Inward FDI [BLC]
adverse effects on competition (host country cost)
the SUBSIDIARIES of foreign MNEs may have GREATER ECONOMIC POWER than indigenous competitors because they may be part of a larger international organization
adverse effects on the balance of payments (host country cost)
there are two possibilities of this: 1) with the initial capital inflows that come with FDI, must be the SUBSEQUENT OUTFLOW of CAPITAL as the foreign subsidiary repatriates earnings to its parent country 2) when a FOREIGN SUBSIDIARY IMPORTS a substantial number of its INPUTS from ABROAD, there is a debit on the current account of the host country's balance of payments
national sovereignty and autonomy (host country cost)
FDI can mean some loss of ECONOMIC INDEPENDENCE.
BALANCE of PAYMENTS: CAPITAL ACCOUNT: INWARD FLOW of foreign earnings, EMPLOYMENT EFFECTS, GAINS from LEARNING VALUABLE SKILLS from FOREIGN MARKETS
3 Main HOME COUNTRY Benefits to FDI [BEG]
BALANCE of PAYMENTS , EMPLOYMENT EFFECTS
HOME COUNTRY Costs to FDI [BE]
balance of payments (home country cost to FDI)
the MOST IMPORTANT CONCERNS for the HOME COUNTRY center around this.
employment effects of outward FDI (home country cost to FDI)
if the home country is suffering from unemployment, there may be concern about the export of jobs
offshore production
FDI undertaken to serve the home market
international trade theory
home country concerns about the negative economic effects of offshore production. FDI may actually STIMULATE ECONOMIC GROWTH by FREEING HOME COUNTRY RESOURCES to concentrate on activities where the home country has a COMPARATIVE ADVANTAGE. CONSUMERS may also benefit in the form of LOWER PRICES
RELAXED RESTRICTIONS on INBOUND FDI, ELIMINATED DOUBLE TAXATION of FOREIGN INCOME, GOVERNMENT-BACKED INSURANCE PROGRAMS to cover major ties of foreign investment risk
Home Country Policies to Encourage Outward FDI [REG]
MANIPULATE TAX RULES to make it MORE FAVORABLE for FIRMS to INVEST AT HOME, RESTRICT FIRMS from investing in CERTAIN NATIONS for political reasons
Home Country Policies to Restrict Outward FDI [MR]
INCENTIVES offered to FOREIGN FIRMS to invest in their country (motivated by desire to gain from resource transfer effect and employment effects)
Host Country Policies to Encourage Inward FDI [I]
PERFORMANCE REQUIREMENTS used to MAXIMIZE BENEFITS and MINIMIZE COSTS of FDI for HOST COUNTRY, OWNERSHIP RESTRAINTS used to EXCLUDE FOREIGN FIRMS from CERTAIN SECTORS on grounds of NATIONAL SECURITY/COMPETITION, OWNERSHIP RESTRAINTS and PERFORMANCE REQUIREMENTS used to restrict FDI.
Host Country Policies to Restrict Inward FDI [POO]
direction of FDI
The location-specific advantages argument associated with Dunning help explain the ________ of _____.
prefer FDI to licensing or exporting.
The internalization theory is needed to explain why firms ................ .
PROPRIETARY PROPERTY CANNOT be properly PROTECTED by a LICENSING AGREEMENT, TIGHT CONTROL needed over a FOREIGN ENTITY in order to MAXIMIZE its MARKET SHARE and EARNINGS in that country, SKILLS and CAPABILITIES are NOT AMENABLE to LICENSING
Licensing is Unattractive When: [PTS]
GOVERNMENT VALUES what the firm has to offer, FEW COMPARABLE ALTERNATIVES available, FIRM has LONG TIME to NEGOTIATE [[end of CH.7]]
A Firm's Bargaining Power with the Host Government is Highest When: [GFF]
when- to enter the market, where-which markets to enter, how-on what scale to enter the market [[beg of CH.12]]
A firm expanding internationally must decide 3 things:
POLITICALLY STABLE DEVELOPED and DEVELOPING nations with FREE MARKET SYSTEMS, LOW INFLATION and LOW private sector DEBT
The most favorable markets are:
POLITICALLY UNSTABLE DEVELOPING nations with MIXED/COMMAND ECONOMIES, or developing nations where SPECULATIVE FINANCIAL BUBBLES had led to EXCESS BORROWING
The less desirable markets are:
have not yet been widely available in the market ; satisfy and unmet need.
Successful firms usually offer products that ........ and that ..........
early entry
when an international business enters a foreign market BEFORE OTHER FOREIGN FIRMS
late entry
when a firm enters AFTER OTHER INTERNATIONAL BUSINESSES HAVE ALREADY ESTABLISHED themselves in the market
first mover advantages
ability to pre-empt rivals and capture demand by establishing a STRONG BRAND NAME, the ability to BUILD UP SALES VOLUME in that country and RIDE down the EXPERIENCE CURVE AHEAD of RIVALS and gain a cost advantage per later entrants, the ability to CREATE SWITCHING COSTS that TIE CUSTOMER INTO their products or services making it difficult for later entrants to win business.
first mover disadvantages
the disadvantages associated with entering a foreign market BEFORE other international businesses. these may result in PIONEERING COSTS
pioneering osts
costs that an early entrant has to bear that a later entrant can avoid
Exporting (indirect, direct), Joint Venture (licensing and franchising, management and contracts, manufacturing contracts, turn-key projects), FDI (ownership arrangements [also a form of JV], acquisition, greenfield)
Mode of Entry in order of least involvement to greater involvement.
LEAST COMPLEX, ENABLES INCREMENTAL GROWTH, EXPERIENCE CURVE and EOS
Advantages of Exporting [LEE]
POLITICAL/LEGAL BARRIERS, COSTS (transportation tariffs), LIMITS LOCAL KNOWLEDGE/CONTROL
Disadvantages of Exporting [PCL]
1) as FUNDAMENTAL ASPECT of a CENTRALIZED PRODUCTION STRATEGY 2) for INITIAL EXPLORATION of INTERNATIONAL MARKETS 3) as a REGIONAL STRATEGY for SMALL MARKETS
Exporting is appropriate for/when.... [FIR]
RAPID EXPANSION, LOW RISK, LOW COST
Advantages of Licensing [RLL]
POSSIBLE LOSS of IP, CREATE COMPETITION?, LIMITED LOCAL CONTROL, DIMINISHES GLOBAL COORDINATION
Disadvantages of Licensing [PCLD]
1) RAPID DIFFUSION of PRODUCT/BUSINESS MODEL 2) in NONSTRATEGIC LOCATIONS or with LIMITED DEMAND 3) LIMITED INVESTMENT FUNDS 4) with NON-ESSENTIAL PROCESSES or TECHNOLOGY (or where legal/practical protection is possible/strong) 5) in HIGH-RISK or HIGHLY SPECIFIC local business 6) when there are SIGNIFICANT TRADE BARRIERS
Licensing is appropriate for/when... [RN LN HS]
franchising
operates business under name of a _______. pays FEE, and RECEIVES SUPPLIES, TRAINING and TECHNICAL SUPPORT, includes BRAND NAME, OPERATING SYSTEM, ADVERTISING, REPUTATION, QUALITY CONTROL, etc.
CONSUMER GOODS/DISTRIBUTION/SERVICES
Franchising is appropriate for/when.....
management contracts
leverage industry knowledge; "RENT" MANAGEMENT SERVICES; few risks, obligations
contract manufacturing
LOW COST/high flexibility; LOW CONTROL over operations
turn-key projects
DESIGN, CONSTRUCT, EQUIP facility for LOCAL FIRM/GOVERNMENT; usually complex projects
1) BASIC OPERATIONAL or KNOWLEDGE component MISSING by BOTH PARTIES 2) REGULATORY TRADE BARRIERS 3) SIGNIFICANT INVESTMENT REQUIREMENTS (share costs of: manufacturing efficiency, development costs, shared distribution)
FDI: Ownership Joint-Venture is appropriate when: [BRS]
1) when CONTROL of BRAND/PRODUCTS/PROCESSES or TECHNOLOGY is KEY to COMPETITIVE ADVANTAGE 2) in STRATEGIC COUNTRIES/LARGE MARKETS 3) when there are SIGNIFICANT GOVERNMENT INCENTIVES
Wholly-Owned/Subsidiary is appropriate when: [CSS]
greenfield
start from scratch and have less baggage than acquisition; acclimate at own pace, customize to firm's needs
acquisition
acquire all the good and the bad and have less time to begin operations that greenfield; country expertise; integration challenges
TRANSPORT/TARIFF COSTS, INITIAL INVESTMENT REQUIRED, PROTECT COMPETITIVE ADVANTAGE/TECHNOLOGY,SPEED TO START UP, FINANCIAL RETURN POTENTIAL, ABILITY TO COORDINATE GLOBAL OPERATIONS, STRATEGIC LOCATION ADVANTAGES, TRADE/INVESTMENT BARRIERS, LOCAL CONTROL/RESPONSIVENESS, INCENTIVES, CREATE COMPETITOR, LEVEL OF EXPERTISE REQUIRED [[end of CH.12]]
Choice Issues [TIPS FAST LICL]
regional economic integration [[beg. of CH. 8]]
agreements between countries in a GEOGRAPHIC REGION to REDUCE tariff and non-tariff barriers to free flow of goods, services, and factors of production between each other. in theory, this benefits ALL MEMBERS. in the LAST TWO DECADES the number of these has been on the rise.
free trade area
all BARRIERS TO TRADE of GOODS AND SERVICES among member countries are removed, but members DETERMINE their OWN TRADE POLICIES with regard to NONMEMBERS. Ex: EUROPEAN FREE TRADE ASSOCIATION (Norway, Iceland, Liechtenstein, Switzerland) & NAFTA
customs union
ELIMINATES TRADE BARRIERS BETWEEN member countries and adopts a COMMON EXTERNAL TRADE POLICY. most countries that enter this, desire further integration in the future. Ex: Andean Pact (Bolivia, Colombia, Ecuador, Venezuela, Peru)
common market
NO BARRIERS TO TRADE between member countries, a COMMON EXTERNAL TRADE POLICY and the FREE MOVEMENT OF THE FACTORS OF PRODUCTION. can be difficult to achieve and requires significant harmony among members in fiscal, monetary and employment policies. Ex: MERCOSUR (Brazil, Argentina, Paraguay, Uruguay)
economic union
involves the FREE FLOW OF PRODUCTS AND FACTORS OF PRODUCTION between members, the adoption of a COMMON EXTERNAL TRADE POLICY, and in addition, a COMMON CURRENCY, HARMONIZATION of the member countries' TAX RATES, and COMMON MONETARY and FISCAL POLICY. sacrifice a significant amount of national sovereignty . Ex: European Union (EU)
political union
independent states are combined into a SINGLE UNION . requires that a CENTRAL POLITICAL APPARATUS coordinate ECONOMIC, SOCIAL AND FOREIGN POLICY for member states. Ex: U.S. / The EU is headed toward at least partial this.
Canada, Mexico, U.S.
members of NAFTA
BRAZIL, ARGENTINA, PARAGUAY, URUGUAY, BOLIVIA, ECUADOR, CHILE, COLOMBIA, PERU, VENEZUELA
members of MERCOSUR [BAPU BECC P V]
BELIZE, COSTA RICA, DOMINICAN REPUBLIC, EL SALVADO, NICARAGUA, PANAMA, GUATEMALA, HONDURAS
members of CACM (Central American Common Market) [BC DEN PG H]
BRUNEI, CAMBODIA, MALAYSIA, INDONESIA, LAOS, SINGAPORE, MAYANMAR, THAILAND, VIETNAM, PHILLIPINES
members of ASEAN (Association of Southeast Asian Nations) [BC MILS MTV P]
...
members of EU (European Union)
tariffs -> quotas -> mobility of capital and labor -> economic issues -> political issues
For economic integration, agreements regard (in order of progression):
trade creation
HIGH COST DOMESTIC PRODUCTION and LOW COST TRADE AGREEMENT PARTNER
trade diversion
LOW COST NON-AGREEMENT TRADE PARTNER and HIGH COST TRADE PARTNER
REGIONAL/BILATERAL AGREEMENTS (VERs) ,CONSENSUS, ANTIDUMPING, NEGOTIATION STALEMATE/ECONOMIC TENSIONS, NORTH/SOUTH TENSIONS AND DISPUTES (market access, agricultural policy, pharmaceutical industry, intellectual property) , TRANSPARENCY
Key Challenges for WTO [R CANNT]
HASN'T WORKED for DEVELOPING COUNTRIES--UNDERMINES INITIAL STAGES of DEVELOPMENT, UNDERMINES NATIONAL SOVEREIGNTY and thus, legitimate trade barriers, RICH COUNTRY CLUB
Major Criticism of the WTO [HUR]
COMPARABLE MARKETS, MANAGEABILITY
Regional Integration Pros [CM]
GLOBAL FORUM, EFFICIENCY POTENTIAL, NORTH/SOUTH EXCHANGE
Global Integration Pros [GEN]
comparable markets-thus MORE LIMITED POTENTIAL, FORTRESS/TRADE DIVERSION
Regional Integration Cons [MF]
CONSENSUS DIFFICULT, CULTURAL/POLITICAL GAPS
Global Integration Cons [CC]
European Commission, European Council, European Parliament, Court of Justice
4 Main Institutions of the EU
European Commission
PROPOSES EU LEGISLATION, IMPLEMENTS it, and MONITORS compliance. reduced to 18 members from 27, selected by commissioners and rolling state membership. compares to EXECUTIVE BRANCH of the U.S.
European Council
the ULTIMATE CONTROLLING authority within the EU. has 1 rep from the government of each state. . compares to U.S. SENATE.
European Parliament
DEBATES LEGISLATION proposed by the commission and forwarded to it by the council. 732 members directly elected by population of state. TREATY OF LISBON '07 -gave this more power. compares to U.S. House.
Court of Justice
the supreme appeals court for EU law.
27
The number of countries in the EU.
17 out of 27
How many countries in the EU have adopted the Euro?
Single European Act (1987)
ABOLISH RESTRICTIONS on CABOTAGE, REMOVE all FRONTIER CONTROLS between E.C. COUNTRIES, REMOVE all RESTRICTIONS on FOREX TRANSACTIONS between member countries, OPEN PROCUREMENT to NON-NATIONAL SUPPLIERS, LIFT BARRIERS to COMPETITION in RETAIL BANKING and INSURANCE, APPLY the PRINCIPLE of MUTUAL RECOGNITION to product standards
committed EC countries to work toward establishment of a SINGLE MARKET by 1992. The act proposed to: [ARROLA]
Maastricht Treaty (1991)
PARTICIPATING COUNTRIES agree to GIVE UP CONTROL, BRITAIN DENMARK AND SWEDEN opted OUT of EURO ZONE, USED by 17 of the 27 MEMBER STATES, CREATED the EURO ZONE-2nd largest currency zone in the world after the U.S.'s dollar
committed EU members to adopt a SINGLE CURRENCY, the euro. Details of it: [PBUC]
HANDLING 1 CURRENCY rather than many, INCREASED COMPETITION promotes GREATER EFFICIENCIES in PRODUCTION, PAN-EUROPEAN CAPITAL MARKET should further develop, EASIER to COMPARE PRICES across Europe, RANGE of INVESTMENT OPTIONS open both to INDIVIDUALS and INSTITUTIONS should INCREASE
The Benefits of the Euro: [HIPER]
LOSS of NATIONAL SOVEREIGNTY, NOT and OPTIMAL CURRENCY AREA
Costs of the Euro: [LN]
optimal currency area
an area where SIMILARITIES in the UNDERLYING STRUCTURE of ECONOMIC ACTIVITIES makes it FEASIBLE TO ADOPT a SINGLE CURRENCY and use a SINGLE EXCHANGE RATE as an instrument of macro-economic policy
EU
Who has the #1 GDP as a whole?
VOLATILE
Since its establishment, the euro has had a steady/volatile trading history with the U.S. dollar.
25 years; 80's/90's
The EU is old, but the most movement occurred in the last ___ years. IN the 19___s/ __s.
HIGHER UNEMPLOYMENT, MORE SOCIAL PROGRAMS, VALUES (soft power, responsibility of state vs individual, sense of history/less adaptable), LESS INCOME VARIANCE, LOWER ECONOMIC GROWTH
Characteristics of EU as compared to the U.S. [HM V LL]
PHILISOPHICAL VALUES/IDENTITY, OPPORTUNITY COSTS, POLITICAL POWER/BALANCE, ECONOMIC POWER/BALANCE, TRADE EFFICIENCIES, ECONOMIC GROWTH
Why EU Enlargement? [PO PETE]
BUREAUCRACY (5 governmental bodies), ENGLAND vs "CONTINENT", COMMON AGRICULTURAL POLICY, COST of SOCIAL POLICY, FURTHER EXPANSION (Croatia, FYR, TURKEY?) , DIFFERING ECONOMIC STRAINS with CURRENT CRISIS (pressure on euro), MARKET DIFFERENCES (harmonization and friction)
European Union Challenges: [BECC FDM]
1982-88 De La Madrid, 1988-94 Salinas de Gortari, 1989 Canadian FTA, Mexico
BACKGROUND of NAFTA
North American Free Trade Agreement (NAFTA)
between U.S., CANADA, & MEXICO. became law in 1994.
PROTECTS INTELLECTUAL PROPERTY RIGHTS, ABOLISHED TARIFFS on 99% of goods traded, REMOVED BARRIERS on the cross-border flows of services, ESTABLISHES 2 COMMISSIONS to IMPOSE FINES and REMOVES TRADE PRIVILEGES when environmental standards/legislation are ignored, ALLOWS each country to APPLY ITS OWN ENVIRONMENTAL STANDARDS
What did NAFTA do? [PAREA A]
MEXICO- INCREASED JOBS as low cost production moves south and more RAPID ECONOMIC GROWTH, U.S. and CANADA (access to a LARGE AND PROSPEROUS MARKET LED TO LOWER PRICES for CONSUMERS from goods made in Mexico , U.S. and CANADIAN FIRMS with production sites in Mexico are MORE COMPETITIVE on WORLD MARKETS)
Benefits of NAFTA [MU]
JOBS could be LOST and WAGE LEVELS in U.S. and Canada decreased, MEXICAN WORKERS could EMIGRATE NORTH, MEXICO would LOSE its SOVEREIGNTY, POLLUTION could INCREASE due to MEXICO'S MORE LAX STANDARDS
Drawbacks of NAFTA [JMMP]
TRADE between 3 COUNTRIES has INCREASED by 250%, MEMBERS have become MORE INTEGRATED, PRODUCTIVITY has INCREASED in member nations, EMPLOYMENT EFFECTS have been SMALL, MEXICO has become more POLITICALLY STABLE
Effects/Success of NAFTA [TM PEM]
wait and see attitude.
Several other Latin American countries have indicated their desire to eventually join NAFTA. Currently, both Canada and the U.S. are adopting what kind of attitude with regard to most countries.
Andean Pact (1969)
was based on EU model . had more or less failed by the mid-1980's. in 1990, was RELAUNCHED and now operates as a CUSTOMS UNION.
Bolivia, Ecuador, Chile, Peru
Members of Andean Pact (1969). [BECC P]
Andean Pact (1969)
Who signed an agreement with MERCOSUR in 2003 to restart negotiations towards the creation of a FREE TRADE AREA
MERCOSUR (1988)
a FREE TRADE pact between Brazil and Argentina. in 1990 was expanded to include Paraguay and Uruguay. Now Venezuela is also a part of this. has been SUCCESSFUL AT REDUCING TRADE BARRIERS between member states. However, critics worry that it is DIVERTING TRADE RATHER THAN CREATING TRADE, and LOCAL FIRMS are INVESTING in industries that are NOT COMPETITIVE on a worldwide basis.
Free Trade of the Americas (FTAA)
talks began in 1998 to establish this by 2005. this was not established as planned. Current SUPPORT for the agreement by the U.S. and Brazil is LIMITED. if this were to be established, it would create a FREE TRADE AREA of nearly 800 MILLION PEOPLE and would be LARGER THAN THE WTO.
Association of Southeast Asian Nations (ASEAN) (1967)
foster FREER TRADE BETWEEN MEMBER COUNTRIES AND TO ACHIEVE SOME COOPERATION IN THEIR INDUSTRIAL POLICIES
BRUNEI, CAMBODIA, MALAYSIA, INDONESIA, LAOS, SINGAPORE, MYANMAR, THAILAND, VIETNAME, PHILLIPINES
Members of ASEAN (1967) [BC MILS MTV P]
ASEAN Free Trade Area (AFTA) (2003)
between the SIX ORIGINAL MEMBERS of ASEAN came into full effect to REDUCE IMPORT TARIFFS AMONG MEMBERS. Vietnam, Laos and Myanmar have all joined.
Asian Pacific Economic Cooperation (APEC) (1990)
was founded in 1990 to INCREASE MULTILATERAL COOPERATION in view of the ECONOMIC RISE of the PACIFIC NATIONS and the growing INTERDEPENDENCE within the region. currently has 21 members including the U.S. , Japan and China. IF THIS WERE TO BE A COMMON MARKET IT WOULD BE THE BIGGEST.
21
# of members in APEC
9
How many trade blocs are on African continent?
slow. ; many countries believe that they need to protect their industries from UNFAIR FOREIGN COMPETITION making it difficult to create free areas of customs unions.
Progress towards the establishment of MEANINGFUL TRADE BLOCS has been fast/slow in Africa because ....
A: Regional economic integration means that markets that had been protected from FOREIGN COMPETITION are INCREASINGLY OPEN. and regional economic integration is likely to INCREASE COMPETITION.
Why is regional economic integration important to international companies?
FORMERLY PROTECTED MARKETS are now open to export and direct investment, FREE MOVEMENT of GOODS across borders & HARMONIZATION of product standards & SIMPLIFICATION of TAX REGIMES mean FIRMS can REALIZE enormous cost economies by centralizing production in locations where the mix of factor costs and skills is optimal
Opportunities due to Regional Economic Integration [FF]
LOWER TRADE and INVESTMENT BARRIERS could lead to INCREASED PRICE COMPETITION within EU and NAFTA, FIRMS OUTSIDE the BLOCS risk being SHUT OUT of the SINGLE MARKET by the CREATION of "TRADE FORTRESS"[[end of CH. 8]]
Threats due to Regional Economic Integration [LF]
foreign exchange market [[beginning of CH.]]
a market for CONVERTING the CURRENCY of one country into that of another
exchange rate
the rate at which ONE CURRENCY is CONVERTED into another
foreign exchange risk
the ADVERSE CONSEQUENCES of UNPREDICTABLE CHANGES in exchange rates
currency speculation
the SHORT TERM movement of FUNDS from one currency to another in the hopes of PROFITING from SHIFTS in exchange rates
spot exchange rate
the rate at which a foreign exchange dealer converts one currency into another currency on a PARTICULAR DAY
forward exchange rates
the exchange rate governing FORWARD EXCHANGE
forward exchange
occurs when TWO PARTIES AGREE to exchange currency and execute the deal at some SPECIFIC DATE in the future
currency swap
the SIMULTANEOUS PURCHASE and SALE of a GIVEN AMOUNT of foreign exchange for 2 DIFFERENT value dates. used when it is DESIRABLE to MOVE OUT of one currency into another for a LIMITED PERIOD WITHOUT INCURRING FOREIGN EXCHANGE RATE RISK
arbitrage
the process of BUYING A CURRENCY LOW and SELLING it HIGH
law of one price
in competitive markets free of transportation costs and barriers to trade, IDENTICAL PRODUCTS sold in DIFFERENT COUNTRIES must SELL for the SAME PRICE when their price is EXPRESSED in terms of the SAME CURRENCY
purchasing power parity theory
given relatively EFFICIENT MARKETS (markets in which few impediments to international trade and investment exist), the PRICE of a "BASKET OF GOODS" should be roughly EQUIVALENT in EACH COUNTRY
Fisher Effect
states that a COUNTRY'S NOMINAL INTEREST rate (i) is the SUM of the REQUIRED REAL RATE OF INTEREST (r) and the EXPECTED RATE OF INFLATION over the period for which the funds are to be lent (l). i=r+l
International Fisher Effect
suggests that for ANY 2 COUNTRIES, the SPOT EXCHANGE RATE should CHANGE in an EQUAL AMOUNT but in the OPPOSITE DIRECTION to the DIFFERENCE in NOMINAL INTEREST RATES between the 2 countries
bandwagon effect
occurs when EXPECTATIONS on the part of TRADERS TURN INTO SELF-FULFILLING PROPHECIES, and TRADERS JOIN the bandwagon and MOVE EXCHANGE RATES based on group expectations.