6-International Trade(International Business)

Dr Zain Yusufzai

International Internatio nal trade

Chapter # 6 (page152-178).

Introduction International trade: The branch of economics concerned with the exchange of goods and services with foreign countries  Trade deficit will not be reduced by political measures  International economic problems cannot be solved in the short run  Require long run economic measures that reduce imports and increase exports  All countries want favorable trade balance,  Not possible since a nation with a deficit must be matched b y a nation with a surplus  Economies moving from state run to market driven economies  Inflation and unemployment severe problems  Enhanced international trade is one way to address a weak macroeconomic  Economists have proven that free trade is efficient and leads to maximum economic prosperity Intention trade theory  

Why do nations trade? Answer provided by mercantilism

Mercantilism: a trade theory, which holds that a government can improve the economic well-being of the country by encouraging exports and stifling imports  It results in positive balance of trade that leads to wealth (gold) flowing into the country Theory of absolute advantage: A trade theory, which holds that, by specializing in the production of goods, which they can produce more efficiently than any others, nations, can increase their economic well-being Theory of comparative advantage:

International business Alan M. Rugman, Richard M. Hodgetts

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Dr Zain Yusufzai

International Internatio nal trade

Chapter # 6 (page152-178).

A trade theory which holds that nations goods for  which they have the greatest relative advantage Factor endowment theory a trade theory that holds that nations will produce and export products that use large amounts of  production factors that they have in abundance and will import products requiring a large amount of  production factors that are scarce in their country  First country has absolute advantage in producing a product, there exists a potential for gains from trade  Second, the more a country is able to specialize in the production of the goods it produces most efficiently , the greater its potential gains in national well being  Third , within one country the competitive market does not evenly distribute the grains from trade  The nation as a whole benefit from trade Heckscher-Ohlin theory: That extends the concept of comparative advantage by bringing into consideration the endowment and cost of factors of production and helps to explain why nations with relatively large labor forces will concentrate on producing Labor-intensive goods, Whereas countries with relatively mare capital than labor will specialize in capital-intensive goods Leontief paradox: A finding by Wassily Leontief, a noble prize economist, which shows that the US, surprisingly, exports relatively more labor-intensive goods and imports capital-intensive goods International product life cycle theory (IPLC) a theory of the stages of production of a product with new know how it is fist produced by the parent firm then by its foreign subsidiaries and finally anywhere in the world where costs are the lowest it helps to explain why a product that begins as a nation’s export often ends up as an import

International business Alan M. Rugman, Richard M. Hodgetts

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Dr Zain Yusufzai

International Internatio nal trade

Chapter # 6 (page152-178).

Product stages: IPLC has three stages 1. new pro product duct 2. matu maturi ring ng prod produc uctt 3. stan standar dardi dized zed prod produc uctt New product  innovative or unique in some way  initial consumption is in the home country  price inelastic, profits are high  production increases and output runs local consumption exporting begins (maturity stage)  competitors will be working to develop substitute products so the original product can be replaced with one of  their own  introduction of substitutes and the softening of demand for the original product will eventually result in the firm switching its strategy from production to market protection, Personal computers and the IPLC  Change from desk top to laptop and notebooks in five years Other important considerations  Government regulations  Political reasons  Monetary currency valuation  Consumer tastes Monetary currency valuation Exchange rate the price of and currency stated in terms of another currency Consumer tastes  Personal tastes dictate consumer decisions  Price not the only decision factor   Willing to pay more may be based on: o Prestige, perceived quality o Physical and psychological reasons Barriers to trade

International business Alan M. Rugman, Richard M. Hodgetts

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Dr Zain Yusufzai 

International Internatio nal trade

Chapter # 6 (page152-178).

Trade barriers make less expensive foreign product expensive

Reasons for trade barriers  Encourage local production by making it difficult for competition from foreign firms  Help local firms export and build world wide market share  Protect local jobs  Protect infant industries  Promote export activity  Promote political objectives such as refusing to trade with counties that practice apartheid or deny civil liberties to their citizens Commonly used barriers (six barriers) i. price price base based d bar barrie riers rs  imported goods and services sometimes have a tariff added to their  price  based on the value of the goods Tariffs:  raise revenues for the government,  discourage imports  make local goods more attractive ii. ii. Quan Quanti tity ty limi limits ts Also known as quota, restrict the number of units that can be imported or the market share that is permitted Quota prices set at zero, it is called embargo

Quota: A quantity limit on imported goods Embargo: A quota set at zero, thus preventing the importation of those products that are involved iii. Interna Internation tional al price price fixin fixing g A host of international firms will fix prices or  quantities sold in an effort to control price this is known as a cartel 

International business Alan M. Rugman, Richard M. Hodgetts

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Dr Zain Yusufzai

International Internatio nal trade

Chapter # 6 (page152-178).

Cartel: A group of firms that collectively agree to fix prices or quantities sold in an effort to control price (example: OPEC controls price of oil) iv. iv. Non-t Non-tari ariff ff barri barriers ers:: Rules, regulation, and bureaucratic red tape that delay or preclude the purchase of foreign goods (examples include) Slow processing of import permits establishment of quality standards that exclude foreign producers, a “buy local” policy v. Financial limits i. Exchange Exchange controls controls that restrict restrict the flow flow of currency ii. Allow exporters exporters to exchange exchange their  their  dollars for local currency iii. Place restriction restrictions s on access to to dollars for purchasing imports iv. Limit on currency currency taken out out of the the country v. Fixed exchange exchange rates rates price of currency currency V1. Foreign investment controls Limits on foreign direct investment or the transfer  or remittance of funds These controls take a number of different forms Requiring foreign investors to take minority ownership position (49 % or less) Limiting profit remittance example 15% of  accumulated capita l per year  Prohibiting royalty payments to parent companies stopping the latter from taking out capital Tariffs: A tax on goods shipped internationally Import tariff: A tax levied on goods shipped into a country Export tariff: A tax levied on goods sent out of a country Transit tariff: A tax levied on goods passing though a country Specific duty: International business Alan M. Rugman, Richard M. Hodgetts

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Dr Zain Yusufzai

International Internatio nal trade

Chapter # 6 (page152-178).

A tariff based on the number of items shipped into a country Ad valorem duty: A tax, based on a percentage of the value of  imported goods Compound duty: A tariff consisting of both a specific and an ad valorem duty Dumping: The selling of imported goods at a price below cost or below that price in the home country US Trade Policy US strives to lower tariffs and trade barriers through the use of multilateral agreements Minimize the use of tariffs Supported the general agreement on tariff  and trade (GATT) Supported the world trade organization (WTO) in 1994 •

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Caribbean basin initiative: A trade agreement that eliminates tariffs on many imports to the US from the Caribbean and Central American and Central American regions Foreign sales: Corporation ACT legislation designed to allow US exporters to establish overseer’s affiliates and not pay taxes on the affiliate’s income until the earnings are remitted to the parent company Trade adjustment assistance: Assistance offered by the US government, to US businesses and individuals harmed by competition from imports Non-tariff barriers to trade not imposed by countries to interfere with trade a by product of domestic policy and economic management example: tax break, to reduce regional income disparities or regulations designed to increase local purchasing or employment •

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International business Alan M. Rugman, Richard M. Hodgetts

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Dr Zain Yusufzai

International Internatio nal trade

Chapter # 6 (page152-178).

Buy national restrictions “buy National” regulations require national governments to give preference to domestic producers, sometimes to the complete exclusion of foreign firms •

Customs valuation value for duty is based on the invoice cost, and the latitude of customers to reclassify products has been reduced Technical barriers product and process standards for health, welfare, safety, quality, size and measurements testing and certification procedures, such as testing only in the importing country and on site plant inspections New code on technical barriers to trade requires: consultation between trading partners before a standard that impedes trade is put in place it requires that testing and certification procedures treat imports and domestic goods equally importing country accepts certification testing conducted in the exporting country •

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Antidumping legislation, subsides, and countervailing duties Governments protect local firms from foreign companies, who practice, Dumping goods at low prices to drive local competition out of business Agricultural products Trade in agricultural products highly regulated by quotas and fixed and variable tariffs Domestic product highly subsidized •

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Export restraints Other economic developments (includes three considerations: i. Counter Counter trade trade Barter trade in which the exporting firm receives payment in products from the importing country International business Alan M. Rugman, Richard M. Hodgetts

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Dr Zain Yusufzai

International Internatio nal trade

Chapter # 6 (page152-178).

Trade in services High income countries move towards a service economy Internationally traded services: banking, investment income, insurance, media, transportation, advertising accounting ,travel, and technology licensing Subject to a host of national and international regulations for economic, social, cultural and political reasons •

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Free trade zones: A designated area where importers can defer  payment of customs duty while further processing of products takes place (same as foreign trade zone) Maquiladora industry: a free trade zone that has sprung up along the USMexican border for the purpose of producing goods and them between the two countries

International business Alan M. Rugman, Richard M. Hodgetts

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