International BusinessSession 6

National Trade PoliciesProtectionist PoliciesEconomic Development Programs

◦Export promotion strategy◦Import substitution strategy

Industrial Policy◦Key domestic industries chosen,

protected, and promotedRegional Agreements

Trade Intervention

Should a national government intervene to protect the country’s domestic firms by taxing foreign goods entering the domestic market or constructing other barriers against imports?

Should a national government directly help the country’s domestic firms increase their foreign sales through export subsidies, government-to-government negotiations, and guaranteed loan programs?

Two Types of Rationale for Protectionism

Defensive barriers safeguard industries, workers, special interest groups, protect infant industries and to promote national security (export controls).

Offensive barriers pursue a strategic or public policy objective, such as increasing employment or generating taxes.

International Business: Strategy, Management, and the New Realities 4

National Defense ArgumentCountry must be self-sufficient in

critical raw materials, machinery, and technology or else be vulnerable to foreign threats

Appeals to general publicProtects steel, electronics, and

machine tools industries, and merchant marines

Infant Industry Argument

Imposition of tariffs to give U.S. firms temporary protection from foreign competition until firms are fully established

Powerful economic development strategy

Which industries should be protected? For how long?

Maintenance of Existing JobsJobs in high-wage countries

threatened by imports from low-wage countries

Forms of assistance◦Tariffs◦Quotas

Protection of the National Economyadvanced economies cannot compete

with those in developing countries that employ low-cost labor, thus governments should impose trade barriers to block imports

Preserving National Culture and IdentityGovernments seek to protect certain occupations,

industries, and public assets central to national culture:

Switzerland imposed trade barriers to preserve its long-established tradition in watch making.

Japanese restrict the import of rice because it is central to the nation’s diet and food culture.

U.S. opposed Japanese investors’ purchase of the Pebble Beach golf course in California, New York’s Rockefeller Center, and the Seattle Mariners baseball team, all considered to be part of the national heritage.

France does not allow significant foreign ownership of its TV stations because of concerns that foreign influences will taint French culture.

National Strategic PrioritiesIntervention encourages the

development of industries that bolster the nation’s economy.

Countries with many high-value-adding industries —such as IT, pharma, automotive, or financial services — create better jobs and higher tax revenues.

Deciding which industries to support is challenging; it is difficult to predict which industries will produce comparative advantages. May result in continuous subsidization of underperforming industries.

Barriers to International Trade

Tariff barriers◦ Export tariff◦ Transit tariff◦ Import tariffs

Ad valorem Specific Compound

Non-tariff barriers◦ Quotas◦ Product and testing standards◦ Restricted access to

distribution networks◦ Public-sector procurement

policies◦ Regulatory controls◦ Local-purchase requirements

Tariffs

Export tariffs- taxes on products exported by domestic firms- ◦ Example- Russia charges a duty on oil exports,

intended to generate government revenue and maintain higher stocks of oil within Russia.

Import tariff (most common) - tax levied on imported products. 1. Ad valorem - tariffs are assessed as a percentage of

the value of the imported product. 2. Specific tariff—a flat fee or fixed amount per unit of

the imported product—based on weight, volume, or surface area (such as barrels of oil or square meters of fabric).

Revenue tariff - intended to raise money for the government, e.g. by taxing cigarette imports.

Protective tariff - protects domestic industries from foreign competition.

Prohibitive tariff - is so high that no one can import any of the items. International Business: Strategy,

Management, and the New Realities 12

World Trade OrganizationStarted in 1947 as General Agreement

on Tariffs and Trade (GATT)Goal: to promote a free and

competitive international trading environment

Method: multilateral negotiationsBecomes WTO in 1995Added: Services, IP, Investment, and

Enforcement powersCurrently 153 member countries

Success in Reducing Tariffs

Doha Round

Started in 2001, aim for conclusion 2011Aims for developing countries:

◦ reforming agricultural subsidies◦ improving the access to global markets◦ ensuring that new liberalisation in the global economy

respects the need for sustainable economic growth in developing countries

General Agreement on Trade in Services (GATS)

Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)

Harmonized Tariff ScheduleMost countries have adopted a

detailed classification scheme for imported goods called the harmonized tariff schedule (HTS). Because of its complexity, the HTS can sometimes be difficult to use.

Sample Import Tariffs

TARIC – Info on Tariffs

http://ec.europa.eu/taxation_customs/dds2/taric/taric_consultation.jsp?Lang=en 18

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Degrees of International Integration

nationalInter-

ofForms

Inte-gration

RemovalInternalTariffis

CommonExternalTariffs

Free FlowCapital &Labour

HarmoniseEconomicPolicy

PoliticalIntegration

FreeTradeArea

CustomUnion

CommonMarket

EconomicUnion

PoliticalUnion

Source: SUDER

Why Nations Pursue Economic Integration?

1. Expand market size◦ Regional integration greatly increases the scale of the

marketplace for firms inside the economic bloc. ◦ Example- Belgium has a population of just 10 million;

the EU gives Belgian firms easier access to a total market of roughly 490 million.

◦ Consumers also gain access to a greater selection of products and services.

2. Achieve scale economies and enhanced productivity ◦ Expansion of market size within an economic bloc gives

member country firms the opportunity to gain economies of scale in production and marketing.

◦ Internationalization inside the bloc helps firms learn to compete more effectively outside the bloc as well.

◦ Labor and other inputs are allocated more efficiently among the member countries- leading to lower prices for consumers.

Why Nations Pursue Economic Integration?

3. Attract direct investment from outside the bloc◦ Compared to investing in stand-alone countries,

foreign firms prefer to invest in countries that are part of an economic bloc as they receive preferential treatment for exports to other member countries.

◦ Examples- General Mills, Samsung, and Tata- have invested heavily in the EU to take advantage of Europe's economic integration.

◦ By establishing operations in a single EU country, these firms gain free trade access to the entire EU market.

4. Acquire stronger defensive and political posture ◦ Provide member countries with a stronger

defensive posture relative to other nations and world regions- this was one of the motives for the initial creation of the European Community (precursor to the EU).

International Trade Groups

Trade Group Comparison

Trade Group Comparison 2

Producers’ Alliances and ICCAs

Producers’ Alliances ◦ Membership agreements between producing and exporting

countries.◦ OPEC (Producers’ Cartel), Diamonds, Wool, Bananas◦ Quota system

International Commodity Control Agreements◦ Agreements between producing and consuming countries.◦ Aim is to counteract price instability.◦ ICCO: International Cocoa Organization

42 countries + EU Represents 80% of production and 70% of consumption

Doing Business in the EU

EU Competencies

28

29

30

Development of the EU

31

Political Union

Economic Union

Common Market

Customs Union

Free Trade Area

Lisbon

EMS

EURO

Single Europe

Coal and Steel

European Economic Community

EU Trade - Export

32

Exports - percentage

33

EU Trade - Import

34

Imports - percentage

35

Main Trade Partners

Export Import

United States (18.7%)Switzerland (8.1%)China (7.5%)Russia (6%)Turkey (4%)

Top 5 total: 44.3%

China (17.9%)United States (13.3%)Russia (9.6%)Switzerland (6.2%)Norway (5.7%)

Top 5 total: 52.7%

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Main Industries by Country• Automobiles - France, Italy, UK, Germany, Czech

Republic, Slovakia, Spain• Fashion- Italy and France and other western

European countries• Aircraft- France and Germany• Machinery- The entire continent• Electronics- Italy, The Netherlands, Germany• Food products such as wine, beer, cheeses,

chocolates- Western Europe• Pharmaceuticals- Switzerland• Military equipment- UK, France, Italy, Germany,

Russia• Industrial chemicals- Most countries

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Single European MarketFree Movement of:

1. Goods2. Services3. Labor4. Capital

SEM principlesHarmonisation = common rules

◦time consuming, complex, inflexibleMutual recognition - Cassis de

Dijonhome country controlnew approach to standards -

‘essential requirements’liberalisation

Free Movement of GoodsMost of the SEM reforms of 1992

involved goodsSuccessResults

◦Ever increasing intra-EU trade◦Reduction in consumer prices (est

11%)

40

Free Movement of ServicesServices currently represent two-

thirds of the EU's GDP and employment, they only make up for around one-fifth of total intra-EU trade.

Why?

41

Barriers to Exporting Services

42

Services Directiveto ease freedom of establishment

for providers and the freedom of provision of services in the EU;

to strengthen rights of recipients of services as users of the latter;

to promote the quality of services;

to establish effective administrative cooperation among the Member States.

43

Freedom of LaborHow mobile is labor?Are some professions more

mobile?How diverse is labor?

◦Productivity◦Wages

44

Non-nationals (EU)

Non-nationals (All)

Mobility by Profession

47

48

The Neighborhood

49

EU and the USA

They are the two largest economies in the world

They enjoy the world's biggest bilateral trading and investment relationship

Common goals and interests worldwide

Common concerns on security and political issues

US FDI is the greatest in the EU

The US receives one quarter of EU exports and supplies 20% of its imports.

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  EU USA

Population (million): 494 307

Area (1000km2) 4422 9826

Population density (inh./km2)

112 34

The Lisbon Criteria

In 7 out of 8 Lisbon dimensions, the EU is less competitive than the US. These include:

“An Information Society for All”, “Innovation, Research and Development”, “Liberalization”, “Network Industries”, “Efficient and Integrated Financial Services”, “Enterprise Environment” and “Social Inclusion”.

The EU outperforms the US in “Sustainable Development” and in the subcategories “Telecommunications” and “Modernising Social Protection”.

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EU View of the World

52

Biggest trade partner

Oil And Gas

Reaching EastNeighborhood

Regional RealationsRegional Realations