Classes 5, 6

Question 1

(5) Import protection vs exporting promoting

Answer 1

-tariffs and non-tariff barriers are import protection-production subsidies and dumping are export promoting-They are both violations on free trade

Question 2

(5) Production subsidy

Answer 2

-must come from an official agency (government)-if other nations are injured then they will challenge the government

Question 3

(5) Dumping

Answer 3

-is export promoting-where a company will sell its product at a price in the destination market that is below production costs in the country of origin (exporting nation)-strategic action taken by companies to do strategic pricing in global markets to capture market share in a foreign market-a form of predatory pricing-

Question 4

(5) WTO

Answer 4

World Trade Organization-based in Geneva-168 member nations… it’s a “club”-oriented towards rules-WTO has NO direct enforcement power-maintains a dispute settlement mechanism-to be a member of the club you need to abide by the rules, but if you are a member then you can also help develop the rules

Question 5

(5) Action in trade disputes

Answer 5

-Action must be initiated by an injured party in the importing nation - it must be a company (or it can be an industry)-the private sector injured party will file a complaint to the official agency of their own government (in Canada it’s a division within foreign affairs)-from then on it’s a government-to-WTO affair, the companies themselves are not engaged in the dispute after it’s been initiated

Question 6

(5) What is injury?

Answer 6

-Reduced prices-lost sales-lost market share-decreased profitsAny erosion of the profitability in a company where it can be attributed to something going on in another country. Generally happens as a result of export promotion or dumping

Question 7

(5) Action in dumping cases

Answer 7

Countervailing duties are imposed at:-specific rates-against specific producers-from specific exporters

Question 8

(5) Allowed vs not allowed subsidies

Answer 8

Allowed: any subsidies that do not violate WTO policy, one that enhances the quality of workers. Anything related to training, education or similar stuff is allowed, also support of research and development that is before the commercial stage is allowedNo allowed: any substantial support of an industry involved in a traded product that comes directly from a government body and enters into the cost structure of that product

Question 9

(5) Canada/Brazil trade dispute summary

Answer 9

-Canada requests a WTO panel to rule on the ligality of Brazil’s ProEx export finance program-ProEx is an interest rate equalization programme that equalizes the cost of financing on exports of covered Brazilian products to international levels. It provides foreign purchases of Embraer aircraft with interest rate subsidies, which make them more advantageous to purchasers than if they bought from other countries-WTO originally gave Brazil 90 days to withdraw the prohibited export subsidies, and Brazil failed to do so (they said the rules don’t apply because they are a developing nation)-WTO ruled that ProEx was in line with international guidelines but it was only to be used to that Brazilian firms can finance deals at international market rates, not undercut them.-Both Canada and Brazil claim victory (Brazil because they were ruled not illegal and Canada because Brazil can not undercut international market rates)-Shortly after, Brazil claimed that Canada had illegal trade subsidies in the sale of Bombardier jets

Question 10

(5) Export Credit Arrangement

Answer 10

-defines and sets limits on the most generous export credit terms and conditions that may be supported by its participants-seeks to encourage competition among exporters based on quality and price of goods and services rather than on the most favourable officially supported terms (ie. subsidies)-strives to make trade finance more transparent and governed by rules

Question 11

(5) OECD

Answer 11

-Organization for Economic Co-Operation and Development-sometimes referred to as the “Rick Nations Club”-founded to foster market-based policy development within and among member nationsDevelops and endorses policies that encourage:-highest sustainable economic growth and employment-rising standard of living in member countries while maintaining financial stability (thus contributing to development of world economy)-sound economic expansion in all countries-expansion of world trade on multilateral, non-discriminatory basis

Question 12

(5) OECD Member nations (9)

Answer 12

-Australia-Canada-European Community-Japan-South Korea-Norway-New Zealand-Switzerland-US

Question 13

(5) Export Credits

Answer 13

an insurance, guarantee or financing arrangement that allows a foreign buyer of exported gods and/or services to defer payment over a period of time

Question 14

(5) Official Support can take the form of:

Answer 14

1. Official Financing Support: direct credits/financing, refinancing and interest rate support2. Aid financing (credits and grants)3. “Pure Cover”: export credit insurance and guarantees with no financing support

Question 15

(5) Limitations on terms of conditions that OECD arrangement places:

Answer 15

1. minimum premium benchmarks2. minimum cash payments3. maximum repayment terms4. minimum interest rates5. restrictions on the provision of tied aid

Question 16

(5) Export Credits - CIRRs

Answer 16

Commercial Interest Reference Rate-should approximate final commercial lending interest rates in the domestic market of the currency concerned-should closely correspond to the rate for first class domestic and foreign borrowers-should be based on the local fixed interest-rate financing in the local market of no less than 5 years-should not distort domestic competitive conditions-they are set at a fixed margin of 100 basis points above their respective base rates unless otherwise agreed upon

Question 17

(5) Effects of raising or lowering CIRRs

Answer 17

-Higher CIRRs improve the competitive position of companies who rely on private financing with official support by way of pure cover-Lower CIRRs enhance the competitive position of government export financing agencies vis-a-vis private sector financing companies

Question 18

(5) Tied aid

Answer 18

-includes loans, grants or associated financing packages with a “concessionality” level greater than zero percent-tied to the procurement of goods and/or services from the donor country of selected other countries-should provide needed external resources to countries, sectors or projects with little or no market access to market financing-tied aid shall not be given to any countries whose GNP per capital is sufficient enough to quality for 17 year loans from the World Bank

Question 19

(5) Results of the OECD Arrangement

Answer 19

-use of CIRRs coupled with a 6-month limit on finance offers has eliminated interest rate subsidies-reduced trade distortion with rules and procedures for tied aid-established a system of risk charges that act to reduce risk subsidies-changed role of Export Credit Agencies (increased transparency and instilled discipline)-Provide balance while avoiding a destructive and expensive export-credit race

Question 20

(6) Nominal exchange rate AND Direct vs Indirect quote

Answer 20

The number of units of domestic currency required to purchase one unit of a foreign currency. Direct quote = CAN $1.25 is required to buy 1 EuroIndirect quote 0.8 Euros required to buy CAN $1 (to use a foreign currency to explain the price of your own currency)

Question 21

(6) Support factors that drive innovation

Answer 21

Domestic factors: -Government funding for R&D-University education of Masters and PhD students-Skilled investors-capable mangers Trade factors:-larger markets-better supply chains

Question 22

(6) Pressure factors that drive innovation

Answer 22

Domestic factors: -sophisticated consumers-aggressive competitors-investor demand for profitable growthTrade factors: -challenging consumers-more intense competition

Question 23

(6) trends in manufacturing in Canada

Answer 23

-in general manufacturing has shrunk in canada-it grew in the 1990 a little bit – this is because we entered into a free trade agreement with the US, and that led to efficiencies in manufacturing that were pursued. So some manufacturing thrived and those that could not thrive died

Question 24

(6) relationship between manufacturing jobs and exchange rate

Answer 24

-as exchange rate got weaker our manufacturing employment peaked-as Canadian exchange rate appreciated we see a decline in manufacturing-as exchange rate appreciates, we can buy substitute products abroad for cheaper, so we lose unsophisticated jobs (motor vehicle, sawmills, clothing, etc)-as our exchange rate appreciates, it favours the import substitutes and it is harder to export (it’s too expensive for other countries)-we kept our strong industries (architectural, pharmaceuticals, petroleum and coal, etc) and our weaker industries faded -jobs we didn’t lose: more added value and creativity-oriented jobs

Question 25

(6) If Canadian dollar appreciates, why do department store profits rise?

Answer 25

-because if it’s cheaper for department stores to import goods from other countries, and they keep the domestic price in their stores the same then they will make a profit

Question 26

(6) How do firms adjust to currency appreciation? (7)

Answer 26

1. Raise prices2. reduce labour costs3. move inputs or processing abroad4. reduce capital spending5. increase hedging6. re-orient sales strategies7. do nothing

Question 27

(6) Pass through effect

Answer 27

A pass through of a change in your currency to keep your margins the same in a domestic currency-if you are selling to a destination market and your currency appreciated, you raise the price in the destination market (the price passes through)

Question 28

(6) Main effects of Canadian dollar appreciation reported by adversely affected firms (4)

Answer 28

1. lower margins to foreign sales (this happens to exporters, and they get lower margins on their export markets)2. lower export volume3. lower margins on domestic sales4. lower domestic volume

Question 29

(6) Real Exchange Rate

Answer 29

“real exchange rate” (RER) is the purchasing power of a currency relative to another.The changes of the RER are instead informative on the evolution over time of the relative price of a unit of GDP in the foreign country in terms of GDP units of the domestic country.