International Business Environment Flashcards
What are some economic outcomes of Globalization?
Acceleration in all forms of IB.
Newer forms of IB(Service trade growth)
Growing powers of MNE’s
Proliferation of Global Value Chains; integration of trde, FDI
Intensified technology-based competition
What are the drivers of Globalization
1) Decline in barriers to the free flow of goods, services and capital
2) Technological change, particularly the dramatic developments in communication, information processing and transportation technologies
Mention some important outcomes of globalization
1) Acceleration in all forms of IB
2) Newer forms of IB( Service trade growth)
3) Growing powers of MNE’s
4) Proliferation of Global Value Chains
5) Intensified technology-based competition
What are the dark sides of Globalization?
1) More access to goods and services.. but greater illegal trade in arms, people, drugs, money.
2) More goods transportated across the globe… but they can bring in toxic toys, invasive species, contamined food
3) Movement of capital helps build imbalances and amplify the effect of shocks and transmission across countries.
4) It polarizes the income distribution within countries
What are norms?
Social rules and guidelines that prescribe appropriate behaviour in particular situations
What is a folkway?
A norm.. More specifically: Routine conventions of everyday life.. Generally, folkways are actions of little moral significance. (Apporpriate dress code, good social manner etc.)
What is a more
Norms central to the functioning of society and its social life (theft, adultery, canibalism, incest)
What is a society?
A group of people who share a common culture
What does social structure mean?
Refers to its basic social organizations. In essence, we are talking about how a society is organized in terms of its values, norms, and the relationships that are part of the society’s fabric
What does the Power Distance describe?
- The extent to which hierarchical differences are accepted in society and articulated in terms of deference to higher and lower social and decision levels in an organization
What describe a high PD culture?
High PD cultures: Inequalities accepted, Superiors rather inaccessible, privelege and status are normal, subordinates expect to be told what to do.
What describes a low PD culture?
□ Low PD cultures: Subordinates expect to be consulted, Bosses are accessible, Initiative is expected, Inequalities should be minimised, privelege and status symbols discouraged
What does the Individualism versus Collectivism culture measure focus on?
This dimension focuses on the relationship between the individual and his/her fellows within a culture
What describes a high IND culture?
® Identity is based on the individual
® Task prevails over relationship
® Work relationship - contract of mutual advantage
Self-respect important
What describes a Low IND culture?
® Identity is based on social network ® Relationship prevails over task ® Work relationship - family model ® The face and maintenance of harmony Management of groups, not individuals
What is Uncertaincy Avoidance?
One of the four dimensions of measring culture. This dimensions measures the extent to which a culture pushes its members into accepting ambigious situations and tolerating uncertainty
Describe a high UA culture
Anxious, higher stress levels at work, Risk averse, need for rules and regulations, resistant to change, Low tolerance of deviant, innovative ideas, People can seem busy, emotional, aggressive
Describe a low UA culture
Apparantly relaxed environment, initiative encouraged, relatively few rules and regulations, pragmatic, tolerance of deviant, innovative ideas,
What is a high MAS culture
® Ambition, assertiveness ® Competition and performance important ® Live to work ® Size matters ® Distinct gender roles Managers are expected to be assertive
Describe Low MAS (High FEM) cultures
® Quality of life issues are important ® Equality and solidarity are important ® Work to live ® Small is beautiful ® Overlapping gender roles Managers often strive for consensus
What are the problems with Hofstede Findings (measuring Culture)
- Focuses on national country
- Single company data, with a large multinational enterprise having a strong corporate culture
- Business culture, not values culture, representing a reflection of business culture at IBM and not national culture of the countries IBM operates within
What is Corporate culture?
The culture adopted, developed and disseminated in an organization. Corporate culture can deviate from national norms, but that depends upon the strength of the culture and the values and practices tied to it.
What does a political system include?
Political system includes the structures, processes and activities by which a nation governs itself
To which two dimensions can political systems generally be assesed to?
○ Degree to which they emphasize Individualism vs collectivism
Degree to which they are democratic or totalitarian
Describe a market economy
A free market in which all productive activities are privately owned. Production is determined by supply and demand. If there is an increase in demand, supply will raise autimatically to meet the demand and opposite. If demand exeeds supply, prices will rise, signalling producers to produce less. Consumers are soverign.
What is a command economy?
- An economy in which the governent plans all the goods and services that has to be produced - also they control prices and quantity.
- The main objective is to allocate resources for the good of society.
- Furthermore, all businesses are state owned . The rationale of this being that the government can control their investments and make sure they are in the interests of everyone rather than private individuals.
State owned companies have little incentives to do things more efficiently and control costs as they are not in the danger of going out of business. These economies tend to stagnate
Describe a mixed economy
- A mixed economy is a economy in which certain sectors are left to private ownership while others have significant state ownership.
- In mixed economies, governments also tend to help troubled companies whose further operation is thought to be vital to national interests.
What is common law?
a. Based on tradition, precedent, and custom
b. Has a lot of flexibility as judges are allowed to interpret the law so that it applies to the unique circumstances of an individual case
Civil Law
What is Civil Law?
Based on a detailed set of laws organized into codes.
Less flexibility as the judges are only ably to apply the law - not interpret the law.
What theocratic Law?
Based on Religious teachings
Which laws are impotant to IB
- Contract Laws
- Anti-corruptions laws
- Protection of property rights and intellectual rights
- INvestor protection laws that determine corporate governance and ownership forms
- Criminal/civil liberties
- Employment practices
- Environmental practices
What is the main function of institutions?
Reduce uncertainty
How do insitutions reduce uncertainty?
- Relational contracting - informal. Relationship based, personalized exchanges
- Arm’s length transaction - formal, rule-based, impersonal exchange with third part enforcement
Institutional transitions - fundamental and comprehensive changes to the rules that affect all organizations
- Arm’s length transaction - formal, rule-based, impersonal exchange with third part enforcement
From a companies perspective; what are the advantages of globalizing their products?
- Makes it easier for the company to enter a foreign maret if it already makes business in that specific country (Boeing)
- Disperse component part production to those in the world who are the best at their particular activity
- Unburden risks of getting your own production facilities.
Economic interdependence. What does this mean?
- No nation exists in economic isolation
- All aspects of a nations economy are linked to the economies of it’s trading partners
-
What is GDP and what does it measure?
- Currency value of all final goods and services.
- Total income of a nation
- It measures a nations economic well being
What is included in GDP?
- Consumption by household(goods, groceries, clothes etc)
- Investment by business and household(fixed asset for production, new homes, inventories)
- Governments expenditures by local, state, and federal government(Roads and schools, transfer payments(such as, welfare payments and unemployment benefits)
- Net exports (Value of a country’s exports to other nations, less its imports from other antions. For Denmark, for instance, it is the value by which Danish spending on foreign goods and services exceeds foreign spending on Danish goods and services)
What is not included in GDP?
-Intermediate goods
-Free goods
_Underground production
-Financial transactions (stocks, bonds, CDs etc)
-Household production
- Transfer payments
- Leisure
What does GDP not tell us?
- Does not measure income distribution
- Does not measure non-monetary-output or transactions(e.g. barter, household activities)
What are the possible risks to economic growth sustainability?
Political risk: (Rise of nationalism, populism|Creates uncertainty on the global markets.)
- Increased fragmentation and atomization of the global economy: (Efforts are under way to put up walls, to limit trade, and other cross-border flos of goods and services, capital and people)
- The growing debt overhang (All major economies today have higher levels of borrowing relative to GDP than they did in 2007. ,, Decreased the total amount of money invested)
- Weak productivity growth (Lack of innovation)
What are monetary policy?
The process by which the monetary authority of a country controls the supply of money
What are the goals of monetary policy?
- Price stability
- High unemployment
- Economic growth
- Financial markets stability
- Interest rate stability
- Stability in foreign exchange market
Expansionary monetary policy ….
Increses the total supply of money in the economy more rapidly than usual
Contractionary Monetary policy —-
Expands the money supply more slowly than usual or even shrinks it.
What are the tools of monetary policy?
- Open market operations(The buying and selling government securities/bonds by the central bank). Increases or decreases the supply of money by introducing new money or taking money our of the system
- Setting reserve requirements (affects the amount that the bank has available to lend)
- Setting the discount rate (a decrease in the discount rate makes it cheaper for commercial banks to borrow money, which increases the money supply and opposite)
What is fiscal policy?
-Fiscal policy is the means by which the government
What are two types of fiscal policies and describe them
- Expansionary, which is typically used to combat a recession. This would involve increased government spending or lower taxes
- Contractionary, which is typically used to combat an economy’s overheating. This would involve decreased government spending or increased taxes
How can financing of deficits be done (fiscal policy)?
- Through two ways:
- Borrowing
- Money creation
How can disposing of surplusses be done?
- Through two ways:
- Paying back debt
- Letting the surplus funds remain idle
When is a deficit created(regarding government)
- When government spending exceeds government revenue
If economists are concerned about unmet social needs or infrastructure, they tend to favor ..?
Higher government spending during recessions and higher taxes during inflationary times
When economists think that the government is too large or inefficient, they tend to favor .. ?
-Lower taxes for recession and lower government spending during inflationary periods
What are the problems, critisiscm and complications of fiscal policies?
- Problem of timing (it is a slow process. Recognition lag –> Administrative lag –> Operational lag)
- Political considerations: government has other goals besides economic stability) Election years have been characterized by more expansionary policies regardless of economic conditions
- Crowding out effect(The crowding out effect is an economic theory arguing that rising public sector spending drives down or even eliminates private sector spending)
What is austerity?
-It is a political-economic term refering to policies that aim to reduce govenrment budget deficits through spending cuts, tax increases, or a combination of both
Why does high government debt/GDP tend to lower growth?
-Large deficits and debt may rise interest rates and crowd out private investment
-High debt and high interest payments may require distortionary taxes.
High debt may eventually lead to a fiscal crisis, which in turn, may trigger a financial crisis and require painful adjustments
What does the Reinhart and Rogoff study tell?
- That high government debt/GDP tends to lower growth
Why does productivity matter?
- An economy’s productivity level affects the populations’s overall purchasing power and standard of living
- Productive economies produce more goods and sevrvices and they also have excess resources with which they can invent and produce new types of goods and services, creating new opoortunities and jobs.
What are the two keys to sustained economic growth?
- Increases in number of workers (A result of growing labor force, falling unemployment rate)
- Increases in workers’ productivity thanks to new skills, processes, or technologies that enable greater efficiency
What is the recent trend of productivity?
- Productivity growth is slowing around the world
- The decline in TFP growth is not limited to the advanced economies.. (Also falling in CHina, Negative in Brazil and Mexico
Why do some reject the “falling productivity” phenomenon?
- Because we are unable to measure productivity gains accurately in a services-driven, increasingly digital economy
- Another more data-driven perspective from amcroeconomists suggests that productivity gains from technology simply may not have been captured yet because of underinvestment
What are drivers of productivity growth ? And how are they performing?
Business investment –> R&D, machinery and plants, employee training
Government investment –> Education, infrastructure, R&D
All the above –> Labor productivity growth, Business model innovation, new technology –> Intra-firm total factor productivity growth –> Aggregate total factor productivity growth
And Intra-firm total factor productivity growth Industry competition, global value chains –> Spillover effects –> Aggregate total factor productivity growth
They are underperforming. Investments (as percentage of GDP) are falling.
How does infrastructure investments support productivity growth?
- First, these investments provide more capital stock for workers to use, thus improving labor productivity growth?
- Second, public infrastructure investments increases productivity through “spillover externalities” that make private capital stocks more efficient as well
- FInally, public infrastructure investments can crowd-in pricate investors to invest to take advantage of new improved infrastructure, thus stimulating within-firm and aggregrate productivity
True or false? Productivity growthis also threatened by declining competition within the business environment
- True. Studies show that reduced dynamism and reduced competitions can cause lower productivity and increase inequality
How is labor force and education related to productivity?
- Aging populations are closely tied to declining labor productivity as workers’ skills decline with age
- Declines in investment in education and training also contributes to decreasing productivity
How does economic integration and openess support productivity growth?
- First, diffusion of technologies and knowledge sharing between firms
- Second, the heightened competition as a result of cross border integration, boosts productivity
- Lastly, internaitional trade creates larger markets, allowing greater levels of specialization in producing certain goods and services
True or false? Productivity growth reflects the technological innovations?
False
Why has competition fallen?
-The digital revolution gives significant and sustained advantages to large firms which are able to colect masive amounts of consumer data and attract top talent
Low rates of entrepreneurship after the crisis.
What is the idea behind mercantilism?
- First trade theory: Nations accumulate financial wealth by encouraging exports and discouraging imports
- Zero-sum vs positive-sum game view of trade
- Government intervenes to achieve a surplus in exports
- Today neo-mercantilists = protectionists
○ Trump doctrine
Some segemnts of society shielded short term
What are Adam Smiths theory Absolute Advantage about?
- Mercantilism weakens country in long rund; enriches only a few
- A country
○ Should specialize in production of and export products for which it has absolute advantage; import other products
Has absolute advantage when it is more productive (produces at lower costs) than another country in producing a particular product
- A country
Describe David Ricardos theory of comparative advantage:
- A Country should specialize in the production of those goods in which it is relatively more productive.. Even if it has absolute advantage in all goods it produces. Do what you do best, import the rest
Absolut advantage is a special case of comparative advantage.
When does a country have a comparative advantage?
- A country has a comparative advantage in producing a goods if the opportunity cost of producing that goods in terms of other goods is lower in that country than it is in other countries
A country’s comparative advantage is dynamic. It might change due to the changes in both domestic adn international markets
What is opportunity costs?
- The opportunity cost of good A in terms of good B is the number of unit of good B that could be produced with the same resources
Opportunity cost is the largest sacrifice made to produce a given good
What are the assumptions and limitations of the trade theories of comparative advantage?
- Nations strive only to maximize production and consumption
- Only two countries produce and consume just two goods
- No transportation costs of trading goods
- Labor is the only ressource used to produce goodsa
- No role for price of recources
- No distributional effects
Full specialization
What does the Heckscher Ohlin theory explain
- It is an economic theory that proposes that countries export what they can most efficiently and plentifully produce
- The model emphasizes the export of goods requiring factors of production that a country has in abundance. It also emphasizes the import of goods that a nation cannot produce efficiently.
- It takes the position that countries should ideally export materials and resources of which they have an excess, while proportionately importing those resources they need.
Differences in factor endowments does also determine the patterns of trade - not only the differences in productivity
The fundamental reason why trade potentially benefits a country is that it expands the economy’s choices. What does this mean?
The expansion of choice means that it is always possible to redistribute income in such a way that everyone gains from trade
Describe the Product life cycle theory:
- The cycle describes how a product matures and declines as a result of internalization
- There are three stages contained within the theory:
- New product introduction ( A company in a developed country innovates a new product –> low revenue),
- The maturity stage (At this point, when the product has firmly established demand in developed countries, the manufacturer of the product will need to consider opening production plants locally in each developed country to meet the demand–>increase revenue),
- Product standardization and streamlining of manufacturing (With demand expansion in secondary markets –> Exports to nations with a less developed economy begin. Competitive product offers saturate the market.. Company A loses their competitive edge and moves their production to low production countries.
Product now imported to US and to advanced countries.
What are the theory limitions(Classic theories)?
- Simple world(two countries, two products)
- No transportation costs
- No price differences in resources
- Resources immobile across countries
- Constant returns to scale
- Each country has a fixed stock of resources and no efficiency gains in ressource use from trade
Full employments
What are some different arguments of New Trade theories?
- Increasing returns of specialization due to economies of scale (unit cost of production decrease)
- First mover advantages (economies of scale such that barriers to entry created for second or third company
- Luck - first mover may be simply lucky
Government intervention: strategic trade policy
Who are the key contributors to new trade theories?
- Paul Krugman - How trade is altered when markets are not perfectly competitive
Michael Porter - Examined competitiveness of industries on a global basis.
What does economies of scale refer to?
It refers to the property whereby long-run average total cost falls as the quantity of output increases
What does diseconomies of scale refer to?
It refers to the property whereby long-run average total cost rises as the quantity of output increases
Constant returns to scale refers to?
The propoerty whereby long-run average total cost stays the same as the quantity of output increases
What is perfect competition?
It is an economic model that describes a hypothetical market form in which no producer or consumer has the market power to influence prices, ie., all act as price takers. The analysis of percetly competitive markets provides the foundation of the theory of supply and demand
What is imperfect competition?
- Imperfect competition, is the competitive situation in any market ehere the conditions necessary for perfect competition are not satisfied. Forms include(:
- Monopoly,
- Oligopoly(small number of sellers)
- Monopolistic competition(many sellers producing highly differentiated goods, but each has some power to influence prices)
- Monopsony (only one buyer of a good
Oligopsony (small number of buyers)
Classic trade theories based on comparative advantage used the assumption of constant returns to scale and perfect competition: Increasing the amount of all inputs used in the production of any commodity wil increase output of that commodity in the same proportion. However, in practice,,
- Many industries are characterized by economies of scale
Production gets more efficient, the larger the scale at which it takes place
Explain external and internal economies of scale:
- External
○ The cost per unit depends on the size of the industry but not necessarily on the size of any one firm
○ An industry will typically consist of many mall firms and be perfectly competitive- Internal
○ The cost per unit depends on the size of an individual firm but not necessarily on that of the industry
○ The market structure will be imperfectly competitive with large firms having a cost advantage over smalle
Both types of scale economies are important causes of international trade.
- Internal
Monopolistic competition model can be used to show how trade leads to:
- A lower average price due to scale economies
- The availability of a greater variety of goods due to product differentiation
Imports and exports within each industry (intra-industry trade)
- The availability of a greater variety of goods due to product differentiation
What are the main differences between inter-industry and intra industry trade?:
- Inter industry trade reflects comparativve advantage, whereas intra-industry trade does not.
- The pattern of intra-industry trade itself is unpredictable, whereas that of inter-industry trade is determined by underlying differences between countries
The relative importance of intra-industry and inter-industry trade depends on how similar countries are
- The pattern of intra-industry trade itself is unpredictable, whereas that of inter-industry trade is determined by underlying differences between countries
What is factor endowments?
Land, labor, capital, workforce, infrastructure
What is demand conditions?
Large, sophisticated domestic consumer base; offers an inoovation friendly environment and a testing ground.
What is related and supporting industries?
Local suppliers cluster around producers and add to innovation
What is firm strategy, structure, rivalry?
Competition good, national governments can create conditions which facilitate and nurture such conditions.
What is Porters diamond?
- It is a model that is designed to help understand the competitive advantage that nations or groups posses due to certain factors available to them, and to explain how governments can act as catalystst to improve a country’s position in a globally competitive economic environment
The porter diamond suggests that countries can create new factor advantages for themselces, such as a strong technology industry, skilled labor, and government support of a country’s economy.
What is free trade?
Free trade refers to the situation when the government does not attempt to restrict what its citizens can buy from and sell to another country
What does all classical trade theories predict that free trade leads to?
- Static economic gains(higher level of domestic consumption and more efficient utilization of resources) and dynamic economic gains (stimulates economic growth, job creation and wealth accumulation)
- Yet, often government manage trade
○ Restrict imports
○ Promote of exports
Provide various types of overt and covert support to exporters
- Yet, often government manage trade
Draw a model of Trade policy instruments:
Trade Policy instruments:
1. Trade expansion a. --> Price -->import subsidy, export subsidy b. --> Quantity --> Voluntary import expansion 2. Trade contraction a. --> Price --> Tariff, export tax - -> Quantity --> Import quota, voluntary export restraint
What can tariffs be classified as and what are the classifications?
- Specific tariffs
○ Taxes that are levied as a fixed charge for each unit of goods imported- Ad Valorem tariffs
Taxes that are levied as a fraction of the value of the imported goods
- Ad Valorem tariffs
What does a tariff do and what are the effects?
- A tariff raises the price of a good in the importing country and lowers it in the exporting country
- As a result of these price changes:
○ Consumers lose in the importing country
○ Producers gain in the importing country
○ Government imposing the tariff gains revenue
Employees of protected industries gain in terms of keeping their jobs but lose in terms of not developing new skills.
- As a result of these price changes:
Are tarrifs pro/anti-consumer and pro/anti-producer?
Anti-consumer and pro-producer
Does tariffs reduce the overall economic efficiency of the world economy?
Yes. Because the tariff encourages economic domestic producers to produce at home when, theoretically, production could have been taking place more efficiently abroad
What are subsidies and which types of subsidies exist?
- It is government support to domestic producers
○ Cash grants, low-interest loans, tax breaks, equity participation, government purchases
Export subsidies are payments by the governemnt to a firm or individual that ships a good abroad
The aim of subsidies is to lower costs to?:
- Compete against cheaper imports
- Gain export markets
- Increase domestic employment
Help local producers achieve first-mover advantages in emerging industries
What are the effects of subsidies?
- An export subsidy may raise prices in the exporting country while lowering them in the importing country
- Tax individuals… to pay for subsidies
- Consumers buy more expensive goods with lower disposable incomes
Subsidies promote inefficient firms and excess production.
What is an import quota?
- An import quota is a direct restriction of a good that is imported.
The restriction is usually enforced by issuing licenses to some group of individuals or firms
What is the ffect of import quotas?
- An import quota always raises the domestic price of the imported good.
- License holders are able to buy imports and resell them at a higher price in the domestic market
○ The profits received by the holders of import licenses are known as quota rents.
If domestic producers are not able to meet the excess deman, then an import quota can raise prices for both domestically produced and the imported good.
- License holders are able to buy imports and resell them at a higher price in the domestic market
What are the differences between quota and tariffs?
The difference is that with a quota the government receives no revenue.
What is a voluntary export restraint?
- It is an export quota administered by the exporting country
- VER’s are iposed at the request of the importer and are agreed to by the exporter to forestall other trade restrictions
- A VER is exactly like an import quota where the licenses are assigned to foreign governments and is therefore very costly to the importing country.
- A VER is always more costly to the importing country than a tariff tha limits imports by the same amount
The tariff equivalent revenue becomes rents earned by foreigners under the VER
What is a local content requirement?
- A regulation that requires that some specified fraction of a final good be produced domestically
Can be specified in physical units or in value terms
Where (and why there) have local content requirements been widely used?
By developing countries trying to shift their manufacturing base from assembly back into intermediate goods and to achieve technology and skills transfer
Does local content laws produce government revenue or quota rents?
No. Instead, the difference between the prices of imports and domestic goods gets averaged in the final price and is passed on to consumers
What are the effect on customers, firms or governments of Local content requirement?
- Discourages imports of raw materials, parts, and supplies, which harms manufacturers sourcing options.
May result in higher costs and lower product quality for buyers
What are the rationale for government intervention in free trade?
- Protection of the national economy
○ Weak or young economies sometimes need protection from foreign competitors. E.g. India has imposed barriers to shield its huge agricultural sector, which employs millions.- Protection of an infant industry
○ A young industry may need protection, to give it a chance to grow and succeed. E.g., Japan long protected its car industry - National security
○ The United states prohibits exports of plutonium and similar products to North Korea - National Culture and identity
○ Canada restricts foreign investments in its movie and TV industries - National strategic priorities
○ Protection helps ensure the development of industries that bolster the nation’s economy. Countries create better jobs and higher tax revenues when they support high value-adding industries, such as IT, automotive, pharmaceuticals, or financial services - Increase employment
Protection helps preserve domestic jobs, at least in the short term. However, protected indusrtries become less competitive over time, especially in global markets, leading to job loss in the long run
- Protection of an infant industry
What is regulations and technical standards and what are the effect on customers, firms, or governments?
- Safety, health or technical regulations; labeling requirement
May hinder the entry of imported products; and reduce the quantity of available products, resulting in higher costs to importers and buyers
What is protectionism?
Governments favoring local firms
Has there been an increasing tendency of protectionism since 2008?
- From the whole period, no. There has been a decrease in discrimatory measures such as subsidies
There has however, been an increasing uncertainty in the last couple of years
Why does uncertainty matter(trade)
Because it has serious consequences for the economy
What does companies/households due regarding investments in times of high uncertainty?
- They might reduce investment and delay projects. They do so, as it is costly to reverse investment. So, they prefer to “wait and see”
Households reduce consumption and investemnts as well
Rising uncertainty affects all sectors of the economy. How fx?
It can increase the cost of credit to householders and firms
Trade can have both positive and negative effects at the individual/household level - Explain:
- For some groups of people, trade has a negative effect on wages and employment opportunities
- At the same time it has a positive effect via lower consumer prices and increased availability of products
Overall, if we aggregate changes in welfare across households, the net effect is often positive.
- At the same time it has a positive effect via lower consumer prices and increased availability of products
Does trade raise inequality?
- In developed countries, proably yes
- Some emerging and frontier countries exprienced increases, other decreases in inequality after trade reform
- But trade is not the main driver
Technological change is
What does the Global Value Chain describe?
It describes the people and activities involved in the production of a good or service and its supply, distribution and post-sales activite (also known as the supply chain) s when activities must be coordinated across geographies
Participation in GVCs is shaped by…?
What a country is already endowed with and the policy choices it makes.
How can a country remedy the scarcity of endowments such as capital, technology, and management skills?
- By attracting FDI
How can a country overcome the constraints of a small domestic market
By liberalizing trade at home and negotiating trade liberalization abroad
How can the disadvantages of a remote location be addressed?
By improving transport and communication infrastructure and introducing competition in these sectors
How can a country improve its domestic institutions?
By participating in deep integration agreements that help spur both reform as well as technical and financial assistance.
What made the increase in GVC participation possible and why has it stalled?
- Increase:
○ Combination of severel factors
§ The information, communication, and technology revolution
§ Transport costs decreased (made disperse of production possible)
§ Successive rounds of trade liberalization
§ The creation of The EU, integration of China, India and Russia into the global economy –> Huge new product and labor markets- Stallen:
○ Partly cyclical
Absent of any major liberalization
- Stallen:
Mention the different levels of economic integration that are possible in theory
- Free Trade area
- Customs union
- Common market
- Economic union
Political union
What describes free trade area integration?
All barriers to the trade of goods and services among member countries are removed.
What describes free trade area integration?
All barriers to the trade of goods and services among member countries are removed.
What describes a customs union in terms of integration?
Elimination of trade barriers and adoption of a common external trade policy
What is common market integration?
No barriers to free trade, commond external trade policy, and allows factors of production to move freely among member countries
What is an economic union?
Involves the free flow of products and factors of production, adoption of a common external trade policy, but it also requires a common currency, harmonization of members’ tax rates and a common monetary and fiscal policy
Poltical union is what?
A union in which a central political apparatus coordinates the economic, social, and foreign policy of member states.
Mention the impediments to integration
- While a nation as a whole may benefit significantly from a regional free trade agreement, certain groups will lose.
Concerns over national sovereignity
What is multilateralism?
Multiple (close to all) countries working in concert on a given issue under certain international relation agreements.
What is Regionalism?
Any agreement that involves two or more countries but much fewer than all possible members.
What is economic integration?
- A process by which economies of seperate countries merge into larger entities. The process is charcterized by discriminatory removal of all
barriers of economic cooperation
What are the arguments against regionalism?
- Discriminatory by nature
- They lead to the “spaghetti-bowl” phenomenon
○ Meaning the overlapping nature of most regional agreements, with, let say, most WTO members holding simultaneous membership in many regional economic agreements at once - Is possible to lessen the tensions between regionalism and multilateralism but probably not possible to eliminate these tensions entirely
- The negotiating energies put into such regional agreements will detract from those put into multilateral agreements under the auspices of the WTO
- They lead to the “spaghetti-bowl” phenomenon
What is unilateral?
Trade policy of countries not part of any multilteral or regional agreement
What are examples of bilaterial trade deals?
An exchange agreement between two nations or trading groups that gives each party favored trade status pertaining to certain goods obtained from the signatories.
Examples of Minilateral (regional)
EU, Mercosur, NAFTA/USMCA (geographically concentraded) or the global system of trade preferences among developing countries /GSTP) that aims of increasing trade between developing countries in the framework of the UNCTAD (Geographically dispersed)
Multilateral? Examples
GATT, GATS –> WTO
What are the fundamental principles of the GATT/WTO system?
- Reciprocity
○ A practice whereby one country offers to reduce a barrier to trade and a second country reciprocates by offering to reduce one of its own trade barriers.
○ The practive of swapping tariff concessions, facilitates the reduction of trade barriers.- Nondiscrimination
○ (Equal treatment) If one GATT member offers a benefit or a tariff concession to another GATT member, it must offer the same tariff reduction to all GATT members.
○ Most favoured nation treatment:
○ National treatment - Freer trade
Lowering trade barriers, gradually through negotiating
- Nondiscrimination
What is the power of the nondiscrimination principle of WTO system?
- Convenience and practicality
- Setting the same tariff policy on imports from all countries ensures that resources are allocated to their most productive use.
- On the import side, nondiscrimination ensures that countries purchase import from the lowest-cost source country
- On the export side, nondiscrimination protects exporting countries from bilateral opportunism. If one country were later to offer a lower tariff rate to a third country, this could erode the value of the original tariff concession to the first trading partner
It prevents re-routing in order to circumvent high tariffs.
What were the objectives of the Doha Development Round in xxxx?
- 2001
- Continue to lower trade barriers around the world
Comitting all countries to negotiating
- Continue to lower trade barriers around the world
Under which circumstances has RTA been allowed by the GATT/WTO?
- Regional trade agreements ○ Free trade areas ○ Customs unions - Administered protection ○ Special tariffs that can be used for particular purposes § Safeguards § Anti-dumping duties Countervailing duties
Is GATT succesful?
- Yes. The volume of trade among GATT members surged: in 2000 the volume of trade among WTO memberss stood at 25 times its volume in 1950
Tariffs on manufactured products fell from a trade-weighted average of roughly 35% before the creation of GATT in 1947, to about 6,4% at the start of the Uruguar round in 1986
What are some of the best known RTAs?
- The European Union
- EFTA
- ThE US, Mexico and Canada agreement(USMCA)
- Mercosur
- Asean
Comesa
What is preferential trade agreements?
-Cover preferential tariffs for a set of products
What is a free trade agreement?
Elimination of all barriers to the trade of goods and/or services among members
What is a custom union?
Elimination of trade barriers between members and adoption of a common external trade policy
What is a common market?
No trade barriers between members, a common external trade policy, and the free movement of the factors of production
What is an economic union?
Free flow of products and factors of production between members, a common external trade policy, a harmonized tax rate, and a common monetary and fiscal policy
What is an economic and monetary union?
- A type of trade bloc which is composed of a common market and custom union, with a monetary union (eurozone)
WTO members who wish to form a FTA or CU may so. Which requirements do they have to follow?
- Trade barriers against non-members cannot be “higher or more restrictive than” those in existence prior to the FTA or CU
- FTA or CU must be formed “within a reasonable length of time
FTA or CU must be eliminate trade barriers on substantially all the trade among the members
- FTA or CU must be formed “within a reasonable length of time
Explain the trade diversion and trade creation phenomenon of RTA’s. Consider three countries A, B, and C:
- A trade bloc between A and B reduces tariffs between them. A and B maintain tariffs with C
- Trade creation: A imports more products from B, while not producing them at home
Trade diversion: Part of the increase in trade between A and B is a result of a decrease in trade between A and C
- Trade creation: A imports more products from B, while not producing them at home
What are the dynamic effects of trade agreements?
- Economies of scale - acces to a larger market allows producers to become more efficient through greater specialization, better equipment, and usage of by-products.
- Greater competition - increased number of producers makes collusion less likely and forces firms to become more efficient
- Economies of scale and competition lead to lower costs and more efficient producers, which subsequently surpresses further imports from the rest of the world
Stimulus of investment - because of increased rate of return an ability to spread R&D costs trade makes greater levels of investment more likely
What types of RTAs stimulate trade in goods the most?
The more integration, the more stimulation of trade in goods
True or false? The major economies have not shifted trade negotiating emphasis toward mega-regional agreements?
- False. They have.
- the Trans-Pacific Partnership (TPP) agreement among Australia, Canada, Japan, Mexico, the United States, and seven other countries
- the Transatlantic Trade and Investment Partnership (TTIP) negotiations between the United States and the European Union (EU)
China’s pursuit of the Regional Comprehensive Economic Partnership (RCEP) negotiations
