Lecture 5: Trade and Investment Flashcards
What is free trade?
The absence of barriers (government-related) to the free flow of goods and services between countries.
Theoretically free trade brings economic gains
What is the political economy?
The political, economic and legal systems and forces that govern the economy and business.
What are the two types of benefits of free trade?
Statistic benefits: IB and consumers can locate or source production in countries where products can be produced more efficiently
Dynamic benefits: …larger market access and competition stimulate best practice, investment and innovation
What is International E-Business?
The purchase and delivery of products and services online. No longer a free trade zone.
What are some political motives of government intervention?
- Protection of domestic jobs and industries - Eg Australian tariffs on foreign cars
- National security - key industries, encryption
- Retaliation - US & China - intellectual property laws, China and EU on carbon tax
- Protection of consumer welfare - EU and hormone-treated beef
- Maintain cultural distinctiveness- Cars are often source of national pride
- Foreign relations policy - preferential treatment or ‘punishment’
- Contingent policies - issues of human rights, work conditions, environment - ant-globalisation movement - US withholding MFN status for China
- Revenue - tariffs
EB-specific:
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*Fair treatment of online and offline businesses
- Threats to privacy and security
What are some economic motives of government intervention?
- Infant industry argument - potential comparative advantage
- Difficult for new firms to compete with established - Korean shipping manufacturing - Strategic trade policy: assisting firms to gain or to overcome exisiting first-mover advantages and as a consequence, economies of scale and market power
What is the infant industry argument and criticisms of it?
That new industries often do not have the economies of scale that their older competitors from other countries may have, and thus need to be protected until they can attain similar economies of scale.
Criticisms - protection fosters inefficiency and dependence; government vs. private investors in “picking winners”; rent-seeking; opportunity cost of government funds
What is strategic trade policy and criticisms of it?
Assisting firms to gain or to overcome exisiting first-mover advantages and as a consequence, economies of scale and market power.
Criticisms - as with all protection policies, a “beggar-thy-neighbour” policy boosts national income at the expense of other countries, leading possibly to retaliation and trade wars, capture of gov. by vested interest.
What are some transparent means of regulating trade?
- Tariffs
- Quotas
- Export/import controls (embargoes)
- Anti-dumping (below product cost or fair market value)
What are some less transparent non-tariff barriers of regulating trade?
- Product standards (GM foods)
- Administrative delays
- Labelling
- Cabotage (airlines)
- Production subsidies
- Exclusive supplier
- Tax exemptions on foreign sales income
- Corruption (extra-territoriality - anti-bribery legislation prevents firms dealing in countries where bribery is rife)
- Intellectual property piracy
What are tariffs? Who gains? Who loses?
Taxes usually levied on imports
- Specific tariff: fixed charge for each good imported
- Ad valorem tariff: a % of imported goods value
Who gains:
- Gov (through revenue)
- Domestic producers (at least in the short run)
- Employees of protected industries keep their jobs
Who loses:
- Consumers who pay higher prices
- The economy which remains inefficient
- Employees of protected industries who don’t develop new skills
What are subsidies?
Government payments to domestic producers.
Can be cash grants, low-interest loans, tax breaks, gov equity participation in domestic firms, gov orders.
Subsidies are aimed at lowering costs to help
- Compete against cheaper imports
- Gain export markets
- Increase domestic employment
- Local producers achieve first-mover advantage in emerging industries
Govs tax society to pay for subsidies
Define import quota restaint
Government specifies how much of what product can be imported from which countries.
May allow some to help meet domestic demand, but does not want to open domestic firms up to full competition e.g. US and sugar
Define voluntary export restraint
A quota imposed by the exporting country officially or unofficially - usually imposed at the request of the importing country e.g. US and Japan’s auto
What are local content requirements?
Domestic content with local raw materials and local labor required. Most often used by developing countries. Achieve technology transfer, skills transfer, shift manufacturing base to a higher technological level
