International Business Exam #2 – Flashcards
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Free Trade
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When governments do not attempt to restrict what citizens can buy from another country or what they can sell to another country.
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Tariffs
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Taxes levied on imports that effectively raise the cost of imported products relative to domestic products.
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Specific Tariffs
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Levied as a fixed charge for each unit of a good imported
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Ad Valorem Tariff
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Levied as a proportion of the value of the imported good
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Subsidies
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Government payments to domestic producers.
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Import Quotas
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Restrict the quantity of some good that may be imported into a country.
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Tariff Rate Quotas
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A lower tariff is applied to imports within the quota and higher tariff for those above quota.
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Quota Rent
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The extra profit that producers make when supply is artificially limited by an import quota.
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Voluntary Export Restraints
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Quotas on trade imposed by the exporting country, typically at the request of the importing country's government.
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Local Content Requirements
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Demand that some specific fraction of a good be produced domestically.
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Antidumping Policies
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Punish Foreign firms that engage in dumping and protect domestic producers from unfair foreign competition.
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Dumping
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Selling goods in a foreign market below their costs of production, or selling goods in a foreign market below their "fair" market value.
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2 Arguments Why Governments Intervene in Markets
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Political Arguments and Economic Arguments
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Political Arguments
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Concerned with protecting the interests of certain groups (usually producers) often at the expense of other groups (usually consumers)
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Economic Arguments
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Concerned with boosting the overall wealth of a nation- benefits both producers and consumers.
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7 Political Arguments for government intervention
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protecting jobs, protecting industries important for national security, retaliation for unfair competition, protecting consumers from dangerous products, furthering goals of foreign policy, protecting human rights of individuals in exporting countries, protecting the environment
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Helms-Burton Act
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Act passed in 1996 that allowed Americans to sue foreign firms that use Cuban property confiscated from them after the 1959 revolution.
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D'Amato Act
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Act passed in 1996, similar to the Helms-Burton Act, aimed at Libya and Iran
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Political Arguments for Gov. Intervention: Furthering Goals of Foreign Policy. What Acts fall under this?
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Helms-Burton Act, D'Amato Act
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3 Economic Arguments for Gov. Intervention
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Infant Industry Argument, Strategic Trade Policy and to conform to local content.
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Infant Industry System
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An industry should be protected until it can develop and be viable and competitive internationally
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When is an industry "grown up"?
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If the country has the potential to develop a viable competitive position.
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Strategic Trade Policy
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First mover is important for success and governments can help attain these advantages.
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Foreign Direct Investment (FDI)
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When a firm invests directly in new facilities to produce and/or market in a foreign country.
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Greenfield Investments
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The establishment of a wholly new operation in a foreign country
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Stock of FDI
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Total accumulated value of foreign-owned assets at a given time.
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Gross Fixed Capital Formation
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Total amount of capital invested in factories, stores, office buildings, etc.
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Why does FDI occur instead of exporting?
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Exports can be limited by costs and trade barriers (tariffs, quotas).
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Why does FDI occur instead of licensing?
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Internationalization Theory
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Internationalization Theory
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Firms could be giving away techno. know-how to potential competitor, loses control over manufacturing, marketing, and strategy.
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Multipoint competition
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When two or more enterprises encounter each other in different regional markets, national markets, or industries.
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Dunning's Eclectic Paradigm
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When a company should engage in international production.
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The Radical Approach to FDI
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A multinational enterprise is an instrument of imperialist domination and a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries.
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Free Market View to FDI
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International production should be distributed among countries according to the theory of comparative advantage.
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Pragmatic Nationalism
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FDI has both benefits and costs and should only be allowed if the benefits outweigh the costs.
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4 Main Benefits of FDI for host country
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Resource Transfer Effects, Employment Effects, Balance of Payments Effects, Effects on Competition and Economic Growth
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Resource Transfer Effects
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Brings capital, technology, and management resources.
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Employment Effects of FDI
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Brings Jobs
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Balance of Payments Effects of FDI
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Can help a country to achieve a current account surplus
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Effects on Competition and Economic Growth from FDI
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Greenfield investments increase the level of competition in a market, driving down prices and improving the welfare of consumers.
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3 Main Costs of FDI
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Adverse effects on competition within the host nation and the balance of payments, and perceived loss of national sovereignty and autonomy.
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Regional Economic Integration
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Agreements between countries in a geographic region to reduce tariff and non-tariff barriers to the free flow of goods, services, and factors of production between each other.
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Do regional trade agreements promote free trade?
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In theory yes, but may lead toward competition between regions.
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Free Trade Area
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Eliminates all barriers to the trade of goods and services among member countries.
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Two Examples of Free Trade Associations
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European Free Trade Association (EFTA) and North American Free Trade Agreement (NAFTA)
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Customs Union
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Eliminates trade barriers between member countries and adopts a common external trade policy.
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Common Market
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Has no barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production.
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Economic Union
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Has the free flow of products and factors between members, a common external trade policy, a common currency, a harmonized tax rate, and a common monetary and fiscal policy.
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Political Union
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Central political apparatus that coordinates the economic, social and foreign policy of member states.`
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Trade Creation
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Occurs when low cost producers within the free trade area replace high cost domestic producers.
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Trade Diversion
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Occurs when higher cost suppliers within the free trade area replace lower cost external suppliers.
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What formed the European Economic Community in 1957?
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Treaty of Rome
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Single European Act
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Committed the EC countries to work toward establishment of a single market.
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Maastricht Treaty
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Committed EU to adopt single currency
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MERCOSUR
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Trade between Brazil, Argentina, Paraguay, and Uruaguay which is diverting trade rather than creating it.
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Central American Trade Agreement
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Lower trade barriers between US and members
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CARICOMS
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Establish customs union
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Caribbean Single Market Economy
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Lower trade barriers and harmonize macro-economic and monetary policy between members.
