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Globalization

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The process by which we are moving toward a world in which barriers to cross-border trade and investment are declining; perceived distance is shrinking due to advances in transportation and telecommunications technology; material culture is tarting to look similar the world over; and national economies are merging into and interdependent, integrated global economic system.

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Thomas Friedman

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Argued that the world is becoming flat.

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Globalization

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The shift toward a more integrated and interdependent world economy.

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Two Facets of Globalization

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Globalization of markets and globalization of production.

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Globalization of Markets

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The merging of historically distinct and separate national markets into one huge global marketplace.

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Globalization of Production

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The sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production.

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Factors of Production

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Labor, energy, land, and capital.

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General Agreement on Tariffs and Trade (GATT)

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Precursor to the World Trade Organization

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World Trade Organization

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Primarily responsible for policing the world trading system and making sure nation-states adhere to the rules laid down in trade treaties signed by WTO member states. Also responsible for facilitating the establishment of additional multinational agreements between WTO memeber states. Has promoted the lowering of barriers to cross-border trade and investment.

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International Monetary Fund

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Established to maintain order in the international monetary system. Created in 1944 by 44 nations that met at Bretton Woods, New Hampshire. Often seen as the lender of last resort to nation-states whose economies are in turmoil and whose currencies are losing value against those of other nations. The IMF requires nation-states to adopt specific economic policies aimed at returning their troubled economies to stability and growth.

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World Bank

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Set up to promote economic development. Created in 1944 by 44 nations that met at Bretton Woods, New Hampshire. Focused on making low-interest loans to cash-strapped governments in poor nations that wish to undertake significant infrastructure investments.

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United Nations

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Established October 24, 1945 by 51 countries committed to preserving peace through international cooperation and collective security. Membership totals 191 countries. Promotes higher standards of living, full employment, and conditions of economic and social progress and development.

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Four UN Purposes According to UN Charter

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To maintain international peace and security, to develop friendly relations among nations, to cooperate in solving international problems and in promoting respect for human rights, and to be a center for harmonizing the actions of nations.

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G20x

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Established in 1999, the G20 comprises the finance ministers and central bank governors of the 19 largest economies in the world, plus representatives from the European Union and the European Central Bank. Originally established to formulate a coordinated policy response to financial crises in developing nations.

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Two factors underlying the trend towards greater globalization

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The decline in trade and investment barriers and technological change.

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International Trade

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Occurs when a firm exports goods or services to consumers in another country.

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Foreign Direct Investment (FDI)

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Occurs when a firm invests resources in business activities outside its home country.

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Moore's Law

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A phenomenon which predicts that the power of microprocessor technology doubles and its cost of production falls in half every 18 months.

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Stock of Foreign Direct Investment

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Refers to the total cumulative value of foreign investments.

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Multinational Enterprise (MNE)

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Any business that has productive activities in two or more countries.

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International Business

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Any firm that engages in international trade or investment.

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Four differences between managing domestic and international businesses

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Countries are different, the range of problems confronted by a manager in an international business is wider and the problems themselves more complex than those confronted by a manager in a domestic business, an international business must find ways to work within the limits imposed by government intervention in the international trade and investment system, and international transactions involve converting money into different currencies.

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Political Economy

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The collective political, economic, and legal systems of a country. These systems are all interdependent; they interact and influence each other, and in doing so they affect the level of economic well-being.

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Political System

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The system of government in a nation.

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Two dimensions of political systems

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Collectivism vs. individualism and democratic vs. totalitarian.

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Collectivism

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A political system that stresses the primacy of collective goals over individual goals.

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Socialists

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Trace their intellectual roots to Karl Marx, although socialist thought predates Marx. Advocate state ownership of the basic means of production to ensure that workers are fully compensated for their labor.

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Two camps of socialist ideology

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Communists and social democrats

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Communists

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Believed that socialism could be achieved only through violent revolution and totalitarian dictatorship.

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Social Democrats

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Committed themselves to achieving socialism by democratic means, turning their backs on violent revolution and dictatorship.

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Privatization

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A process where state-owned enterprises are sold to private investors.

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Individualism

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A philosophy that an individual should have freedom in his or her economic and political pursuits. The interests of the individual should take precedence over the interests of the state.

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Two tenets of individualism

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(1) An emphasis on the importance of guaranteeing individual freedom and self-expression. (2) The welfare of society is best served by letting people pursue their own economic self-interest, as opposed to some collective body (such as government) dictating what is in society's best interest.

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Democracy

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A political system in which government is by the people, exercised either directly or through elected representatives.

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Totalitarianism

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A form of government in which one person or political party exercises absolute control over all spheres of human life and prohibits opposing political parties.

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Representative Democracy

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Practiced in most modern democratic states, in a representative democracy, citizens periodically elect individuals to represent them.

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Representative democracy safegaurds

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(1) An individual's right to freedom of expression, opinion, and organization. (2) A free media. (3) Regular elections in which all eligible citizens are allowed to vote. (4) Universal adult suffrage. (5) Limited terms for elected representatives. (6) A fair court system that is independent from the political system. (7) A nonpolitical state bureaucracy. (8) A nonpolitical police force and armed service. (9) Relatively free access to state information.

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Four major forms of totalitarianism

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Communist totalitarianism, theocratic totalitarianism, tribal totalitarianism, and right-wing totalitarianism.

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Communist Totalitarianism

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Communist ruled governments.

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Theocratic Totalitarianism

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Found in states where political power is monopolized by a party, group, or individual that governs according to religious principles. Most common form based on Islam.

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Tribal Totalitarianism

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Occurs in African countries and occurs when a political party that represents the interests of a particular tribe monopolizes power.

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Right-wing Totalitarianism

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Generally permits some individual economic freedom but restricts individual political freedom, frequently on the grounds that it would lead to the rise of communism. A common feature of many right-wing dictatorships is an overt hostility to socialist or communist ideas. Many of these governments are back by the military.

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Three types of economic systems

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Market economy, command economy, and mixed economy.

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Market Economy

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All productive activities are privately owned, as opposed to being owned by the state.

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Command Economy

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The government plans the goods and services that a country produces, the quantity in which they are produced, and the prices at which they are sold.

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Mixed Economy

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In a mixed economy, certain sectors of the economy are left to private ownership and free market mechanisms while other sectors have significant state ownership and government planning.

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Legal System

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The rules, or laws, that regulate behavior along with the processes by which the laws are enforced and through which redress for grievances is obtained.

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Three types of legal systems

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Common law, civil law, and theocratic law.

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Common Law

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Evolved in England and is now found in most of Great Britain's former colonies including the United States. Based on tradition, precedent, and custom. Tradition being a country's legal history, precedent being cases that have come before the courts in the past, and custom being the ways in which laws are applied in specific situations.

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Civil Law System

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Based on a detailed set of laws organized into codes.

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Theocratic Law System

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A system in which the law is based on religious teachings. Islamic law is the most widely practiced theocratic legal system in the modern world.

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Contract

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A document that specifies the conditions under which an exchange is to occur and details the rights and obligations of the parties involved.

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Contract Law

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The body of law that governs contract enforcement.

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United Nations Convention on Contracts for the International Sale of Goods (CIGS)

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Establishes a uniform set of rules governing certain aspects of the making and performance of everyday commercial contracts between sellers and buyers who have their places of business in different nations.

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Property Rights

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The legal rights over the use to which a resource is put and over the use made of any income that may be derived from that resource.

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Two ways of violation property rights

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Through private action and through public action.

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Private Action

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Refers to theft, piracy, blackmail, and the like by private individuals or groups.

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Public Action

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Violation of property rights occurs when public officials, such as politicians and government bureaucrats, extort income, resources, or the property itself from property holders.

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Foreign Corrupt Practices Act

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This law makes it illegal to bribe a foreign government official to obtain or maintain business over which that foreign official has authority, and it requires all publicly traded companies (whether or not they are involved in international trad) to keep detailed records that would reveal whether a violation of the act has occurred.

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Intellectual Property

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Property that is the product of intellectual activity, such as computer software, a screenplay, a music score, or the chemical formula for a new drug.

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Patent

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Grants the inventor of a new product or process exclusive rights for a defined period to the manufacture, use, or sale of that invention.

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Copyrights

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The exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit.

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Trademarks

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Designs and names, often officially registered, by which merchants or manufacturers designate and differentiate their products.

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World Intellectual Property Organization

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183 countries are members and have signed international treaties designed to protect intellectual property, including the oldest such treaty, the Paris Convention for the Protection of Industrial Property, which dates to 1883 and has been signed by some 170 nations.

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Product Safety Laws

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Set certain safety standards to which a product must adhere.

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Product Liability

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Involves holding a firm and its officers responsible when a product causes injury, death, or damage.

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The past three decades have seen a general move toward more democratic forms of government, market-based economic reforms, and adoption of legal systems that better enforce property rights.

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Taken together, these trends have helped to foster greater economic development around the world and have created a more favorable environment for international business.

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Gross National Income (GNI)

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GNI is regarded as a yardstick for the economic activity of a country; it measures the total annual income received by residents of a nation.

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Purchasing Power Parity (PPP)

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An adjustment of GNI that allows for a more direct comparison of living standards in different countries. The base for adjustment is the cost of living in the United States.

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Human Development Index (HDI)

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Measures the quality of human life in different nations based on three measures: life expectancy at birth (a function of health care), educational attainment (measured by a combination of the adult literacy rate and enrollment in primary, secondary, and tertiary education), and whether average incomes, based on PPP estimate, are sufficient to meet the basic needs of life in a country (adequate food, shelter, and health care).

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There is substantial agreement among economists that innovation and entrepreneurial activity are the engines of long-run economic growth.

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One can conclude that if a country's economy is to sustain long-run economic growth, the business environment must be conducive to the consistent production of product and process innovations and to entrepreneurial activity.

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Innovation

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New products, new processes, new organizations, new management practices, and new strategies. Innovation is seen as the product of entrepreneurial activity.

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It has been argued that the economic freedom associated with a market economy creates greater incentives for innovation and entrepreneurship than either a planned or a mixed economy.

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A study of 102 countries over a 20-year period provided evidence of a strong relationship between economic freedom (as provided by a market economy) and economic growth.

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Strong legal protection of property rights is another requirement for a business environment to be conducive to innovation, entrepreneurial activity, and hence economic growth.

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It is argued that democracy is good for economic growth. Democratic regimes are far more conducive to long-term economic growth than are dictatorships, even benevolent ones. However, some totalitarian regimes have fostered a market economy and strong property rights protection and have experienced rapid economic growth such as China. Only a totalitarian regime that is committed to a market system and strong protection of property rights is capable of promoting economic growth.

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Economic growth often leads to the establishment of a democratic regime.

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Geography and education are important determinants of economic growth.

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Two trends of changes in political economy since the 1980s

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The growth and spread of democracy and a strong move away from centrally planned and mixed economies towards a more free market economic model.

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Three reasons for the spread of democracy

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(1) Many totalitarian regimes failed to deliver economic progress to the vast bulk of their populations. (2) New information and communication technologies, including satellite television, fax machines, desktop publishing, and the Internet, have reduced a state's ability to control access to uncensored information. (3) In many countries the economic advances of the past quarter century have led to the emergence of increasingly prosperous middle and working classes who have pushed for democratic reforms.

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Samuel Huntington's views

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He sees a world that is split into different civilizations, each of which has its won value systems and ideology. Global terrorism is a product of the tension between civilizations and the clash of value systems and ideology.

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Market based economies have been spreading. Command and mixed economies failed to deliver the kind of sustained economic performance that was achieved by countries adopting market-based systems.

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As a consequence, even more states have gravitated towards the market-based model.

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Steps entailed in a shift toward a market-based economic systm

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Deregulation, privatization, and creation of a legal system to safeguard property rights.

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Deregulation

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Involves removing legal restrictions to the free play of markets, the establishment of private enterprises, and the manner in which private enterprises operate.

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First-Mover Advantages

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The advantages that accrue to early entrants into a market.

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Late-Mover Disadvantages

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The handicaps that late entrants in a market might suffer.

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Political Risk

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The likelihood that political forces will cause drastic changes in a country's business environment that adversely affect the profit and other goals of a business enterprise.

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Economic Risk

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The likelihood that economic mismanagement will cause drastic changes in a country's business environment that hurt the profit and other goals of a particular business enterprise.

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Legal Risk

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The likelihood that a trading partner will opportunistically break a contract or expropriate property rights.

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Overall attractiveness of a country

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Based on benefits such as size of economy and likely economic growth; costs such as corruption, lack of infrastructure, and legal costs; and risks such as political risks, economic risks, and legal risks.

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Cross-Cultural Literacy

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An understanding of how cultural differences across and within nations can affect the way business is practiced.

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Culture

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A system of values and norms that are shared among a group of people and that when taken together constitute a design for living.

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Values

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Abstract ideas about what a group believes to be good, right, and desirable. Shared assumptions about how things ought to be.

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Norms

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The social rules and guidelines that prescribe appropriate behavior in particular situations.

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Society

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A group of people who share a common set of values and norms. Some countries harbor several societies, and some societies embrace more than one country.

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Two categories of norms

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Folkways and mores.

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Folkways

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The routine conventions of everyday life concerning thins such as the appropriate dress code in a particular situation, good social manners, eating with the correct utensils, neighborly behavior, and the like. Include rituals and symbolic behavior.

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Mores

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Norms that are seen as central to the functioning of a society and to its social life. They have much greater significance than folkways. Include such things as indictments against theft, adultery, incest, and cannibalism.

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The determinants of culture

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Prevailing political and economic philosophies, the social structure of a society, and the dominant religion, language, and education.

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Social Structure

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A society's basic social organization.

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Two important dimensions of social structure

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The degree to which the basic unit of social organization is the individual, as opposed to the group, and the degree to which a society is stratified into classes or castes.

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Group

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An association of two or more individuals who have a shared sense of identity and who interact with each other in structured ways on the basis of a common set of expectations about each other's behavior.

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Social Strata

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Social categories that all societies are stratified into on a hierarchical basis. These strata are typically defined on the basis of characteristics such as family background, occupation, and income.

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Differences in stratification of societies

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(1) They differ from each other with regard to the degree of mobility between social strata. (2) They differ with regard to the significance attached to social strata in business contexts.

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Social Mobility

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The extent to which individuals can move out of the strata into which they are born. Social mobility varies significantly from society to society. The most rigid system of stratification is a caste system.

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Caste System

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A closed system of stratification in which social position is determined by the family into which a person is born, and change in that position is usually not possible during an individual's lifetime.

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Class System

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A less rigid form of social stratification in which social mobility is possible.

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Class Consciousness

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A condition where people tend to perceive themselves in terms of their class background, and this shapes their relationships with members of other classes.

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Religion

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A system of shared beliefs and rituals that are concerned with the realm of the sacred.

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Ethical Sytems

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A set of moral principles, or values, that are used to guide and shape behavior. Most of the world's ethical systems are the product of religions.

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Hofstede's Power Distance Dimension

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Focuses on how a society deals with the fact that people are unequal in physical and intellectual capabilities.

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Hofstede's Individualism Versus Collectivism Dimension

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Focuses on the relationship between the individual and his or her fellows.

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Hofstede's Uncertainty Avoidance Dimension

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Measures the extent to which different cultures socialized their members into accepting ambiguous situations and tolerating uncertainty.

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Hofestede's Masculinity Versus Femininity Dimension

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Looks at the relationship between gender and work roles.

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Hofestede's Confucian Dynamism

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Captures the attitudes towards time, persistence, ordering by status, protection of face, respect for tradition, and reciprocation of gifts and favors.

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Convergence Hypothesis

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There may be a slow but steady convergence occurring across different cultures toward some universally accepted values and norms.

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Ethnocentrism

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A belief in the superiority of one's own ethnic group or culture.

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Business Ethics

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The accepted principles of right or wrong governing the conduct of business people.

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Ethical Strategy

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A strategy, or course of action, that does not violate these accepted principles of business ethics.

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The Tragedy of the Commons

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This occurs when a resource held in common by all, but owned by no one, is overused by individuals, resulting in its degradation.

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Global Tragedy of the Commons

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Corporations can contribute to this by moving production to locations where they are free to pump pollutants into the atmosphere or dump them in oceans or rivers, thereby harming these valuable global commons.

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Foreign Corrupt Practices Act

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Passed because of the Lockheed bribery case, this act outlawed the paying of bribes to foreign government officials to gain business.

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Convention on Combating Bribery of Foreign Public Officials in International Business Transactions

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Went into force in 1999 and obliges member states and other signatories to make the bribery of foreign public officials a criminal offense.

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Facilitating Payments/Speed Money

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Payments to ensure receiving the standard treatment that a business ought to receive from a foreign government, but might not due to the obstruction of a foreign official. Facilitating payments are not payments to secure contracts that would not otherwise be secured and nor are they payments to obtain exclusive preferential treatment.

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Social Responsibility

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The idea that businesspeople should consider the social consequences of economic actions when making business decisions, and that there should be presumption in favor of decisions that have both good economic and social consequences.

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Noblesse Oblige of Companies

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Benevolent behavior that is the responsibility of successful enterprises.

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Ethical Dilemmas

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Situations in which none of the available alternatives seems ethically acceptable.

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Personal Ethics

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The generally accepted principles of right and wrong governing the conduct of individuals.

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The root causes of unethical behavior

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Personal ethics, societal culture, decision-making processes, leadership, unrealistic performance goals, and organization culture.

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Organization Culture

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The values and norms that are shared among employees of an organization.

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Four straw men approaches to ethics

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The Friedman doctrine, cultural relativism, the righteous moralist, and the naive immoralist.

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The Friedman Doctrine of Ethics

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Friedman's basic position is that the only social responsibility of business is to increase profits, so long as the company stays within the rules of law.

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Cultural Relativism

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The belief that ethics are nothing more than the reflection of a culture - all ethics are culturally determined - and that accordingly, a firm should adopt the ethics of the culture in which it is operating.

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Righteous Moralist

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This approach to ethics claims that a multinational's home-country standards of ethics are the appropriate ones for companies to follow in foreign countries.

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Naive Immoralist

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This approach to ethics asserts that if a manager of a multinational sees that firms from other nations are not following ethical norms in a host nation, that manager should not either.

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Utilitarian Approaches to Ethics

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Based on the philosophies of David Hume, Jeremy Bentham, and John Stuart Mill, these approaches hold that the moral worth of actions or practices is determined by their consequences. An action is judged desirable if it leads to the best possible balance of good consequences over bad consequences. Utilitarianism is committed to the maximization of good and the minimization of harm.

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Kantian Ethics

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Based on the philosophy of Immanuel Kant, Kantian ethics hold that people should be treated as ends and never purely as means to the ends of others. People have dignity and need to be respected as such.

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Rights Theories

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Developed in the 20th century, rights theories recognize that human beings have fundamental rights and privileges that transcend national boundaries and cultures. Moral theorists argue that fundamental human rights form the basis for the moral compass that managers should navigate by when making decisions that have an ethical component.

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Universal Declaration of Human Rights

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Developed by the United Nations and ratified by almost every country on the planet, it lays down basic principles that should always be adhered to irrespective of the culture in which one is doing business.

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Justice Theories of Ethics

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Focus on the attainment of a just distribution of economic goods and services.

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Just Distribution

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One that is considered fair and equitable.

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John Rawls' Justice Theory

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Two principles: (1) Each person be permitted the maximum amount of basic liberty compatible with a similar liberty for others. (2) Once equal basic liberty is assured, inequality in basic social goods - such as income and wealth distribution, and opportunities - is to be allowed only if such inequalities benefit everyone.

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Veil of Igorance

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Under this, everyone is imagined to be ignorant of all of his or her particular characteristics, for example, race, sex, intelligence, nationality, family background, and special talents.

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Difference Principle

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Inequalities are justified if they benefit the position of the least-advantaged person.

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Five things that an international business and its managers can do to make sure ethical issues are considered in business decisions

answer

(1) Favor hiring and promoting people with a well-grounded sense of personal ethics. (2) Build an organizational culture that places a high value on ethical behavior. (3) Make sure that leaders within the business not only articulate the rhetoric of ethical behavior, but also act in a manner that is consistent with that rhetoric. (4) Put decision-making processes in place that require people to consider the ethical dimension of business decisions. (5) Develop moral courage.

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Code of Ethics

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A formal statement of the ethical priorities a business adheres to.

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Stakeholders

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Individuals or groups that have an interest, claim, or stake in the company, in what it does, and in how well it performs.

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Internal Stakeholders

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Individuals or groups who work for or own the business. (Employees, board of directors, and stockholders)

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External Stakeholders

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All other individuals and groups that have some claim on the firm. (Customers, suppliers, lenders, governments, unions, local communities, and the general public)

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Free Trade

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A situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country, or what they can produce and sell to another country.

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The trade theories of Smith, Ricardo, and Heckscher-Ohlin show why it is beneficial for a country to engage in international trade even for products it is able to produce for itself.

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These theories tell us that a country's economy may gain if its citizens buy certain products from other nations that could be produced at home. The gains arise because international trade allows a country to specialize in the manufacture and export of products that can be produced more efficiently in other countries.

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Key insight of international trade theory

answer

Limits on imports are often in the interests of domestic producers, but not domestic consumers.

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New Trade Theory

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Developed by Paul Krugman. Stresses that in some cases countries specialize in the production and export of particular products not because of underlying differences in factor endowments, but because in certain industries, the world market can support only a limited number of firms.

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Mercantilism

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First theory of international trade. Emerged in England in the mid-sixteenth century. The main tenet was that it was in a country's best interests to maintain a trade surplus, to export more than it imported. By doing so, a country would accumulate gold and silver and, consequently, increase its national wealth, prestige, and power.

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Zero-sum Game

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A gain by one country results in a loss by another.

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Absolute Advantage

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A country has this in the production of a product when it is more efficient than any other country in producing it.

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Absolute Advantage Theory

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Held by Adam Smith, who argued that countries differ in their ability to produce goods efficiently and should specialize in the production of goods for which they have an absolute advantage and then trade these goods for goods produced by other countries. A country should never produce goods at home that it can buy at a lower cost from other countries.

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Comparative Advantage Theory

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Put forth by David Ricardo, this theory suggests that it makes sense for a country to specialize in producing those goods that it can produce most efficiently, while buying goods that it can produce relatively less efficiently from other countries - even if that means buying goods from other countries that it could produce more efficiently itself. It also suggests that unrestricted free trade brings about increased world production, that is, that trade is a positive-sum game. The theory of comparative advantage also suggests that opening a country to free trade stimulates economic growth, which creates dynamic gains from trade. The empirical evidence seems to be consistent with this claim.

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Basic message of the theory of comparative advantage

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Potential world production is greater with unrestricted free trade than it is with restricted trade. The theory of comparative advantage suggests that trade is a positive-sum game in which all countries that participate realize economic gains.

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Constant Returns to Specialization

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The units of resources required to produce a good are assumed to remain constant no matter where one is on a country's production possibility frontier.

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Heckshcer-Ohlin Theory

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This theory argues that the pattern of international trade is determined by differences in factor endowments. It predicts that countries will export those goods that make intensive use of locally abundant factors and will import goods that make intensive use of factors that are locally scarce.

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Factor endowments

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The extent to which a country is endowed with such resources as land, labor, and capital.

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Product Life-Cycle Theory

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This theory suggest that trade patterns are influenced by where a new product is introduced. In an increasingly integrated global economy, the product life-cycle theory seems to be less predictive than it once was.

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Economies of Scale

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Unit cost reductions associated with a large scale of output.

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New Trade Theory

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New trade theory states that trade allows a nation to specialize in the production of certain goods, attaining scale economies and lowering the costs of producing those goods, while buying goods that it dos not produce from other nations that similarly specialized. By this mechanism, the variety of good available to consumers in each nation is increased, while the average costs of those goods should fall.

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First-Mover Advantages

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The economic and strategic advantages that accrue to early entrants into an industry.

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New Trade Theory

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New trade theory also states that in those industries where substantial economies of scale imply that the world market will profitably support only a few firms, countries may predominate in the export of certain products simply because they had a firm that was a first mover in that industry.

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New Trade Theory

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Some new trade theorists have promoted the idea of strategic trade policy. The argument is that government, by the sophisticated and judicious use of subsidies, might be able to increase the chances of domestic firms becoming first movers in newly emerging industries

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Porter's Diamond Theory

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Porter's theory of national competitive advantage suggests that the pattern of trade is influenced by four attributes of a nation: (1) factor endowments, (2) domestic demand conditions, (3) relating and supporting industries, and (4) firm strategy, structure, and rivalry.

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International Trade Theories

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Theories of international trade are important to an individual business firm primarily because they can help the firm decide where to locate its various production activities.

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Influence on government policy

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Firms involved in international trade can and do exert a strong influence on government policy toward trade. By lobbying government, business firms can promote free trade or trade restrictions.

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Seven instruments of trade policy

answer

Tariffs, subsidies, import quotas, voluntary export restraints, local content requirements, administrative policies, and anti-dumping duties.

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Tariff

answer

A tax levied on imports (or exports).

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Two categories of tariffs

answer

Specific tariffs and ad valorem tariffs.

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Specific Tariffs

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Levied as a fixed charge for each unit of a good imported (for example, $3 per barrel of oil).

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Ad Valorem Tariffs

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Levied as a proportion of the value of the imported good.

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Effect of import tariffs

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(1) Tariffs are generally pro-producer and anti-consumer. (2) Import tariffs reduce the overall efficiency of the world economy.

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Export Tariffs

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Far less common than import tariffs. Generally used to raise revenue for the government and to reduce exports from a sector, often for political reasons.

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Subsidy

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A government payment to a domestic producer. They take many forms such as cash grants, low-interest loans, tax breaks, and government equity participation in domestic firms. Subsidies help domestic producers in two ways: Competing against foreign imports and gaining export markets.

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Import Quota

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A direct restriction on the quantity of some good that may be imported into a country.

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Tariff Rate Quota

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A lower tariff rate is applied to imports within the quota than those over the quota.

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Voluntary Export Restraint (VER)

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A quota on trade imposed by the exporting country, typically at the request of the importing country's government.

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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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Local Content Requirement

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A requirement that some specific fraction of a good be produced domestically. The requirement can be expressed either in physical terms or in value terms.

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Administrative Trade Policies

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Bureaucratic rules designed to make it difficult for imports to enter a country.

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Dumping

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Variously defined as selling goods in a foreign market at below their costs of production or as selling goods in a foreign market at below their "fair" market value.

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Antidumping Policies

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Policies designed to punish foreign firms that engage in dumping.

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Countervailing Duties

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Alternative name for antidumping duties.

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Two argument paths for government intervention

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Political and economic.

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Political arguments for government intervention

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Protecting jobs and industries, national security, retaliation, protecting consumers, furthering foreign policy objectives, protecting human rights, and protecting the environment.

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Helms-Burton Act

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Allows Americans to sue foreign firms that use property in Cuba confiscated from them after the 1959 revolution.

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D'Amato Act

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Similar to the Helms-Burton Act, but aimed at Libya and Iran.

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Economic arguments for government intervention

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Infant industry argument and strategic trade policy argument.

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Infant Industry Argument

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The oldest economic argument for government intervention. Proposed by Alexander Hamilton in 1792. According to this argument, many developing countries have a potential comparative advantage in manufacturing, but new manufacturing industries cannot initially compete with established industries in developed countries. To allow manufacturing to get a toehold, the argument is that governments should temporarily support new industries (with tariffs, import quotas, and subsidies) until they have grown strong enough to meet international competition. In practice, however, governments often end up protecting the inefficient.

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Strategic Trade Policy Argument

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Strategic trade policy suggests that with subsidies, government can help domestic firms gain first-mover advantages in global industries where economies of scale are important. Government subsidies may also help domestic firms overcome barriers to entry into such industries.

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Problems with Strategic Trade Policy Argument

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(a) such a policy may invite retaliation, in which case all will lose, and (b) strategic trade policy may be captured by special-interest groups, which will distort it to their own ends.

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GATT

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The GATT was a product of the postwar free trade movement. The GATT was successful in lowering trade barriers on manufactured goods and commodities. The mover toward greater free trade under the GATT appeared to stimulate economic growth.

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The completion of the Uruguay Round of GATT talks and the establishment of the World Trade Organization have strengthened the world trading system by extending GATT rules to services, increasing protection for intellectual property, reducing agricultural subsidies, and enhancing monitoring and enforcement mechanisms.

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Trade barriers act as a constraint on a firm's ability to disperse its various production activities to optimal locations around the globe. One response to trade barriers is to establish more production activities in the protected country.

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