MGRECON401 Economics of International Business and Multinationals LECTURE 3
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Transcript of MGRECON401 Economics of International Business and Multinationals LECTURE 3
MGRECON401Economics of International Business
and Multinationals
LECTURE 3Multinationals and
Global Trade Agreements
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Lecture Focus
What are the instruments and effects of trade policy?
What is the history of trade agreements?
What are the implications of trade agreements for multinationals?
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The 7 Instruments of Trade Policy
AntidumpingDuties
LocalContent
Requirements
Tariffs
VoluntaryExports
Restraints
Subsidies
AdministrativePoliciesImport
Quotas
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Tariffs
SpecificFixed charge
per unit
Ad ValoremCharge is
a proportion of the goods value
Oldest form of protection.
Tariffs
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Tariffs
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Tariffs and Florida OJFlorida: 40 percent of the World OJ market.
Brazil: 45 percent of the World OJ market. Brazil controls World market except the US.
29.5 cent per gallon tariff on Brazilian OJ concentrate.
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Subsidies
Government payment to a
domestic producerCash Grants
Tax Breaks
Low InterestLoans
GovernmentEquity
Participation
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Agricultural SubsidiesVery common in North America, Europe and JapanKeeps inefficient farmers in business.Encourages production of products that can be grown more cheaply elsewhere.Reduces world trade.Perpetuates global poverty.
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Trends in Agricultural Development
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EU Sugar Subsidies
Radical French Farmer Jose Boveis Arrested by French Gendarmes in the South Western Village of Solomiac
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EU Sugar Subsidies
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US Cotton Subsidies – Impact on Mali
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Import Quotas and Voluntary Export Restraints
Direct restrictionon the quantity of a
good that canbe imported into
a country.
Import Quotas
Quota on trade imposedby the exporting
country at the requestof the importing
country’s government.
VERs
Hurtsconsumers
Raises domestic prices on imported
goods (and possibly
imported good)
Helps
producers
Quotarent
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The MultiFibre AgreementThe MultiFibre Agreement (MFA) sets quotas limiting the amount of imports of textiles and clothing from “developing” to “developed” countries.Will be phased out during the ten year period 1995-2005.Will have major implications for exports from China and India.Will also have major implications for countries, such as Sri Lanka, Indonesia, and Mauritius, who would not otherwise have developed a textile industry.
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Dumping & Antidumping PoliciesDumping = Selling goods
into a foreign market below production costs, or selling below “fair market value.”
Antidumping = policies enacted to punish foreign firms and protect local industry from “unfair” trading practices.
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Domestic Demand DDOM
Foreign Demand DFOR
MR = PFOR
Profit Max at QMONOPOLY
MC = PFOR
Domestic Sales QDOM
Exports QMONOPOLY- QDOM
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Development of the World Trading System
Intellectual arguments for free trade: Adam Smith and David Ricardo.
Free trade as government policy: Britain’s (1846) repeal of the Corn Laws.
Britain continued free trade policy.Fear of trade war.
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World War I to World War II1918 - 1939
Great DepressionUS stock market collapseSmoot-Hawley Act (1930)
US had positive trade balance with worldAct imposes tariffs to protect U.S. firms.Foreign response was to impose own barriersUS exports tumbled
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General Agreement on Tariffs and Trade (GATT)
WWII allies want international organization in trade arena similar to UN in political arena.
GATT proposed by US in 1947.19 original members grew to 120 nations by the time it was superceded by the WTO.
GATT members agree not to raise tariffs above negotiated rates.
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Average Reduction in US Tariff Rates 1947 - 85
0
20
40
60
80
100
120
Pre-Geneva
Geneva
Annecy
Torquay
Geneva
Dillon
Kennedy
Tokyo
IndexPre-GenevaTariff = 100
GATT Negotiating Rounds
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WTOCreated by Uruguay round of GATT.141 members and 28 candidates.Between 1995 and 2000, 213 disputes brought before the WTO.Significant victories:
TelecommunicationsFinancial ServicesIntellectual Property Protection
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Regional Trade AgreementsEU: Complete elimination of restrictions on goods flows, capital flows, and labor flows within Europe.NAFTA: Free trade among Canada, US, Mexico.Andean Pact: Bolivia, Colombia, Ecuador, Peru, Venezuela.Mercosur: Argentina, Brazil, Paraguay, Uruguay.Free Trade Area of the Americas (FTAA): 34 nations from Alaska to Argentina, planned start by 2005.ASEAN: Brunei, Indonesia, Laos, Malaysia, the Philippines, Myanmar, Singapore, Thailand and Vietnam.APEC: US, Canada, Japan, China, many in S.E. Asia, Australia.African trade blocs: 9 different trade blocs.
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Regional Economic Integrationand Firm Strategy
What does NAFTA (or EU, etc.) mean for a firm’s strategy?A larger market raises profits due to economies of scale.Larger profits encourages new entrants; provides an incentive for firms to erect entry barriers:
Introduce new varietyExpand capacity
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Toyota Motor Manufacturing USA• What are the political motivations behind Toyota moving
production facilities from Japan to the US?• What are the economic motivations behind Toyota moving
production facilities from Japan to the US?• What is the source of Toyota’s comparative advantage in
producing automobiles?• Why is it so hard for another company to fully replicate the Toyota
Production System (TPS)?• In what sense was the creation of TPS a response to some primitive
characteristics of automobile production and to a perceived weakness of U.S. automotive companies and addressing these characteristics?