Chap006

Chapter 06

Politicaland Trade Forces

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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Learning Objectives• LO1 Discuss expropriation and privatization.• LO2 Explain the changing sources and reasons

for terrorism and the methods and growing power of terrorists.

• LO3 Evaluate the importance to business of government stability and policy continuity.

• LO4 Explain country risk assessment by international business.

• LO5 Discuss types of trade restrictions.

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Why Firms are Nationalized1. Extract money: government suspects hidden

profits2. Profitability: government seeks to increase

firm’s efficiency and profits3. Ideology 4. Job preservation: government saves jobs by

saving dying industries 5. Control follows money: subsidized firms often

targets of nationalization6. Happenstance: nationalization of German firms

after World War II

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Unfair Competition?Government-owned companies can:

1. cut prices unfairly – don’t have to make profits2. access cheaper financing3. access government contracts4. receive export assistance 5. hold down wages with government assistance6. receive government subsidies

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Privatization• Transfer of public sector assets to the

private sector

• Transfer of management of state activities through contracts & leases

• Contracting of activities previously conducted by the state

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Privatization Anywhere• Need not involve

ownership transfer from government to private sector

• Activities can be contracted out

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Government Protection• Historical function

of government is to protect economic activities within its geographic areas of control:– Attacks, destruction, or

robbery by bandits, foreign invaders, or terrorists

• Aftermath of war shows influence of politics on business:– Solidify Political

Alliances– Solidify Military

Alliances– Gratitude for Support– Appeasement

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Terrorism• Unlawful acts of

violence for a variety of reasons:– Ransom– Overthrow government– Release of imprisoned

colleagues– Revenge– Punish religious

nonbelievers

• Situations:– Kidnapping for ransom– Paying ransom

becomes counterproductive

– Countermeasures by industry

– Chemical and biological terrorism

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Government Stability• Stability:

– Characteristic of a government’s ability to maintain itself in power and keep fiscal, monetary, and political policies predictable

• Instability:– Characteristic of a government’s inability to

maintain power, becomes unpredictable

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International Companies (ICs)

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Country Risk Assessment (CRA)• Evaluation carried out by bank or

business that assesses a country’s economic situation and policies to determine how much risk exists of losing an investment.

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Types of Country Risks• Political

– Wars– Revolutions– Coups– New

governments hostile to private or foreign-owned business

• Economic/ Financial– BOP Deficits– High

Inflation– Low Labor

Productivity– Militant

Labor Unions

• Legal-related– Taxes– Currency

Conversion– Tariffs – Quotas– Labor

Permits– Fair Trial

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Country Risk Assessment

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Trade Restrictions• Arguments for:

– National defense– Sanctions to punish offending nations– Protection for infant (or dying) industry– Protection for domestic jobs from cheap foreign

labor– Scientific tariff or fair competition– Retaliation– Dumping– Subsidies

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Arguments For Trade Restrictions

• National Defense– Industries vital to

national security must be kept operating even though not competitive with foreign suppliers

• Sanctions to Punish Offending Nations– Inflict economic

damage to punish or encourage desired change

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• Protect Infant (or Dying) Industry– Protect new industries

till they gain comparative advantage

– Protect new industries against lower cost imports

– Protect smooth transition of dying industry’s resources to other sectors

• Protect Domestic Jobs from Cheap Foreign Labor– Low labor costs bring in

lower priced goods and eliminate home-country jobs

• Fallacies:– Wages not total labor or

production cost– Productivity rates greater

in developed countries

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• Scientific Tariff/Fair Competition– Import duty to bring

cost of imports up to cost of domestic goods

• Retaliation– Industries facing

restrictions ask their governments to retaliate with similar restrictions

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Dumping• WTO Definition:

– Selling a product abroad for less than:

• the average cost of production in the exporting nation, or

• the market price in the exporting nation, or

• the price to third countries

• Predatory Dumping:– Lowering export

price to force import country’s producer out of business, then expecting to raise price

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New Types of Dumping• Social Dumping

– Unfair competition from lower labor costs and poor working conditions

• Environmental Dumping– Unfair competition caused by lax environmental standards

• Financial Services Dumping– Unfair competition caused by low requirements for bank

capital-asset ratios• Cultural Dumping

– Unfair competition caused by cultural barriers aiding local firms

• Tax Dumping– Unfair competition cause by different corporate tax rates or

special breaks

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• Subsidies– Financial contributions to encourage

exports or protect against imports:• Cash payments• Ownership Participation • Low cost loans• Preferential taxes

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Tariff Barriers• Taxes on imports to raise their price to reduce

competition for local producers or to stimulate local production.

• Official Prices:– guarantees that a minimum import duty is paid

• Variable Levy:– import duty set at the difference world-market prices and

government-supported local prices • Lower Duty for More Local Input

– Lower duty on goods requiring local assembly, repackaging, etc.

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Nontariff Barriers (NTBs)• All forms of

discrimination against imports other than import duties

• Quotas:– Absolute quota– Global quota– Allocated quota

• Voluntary Export Restraints (VERs)

• Orderly Marketing Arrangements

• Nonquantitative Nontariff Barriers

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Quantitative NTBs• Absolute Quota

– When specific quantity of imports reached, imports are prohibited for rest of period (usually 1 year)

• Global Quota– Total import quantity is

fixed regardless of source• Allocated Quota

– Importing government assigns quantities to specific countries

• Voluntary Export Restraints (VERs)– Export quotas imposed

by the exporting nation

• Orderly Marketing Arrangements– Formal agreements

between importing & exporting countries stipulating quotas for each country

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Nonquantitative Nontariff Barriers• Direct government participation in trade:

– Government subsidy – to protect and support targeted industries (agriculture)

– Government procurement policies – restrict purchases of imported goods by government agencies

– Local content – domestic manufacturing using local materials & labor (Buy America Act)

• Customs and other administrative procedures:– Government policies/procedures that favor exports or

discriminate against imports • Standards:

– Protect a nation’s citizens’ health and safety, but can be complex and discriminatory

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Costs of Barriers to Trade

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GLOBAL gauntlet• Chocolate,

Coffee, and Fair Trade– When you savor

these, do you consume a product made with child labor?

• What is the extent of world-wide exploitation of child labor?

• How do Fair-Trade Practices factor in to this situation?

• Should a country’s labor practices be a relevant management consideration in international trade?

Chap006

Education

Transcript of Chap006