BSB119 L W 5

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Queensland University of Technology
Management and Human Resources

1 BSB119 – GLOBAL BUSINESS LECTURE 5: TRADE AND INVESTMENT Lecture outline 1. Motives for government intervention  political and economic motives 2. Instruments of intervention in trade  tariff and non-tariff barriers 3. Host governments and MNEs Free Trade  The absence of barriers to the free flow of goods and services between countries o Without trade barriers, trade patterns are determined by the relative productivity of different factors of production o Free trade generates more efficient utilization of resources and increases competition – thus increasing economic growth  Theoretically free trade brings economic gains (Smith; Ricardo; Heckscher-Ohlin) Trade and Investment The benefits of free trade:  Static benefits: IB and consumers can locate or source production in countries where products can be produced most efficiently.  Dynamic benefits: larger market access and competition stimulate best practice, investment and innovation. Why do governments intervene with free trade or internet trade?  Why do governments impose restrictions on trade, given the benefits?  International E-business - the purchase and delivery of products and services online - Motives for Government Intervention  Political motives: o Protection of domestic jobs and industries  Eg Australian tariffs on foreign cars o National security - key industries, encryption  US semiconductor industry  Successfully made the argument that because semiconductors are integral to defense products it would be dangerous to rely solely on foreign imports.  US threatened to impose 100% tariffs on Chinese goods if China did not start to actively enforce intellectual property laws o Retaliation  US & China - intellectual property laws o Protection of consumer welfare  EU and hormone-treated beef o Maintain cultural distinctiveness  Cars - often source of national pride o Foreign relations policy  Preferential treatment or ‘punishment’ o Contingent policies - issues of human rights, work conditions, environment - anti- globalisation movement 2  US withholding MFN status for China o Revenue - tariffs  Dubai and Skype  EB-specific: o Fair treatment of online and offline business o Threats to privacy and security  Economic motives: o Infant industry argument - potential comparative advantage  Difficult for new firms to compete with established  Korean shipping manufacturing  Criticisms: …protection fosters inefficiency and dependence; government v. private investors in “picking winners”; rent-seeking; opportunity cost of government funds. o Strategic trade policy: …assisting firms gain or to overcome existing first-mover advantages and as a consequence, economies of scale and market power  case for protection and export assistance  Japan often cited as successful example  criticism: 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 government by vested interest Instruments Tariff and non-tariff barriers  Transparent means of regulating trade include tariffs, quotas, export/import controls (embargoes), anti-dumping (below production cost or fair market value)  Less transparent non-tariff barriers: o 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  Cabotage - the right s of one company to trade in another - used mainly for transport, aviation (right to land the plane etc). Cabotage restrictions include when a country restricts trade to domestic carriers.  Tariff = tax levied on imports by governments – oldest and simplest method o Specific tariff: fixed charge for each good imported o Ad valorem tariff: a % of imported goods value o Who gains: pro-producer  Government – increased revenue  Domestic producers – protected from foreign competition by increasing the price of their goods  Employees of protected industries keep their jobs o Who loses: anti-consumer  Restriction of supply results in consumers paying higher prices  Results in the economy being inefficient  Employees of pr
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