IB 150 Lecture Notes - Lecture 11: North American Free Trade Agreement, Final Good, Havana Conference

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IB 150 – Lecture 11
The Political Nature of International Business
Political realities have shaped, and continued to shape, the international business practices
and the trading system
Business leaders should understand and anticipate the complexities of conducting
international business
Objectives of Trade Policies
Free Trade
When a government does not restrict what its citizens can buy from or sell to other
country
Government intervention
While free trade is theoretical ideal, many countries have adopted trade policies that
restrict imports & increase exports
Objective of government intervention
Protect domestic producers and jobs from foreign competition
Increase foreign markets for products of domestic producers
The Instruments of Trade Policy
Tariffs
Subsidies
Import quotas
Voluntary export restraints
Local content requirements
Anti-dumping policies
Administrative policies
Tariffs – A tax levied on imports
Specific tariffs – a fixed change for each unit of the imported good
Ad valorem tariffs – a proportion of the value of the imported good
Who gains:
Government
Domestic producers (At least in the short run)
Employees of protected industries keep their jobs
Who loses:
Consumers who pay higher prices
The economy which remains inefficient
Employees of protected industries who don't develop new skills
Tariffs are pro-producer and anti-consumer, and reduce overall economic efficiency
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Imported Quota
Direct restriction on the quantity of a good that may be imported into a country
Tariff rate quotas – a hybrid of a quota and a tariff where a lower tariff is applied to
imports within the quota than to those over the quota
A quota rent – the extra profit that producers make when supply is artificially limited by an
important quota
Voluntary export restraint (VER) – quota on trade imposed by the exporting country at the
request of importing country’s government
Foreign producers (Exporters) accept VERs because they fear more punitive tariffs or
import quotas
Effect of Import Quota
Import quotas and voluntary export restraints
Benefit domestic producers
Raise the prices of imported goods for consumers
Subsidy
It takes many forms:
Cash grant, low-interest loans, tax breaks, government orders, etc…
It helps domestic producers in two ways:
Help them compete against low cost foreign imports
Gain export markets
It benefits domestic producers and damages foreign producers
The bottom line: governments pay for subsidies by taxing individuals
Local Continent Requirement
A demand that some specific portion of a good be produced domestically
Percent of component parts
Percent of the value of the good
To avoid the formation of domestic industries
To prevent “screwdriver” operations
It clearly benefits local suppliers it may hurt local consumers if local suppliers are less efficient
producers
Initially used by developing countries to help shift from assembly to production of goods
Developed countries (e.g. US ) beginning to implement LCR too, e.g. in NAFTA
Each NAFTA country retains its external tariffs vis-à-vis non-members' goods and levies a
lower tariff on the goods "originating" from the other NAFTA members. Rules of origin
provide the basis for customs officials to make determinations about which goods are entitled
preferential tariff treatment under the NAFTA. Negotiators of the agreement sought to make
the NAFTA's rules of origin very clear so as to provide certainty and predictability to
producers, exporters and importers. They also sought to ensure that the NAFTA's benefits are
not extended to goods exported from non-NAFTA countries which have undergone only
minimal processing in North America. The NAFTA rules of origin are included in Chapter Four
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