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McGill University
Management Core
MGCR 382
John Saba

Chapter 7: formulation of national trade policies Objective 5: i-trade promotion 1. 3 types of Subsidies [FOCUS] a. Gov grants including the following forms: i. Price supports ($$ as transfers/loans) intended to ensure firms’ survival by EITHER facilitating production at reduced selling prices OR encouraging exports ii. Direct SS of goods, income or services iii. Tax breaks iv. Provision of infrastructure v. Gov contracts at inflated prices b. Reduce cost of doing biz & artificially help competitiveness of recipient firms c. DOMESTIC subsidy i. Payments & incentives made to DOMESTIC producers whose products compete with imports, intended to lower the selling price below market price. d. EXPORT subsidy i. Payments & incentives made to EXPORT producers whose products compete with imports, intended to increase exports e.g. Boeing & Airbus subsidies to promote commercial aircraft exports e. INDIRECT GOV(economic incentive) subsidies i. Subsidies are hard to define => RULE: WTO prohibits subsidies when they HINDER free trade ii. EXCEPTION: tolerance of subsidies in the form of local gov when they provide econ devt incentives to entice firms to locate/expand facilities to provide jobs & increase local tax bases iii. Incentives => property tax abatements, free land, training of workforce, reduced utility rates, new highway/port constructions, R&D initiatives, tax exemptions, offers of biz devt services (such as mkt info, trade missions & privileged access to key foreign contacts) iv. E.g. 1990s Germany encouraged FDI in East German states by providing tax & investment incentives, Ireland targeted foreign firms in high-tech sector incl. medical instruments, pharm, comp software (offered pref corp tax rates 12%) v. HK gov paid most of cash to build Disney Park, Austin Texas got Samsung to build semicon plant by offering $225mil of tax relief & other concessions vi. Ericsson built R&D plant in Vaudreuil-Dorion due to benefits from a variety of incentives including cheap electricity (save $10mil with pref rate, Hydro-Quebec charge on 45MW of power) & tax breaks ($20mil), Nordic climate friendly to energy-hungry servers, vii. INTERNET growth is subsidized but NOT environmentally friendly 1. Explosion of data turned internet to 1 of earth’s fastest-growing sources of carbon emissions, consumers almost 3% of world’s electricity 2. Internet’s power blah blah blha 3. Average internet user causes 1-10 grams of carbon emissions on each search session 4. Most energy consumed by fast-growing network of huge “server farms” 5. Apple, Google, FB fuelled by hydro generated power coming from coal-burning – world’s most pollution blah blah…… google gets subsidies from N. Carolina viii. France gov subsidizes Air France, China state-owned enterprises ix. Special situation: protection in EU, Japan, US is in older, labour-intensive industries where firms & countries have NO MORE CA e.g. clothing, agriculture, textiles x. EU’s Common Agricultural Policy (CAP) [TESTED] 1. System of subsidies that is 45+% of EU’s budget xi. US gov Agricultural subsidies (cotton) 1. Averaged $3+bil yearly 2. Effects: WINNERS = US cotton producers, increase SS of cotton production  increase in world SS  world cotton prices fall  developING countries hurt by falling prices & reduced cotton exports to US
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