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Administrative Studies
ADMS 1000
Eytan Lasry

CHPATER 6 What is Integration of markets and economies? Also known as Globalization. Integration of world economies is the presence of trade blocs reflects the accelerating pace with which nations are integrating their economies. For example, NAFTA is a free-trade bloc consisting of Canada, the United States and Mexico. The EU groups 25 countries, while APEC (Asian Pacific Economic Cooperation) consists of 21 nations forming a free-trade zone around the pacific. Integration of world markets is the notion that consumer preferences are converging around the world. Organizations are increasingly marketing their goods and services worldwide. Though local modifications may be made to tailor the product to the local consumer, there is a push toward global products. On the other side, production is increasingly becoming a global affair. Businesses will set up operations wherever it is least costly to do so.  Globalization can be considered a process that is expanding the degree and forms of cross-border transactions among people, assets, goods and services.  Globalization refers to the growth in direct foreign investment in regions across the world.  Globalization reflects the shift toward increasing economic interdependence: the process of generating one, single, world economic system or a global economy. What is free flow of goods/services, capital and labour? Free flow of goods/services, capital and labour refers to the removal of trade barriers. Trade barriers are government-induced restrictions on international trade. For example, tariffs, taxes, import/export licenses, subsidies, embargo, etc. When these are remove, which they have been in some parts of the world (i.e. NAFTA), this is refers to as free flow of goods/services, capital and labour. This is done to increase foreign countries to do business easier with the country without trade barriers. Free trade is based on the objective of open markets, where a level playing field is created for businesses in one country to compete fairly against businesses in other countries for the sale of their products or services. What is a Multinational Corporations? A multinational corporation is a type of global business, which engages directly in some form of international business activity, including such activities as exporting, importing or international production. A business that has direct investments (whether in the form of marketing or manufacturing facilities) in a least two different countries is specifically referred to as a multinational corporation. In other words, MNCs are business enterprises that control assets, factories, etc., operated either as branch offices or affiliates in two or more foreign countries. An MNC generates products or services through its affiliates in several countries, and it maintains control over the operations of those affiliates, and manages from a global perspective. What are some benefits and threats? Benefits:  Encourages economic development  Offers management expertise  Introduces new technologies  Provides financial support to underdeveloped regions of the world  Creates employment  Encourages international trade through a company’s access to different markets: it is relatively easy to produce goods in one country and distribute them in another country through a subsidiary or foreign affiliate  Brings different countries closer together  Facilitates global co-operation and worldwide economic development Threats:  MNCs do not have any particular allegiance or commitment to their host country  Profits made by an MNC do not necessarily remain within the host country but may be transferred out to other locations depending on where the MNC feels the funds are most needed  Decision making and other key functions of MNCs may be highly centralized in the home country, so that even though other operations are performed in the host country, they do not necessarily include things like research and development and strategic planning  Difficulty in the ability to control and hold MNCs accountable can create serious ethical concerns for the host country. What is International Trade? International trade essentially involves the purchase, sale or exchange of goods or services across countries. This can be distinguished from domestic trade, which involves trade between provinces, cities or regions within a country. What is Mercantilism? (The trade theory underlying economic thinking from the period ranging from about 1500 to 1800 is referred to as mercantilism). Mercantilism, essentially, is the economic policy of accumulating this financial wealth through trade surpluses. Trade surpluses come when a country’s exports exceed its imports, which lead to more money entering the country than leaving. What is Protectionism? Trade protectionism is about protecting a country’s domestic economy and businesses through restriction on imports. Why might imports be a threat to a country’s business and economy? 1. Low-priced foreign goods that enter the country could compete with goods already produced here and, in effect, take business away from domestic producers. The ultimate consequence may be loss of sales and loss of jobs for domestic industries that are unable to compete with these lower-priced imports 2. A country that imports more than it exports will have a negative balance of trade, or a trade deficit, which often results in more money flowing out of the country than flowing in. What are Tariffs? A tariff is essentially a tax placed on goods entering a country. Specifically, protective tariffs are intended to raise the price of imported products in order to ensure that they are not less expensive than domestically produced goods. Three situations in which governments often impose tariffs:  To protect fledgling domestic industries from foreign competition.  To protect aging and inefficient domestic industries from foreign competition. • To protect domestic producers from dumping by foreign companies or governments. Dumping occurs when a foreign company charges a price in the domestic market, which is "too low". In most instances "too low" is generally understood to be a price, which is lower in a foreign market than the price in the domestic market. In other instances "too low" means a price, which is below cost, so the producer is losing money. What is an import quota? Import quota is a trade barrier, which limits the amount of a product that can be imported. The reasons for this restriction are the same: to help ensure that domestic producers retain an adequate share of consumer demand for this product. What are subsidies? A subsidy is an assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributed as subventions in an industry to prevent the decline of that industry (e.g., as a result of continuous unprofitable operations) or an increase in the prices of its products or simply to encourage it to hire more labor (as in the case of a wage subsidy). What are the problems with protectionism? Restrictions on imports can be self-defeating, given that other countries will act in a similar manner and reduce their imports. Consider the case of Canada, where large portions of our raw materials are exported. Can it restrict imports from countries that are similarly purchasing our products? Trade Agreements and International bodies One of the most ambitious programs designed to encourage free trade was established way back in 1948 with the founding of GATT (the General Agreement on Tariffs & Trade), which was an agreement among approximately 100 countries to reduce the level of tariffs on a worldwide basis. And it did encourage a gradual reduction in trade barriers. In 1995 the WTO, in effect, took over the management of the global trade system from GATT. Its mandate is, essentially, to develop and administer agreed-upon rules for world trade, and discourage protectionist laws that restrict international trade. Other organizations exist whose purpose is also to assist nations or the global economy. For example, the International Monetary Fund (IMF) was established after World War II to provide short-term assistance in for of low-interest loans to countries conducting international trade and in need of financial assistance. The World Band was established at the same time to provide long-term loans to countries for economic development projects. Typically they would borrow funds from the more developed countries and offer low-interest loans to underdeveloped Third World nations. Regional Trading Blocs (EU, APEC, ASEAN) The three major regional trading blocks are the European Union (EU), Asia- Pacific Economic Cooperation (APEC), and Association of South-East Asian Nations (ASEAN). NAFTA NAFTA is a trade agreement with objectives to remove trade barriers between Canada, the United States and Mexico. Objectives Aimed to produce a common market among the members.  Increase the level of trade between Canada and the United States. Canada and U.S. trade increased by about 75% since the establishment of FTA. NAFTA’s Impact on Trade Advocates:  Increase the level of trade between Canada and the United States. Canada and U.S. trade increased by about 75% since the establishment of FTA.  Canada’s merchandise trade with the US increased by 80% in the first five years of the NAFTA, and Canada’s trade with Mexico increased by 65%, reaching 271.5 billion dollars and 1.4 billion dollars.  Exports of Canadian goods to the US were approximately 17% of GDP in the 1980s, prior to NAFTA  Exports grew from 25.7% to 43.2%, while imports grew from 25.7% to 40.3% NAFTA helped transform the three economies while creating synergies that go far beyond economic prosperity. The agreement produced real net benefits for workers and consumers of the three countries. The total merchandise trade between the US and Canada has grown by over 120% and when you include trade in services, the growth has been closer to 140%. On the other hand, critics of free trade have said:  Any trade improvements witnessed over the last decade may be more attributable to Canada’s then relatively low dollar than due to results of NAFTA.  NAFTA has encouraged us to become too dependent on trade with the US  Canada needs to expand trade with other nations rather than relying solely on NAFTA. NAFTA’s Impact on Canadian Employment and Business Advocates:  Foreign competition forces domestic businesses to improve their operations and improve their products and services  Protecting domestic business amounts to discouraging competitiveness and innovation and, ultimately, will lead to job losses, given the inability to remain competitive in world markets  Free trade encourages countries to abort inefficient operations and focus on the relatively stronger commodities or services in which they have a competitive or comparative advantage Critics:  Many Canadian manufacturers cannot compete with the US imports, and are forced out of business  Jobs losses arise from US companies deciding to shit down their Canadian subsidiaries and exporting their tariff-free goods to Canada  Many manufacturing jobs are lost in Mexico, given that country’s relatively cheaper labour and, hence, lower-priced goods NAFTA’s Impact on Canadian Culture Advocates:  The agreement is not signing away Canada’s cultural heritage, any more than the European Community forced European nations to lose their individual cultures. Critics:  Free trade will encourage the destruction of a unique Canadian culture  Increasing foreign domination of the Canadian economy will transform Canada into a pure economic subsidiary of the US  Publishing and broadcasting industries are threatened by American competitors and the increasing presence of American-based media.  The presence of the US in areas like the Canadian entertainment industry would pose a serious threat to the transmission of Canadian culture. NAFTA’s Impact on Canadian Competitiveness and the Canadian Consumer Advocates:  One of the central objectives of the FTA was to encourage Canadian business to become more competitive through exposing Canadian businesses to greater competition from American business.  Canadian consumers are given more choice and are exposed to competitive products with free trade  Canadian companies that require inputs from US businesses can now obtain them more cheaply, and pass these savings to the consumers  Canada cannot afford to ignore the US market Critics:  NAFTA has not encouraged any increase in productivity. Canadians have been able to match US productivity rates for the past 20 years, and have produced at rates that are equal to about 80% of the output of workers in the United States  NAFTA has not reduced the productivity gap between Canada and the US  Our good record of exports has come about largely because the relatively low value of the Canadian dollar has med our goods cheaper in the past. CHAPTER 7 What are revenue taxes? The intent of revenue taxes is to collect money in order to help fund government services and programs. Revenue taxes include individual taxes as well as corporate income tax, along with property tax and sales tax. What are restrictive taxes? Restrictive taxes are primarily aimed at controlling or curbing the use of specific products or services. Crown Corporations A Crown Corporation or public enterprise is an organization accountable, through a minister, to parliament for its operations. Crown corporations may be federal (e.g., Canada Post) or provincial (e.g., the Liquor Control Board of Ontario (LCBO) Why do we have them?  To implement public policy that includes protecting or safeguarding national interest  To protect industries deemed to be ital. to the economy (i.e. the Canadian Radio Broadcasting Commission was established by the Canadian government in 1932 to administer a national broadcasting service in order to prevent Canadian broadcasting becoming inundated with material originating in the US.  To provide special services that could not otherwise be made available by private business. For example, Trans Canada Airlines (Air Canada) was established in 1930s, after observing that no private business was willing or able to provide domestic air services.  To nationalize industries that were considered to be “natural monopolies,” including the generation and distribution. Benefits and Disadvantages of Crown Corporations Crown corporations can be both good and bad. Yet there are more positive than negative effects of crown corporations. For example, crown corporations provide high quality services such as public health care and free education. If these sectors were to be privatizing there would not be any public health care or free education. However, crown corporations are not only good, as they don’t face competition, which is one of the main sources of success. Which sectors of the economy should be controlled by the Government and which should be left to the private sector? In my opinion the health care, education, and military/defense sector should all be controlled by the government as it is the fundamentals of the country. Furthermore, these are sectors that almost define a country and are very important to a country. In countries such as Canada should keep it the way it is with a mixed economy as it has been proven to be the most effective way. Yet, in Third World countries privatization of crown corporations would have an positive impacts as it would increase the competition. Regulations Government economic regulation has been defined as “the imposition of constraints, backed by the authority of a government, that are intended to modify economic behavior in the private sector significantly.” Perfect Competition Perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product Imperfect Competition Imperfect competition is the competitive situation in any market where the conditions necessary for perfect competition are not satisfied. Public Interest One of the central objectives of government regulation is to protect the public interest. Instead of having established its own public enterprise, government can control the operations of a private enterprise through regulations. Consequently, what we see in some areas of business in government regulation of business through commissions, tribunals, agencies and boards. The government has also established a competition policy to control the nature of competition in the business sector. This is intended to stimulate open competition and eliminate any restrictive business practices with the aim of encouraging maximum production, distribution and employment opportunities. Bailouts The term “bailout” refers to government assistance given to prevent an organization or industry from financial collapse. A bailout is when a bankrupt, or nearly bankrupt, business is given more “liquidity” in order to meet its financial obligations. A government would usually enter into a bailout if the failing company is very large company and consequently whose failure would cause negative repercussions for the economy. Subsidies Government assistance to business in form of subsidies has significant implications in the global business context. Subsidies have been identified as either cash payments, low-interest loans or potentially reduced taxes. Subsidies are usually given to assist domestic industry to compete against foreign businesses. I believe that large corporations that have large impacts on the countries economy should be government subsidize if needed. However, I don’t believe that foreign countries such as in the case of GM where Canada gave GM 10 billion dollars. I believe so because subsidies should only be given to domestic corporations that would decrease the current net income of a country if they would go bankrupt. I also believe that the government should be allowed to bail out large corporations that are failing if the cost won’t be too large (general public having to pay for it). However, if the general public suffers or looses in the long-run because of the bail out then it should not be done. There should be a method of evaluating whether a bail out will be profitable in the long-run or not and the government should make their decision from there. Government Subsidies in a Global Context 1. Nurturing Young Industries a. The infant-industry argument asserts that government should help a young industry to grow and develop by ensuring that the industry maintains a dominant share of the domestic market until it is mature enough to compete against foreign competition. i. Such protection can discourage domestic industry from increasing competitiveness and engaging in innovation 2. Encouraging Direct Foreign Investment a. The action of reducing foreign imports may result in the foreign business directly investing in the target country instead. That is, a foreign company can decide to set up business in the targeted country if it wishes to gain access to that country’s consumer market and it is unable to achieve that with imports 3. Maintaining Favorable Balance of Trade a. Trade surpluses come about when a country’s exports exceed its imports; more money is entering the country than leaving. 4. Protecting Domestic Business from Unfair Competition a. There is a concern among some businesses that foreign competitors will offer their products at extremely low prices as a means of monopolizing their share of the target country’s market. b. A foreign competitor who manages to export the products at such low prices may be accused of dumping – which is pricing the product below the cost or below the cost of the target country’s products 5. Maintaining Adequate Levels of Domestic Employment a. A government knows that society holds it responsible for ensuring the unemployment rates are not high. Imports that come to dominate an industry bring the threat of causing domestic industries to go bankrupt. Consequently, where businesses claim they are under threat of bankruptcy due to foreign competition, the government is forced to consider what action it can take to combat this threat. 6. Offering Subsidies to Compete Globally a. Whether it is for the purpose of maintaining employment levels or of assisting businesses in the global marketplace, the issue of government subsidies to business has become much more controversial in the context of globalization. Should the Canadian government protect Canadian corporations from foreign ownership? (See Toronto Star Article handout) Advocates:  Core assets and industries should be protected  National security, cultural industries, servicing unprofitable and remote communities  Head offices in Canada will ensure that jobs, R&D, spending on suppliers and related services (law, consltg & acctg firms, IBs…) also remains Critics:  Corporations are driven by profit not nationalistic motives  Protected firms are less efficient, productive, innovative, competitive… and costs to consumers are likely increased  Violates spirit and letter of free trade laws and agreements and may invite retaliation Deregulation Why?  More competition, lower prices, better service…  Deregu
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