GBS Course Notes: International Trade
GBS Course Notes: International Trade BUS 311 10
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This 8 page Class Notes was uploaded by Stephanie Scott on Thursday September 15, 2016. The Class Notes belongs to BUS 311 10 at Washington College taught by Dr. Drischler in Fall 2016. Since its upload, it has received 9 views. For similar materials see Global Business Strategy in Business at Washington College.
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Date Created: 09/15/16
Global Business Strategy 9/15/16 Global Business Game Strategy and International Trade First Meeting for Business Sim Game: - Next Tuesday (9/20) decide team strategy, class work-day for game practice - Design strategy implementation to beat other teams o Consider what strategies others will choose when deliberating - Schedule says the final save for you company is due at 5pm on Saturday (9/24) however you can submit it any time before then o TIP: more than one member changing the model without contacting the others WILL CAUSE CONFUSION. Make sure ALL members agree before saving, because regardless of team discussion the changes will be final on Saturday Tips and Strategies: - Key to succeeding in the game is by selecting one strategy and sticking with it o For Example: Walmart focuses on lowering costs to provide the lowest price possible o Another Example: Tiffany and Co. focuses on maximizing quality to differentiate itself from competitors - Walmart is an example of cost leadership, where the strategy is providing standardized products at the lowest possible price - Tiffany and Co. is an example of product differentiation, where the higher price is justified by enhancing the service and product quality - A third strategy is Market Specialization, or finding a specific niche. This is not a useful strategy for this game as there is only so much specialization you can do in a shoe market CEMEX as a Cost Leader: - CEMEX is a cement producer that focuses on cost efficiency in all aspects of production - Per ton its 1/3 lower in cost than all of its competition Contrast Super Quinn’s: - A high-end grocery, emphasizes quality - Customer service is highly attentive, making it attractive on a personal level - The benefits in service and product quality outweighs the higher prices for consumers, they are willing to pay for the benefit International Trade Overview 1. What is Free Trade? 2. What are some of its principle economic benefits? 3. Why are protectionists so strong politically? 4. Are some economists having second thoughts about Free Trade? 5. What is the case for Government intervention in trade matters? 6. What is the case against government intervention in free trade? 7. What are the major instruments of trade policy? Trade Basics: - Free Trade= willing buyers and sellers interacting free of government interference o Allows countries to specialize exports and maximize output Benefits of Free Trade: - Allows for the highest level of resource specialization which maximizes production and consumption - Competition on world scale fosters greater innovation - The global competition forces companies to increase efficiency in every aspect possible, resulting in the cheapest, highest quality goods available Economists and Second Thoughts: - Concerns voiced, not about free trade, but about the implementation of free trade and what reducing barriers would do to domestic companies and workers - Worried about off-shoring (services delivered electronically being exported to other countries, putting local workers out of jobs) o New industry revolution has made 30-40 million jobs exportable o This has hurt developed economies such as the US, EU, and Japan - Paul Samuelson questions some of the logic in comparative advantage o The lower wages in China and India didn’t threaten UK jobs in the late 90’s, but now that transport technology has improved jobs are being outsourced to people who will work for much lower wages, skewing the measurement of comparative advantage - Consumer gain might not be making up for/balancing out the loss in jobs and wages domestically in rich countries, as those benefitting directly from lower prices may not be the same people who are losing jobs and wages Trade Policy: - Many in the West feel left behind - Trump in the US and Nationalist parties in both Eastern and Western Europe o They protest against free trade and globalization, directing anger against immigration and the feeling of eroding national sovereignty o General feeling of loss in identity and economic security by opening to more free trade For Example: the loss in popularity of German Chancellor Angela Merkel and the increase in popularity of the AfD party (Alternative Germany) Absolute Advantage: - Comes from Adam Smith in Wealth of Nations - If, as a country, you’re more efficient than others at producing a good or a service you should produce it o For Example: Japan and Saudi Arabia Japan is a world class manufacturer, but has no oil. Saudi Arabia has tons of oil but very little manufacturing infrastructure, so it makes sense for Saudi Arabia to export oil and import manufactured goods like cars, and for Japan to do the opposite Comparative Advantage: - David Ricardo provided foundation for international trade theory - If you have two countries (A and B) and two products where country A is the better producer for both products, it is still more beneficial for A to produce one good and trade with B for the other o This allows A to be more efficient with its resources and leads to greater overall production - Comparative advantage is not intuitively obvious, takes opportunity costs into account - Opportunity cost= what you give up (in land, labor, and capital) to acquire another product o Benefits of producing a good domestically or buying it foreign Who Loses? - Immobile resources (resources that can’t be reallocated easily into another economic activity, like trying to make a boxer into a ballerina) o US textile workers and owners like American Apparel are struggling as clothing is being produced more cheaply outside of the US, their skills can’t be easily converted to other economic sectors o Same situation for United States agricultural workers - Diminishing returns o Diminishing returns to specialization devoting all resources to one sector of production would actually cost more (even if the country is really good at that sector) because resources become increasingly immobile o The more a country tries to produce of a good by devoting greater resources, the more its forced to devote incompatible resources to that production, making it cost more to make that product BUT: - This comparative advantage model does not take into account the impact of barriers to trade like production standards - Trade policy versus trade theory Trade Issues: - Free versus protectionism - Social policy has a role in trade health, safety, labor protection, providing subsidies and quotas - Agriculture tariffs provide domestic support and export subsidies allow US agriculture to compete globally, whereas it would otherwise lose out to agriculture in developing countries - Globalization versus Regionalism o NAFTA and APEC - In developing countries: o Intellectual property rights (protection for ideas and commercial aspects through things like patents) aren’t as protected o Investment rules may not be as strict, making it harder for companies to compete since the domestic rules they must follow create higher costs o Developing countries has less stringent environmental and labor standards so it’s cheaper for firms to produce there than in a developed country lowering the cost and taking jobs from developed countries Trade Instruments: - Tariffs= taxes on imports - Subsidies= government funds to develop something o airbussubsidized by Europe so it could compete with Boeing - local content requirements= huge issues, government wants to protect its domestic interests, and requires amounts of domestic sources and added value remain within the country. Or the hosting country will require a certain percentage of the product to be exported to help its trade revenue - Voluntary Export Requirements= (not actually voluntary) request one country to another to adhere to certain trade practices o For example: in the 1980s Japan’s car imports to the United states were causing problems for US manufacturers in Detroit, so the US ‘requested’ that Japan lower its imports. Japan did so and also moved manufacturing processes to the US to circumvent this VER - Multilateral and Bilateral Negotiations= usually numerical restrictions between countries, these negotiations are slow and trade is usually halted until the agreement is reached - Import Quotas= limits imposed to manipulate demand for foreign product - Administrative Policies= on-tariff barrier, consumer protection and standards etc. - Anti-dumping duties= dumping is when a company sells below the cost of production to drive down the price artificially and push all other competitors out. The company then jacks up the price once it holds a monopoly o The UN allows anti-dumping sanctions to be carried out by imposing tariffs to force the price back up Why Should the Government Intervene? - The political reasoning is to protect industry and jobs - National security country doesn’t want to be dependent on foreign supply for essential items like steel and other critical goods o Of course, some industries claim they are essential so they get protection - It’s a way of government retaliation against foreign action like a firm being discriminated against by another country - Protect consumers by establishing standards for products - Further foreign political objectives o For example: forcing other countries to adhere to human rights rules by refusing to trade with them if they don’t - Economical reasoning is to protect infant industries in less-developed countries o Hamilton said it was necessary to protect infant industries in the US from Great Britain’s imports in order for them to grow and not be completely squashed by an already established country o Issue is that it decreases competition and some companies might stagnate rather than work to be able to compete on a global scale (remain infant industries) o Use strategic trading policies to help domestic firms gain advantage or overcome barriers created by foreign ‘first movers’ Jobs: - Strong political argument against free trade is to protect employment in domestic industries - By insulating domestic firms from foreign competition, national production levels remain the same (can end up walled off like North Korea) - Protecting firms domestically allows for jobs that should really be outsourced to continue to exist (like textile workers) National Security: - Trade restrictions on sectors critical to national defense o Military technology and computer technology - Trade barriers help maintain domestic production and secure sources for necessary resources Infant Industries: - Free trade was initially seen as a cover for British imperialism and dominance in the 1800’s - Argument Against: o Raises the price of a good both domestically and abroad (bad for consumption) o Protectionism inspires retaliation, decreasing flow of trade globally o Taxpayer funds are needed to protect infant industries; the cost has to be worth the saved jobs o Internationally reduced global efficiency. Free trade creates specialization and optimal use of resources, protectionism prevents that Less Support for Free Trade: - It’s getting less support politically o Focus on comparative advantage and structural advantage - The presence of trade in complex domestic social and cultural issues o Concern about free trade destroying local culture - Labor, environmental, and human rights standards are not the same globally so free trade supports continuing practices that may lower price but also abuse human rights Political Conscious: - Declining manufacturing jobs and stagnating wages as these jobs are exported to BrIC countries (brazil china India) - Both democratic and republican parties in the US are skeptical of free trade and globalization as demonstrated by resistance to TPP Fast Track: - Provision of US Law regarding trade= a trade agreement, once negotiated by the administration (president) can either be approved or vetoed against by Congress but NOT amended o Huge victory for the white house o Transatlantic and transpacific trade agreements are not possible without this provision Recap: 1. What is Free Trade? a. willing buyers and willing sellers trading without government barriers 2. What are some of its principle economic benefits? a. more cost efficient and provides a greater variety of goods b. more efficient allocation of scarce resources c. fosters greater competition between firms, driving innovation 3. Why are protectionists so strong politically? a. Protectionists are gaining strength politically in western Europe and in the United States i. For Example: the opposition of both US presidential candidates towards the Trans Pacific Partnership b. There are always winners and losers in economics and free trade makes losers out of producers who can’t compete. NOT EVERYONE BENEFITS c. The aggregate benefit of free trade is real, but not everyone gains from its and those who gain don’t do so equally (it favors the already established, and increases inequality) 4. Are some economists having second thoughts about Free Trade? a. Not really, the concept is well supported across economic thought b. There is some concern over implementation of free trade in terms of cost in terms of jobs lost for those in industries that are less competitive domestically i. For Example: coal and steel mining jobs are easily taken over by international suppliers, but these positions are not really translatable to other areas, and workers have a difficult time finding alternative positions c. Second thoughts towards implementation because of political and social consequences for developed countries 5. What is the case for Government intervention in trade matters? a. The most used excuse/reason is JOB PROTECTION b. The government can protect domestic markets from international retaliation or discrimination against local companies in foreign markets c. Protecting domestic jobs, particularly in steel, manufacturing, and agriculture d. The government can intervene in trade as a way to protect national security i. For Example: protecting domestic manufacturing of weapons technology or of oil production we don’t want that technology being exported, and we want to support domestic oil production so we aren’t dependent on foreign resources (and thus vulnerable to their demands) e. Consumer protection against unsafe products through the requirement of product standards before importing anything. Also protects producers domestically against international companies that may cut corners due to less regulation in their home country f. Trade can be an instrument of foreign policy (not driven by particular economic goals) i. For Example: Iran in order to deter Iran from developing nuclear weapons the United States imposed sanctions banning US business investment in Iran 6. What is the case against government intervention in free trade? a. Government intervention helps producers at the expense of consumers, it decreases competition so the product quality, innovation, and variety isn’t as high as it could be b. The cost of intervention can be high for taxpayers due to subsidized products, making it less resource efficient c. We can be retaliated against for this by other countries 7. What are the major instruments of trade policy? a. Tariffs= the taxation of imports either ad-valorum or per unit till 1917 income tax was actually unconstitutional in the United States, most of the country’s revenue came from tariffs b. Subsidies= essentially providing companies in certain sectors a check to lower costs of production, allows the firm to sell more cheaply overseas c. Non-tariff barriers= anything restricting trade, such as regulations on products and manufacturing processes/standards d. Local content requirements= requiring foreign companies to keep x% of added value processes within the country, or requiring a certain amount of production to be exported in order to more greatly benefit the hosting country
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