International Business Environments and Operations, 13/e Part Three Theories and Institutions: Trade and Investment 7-1 Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall Chapter Seven Governmental Influence On Trade 7-2 Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall Chapter Objectives • • • • • To explain the rationales for governmental policies that enhance and restrict trade To show the effects of pressure groups on trade policies To describe the potential and actual effects of governmental intervention on the free flow of trade To illustrate the major means by which trade is restricted and regulated To demonstrate the business uncertainties and business opportunities created by governmental trade policies 7-3 Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall Physical and Social Factors Affecting the Flow of Goods and Services 7-4 Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall The Role of Stakeholders All countries seek to influence trade, and each has economic, social, and political objectives: • Conflicting objectives • Interest groups 7-5 Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall Why Governments Intervene in Trade 7-6 Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall Import Restrictions to Create Domestic Employment • May lead to retaliation by other countries • Are less likely retaliated against effectively by small economies • Are less likely to be met with retaliation if implemented by small economies • May decrease export jobs because of price increases for components • May decrease export jobs because of lower incomes abroad 7-7 Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall Protecting “Infant-Industries” The infant-industry argument for protection holds that governmental prevention of import competition is necessary to help certain industries move from high-cost to low-cost production 7-8 Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall Developing an Industrial Base • Countries seek protection to promote industrialization because that type of production: Brings faster growth than agriculture Brings in investment funds Diversifies the economy Brings more income than primary products Reduces imports and promotes exports Helps the nation-building process 7-9 Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall Assumptions in Developing an Industrial Base • • • • • • Surplus Workers Investment Inflows Diversification Growth in Manufactured Goods Import Substitution and Export-Led Development Nation Building 7-10 Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall Economic Relationships with Other Countries • Trade controls are used to improve economic relations with other countries • Their objectives include improving the balance of: payments raising prices to foreign consumers gaining fair access to foreign markets preventing foreign monopoly prices assuring that domestic consumers get low prices lowering profit margins for foreign producers 7-11 Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall Maintaining Essential Industries • In protecting essential industries, countries must: Determine which ones are essential Consider costs and alternatives Consider political consequences 7-12 Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall Preventing Shipments to “Unfriendly” Countries • Considerable governmental interference in international trade is motivated by: political rather than economic concerns maintaining domestic supplies of essential goods preventing potential enemies from gaining goods that would help them achieve their objectives 7-13 Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall Maintaining or Extending Spheres of Influence • Governments give aid and credits to, and encourage imports from, countries that join a political alliance or vote a preferred way within international bodies • A country’s trade restrictions may coerce governments to follow certain political actions or punish companies whose governments not 7-14 Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall Preserving National Identity To sustain this collective identity that sets their citizens apart from those in other nations, countries limit foreign products and services in certain sectors 7-15 Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall Instruments of Trade Control • Trade controls that directly affect price and indirectly affect quantity include: tariffs subsidies customs-valuation methods special fees 7-16 Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall Nontariff Barriers: Direct Price Influences • • • • Subsidies Aid and Loans Customs Valuation Other Direct Price Influences 7-17 Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall Nontariff Barriers: Quantity Controls • Trade controls that directly affect quantity and indirectly affect price include: quotas voluntary export restraint (VERs) “buy local” legislation standards and labels specific permission requirements administrative delays reciprocal requirements restrictions on services 7-18 Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall Dealing With Governmental Trade Influences • When facing import competition, companies can: Move abroad Seek other market niches Make domestic output competitive Try to get protection 7-19 Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall Tactics for Dealing with Import Competition • Convincing Decision Makers • Involving the Industry and Stakeholders • Preparing for Changes in the Competitive Environment 7-20 Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall Future: Dynamics and Complexity • Trade restriction changes bring about winners and losers among countries, companies, and workers • The international regulatory situation is becoming more complex • Production shifts create uncertainties and dynamics for companies’ operations 7-21 Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher Printed in the United States of America 7-22 Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall ... which trade is restricted and regulated To demonstrate the business uncertainties and business opportunities created by governmental trade policies 7-3 Copyright © 2011 Pearson Education, Inc publishing... companies, and workers • The international regulatory situation is becoming more complex • Production shifts create uncertainties and dynamics for companies’ operations 7-21 Copyright © 2011 Pearson. .. the Competitive Environment 7-20 Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall Future: Dynamics and Complexity • Trade restriction changes bring about winners and losers among