International Business Management - Chapter 7

Instructor: Dr. Thao Kim Nguyen

Free Trade The absence of barriers to the free flow of goods and services
between countries.
many nations are they intervene in international free trade to protect the interests of
nominally politically important groups.
committed to free
trade, when do they
intervene?
seven main 1. Tarrifs
instruments of 2. subsidies
trade policy 3. import quotas
4. voluntary export restraints
5. local content requirements
6. anti dumping policies
7. administrative policies
Tariff A tax levied by governments on imports or exports.
Specific Tariff Levied as a fixed charge for each unit of good imported.
Ad Valorem Tariff Levied as a proportion of the value of the imported good.
effects of import 1. tariffs are generally pro-producer and anticonsumer
tariffs -import tariffs impose a significant costs on domestic consumers in
the for of higher prices

2. import tariffs reduce the overall efficiency of the world economy

-a protective tariff encourages domestic firms to produce products at
home that could be produced more efficiently abroad- inefficient
utilization of resources.
Subsidy Government financial assistance to a domestic producer.
Effects of subsidies subsidies help domestic producers by compete against low cost
foreign imports, producers gain export markets, consumers typically
absorb the costs of subsidies
Import Quota A direct restriction on the quantity of some good that can be
imported into a country.

Tariff Rate Quota 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
Voluntary Export A quota on trade imposed by the exporting country, typically at the
Restraint (VER) request of the importing country's government.

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Quota Rent The extra profit producers make when supply is artificially limited by
an import quota.
Local Content A requirement that some specific fraction of a good be produced
Requirement domestically.
Administrative are bureaucratic rules that are designed to make it difficult for
Trade Policies imports to enter a country.

Administrative benefits producers and hurt consumers, who are denied access to
trade policies possibly superior foreign products
effects
Dumping Selling goods in a foreign market for less than their cost of production
or below their fair market value.
Antidumping Rules designed to punish foreign firms that engage in dumping and
Policies thus protect domestic producers from unfair foreign competition.
antidumping designed to punish foreign firms that engage in dumping and thus
policies protect domestic producers from unfair foreign competition
countervailing represent a special tariff, can be fairly substantial and stay in place for
duties up to 5 yrs.
Political arguments concerned with protecting the interest of certain groups within a
for trade nation (normally producers), often at the expense of other groups
intervention (normally consumers)
political ‘-protecting jobs and industries
intervention -protecting national security
-retaliating against foreign competition
-protecting consumers (ban unsafe products)
-furthering foreign policy objectives
-protecting human rights
economic concerned with boosting the overall wealth of a nation (to the benefit
arguments for trade of all, both producers and consumers)
intervention
Infant Industry an industry should be protected until it can develop and be viable and
Argument competitive internationally
Proposed by Alexander Hamilton in 1792, this is the oldest economic
argument for government intervention. It states that developing
countries might have a comparative advantage in manufacturing, but
initially should be protected from international competition
Strategic Trade Government policy aimed at either helping the country's domestic
Policy firms retain first-mover gains or helping domestic firms find entry into
a market; applied when the world market will profitably support only
a few firms and certain countries may predominate in the export of
certain products simply because they had first-mover firms.

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