Module 5: Political Forces That Affect Global Trade

There is no question: international trade is heavily influenced by political forces. This module reviews the
major ways in which those forces operate.

Governments and the Ownership of Business

 Nationalization: Why Governments Get Involved
 Nationalization: The taking of private property by a government to make it public.
 Nationalization sometimes called expropriation.
 Fundamental motivation is the belief that governments can better ensure equal access
to and control over basic services we consider public goods. (such as education and
health care than private owners could do)
 Motivated by the belief that government can manage a public good or necessity better
than the private, profit-driven sector
 Government ownership can protect against corruption, put social goals ahead of profit,
and provide vital services like national defense.
 To extract more money, to increase profitability, to follow an economic and political
ideology, to save jobs by propping up drying industries, to control an earlier investment
in a firm, and enact political goals.
 Privatization: Why Governments Sell Businesses
 Privatization: The selling of government owned property to the private sector.
 To see them run more efficiently, to reduce government’s size or the extent of its
bureaucracy, or to raise money.
 To gain more efficiency in business operations, to raise money or to change in political
climate/philosophy.
 Margaret Thatcher (Britain’s prime minister) was a leader of Britain’s most recent
privatization movement.
 In Chile, the government of Augusto Pinochet overthrew Salvador Allende’s socialist
regimes and sold its stakes in more than 160 Chilean Corporation.

Government Stability & Protection

o Both important to the international manager because each affects the way the firm operates.
o Stability: Characteristic of a government that maintains itself in power and whose fiscal, monetary,
and political policies are predictable and not subject to sudden, radical changes.
o Instability: Characteristic of a government that cannot maintain itself in power or that makes sudden,
unpredictable, or radical policy changes.
o Business prosper most when there is a government with policies that are permanent or that change
only gradually.
o Political chaos and unpredicted change are not friend of most businesses.
o Government maintain embassies in foreign capitalist and consulates in larger cities to represent their
interests and offer protection to their citizens who are abroad.
 Stability: Issues with Lack of Peace & Predictability
 Business likes peace and predictability because they provide stability and safety for assets and
people.
 Unstable governments can present challenges to businesses that range from the inability to
ensure peace to pattern of unpredictable changes.
 Warring factions are a danger and business manager actually might fear for the physical safety
of their employees and business property.
 As they develop their business and trade institutions, the predictability of change may be an
issue.
 Without predictability, the business cannot adjust.
 Protection From Unfair Competition
 Protect the economic activities of citizens (in real time as well as online) – including farming,
mining, manufacturing, and the delivery of services – within their area of control.
  Protection from attacks and destruction or theft by robbers, revolutionaries, and terrorist.
 Unfair competition is minimize through national laws, negotiations between governments, and
the efforts of institution such as the World Trade Organization (WTO)
 Protection from Terrorism, Cybercrime, and Other Threats
 Four (4) areas of increasing concern to governments:
 Terrorism: unlawful acts of violence committed for a wide variety of reasons
 Terrorist may want to collect a ransom, overthrow a government, gain the
release of imprisoned colleagues, exact revenge for real or imagined wrongs, and
punish nonbelievers.
 Kidnapping for ransom is a weapon used by terrorists and other criminals that targets
international managers as well as tourists.
 Ransom request are frequently for very large amounts and provide terrorists a
source of operating funds.
 Piracy which is a hijacking that includes kidnapping on the seas
 Cybercrime is any illegal Internet-mediated activity that takes place in electronic
networks
 International property theft may also use computer networks.
 Cause harm to an entire organization with a few strokes
 The goal tends to be economic gain, and any harm to individuals is incidental.
 Cybercrime is borderless, no one government or legal system can control it.
 Cybercrime exacts massive costs on businesses.
 Cyber environment is a fluid one, populated by quick learners, so defense have to
be continuously upgraded and updated.

Country Risk Assessment and Countermeasures to Threats

o The first step in managing risk, including political risk, is learning about environment.
o Country Risk Assessment (CRA): An assessment of a country’s economic situation and politics to
determine how much risk to employees, property, and investment exists for the firm doing business
there.
o Companies are using specialized consulting and research firms to assess risk because of the
increasing complexity of the political environment.
o Country risks are often political, including wars, revolutions, and coups.
o The company’s home country may be a factor.
o County risks vary according to the nature of its business and length of time required for the
investment, loan, or other involvement to yield a satisfactory return.
o Financing of exports usually offers the shortest period of risk exposure.
o Types of countermeasures:
o Know country and region so risk-assessment is realistic
o Insurance and outsourced skills, such as hostage negotiations, as needed to cope with
crisis
o Train for daily living skills: varying driving routes, awareness of surroundings,
antiterrorism training

Government Intervention in Trade

o When government impose trade restrictions, the cost of the trade goods increases. Barriers like these
are detrimental to trade and reduce economic efficiency.
o World Trade Organization (WTO) is having difficulty competing trade negotiations due to politically
motivated agricultural tariff barriers.
o Reasons for Restricting Trade:
 Trade has become a political issue for small groups of activists who seek to protect domestic
business from foreign competition.
 Provide for National Defense
 Certain industries need protection from imports because these industries are vital to
security.
  Economist say this is a weak argument and used to gain emotional advantage
 Impose Sanctions
 Inflict economic damage as a way of punish, or encourage change of behavior
 Sanctions seldom achieve their goal
 Produce collateral economic damage
 Protect an Infant or Dying Industry
 Give infant industries a chance to grow and build comparative advantage
 Without this, lower-cost imports will underprice in local market
 Slow down impact of dying industry – move capital into other sectors
 Protect Domestic Jobs
 Protectionists who use “Cheap foreign labor” argument usually compare low foreign
wage rates to those paid in their home country. Conclude that foreign exporters can
flood the home country’s market with low-priced goods and eliminate jobs of home
country. Wages don’t account for all production costs. Argument has strong emotional
appeal.
 Ensure Fair Competition
 Want an import duty to bring cost of imports up to cost of domestic goods
 Don’t ban imports but equalize them
 Consumer impact: import duty increases the price they pay
 Retaliate
 Representatives of an industry whose exports have had import restrictions placed on
them by another country may ask their government to retaliate with similar restrictions.
 Two (2) additional causes for retaliation in trade: Dumping and Subsidies.
 Dumping defined in three (3) ways:
1. Selling product abroad for less than cost of production
2. Selling product abroad for less than price in home market
3. Selling product abroad for less than price to third-party countries
 Predatory dumping – Lowering export price to force that importing nation’s
domestic producers out of business, expecting to raise prices once that objective
has been accomplished.
 Social dumping – Occurs when producers have lower wage rates, lower social
costs such as unemployment taxes and environmental regulations to support the
general welfare, poor worker benefits, and poor working conditions, all of which
undermine social support system.
 Environmental dumping – Occurs when an exporter can sell at lower costs due
to the country’s lax environmental standards.
 Subsidies: financial contributions, provided directly or indirectly by a government,
that confer a benefit, including grants, preferential tax treatment, and government
assumption of normal business expenses.
 Government makes to a domestic firm, either to encourage exports or to help
protect the firm from imports.
 Countervailing duties: additional import taxes levied on imports that have
benefited from export subsidies
o Governments have reasons to restrict trade, even these restrictions do not add to overall economic
good.
o Tariff and nontariff barriers governments use to impede trade.

Tariff Barriers
o Tariffs: taxes on imported goods for the purpose of raising their price to reduce competition for local
producers or stimulate local production
o Few smaller nations also use them to raise revenue on both imports and exports.
o Imposition of tariffs can result in harmful retaliation.
o Tariffs often are set to encourage local input.
o Three (3) types of tariffs or import duties:
1. Ad Valorem Duty: an import duty levied as a percentage of the invoice value of imported
goods
2. Specific duty: a fixed sum levied on a physical unit of an imported good
3. Compound duty: a combination of specific and ad valorem duties
 In an inflationary period:
 Specific duty loses its importance unless it is raised frequently
 Ad valorem duty increases as the invoice price rises
 Exporter may charge prices lower than domestic prices that Ad valorem duty fails to close the
gap. Thus, governments set official prices or use variable levy to correct this deficiency.
 Variable levy: an import duty set at the difference between world market prices and
local government-supported prices.
 Guarantees that the market price of the import will be the same as that of
domestically produced goods.

Nontariff Barriers
o Nontariff Barriers (NTBs): are all forms of discrimination against imports other than import duties
o These are all forms of discrimination against imports other than the import duties we have been
examining.
 Quantitative Barriers
 One type of this is the quotas: numerical limits for specific goods imported during specific
period
 Quota is absolute once the specified amount has been imported.
 Further importation for the rest of the period (usually a year) is prohibited.
 Quotas are generally global once the total amount is fixed without regard to source.
 Quota may also be allocated in which case the government of importing nation assigns
quantities to specific countries.
 Some goods are subject to tariff-rate-quotas which permit a stipulated amount to enter
duty-free or at a low rate.
 Some producers have used transhipping to evade quotas.
 Voluntary export restraints
 Nations have agreed not to impose quotas unilaterally on goods, except for agricultural
products.
 Governments have negotiated Voluntary Export Restraints (VERs), or export quotas, with
other countries.
 Orderly marketing arrangements are VERs consisting of formal arrangements between the
governments of exporting and importing countries.
 Voluntary Export Restraints (VERs): export quotas imposed by exporting nation
 Nonquantitative NonTariff Barriers three (3) major groupings:
1. Direct government participation in trade
 Most common is the subsidy
 Policies may also require that products purchased by government agencies have
a stipulated local content.
2. Customs and other administrative procedures
 Customs (general term for duties paid on imports) and administrative barriers
cover a large variety of government policies and procedures that either
discriminate against imports or favour exports.
3. Standards
 Government and private standards to protect health and safety of nation’s
citizens are both certainly desirable
 Exporting firms plagued by many standards that are complex and discriminatory