St.

Anthony’s College
San Jose Antique
BUSINESS EDUCATION DEPARTMENT

WEEK 2 HANDOUTS IN AEC 223 INTERNATIONAL BUSINESS AND TRADE

Instructor: Maureen Kristianne S. Villavert

WEEK 2. POLITICAL FORCES THAT AFFECT GLOBAL TRADE

Nationalization: Why Government Get Involved

Nationalization – the taking of private property by a government to make it public. Government decides to own
businesses for many reasons. One fundamental motivation is the belief that governments can better ensure equal
access and control over basic services if we consider public goods such as education and health care than private
owners could do.

Privatization: Why Government Sell Business

Privatization – the selling of government-owned property to private sector. Governments sometimes privatize
or sell their businesses, usually in order to see them run more efficiently, to reduce the government’s size or the
extent of its bureaucracy, or to raise money.

Government Stability and Protection and their Importance to Business

Stability – characteristics of a government that maintains itself in power and whose fiscal, monetary, and
political policies are predictable and not subject to sudden, radical, changes.

Instability – characteristics of a government that cannot maintain itself in power or that make sudden,
unpredictable, or radical policy changes.

How can a Government Protect its Citizens Abroad? - Governments maintain embassies in foreign
capitals and consulates in larger cities to represent their interests and offer protection to citizens who are
abroad.

Stability: Issues with Lack of Peach and 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 a pattern of unpredictable changes.
1. Protection from Unfair Competition – in addition to fostering a stable, predictable context for
business, governments whatever their ideology, have historically functioned to protect the economic
activities of their citizens including farming, mining, manufacturing, and the delivery of services
within their area of control.

These services require protection from unfair competition and also more directly, from attacks and
destructions or thefts by robbers, revolutionaries, and terrorist both foreign and domestic, in real time
and space as well as online.

Unfair international competition in minimized through national laws, negotiations between

governments, and the efforts of institutions such as the World Trade Organizations.

2. Protection from Terrorism, Cybercrime, and other Threats – four areas of increasing concern to
government as they try to protect the business activities of their citizens and of the international
managers because they are frequent targets of these activities, terrorism, kidnapping, piracy, and
cybercrime.

a. 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.
 St. Anthony’s College
San Jose Antique
BUSINESS EDUCATION DEPARTMENT

b. Kidnapping – Kidnapping for ransom is a weapon used by terrorist and their other criminals
that targets international managers as well as tourists. Kidnappers target business people and
hold them for ransom not because they are anti-business but they assume that businesses have
deep pockets and will be willing to pay for the safe return of their employees.

c. Piracy –is the hijacking that includes kidnapping on the seas has shown fluctuations in recent
years but remains a significant source of concern.

Latin
Number of
America and Rest of the Total
Piracy Africa Asia
the World Incidents
Incidents
Caribbean
2013 79 167 18 0 264
2014 55 183 5 2 245
2015 70 202 8 1 281
2016 122 101 27 1 251
2017 151 95 71 4 321

d. Cybercrime – Any illegal internet-mediated activity that takes place in electronic networks.
Among the cybercrimes that most often target businesses are hacking, data espionage, and
domain or name – related offense.

International property theft may also use computer networks. Business – related cybercrime can
cause harm to an entire organization with few keystrokes; the goal tends to be economic gain, and
any harm to individuals is incidental.

Because cybercrime is borderless, no one government or legal system can control it; international
cooperation is necessary, including harmonizing laws, improving investigation techniques and
collaboration, and coordinating enforcements.

Country Risk Assessments and Countermeasures to Threats

Country Risk Assessment – is 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.
Country risk are often political, including wars, revolutions, and coups. The company’s home country
may be a factor; does the host country bear a friendly attitude toward it.

Government Intervention on Trade

When government impose trade restrictions, the cost of the traded goods increases. Economists generally
agree that barriers like there are detrimental to trade and reduce economic efficiency.
Reasons for Restricting Trade
1. Provide for National Defense – the national defense argument for trade restrictions suggests that
certain industries need protection from imports because these industries are vital to security and must
be kept operating, even though they are not competitive with foreign suppliers.

Similar to national defense arguments have been offered in support of bans on the export of advanced
technologies. The reasoning goes that such bans prevent valuable technologies from being used to
strengthen competitors, especially military. However, these bans reduce export revenues for the
country’s manufacturers by closing off potential foreign markets. They can also impede efforts to
sustain international market share and fund continued innovation, which enables competitors form
other nations to improve competitiveness.
 St. Anthony’s College
San Jose Antique
BUSINESS EDUCATION DEPARTMENT

2. Impose Sanctions – some trade restrictions are imposed to inflict economic damage on other nations,
as a way of punishing them or otherwise encouraging them to modify their behavior. A common
approach is to pass legislations that prohibits trade with the offending nation or with specific citizens
of that nation.

3. Protect an Infant or Dying Industry – advocates for the protection of an infant industry claim that
in the long run, it will have a comparative advantage, but in the meantime these firms need protection
from imports until they obtain the required investment capital, train the labor force, master production
techniques, and achieve economies scale. Without this protection, advocates argue, a firm will not be
able to survive because lower-cost imports from more mature foreign competitors will underprices in
its local market.

4. Protect Domestic Jobs – protectionist who use the “cheap foreign labor” argument usually compare
low foreign wage rates to those pain in their home country. They conclude that foreign exporters can
flood the home country’s market with low-priced goods and eliminate jobs of home – country workers.

5. Ensure Fair Competition – supporter of fair competition wants an import duty that will bring the
cost of imported goods up to the cost of domestically produced goods. This will eliminate any “unfair”
advantage of a foreign competitor might have because of superior technology, lower raw material
costs, lower taxes, lower labor costs, or a combination of these factors. The intent is not to ban imports
but only to equalize the import process to ensure “fair” competition. The level of such duties is likely
to bet to protect the least efficient domestic producer, however while more efficient domestic
producers earn increase profits. Meanwhile, efficient foreign producers are penalized and their
comparative advantage is eliminated. The impact on consumers might also be viewed as unfair
because the import duty increases the price they pay.

6. Retaliate – representatives of an industry whose exports have had import restrictions place on they by
another country may ask their government to retaliate with similar restrictions. The two causes of
retaliation in trade are dumping and subsidies.

Dumping – is the selling of a product abroad for less than the cost of production, less than the price
in the home market, or less than the price to third-party countries.

• Predatory Dumping – a manufacturer may also lower its export price to force the
importing nation’s domestic producers out of business, expecting to raise prices once that
objective has been accomplished.
• Social Dumpling – occurs when producers have lower wage rates, lower social costs, such
as unemployment taxes and environment regulations to support the general welfare, poor
worker benefits, and poor working conditions, all of which undermine social support
systems.
• Environmental Dumping – occurs when an exporter can sell at a lower costs due to the
country’s lax environmental standards.

Subsidies – financial contributions, provided directly or indirectly by government, that confer a

benefit, including grants, preferential tax treatment, and government assumption of normal business
expenses.

Tariff Barriers – taxes on imported goods for the purpose of raising their price to reduce competition for
local producers or stimulate local production. A few smaller nations also use them to raise revenue on
both imports and exports.
There are three types of tariffs or import duties:
1. Ad Valorem Duty – is stated as a percentage of the invoice of the product.
2. Specific Duty – is fixed sum of money charged for a specified physical unit of a product.
3. Compound Duty – a combination of specific and ad valorem duties.
 St. Anthony’s College
San Jose Antique
BUSINESS EDUCATION DEPARTMENT

Variable Levy – guarantees that the market price of the import will be the same as that of the
domestically produced goods.

Non-Tariff Barries – are all forms of discrimination against imports other than the import duties. As a
result of WTO agreements, nations have reduced import duties, and nontariff barriers have thus gained
greater importance and wider use.
1. Quantitative Barriers – one type of quantitative nontariff barrier is the quota, which sets numerical
limits for specific kinds of goods that country will permit to be imported during a specific period. If
the quota is complete, once the specified amount has been imported, further importation for the rest of
the period, usually a year, is prohibited.

2. Voluntary Export Restraints – export quotas imposed by the exporting nation.

3. Orderly Marketing Arrangement – formal agreements between exporting and importing countries
that stipulate the import or export quotas each nation will have for a good in order to restrict
international competition and preserve some of the national market for local producers.

4. Non-Quantitative Nontariff Barries – can be classified into three major groupings:

a. Direct Government Participation in Trade

b. Customs and other Administrative Procedures
c. Standards