Chapter 2 The Dynamic Environment of International Trade

Chapter 2 The Dynamic Environment of International Trade Hyudai assembly line John Deere tractors 2 -1

GLOBAL PERSPECTIVE Trade Barriers: An International Marketer’s Minefield Example: Japan places restrictions on: skis rice beef baseballs 2 -2

GLOBAL PERSPECTIVE Trade Barriers: An International Marketer’s Minefield Example: France places restrictions on: U. S TV U. S. songs U. S. movies 2 -3

GLOBAL PERSPECTIVE Trade Barriers: An International Marketer’s Minefield Why are P&G Pringles involved in a trade dispute in Great Britain? Turn to p. 27 and find out What is the answer ? 2 -4

Protectionism • Tariffs, quotas, and nontariff barriers are designed to protect markets from intrusions by foreign countries • Nations utilize barriers to restrain entry of unwanted goods – Legal – Exchange – Psychological – Private market 2 -5

Why do countries use protectionism? Review the Chicago Tribune article, written by the CEO of Caterpillar. Write either a “pro” or “con” argument. 2 -6

GLOBAL PERSPECTIVE Why is it true that when competition goes up, so does protectionism? COMPETITION PROTECTIONISM 2 -7

Top Ten 2011 U. S. Trading Partners; p. 28 What one key fact “jumps out” from this table? Answer___________________ 2 -8

World Trade and U. S. Multinationals MNCs confronted by resurgence of competition from all over the world Exam ples? xam NICs (Newly Industrialized Countries) SOEs (State-Owned Enterprises) E U. S. trade deficit – an indication of unfavorable changes in the balance of merchandise trade 9

World’s 100 Largest Industrial Corporations (Annual Revenues); p. 31 What is important here? 10

Balance of Payments • Balance of payments (BP) – the system of accounts that records a nation’s international finance transactions among businesses or consumers • Money constantly flows into and out of a country • Transactions are recorded annually and must always be in balance • BP is a record of condition, not determinant of condition • It records all financial transactions between a country’s firms and residents and the rest of the world, usually over a year • The BP is maintained on a double-entry bookkeeping system 11

Balance of Payments The BP is the difference between: BP Receipts…. . &…. . BP Payments • Merchandise export sales • Money spent by foreign tourists • Transportation • Payments of dividends and interest from FDI abroad • New foreign investment in the U. S. • Cost of goods imported • Spending by U. S. tourists overseas • New overseas investments • Cost of foreign military and economic aid 12

Balance of Payments The BP includes three accounts: (1) current account—a record of all merchandise exports, imports, and services plus unilateral transfers of funds; (2) the capital account—a record of direct investment, portfolio investment, and shortterm capital movements to and from countries; (3) the official reserves account—a record of exports and imports of gold, increases or decreases in foreign exchange, and increases or decreases in liabilities to foreign central banks; 2 -13

U. S. Current Account by Major Components, 2011 ($ billions); p. 34 You. Tube video 14

U. S. Current Account Balance (% of GDP); p. 35 15

Discussion Question? Why does the balance of payments always balance even though the current account does not balance? • Find the answer on page 33. • Check your answer with your neighbor. Make sure you agree. 2 -16

What will one U. S. dollar buy? Turn to your neighbor and brainstorm three items you could buy for $1. 00 1. 2. 3. 2 -17

What Would One U. S. Dollar Buy? P. 35 18

Trade Barriers Tariffs Standards Quotas Voluntary Export Restraints (VER) Antidumping penalties Boycotts and embargoes Domestic Subsidies Monetary barriers: Blocked currency Differential exchange Government approval What is the impact of trade barriers? 19

Shoe Importers Push to Cut U. S. Tariffs • Imported shoes are subject to as much as 67. 5% import tax • Air Jordan shoes retail for $150 that includes a 20% tariff. • 1930 Smoot-Hawley Tariff Act enacted during the Great Depression to protect a large footwear industry, but today more than 90% of shoes are imported. 2 -20

Types of Nontariff Barriers 21

The Impact of Tariff (Tax) Barriers Tariff Barriers tend to Increase: 1. Inflationary pressures 2. Special interests’ privileges 3. Government control and political considerations in economic matters 4. The number of tariffs they beget via reciprocity Tariff Barriers tend to Weaken: 1. Balance-of-payments positions 2. Supply-and-demand patterns 3. International relations (they can start trade wars) Tariff Barriers tend to Restrict: 1. Manufacturer’ supply sources 2. Choices available to consumers 3. Competition 2 -22

The Omnibus Trade and Competitiveness Act of 1988 • Designed to deal with trade deficits, protectionism, and overall fairness of our trading partners • Covers three critical areas in improving U. S. trade – Market access – Export expansion – Import relief • Four ongoing activities to support the growth of international trade – GATT – The associated World Trade Organization (WTO) – International Monetary Fund (IMF) – The World Bank Group (WBG) 23

General Agreement on Tariffs and Trade You. Tube video The GATT paved way for first effective worldwide tariff agreement • Basic elements of the GATT – Trade shall be conducted on a nondiscriminatory basis – Protection shall be afforded domestic industries through customs tariffs, not through such commercial measures as import quotas – Consultation shall be the primary method used to solve global trade problems 24

World Trade Organization (WTO) The WTO is an institution – not an agreement The WTO: – Sets many rules governing trade among its 159 members; 25 observing countries – Provides a panel experts to hear and rule on trade disputes among members – Issues binding decisions – All member countries will have equal representation You. Tube video 25

The International Monetary Fund (IMF) The IMF was created to assist nations in becoming and remaining economically viable -187 members • Objectives of the IMF – Stabilization of foreign exchange rates – Establishment of freely convertible currencies to facilitate the expansion and balanced growth of international trade • Special Drawing Rights (SDRs) – “Paper gold” The World Bank Group was created to reduce poverty and improve standard of living by promoting sustainable growth and investment in people 26

The World Bank Group • The World Bank has five institutions which perform the following services: 1. Lending money to the governments of developing countries 2. Providing assistance to governments for developmental projects to the poorest developing countries 3. Lending directly to the private sector 4. Providing investors with guarantees against “noncommercial risk” 5. Promoting increased flows of international investment 27

Do you know the concept of Keiretsu? • The keiretsu (system) is. . . • It is responsible for about 25% of the activities of all Japanese companies and 78%of the value of all shares on the Tokyo Stock Exchange 2 -28

Ties that Bind: Japanese Keiretsu and Toyota has a typical keiretsu family with financial ties to its most important suppliers. Some of those companies, with the percentage of each that Toyota owns: Lighting Rubber Disc Brakes Transmissions, clutches, brakes Clocks Electronics Seat belts, switches Steel Upholstery material Door sashes, molding Painting Mufflers Koito Mfg. Toyoda Gosel Akebona Aisin Seiki Jeco Nippondenso Tokai Rika Aichi Steel Works Kyowa Leather Shiroki Trinity Futaba Industrial SOURCE: Adapted from “Japan: All in the Family, ” Newsweek, June 10, 1991, p 38. 19. 0 % 41. 4 13. 9 22. 0 34. 0 23. 6 28. 2 21. 0 33. 5 13. 2 30. 2 13. 2 2 -29