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70 Cards in this Set
- Front
- Back
Protectionism |
Raise prices to consumers while benefiting producers
Opposite of Free Trade (How governments intervene);
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How Governments Intervene: |
1. Tariffs 2. Subsidies 3. Import Quotas 4.Voluntary Export Restraints 5.Local Content Requirements 6. Administrative Policies |
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Tariffs |
Taxes levied on imports. (Oldest barrier & easiest for the WTO to limit)
Example: IBM / U.S. STEELE |
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Specific Tariff |
Fixed Charge for each unit imported
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Ad Valorem Tariff |
Taxes a percentage of the value of the imported good.
2002: 15-20% Tariff on Chinese imported steel
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Susbsidies |
Government payments to local producers |
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Import Quotas |
Restrict the quantity of a good being imported into the country
Example: Limits put on cheese imports |
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Tariff Rate Quotas |
Lower tax is applied to imports within the quota than to those over the quota |
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Quota Rent |
Extra profit that producers make when supply is limited by an import quota |
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Voluntary Export Restraints |
quotas on trade imposed by the EXPORTING COUNTRY
Example: 1980- Japanese (automotive industry) decided to restrain voluntarily IOT avoid lobbying/risk of taxation. |
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Local Content Requirements |
Specific fraction of a good must be produced locally.
Example: Buy American Act-(Government Agencies buying products) 51% of the good must be manufactured in the U.S |
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Administrative Policies |
rules designed to make it difficult for imports to enter a country.
Example: Japanese FedEx packages were required to be searches for pornographic material. |
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Dumping |
Selling goods in a foreign market below their cost of production and/or fair market value. IN ORDER TO DRIVE DOMESTIC COMPANIES OUT OF BUSINESS (Predatory behavior) |
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Antidumping Policies (Countervailing) |
Punish foreign firms that are dumping & protect local producers from unfair competition. |
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Political Arguments for Government Intervention |
1. Protecting Jobs 2. Protecting industries that are important for national security 3. Retaliating to unfair foreign competition 4. Protecting consumers from dangerous products 5. Furthering the goals of foreign policy 6. Protecting human rights of individuals in exporting countries |
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Protecting Jobs: |
The most common political reason for trade restriction |
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Protecting Industries deemed important for national security: |
Industries such as aerospace/electronics Example: South Korean Auto Industry |
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Protecting consumers from dangerous products: |
Chinese toy manufacturers (lead) |
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Furthering goals of foreign policy |
preferential trade terms can be granted to countries that a government wants to build strong relationships with |
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Economic Arguments for Government Intervention: |
1. The Infant Industry argument 2. Strategic Trade Policy
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The Infant Industry Argument |
An industtry should be protected until it can develop and be viable and competitive internationally
Example: Japanese car companies being tarriffed by South Korea |
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Strategic Trade Policy |
Governments help firms achieve first mover advantages
Example: Boeing in the 1950s/60s |
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Trade Creation |
When low cost producers replace high cost domestic producers within the free trade area |
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Trade Diversion |
When higher cost suppliers within free trade area replace lower cost external suppliers |
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Size of Country Effect |
Micro benefit of Regionalization |
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Free Trade Area |
Eliminates all barriers to the trade of goods and services among member countries. |
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Customs Union |
Eliminates trade barriers between member countries and adopts a common external trade policy |
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Common Market |
Has no barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production/ |
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Economic Union |
Involves the free flow of products/factors of production between members |
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Political Union |
involves a central political apparatus that coordinates the economic, social, and foreign policy of member states. |
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European Free Trade Association (EFTA) |
Norway, Iceland, Liectenstein & Switzerland (The most enduring free trade area) |
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North American Free Trade Agreement (NAFTA) |
United States, Canada & Mexico |
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Andean Pact |
A pact between Bolivia, Columbia, Ecuador & Peru. (Example of a customs union) |
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Levels of Regional Economic Integration |
1. Free Trade Area 2. Customs Union 3. Common Market 4.Economic Union 5. Political Union |
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Political Structure of the European Union |
1. European Council 2. European Commission 3. Council of the European Union 4.European Parliament 5. The Court of Justice |
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European Council |
Resolves major policy issues and sets policy directions |
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European Commision |
Responsible for implementing aspects of EU law and monitoring member states to ensure they are complying with EU laws |
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Council of the European Union |
THe ultimate controlling authority within the EU |
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European Parliament |
Debates legislation proposed by the commision and forwarded to it by council |
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The COurt of Justice |
The supreme appeals court for EU law |
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The Maastricht Treaty |
Committed the EU to adopt a single currency (The Euro)
Established: January 1, 1999 |
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Arguments in support of NAFTA |
Mexico would benefit from Increased jobs More rapid economic growth.
U.S./Canada would benefit from: Access to a large, prosperous market. Lower Prices for consumers on goods produced in Mexico Low cost labor/ ability to be more competitive on world markets |
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Arguments against NAFTA |
Jobs would be lost and wage levels would decline Mexican workers would migrate north Pollution would increase Mexico would lose sovereignty
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The Foreign Exchange Market |
Used to convert the currency of one country into the currency of another. Provides insurance against exchange risks |
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Exchange Rate |
The rate at which one currency is converted into another |
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Currency Speculation |
The short term movement of funds from one currency to another hoping to profit from shifts in exchange rates |
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Hedging |
When a firm insures itself against exchange risks |
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Spot Exchange Rate |
The rate at which a foreign exchange dealer converts one currency into another currency on a PARTICULAR DAY |
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Forward Exchange Rate |
the rate used for hedging in the forward market (typically for 30, 90, or 180 days) |
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The Most Important Trading Centers: |
London New York Tokyo Singapore |
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Forward Exchanges |
2 parties agree to exchange currency and execute the deal at some specific date in the future |
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Arbitrage |
The process of buying a currency low and selling it high |
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How Exchange Rates are Determined? |
A country's price inflation A country's interest rate Market Psychology |
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Vehicle Currency |
The dollar is used as a vehicle currency to facilitate the change of other currencies |
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Reserve Currency |
2 |
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The Bandwagon Effect |
When expectations by traders turn into self-fulfilling prophecies.
Example: The country focus on the1997 fall of the Korean Won |
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Purchasing Power Parity (PPP) |
Argues that given relatively efficient markets, the price of a basket of goods should be roughly equivalent in each country. |
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Freely Convertible Currency |
Both residents and non-residents are allowed to purchase an unlimited amount of foreign currency with the domestic currency |
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Externally Convertible Currency |
Only non-residents can convert their domestic currency into foreign currency without limitations. |
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Non-Convertible Currency |
Neither residents or non-residents can convert their domestic currency into foreign currency. |
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Exchange Rate Systems |
1 |
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Fundamental Analysis |
1 |
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Foreign Direct Investment |
When a firm invests directly in new facilities to produce/market in a foreign country |
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Types of Foreign Direct Investments |
1. Greenfield Investments (Establishing a wholly new operation) 2. Mergers and Acquisitions |
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Mergers and Acquisitions |
Purchase or partnership with existing firms within the country |
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Greenfield Investments |
Establishing a wholly new operation in a foreign country |
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The Flow of FDI |
the amount of FDI undertaken over a given time period |
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The stock of FDI |
the total accumulated value of foreign owned assets at a given time |
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Why Choose FDI? |
Exporting Licensing Internalization Theory |
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Internalization Theory (Market Imperfections Theory) |
Suggests that licensing has 3 major drawbacks compared to FDI:
firm could give valuable technical info to a foreign competitor
Doesn't give the firm control over manufacturing, marketing and strategy
the firm's competitive advantage may be based on its management, marketing and manufacturing |