MGRECON401

Economics of International Business and Multinationals

LECTURE 3Multinationals and

Global Trade Agreements

5-2

Lecture Focus

What are the instruments and effects of trade policy?

What is the history of trade agreements?

What are the implications of trade agreements for multinationals?

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The 7 Instruments of Trade Policy

AntidumpingDuties

LocalContent

Requirements

Tariffs

VoluntaryExports

Restraints

Subsidies

AdministrativePoliciesImport

Quotas

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Tariffs

SpecificFixed charge

per unit

Ad ValoremCharge is

a proportion of the goods value

Oldest form of protection.

Tariffs

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Tariffs

5-6

Tariffs and Florida OJFlorida: 40 percent of the World OJ market.

Brazil: 45 percent of the World OJ market. Brazil controls World market except the US.

29.5 cent per gallon tariff on Brazilian OJ concentrate.

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Subsidies

Government payment to a

domestic producerCash Grants

Tax Breaks

Low InterestLoans

GovernmentEquity

Participation

5-8

Agricultural Subsidies

Very common in North America, Europe and JapanKeeps inefficient farmers in business.Encourages production of products that can be grown more cheaply elsewhere.Reduces world trade.Perpetuates global poverty.

5-9

Trends in Agricultural Development

5-10

EU Sugar Subsidies

Radical French Farmer Jose Boveis Arrested by French Gendarmes in the South Western Village of Solomiac

                                                                             

            

5-11

EU Sugar Subsidies

5-12

US Cotton Subsidies – Impact on Mali

5-13

Import Quotas and Voluntary Export Restraints

Direct restrictionon the quantity of a

good that canbe imported into

a country.

Import Quotas

Quota on trade imposedby the exporting

country at the requestof the importing

country’s government.

VERs

Hurtsconsumers

Raises domestic prices on imported

goods (and possibly

imported good)

Help

s

pro

du

cers

Quotarent

5-14

5-15

The MultiFibre AgreementThe MultiFibre Agreement (MFA) sets quotas limiting the amount of imports of textiles and clothing from “developing” to “developed” countries.Will be phased out during the ten year period 1995-2005.Will have major implications for exports from China and India.Will also have major implications for countries, such as Sri Lanka, Indonesia, and Mauritius, who would not otherwise have developed a textile industry.

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Dumping & Antidumping Policies

Dumping = Selling goods into a foreign market below production costs, or selling below “fair market value.”

Antidumping = policies enacted to punish foreign firms and protect local industry from “unfair” trading practices.

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Domestic Demand DDOM

Foreign Demand DFOR

MR = PFOR

Profit Max at QMONOPOLY

MC = PFOR

Domestic Sales QDOM

Exports QMONOPOLY- QDOM

5-18

U.S. Vietnam Catfish Dispute

5-19

Development of the World Trading System

Intellectual arguments for free trade: Adam Smith and David Ricardo.

Free trade as government policy: Britain’s (1846) repeal of the Corn Laws.

Britain continued free trade policy.Fear of trade war.

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World War I to World War II1918 - 1939

Great DepressionUS stock market collapseSmoot-Hawley Act (1930)

US had positive trade balance with worldAct imposes tariffs to protect U.S. firms.Foreign response was to impose own barriersUS exports tumbled

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General Agreement on Tariffs and Trade (GATT)

WWII allies want international organization in trade arena similar to UN in political arena.

GATT proposed by US in 1947.19 original members grew to 120 nations by the time it was superceded by the WTO.

GATT members agree not to raise tariffs above negotiated rates.

5-22

Average Reduction in US Tariff Rates 1947 - 85

0

20

40

60

80

100

120

Pre-Geneva

Geneva

Annecy

Torquay

Geneva

Dillon

Kennedy

Tokyo

IndexPre-GenevaTariff = 100

GATT Negotiating Rounds

5-23

WTO

Created by Uruguay round of GATT.141 members and 28 candidates.Between 1995 and 2000, 213 disputes brought before the WTO.Significant victories:

TelecommunicationsFinancial ServicesIntellectual Property Protection

5-24

Regional Trade Agreements

EU: Complete elimination of restrictions on goods flows, capital flows, and labor flows within Europe.NAFTA: Free trade among Canada, US, Mexico.Andean Pact: Bolivia, Colombia, Ecuador, Peru, Venezuela.

Mercosur: Argentina, Brazil, Paraguay, Uruguay.

Free Trade Area of the Americas (FTAA): 34 nations from Alaska to Argentina, planned start by 2005.

ASEAN: Brunei, Indonesia, Laos, Malaysia, the Philippines, Myanmar, Singapore, Thailand and Vietnam.APEC: US, Canada, Japan, China, many in S.E. Asia, Australia.African trade blocs: 9 different trade blocs.

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5-27

ASEAN

5-28

5-29

5-30

Regional Economic Integrationand Firm Strategy

What does NAFTA (or EU, etc.) mean for a firm’s strategy?A larger market raises profits due to economies of scale.Larger profits encourages new entrants; provides an incentive for firms to erect entry barriers:

Introduce new varietyExpand capacity

5-31

Toyota Motor Manufacturing USA

• What are the political motivations behind Toyota moving production facilities from Japan to the US?

• What are the economic motivations behind Toyota moving production facilities from Japan to the US?

• What is the source of Toyota’s comparative advantage in producing automobiles?

• Why is it so hard for another company to fully replicate the Toyota Production System (TPS)?

• In what sense was the creation of TPS a response to some primitive characteristics of automobile production and to a perceived weakness of U.S. automotive companies and addressing these characteristics?