Chapter 7 Notes/Key Concepts

 With free trade and less government intervention, country economy normally
increases. But some industries may be negatively affected. Generally positive
impacts outweigh the negative.
 Government tries to protect homegrown industries/business which restrict
free trade
7.1 Nature of Government Intervention
 Protectionism – Government introduces tariffs, quotas, and administrative
rules to protect domestic industries from foreign competition.
 Protectionism policy can lead to price increases and reduce the choices
available to the consumer due to restriction of what is imported
 Government impose tariffs & non-tariffs barriers for four main reasons:
o Generate revenue
o Ensure citizen safety, security, and welfare (i.e. prevent import of
harmful foods)
o Pursue economic, political or social objectives (i.e. promote job growth
or economic development)
o Serve company or industry (i.e. stimulate development of homegrown
industries)
 Defensive trade barriers
o Protect nation’s economy – Advanced economies can’t compete with
low-cost labor in developing countries
o Protect infant industry – Allows younger firms to gain market share in
home country
o Protect national security – Government may restrict or block trade of
product critical to national defense
o Protect culture identity – Restrict trade that is a threat to national
assets (i.e. Japan firm trying to purchase Seattle Mariners stadium;
baseball considered national heritage.)
 Offensive Trade Barriers
o National Strategic Priorities – Encourage development of industries that
boost economic development
o Increase employment – Import barriers to protect jobs in certain
industries (i.e. China requires companies to enter their market via joint
ventures).
7.2 Instruments of Government Intervention
 Traditional forms of protectionism are tariffs and non-tariffs trade barriers
o Tariffs – Tax imposed on imported products. Increase cost to
importer/exporter and buyer; can discourage product import. Generate
government revenue
o Quota – Quantitative restriction on product for specific time. Early
importer gain monopoly power, and ability to charge higher price. Late
importers miss out, can drive up price of product
 o Local Content Requirements – Requires firm to include certain % of
local material in production of service/product. Limits firms sourcing
options, may result in high prices
o Regulation and Technical Standards – Safety health or technical
regulation and labeling requirements. May reduce quantity imported,
increase price to importer/buyer.
o Administrative & Bureaucratic Procedures – Complex procedures or
requirements on importers or investors that hinder trade/investment.
Slows import/investment process
o FDI & Ownership Restriction – Limits the ability of foreign firms
ownership or invest in firms.
o Subsidy – Government grants subsidy to firm or group of firms to
ensure their survival. Results in increase competitive advantage for
grantee while diminishing competitive advantage of those who did not
receive subsidy.
 Currency Control – Restricts the out flow (and sometimes inflow) of widely
used currencies such as dollars, euros, and yen. Can help conserve valuable
currency. Some nations offer dual exchange rates; better rate for exporters to
encourage exporting but unfavorable rate for importers.
 WTO prohibit subsidies if it can be proven that they hinder free trade
 Government can counter subsidies by issuing countervailing duties – tariffs
on product imported into a country to offset subsidiary given to producer or
exporter in exporting country.
 Government support domestic industries that restrict purchasing to only
home-country suppliers.
7.3 Evolution & Consequence of Government Intervention
 Domestic firms that enjoy government subsidies don’t becoming
competitive in world. Living standards remain low.
 Normal trade relations in which each nation agreed to extend tariff
reduction covered in a trade agreement with a trading partner to all other
countries.
 Ease of doing business index ranks 189 countries for effect of government
intervention; high ease of doing business = good location to start
business.
7.4 How Firm Response to Government Intervention
 Strategies for Managers
o Research to gather knowledge and intelligence – Scan business
environment to identify government interventions, and plan market
entry strategies. Review ROI accounting trade and investment
barriers.
o Choose Appropriate Entry Strategy – Tariffs are associated with an
imported product. Investment barriers associated with FDI. If tariffs are
high consider FDI.
 o Take advantage of of Foreign Trade Zone – Allow firms to import
product in to FTZ and not pay duty until product leaves FTZ.
o Seek Favorable Custom Classification for Export Product – Have
exported product classified in the appropriate harmonized product
code.
o Take Advantage of Investment Incentives – Obtaining economic
development incentives from host countries can help reduce the cost
of trade.
7.5 Regional Integration and Economic Blocs
 Regional Economic Integration – when two or more countries with geographic
region form an alliance to reduce trade barriers, such as EU.
o Easier to do business within bloc
o Regional Economic Integration Bloc – Geographic area that consists of
two or more countries that agree to pursue economic integration by
reducing trade barriers.
 Can include labor in advance stages
 Advantage of economic bloc is that it is easier to reach agreement on trade
with a handful of countries versus one.
 Levels of Regional Integration
o Free Trade Area – Member countries eliminate trade barriers; individual
countries maintain independent trade policy outside of member
countries. Example: NAFTA
o Custom Union – Similar to free trade area except external trade policies
are harmonized and adopt common tariffs and nontariff barriers on
imports from non-member countries. Example: MERCOSUR
o Common Market – Similar to custom union but also, product, services,
and factors of production (i.e. capital, labor, and tech) are free to move
among member nations. Example: EU
o Economic and Monetary Union – Similar to Common Market but also
includes common fiscal and monetary policies. Establish fixed
exchange rate, free movement of capital, can adopt similar tax rate
(extreme end). Example: EU’s 19 nations are a close example.
o Political Union

7.7 Advantage and Implication of Regional Integration

 Four main advantages of integrations:
o Expand market size – Increase in scale of marketplace for firm inside
bloc
o Achieve Scale Economies & Enhance Productivity – Provides firms with
greater concentration and increase efficiency. Internationalization
inside the bloc helps firm compete outside the bloc. As efficiency
increases, can reduce cost for consumers.
o Attract direct investment from outside bloc – Firms prefer countries
part of a bloc because access to one country in bloc gives access to all
countries.
 o Acquire stronger defensive & political posture – Integration help
strength member-countries relative to other nations. Countries are
more powerful when they cooperate than when they operate alone.
 Implication of Bloc
o Internationalization inside the bloc – Elimination of trade barriers can
encourage member-companies to internationalize into neighboring
countries within the bloc
o Restructuring Operation – Firms began to view bloc as a unified whole.
Manager develop strategies for the whole bloc and not individual
countries.
o Regional marketing and products – Firms sell standardized product to
all countries in bloc using similar marketing strategies
o