MGRECON401 Economics of International Business and Multinationals LECTURE 3

1. MGRECON401Economics of International Business and MultinationalsLECTURE 3 Multinationals and Global Trade Agreements

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?

3. Subsidies Tariffs Local Content Requirements Voluntary Exports Restraints Antidumping Duties Administrative Policies Import Quotas The 7 Instruments of Trade Policy

4. Specific Fixed charge per unit Tariffs Ad Valorem Charge is a proportion of the goods value Oldest form of protection. Tariffs

5. Tariffs

6. Tariffs and Florida OJ • Florida: 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.

7. Tax Breaks Government payment to a domestic producer Low Interest Loans Cash Grants Government Equity Participation Subsidies

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

9. Trends in Agricultural Development

10. EU Sugar Subsidies Radical French Farmer Jose Bove is Arrested by French Gendarmes in the South Western Village of Solomiac

11. EU Sugar Subsidies

12. US Cotton Subsidies – Impact on Mali

13. Direct restriction on the quantity of a good that can be imported into a country. Import Quotas Hurts consumers Raises domestic prices on imported goods (and possibly imported good) Helps producers Quota on trade imposed by the exporting country at the request of the importing country’s government. VERs Quota rent Import Quotas and Voluntary Export Restraints

15. The MultiFibre Agreement • The 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.

16. 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.

17. Domestic Demand DDOM • Foreign Demand DFOR • MR = PFOR • Profit Max at QMONOPOLY • MC = PFOR • Domestic Sales QDOM • Exports QMONOPOLY- QDOM

18. U.S. Vietnam Catfish Dispute

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.

20. World War I to World War II1918 - 1939 • Great Depression • US stock market collapse • Smoot-Hawley Act (1930) • US had positive trade balance with world • Act imposes tariffs to protect U.S. firms. • Foreign response was to impose own barriers • US exports tumbled

21. 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.

22. Average Reduction in US Tariff Rates 1947 - 85 Index Pre-Geneva Tariff = 100 GATT Negotiating Rounds

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: • Telecommunications • Financial Services • Intellectual Property Protection

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.

27. ASEAN

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 variety • Expand capacity

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?