Chapter 06

Politicaland Trade Forces

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Why Firms are Nationalized1. Extract money: government suspects hidden

profits2. Profitability: government seeks to increase

firm’s efficiency and profits3. Ideology 4. Job preservation: government saves jobs by

saving dying industries 5. Control follows money: subsidized firms often

targets of nationalization6. Happenstance: nationalization of German firms

after World War II

1. Extract money: government suspects hidden profits

2. Profitability: government seeks to increase firm’s efficiency and profits

3. Ideology 4. Job preservation: government saves jobs by

saving dying industries 5. Control follows money: subsidized firms often

targets of nationalization6. Happenstance: nationalization of German firms

after World War II

LO1

6-2

Unfair Competition?

Government-owned companies can:1. cut prices unfairly – don’t have to make profits2. access cheaper financing3. access government contracts4. receive export assistance 5. hold down wages with government assistance6. receive government subsidies

Government-owned companies can:1. cut prices unfairly – don’t have to make profits2. access cheaper financing3. access government contracts4. receive export assistance 5. hold down wages with government assistance6. receive government subsidies

LO1

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Privatization• Transfer of public sector assets to the

private sector

• Transfer of management of state activities through contracts & leases

• Contracting of activities previously conducted by the state

• Transfer of public sector assets to the private sector

• Transfer of management of state activities through contracts & leases

• Contracting of activities previously conducted by the state

LO1

6-4

Terrorism• Unlawful acts of

violence for a variety of reasons:– Ransom– Overthrow government– Release of imprisoned

colleagues– Revenge– Punish religious

nonbelievers

• Unlawful acts of violence for a variety of reasons:– Ransom– Overthrow government– Release of imprisoned

colleagues– Revenge– Punish religious

nonbelievers

• Situations:– Kidnapping for ransom– Paying ransom

becomes counterproductive

– Countermeasures by industry

– Chemical and biological terrorism

• Situations:– Kidnapping for ransom– Paying ransom

becomes counterproductive

– Countermeasures by industry

– Chemical and biological terrorism

LO2

6-5

Government Stability• Stability:

Characteristic of a government’s ability to maintain itself in power and keep fiscal, monetary, and political policies predictable

• Stability:Characteristic of a government’s ability

to maintain itself in power and keep fiscal, monetary, and political policies predictable

• Instability:Characteristic of a government’s inability to maintain power, becomes unpredictable

• Instability:Characteristic of a government’s inability to maintain power, becomes unpredictable

LO3

6-6

Country Risk Assessment (CRA)

• An evaluation carried out by a bank or business that assesses a country’s economic situation and policies to determine how much risk exists of losing an investment

• An evaluation carried out by a bank or business that assesses a country’s economic situation and policies to determine how much risk exists of losing an investment

LO4

6-7

Types of Country Risks• Political:

– Wars– Revolutions– Coups– New

governments hostile to private or foreign-owned business

• Political:– Wars– Revolutions– Coups– New

governments hostile to private or foreign-owned business

• Economic/ Financial:– BOP Deficits– High

Inflation– Low Labor

Productivity– Militant

Labor Unions

• Economic/ Financial:– BOP Deficits– High

Inflation– Low Labor

Productivity– Militant

Labor Unions

• Legal related:– Taxes– Currency

Conversion– Tariffs – Quotas– Labor

Permits– Fair Trial

• Legal related:– Taxes– Currency

Conversion– Tariffs – Quotas– Labor

Permits– Fair Trial

LO4

6-8

Trade Restrictions• Arguments for include:

– National Defense– Sanctions to Punish Offending Nations– Protect Infant (or Dying) Industry– Protect Domestic Jobs from Cheap Foreign Labor– Scientific Tariff or Fair Competition– Retaliation– Dumping– Subsidies

• Arguments for include:– National Defense– Sanctions to Punish Offending Nations– Protect Infant (or Dying) Industry– Protect Domestic Jobs from Cheap Foreign Labor– Scientific Tariff or Fair Competition– Retaliation– Dumping– Subsidies

LO5 The details are on

pages 109 –

113 in the text.

6-9

Dumping• WTO Definition:

– Selling a product abroad for less than:

• The average cost of production in the exporting nation, or

• The market price in the exporting nation, or

• The price to third countries

• WTO Definition:– Selling a product

abroad for less than:

• The average cost of production in the exporting nation, or

• The market price in the exporting nation, or

• The price to third countries

• Predatory Dumping:– Lowering export

price to force import producer out of business, expecting to raise price when company is out of business

• Predatory Dumping:– Lowering export

price to force import producer out of business, expecting to raise price when company is out of business

LO5

6-10

New Types of Dumping• Social Dumping

– Unfair competition from lower labor costs and poor working conditions

• Environmental Dumping– Unfair competition caused by lax environmental standards

• Financial Services Dumping– Unfair competition caused by low requirements for bank

capital-asset ratios• Cultural Dumping

– Unfair competition caused by cultural barriers aiding local firms

• Tax Dumping– Unfair competition cause by different corporate tax rates or

special breaks

• Social Dumping– Unfair competition from lower labor costs and poor working

conditions• Environmental Dumping

– Unfair competition caused by lax environmental standards• Financial Services Dumping

– Unfair competition caused by low requirements for bank capital-asset ratios

• Cultural Dumping– Unfair competition caused by cultural barriers aiding local

firms• Tax Dumping

– Unfair competition cause by different corporate tax rates or special breaks

LO5

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Tariff Barriers• Taxes on imports to raise their price to reduce

competition for local producers or to stimulate local production.

• Taxes on imports to raise their price to reduce competition for local producers or to stimulate local production.

• Official Prices:– guarantees that a minimum import duty is paid

• Variable Levy:– import duty set at the difference world-market prices and

government-supported local prices • Lower Duty for More Local Input

– Lower duty on goods requiring local assembly, repackaging, etc.

• Official Prices:– guarantees that a minimum import duty is paid

• Variable Levy:– import duty set at the difference world-market prices and

government-supported local prices • Lower Duty for More Local Input

– Lower duty on goods requiring local assembly, repackaging, etc.

LO5

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Nontariff Barriers (NTBs)• All forms of

discrimination against imports other than import duties

• All forms of discrimination against imports other than import duties

• Quotas:– Absolute quota– Global quota– Allocated quota

• Voluntary Export Restraints (VERs)

• Orderly Marketing Arrangements

• Nonquantitative Nontariff Barriers

• Quotas:– Absolute quota– Global quota– Allocated quota

• Voluntary Export Restraints (VERs)

• Orderly Marketing Arrangements

• Nonquantitative Nontariff Barriers

LO5

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Quantitative NTBs• Absolute Quota

– Once a specific quantity has been imported, additional imports are prohibited for the rest of the period (usually 1 year)

• Global Quota– A total import quantity is

fixed regardless of source

• Allocated Quota– Importing government

assigns quantities to specific countries

• Absolute Quota– Once a specific quantity

has been imported, additional imports are prohibited for the rest of the period (usually 1 year)

• Global Quota– A total import quantity is

fixed regardless of source

• Allocated Quota– Importing government

assigns quantities to specific countries

• Voluntary Export Restraints (VERs)– Export quotas imposed

by the exporting nation

• Orderly Marketing Arrangements– Formal agreements

between importing & exporting countries stipulating quotas for each country

• Voluntary Export Restraints (VERs)– Export quotas imposed

by the exporting nation

• Orderly Marketing Arrangements– Formal agreements

between importing & exporting countries stipulating quotas for each country

LO5

6-14

Nonquantitative Nontariff Barriers• Direct government participation in trade:

– Government Subsidy – to protect and support targeted industries (agriculture)

– Government Procurement Policies – restrict purchases of imported goods by government agencies

– Local Content – domestic manufacturing using local materials & labor (Buy America Act)

• Customs and other administrative procedures:– Government policies/procedures that favor exports or

discriminate against imports

• Standards:– Protect a nation’s citizens’ health and safety, but can be

complex and discriminatory

• Direct government participation in trade:– Government Subsidy – to protect and support targeted

industries (agriculture)– Government Procurement Policies – restrict purchases of

imported goods by government agencies– Local Content – domestic manufacturing using local

materials & labor (Buy America Act)

• Customs and other administrative procedures:– Government policies/procedures that favor exports or

discriminate against imports

• Standards:– Protect a nation’s citizens’ health and safety, but can be

complex and discriminatory

LO5

6-15