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You can find the Airbus and Boeing case on pp. 84-89. The FOUR (4) case questions are on pg. 89.

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Page 1 of 8 https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=190&to=191 9/25/2017 Page 2 of 8 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=190&to=191 9/25/2017 Page 3 of 8 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. Chapter 8 Government Intervention in International Business https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=190&to=191 9/25/2017 Page 4 of 8 Learning Objectives In this chapter, you will learn about the following: 1. The nature of government intervention 2. Rationale for government intervention 3. Instruments of government intervention 4. Consequences of government intervention 5. Evolution of government intervention 6. How firms can respond to government intervention MyManagementLab® Improve Your Grade! Over 10 million students improved their results using the Pearson MyLabs. Visit mymanagementlab.com for simulations, tutorials, and end-of-chapter problems. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=190&to=191 9/25/2017 Page 5 of 8 Source: Luciano Mortula/Shutterstock https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=190&to=191 9/25/2017 Page 6 of 8 India’s Transition to a Liberal Economy India is a study in contrasts. It is the world’s leading emerging economy in information technology and e-business. However, India is awash in trade barriers, business regulations, and a powerful bureaucracy. Not only does the Indian federal government impose countless regulations, standards, and administrative hurdles on businesses, each of India’s twenty-eight states also imposes its own local bureaucracy and red tape. Import taxes and controls on foreign investment are substantial, with tariffs averaging over 15 percent on many products, compared to less than 4 percent in Europe, Japan, and the United States. Hundreds of commodities, from cement to household appliances, can be imported only after receiving government approval. Licensing fees, testing procedures, and other hurdles can be costly to importers. Since the early 1980s, however, India’s government has been liberalizing the nation’s regulatory regime. The government has abolished many import licenses and reduced tariffs substantially. It is freeing the economy from state control by selling many state enterprises to the private sector and to foreign investors. India has always had a huge sector of small retailers. The country is home to 10 million “mom-and-pop” shops scattered across 500,000 cities and villages. The arrival of big-box retailers triggered a storm of controversy, sparking widespread protests from small merchants. Although Walmart (www.walmart.com) opened its first Indian branch in 2009, the store cannot sell directly to consumers and is restricted to wholesaling. In 2012, the Indian government yielded to political pressure and denied Walmart, Carrefour, and other foreign retailers the opportunity to participate in the country’s huge retailing sector. In a joint venture with the Indian firm Bharti Enterprises, Walmart had planned to open numerous stores nationwide. India’s economic revolution is unleashing the country’s entrepreneurial potential. The government is establishing Special Economic Zones (SEZs), virtual foreign territories that offer foreign firms the benefits of India’s low-cost, high-skilled labor. In a typical SEZ, firms are exempt from https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=190&to=191 9/25/2017 Page 7 of 8 trade barriers, sales and income taxes, licensing requirements, FDI restrictions, and customs clearance procedures. Mahindra City is home https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=190&to=191 9/25/2017 Page 8 of 8 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=190&to=191 9/25/2017 Page 1 of 10 https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=192&to=193 9/25/2017 Page 2 of 10 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. to an 840-acre SEZ that boasts a $277 million software development center built by Infosys Technologies, India’s leading IT firm. In Europe and North America, the outsourcing of jobs to India has generated calls for protectionism—trade barriers and defensive measures intended to minimize the export of jobs abroad. U.S. and European trade unions host numerous Web sites that denounce outsourcing and offshoring. Trade barriers and government bureaucracy in India, as well as calls for protectionism in Europe and North America, exemplify the complex world of government intervention. Sources: Sy Banerjee, Thomas Hemphill, and Mark Perry, “India Doors To Wal-Mart Shut By Crony Capitalism,” Investors Business Daily, December 28, 2011, p. A13; E. Bellman, “Wal-Mart Exports Big-Box Concept to India,” Wall Street Journal, May 29, 2009, p. A4; J. Lamont, “Strike-hit India Eyes Fuel Price Cuts,” Financial Times, January 8, 2009, retrieved from http://www.ft.com; Central Intelligence Agency, World Factbook, 2012, retrieved from http://www.cia.gov/cia/publications/factbook; “Survey: A World of Opportunity,” Economist, November 13, 2004, p. 15; Oxford Analytica Daily Brief Service, “India: Civil Service Flaws Obstruct Development,” January 28, 2010, p. 1; United States Trade Representative, National Trade Estimate Report on Foreign Trade Barriers: India, 2012, retrieved from http://www.ustr.gov. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=192&to=193 9/25/2017 Page 3 of 10 Governments intervene in trade and investment to achieve political, social, or economic objectives. They often create trade barriers that benefit specific interest groups, such as domestic firms, industries, and labor unions. A key rationale is to create jobs by protecting industries from foreign competition. Governments also intervene to support homegrown industries or firms. Government intervention is at odds with free trade, the unrestricted flow of products, services, and capital across national borders. Market liberalization and free trade are best for supporting economic growth and national living standards.1 One study of more than one hundred countries in the 50 years after 1945 found a strong association between market openness—that is, unimpeded free trade—and economic growth. Countries with an open economy enjoyed average annual per-capita GDP growth of 4.49 percent, while relatively closed countries—those with less free trade—grew at only 0.69 percent per year.2 https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=192&to=193 9/25/2017 Page 4 of 10 EXHIBIT 8.1 Benefits of Free Trade: Outward Shift of Production Possibilities Frontier for Products and Services Exhibit 8.1 shows how increasing free trade translates into an expanded production possibilities frontier, moving from PPF1 to PPF2. Let’s use Poland as an example. Over time, Poland lowered trade barriers and participated more freely in international trade, adopting the principle of comparative advantage.3 As Poland expanded its free trade, the country focused on producing and exporting goods it was best suited to produce, and importing those goods that other nations produce more efficiently. The end result was that Poland’s https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=192&to=193 9/25/2017 Page 5 of 10 production possibilities frontier for products and services shifted outward (Exhibit 8.1 ). Due to growing free trade, Poland began https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=192&to=193 9/25/2017 Page 6 of 10 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. to use its resources more efficiently, generating more overall profits for firms and workers, and, in turn, acquiring more resources with which to import the goods that Polish consumers desire. EXHIBIT 8.2 Government Intervention as a Component of Country Risk As it gradually embraced free trade, Poland’s average annual income rose, from about $1,625 in 1990 to more than $14,000 in 2012. These gains did not occur without some turmoil—unemployment in Poland increased in some industries as jobs producing certain goods shifted to other countries better suited to make those goods. However, free trade’s positive effects substantially outweighed the negative https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=192&to=193 9/25/2017 Page 7 of 10 ones.4 Free trade provides enormous benefits for economic growth and the welfare of nations worldwide. In reality, however, governments intervene in business and the international marketplace in ways that obstruct the free flow of trade and investment. Intervention alters the competitive position of companies and industries and the status of citizens. As highlighted in Exhibit 8.2 , intervention is an important dimension of country risk. In this chapter, we examine the nature, rationale, and consequences of government intervention. We also describe what companies can do to enhance international performance in the face of government intervention worldwide. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=192&to=193 9/25/2017 Page 8 of 10 The Nature of Government Intervention Protectionism National economic policies designed to restrict free trade and protect domestic industries from foreign competition. Tariff A tax imposed on imported products, effectively increasing the cost of acquisition for the customer. Nontariff trade barrier A government policy, regulation, or procedure that impedes trade through means other than explicit tariffs. Customs Checkpoints at the ports of entry in each country where government officials inspect imported products and levy tariffs. Government intervention is often motivated by protectionism , which refers to national economic policies designed to restrict free trade and protect domestic industries from foreign competition. Protectionism is typically manifested by tariffs, nontariff barriers such as quotas, and arbitrary administrative rules designed to discourage imports. A tariff (also known as a duty) is a tax imposed by a government on imported products, effectively increasing the cost of acquisition for the customer. A nontariff trade barrier is a government policy, regulation, or procedure that impedes trade through means other than explicit tariffs. Trade barriers are enforced as https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=192&to=193 9/25/2017 Page 9 of 10 products pass through customs , the checkpoints at the ports of entry in each country where government officials https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=192&to=193 9/25/2017 Page 10 of 10 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=192&to=193 9/25/2017 Page 1 of 9 https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=194&to=195 9/25/2017 Page 2 of 9 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. inspect imported products and levy tariffs. An often-used form of nontariff trade barrier is a quota , a quantitative restriction placed on imports of a specific product over a specified period of time. Government intervention may also target FDI flows via investment barriers that restrict the operations of foreign firms. Quota A quantitative restriction placed on imports of a specific product over a specified period of time. Government intervention affects the normal operation of economic activity in a nation by hindering or helping the ability of its indigenous firms to compete internationally. Often companies, labor unions, and other special interest groups convince governments to adopt policies that benefit them. For example, in the 2000s, the Bush administration imposed tariffs on the import of foreign steel into the United States. The rationale was to give the U.S. steel industry time to restructure and revive itself following years of decline due to tough competition from foreign steel manufacturers. The action may have saved hundreds of U.S. jobs. On the downside, however, the tariffs also increased production costs for firms that use steel, such as Ford, Whirlpool, and General Electric. Higher material costs made these firms less competitive and reduced prospects for selling their products in world markets.5 The steel tariffs were removed within two years, but in the process of attempting to do good, the government also did some harm. Another example of intervention was the U.S. government’s response to the growing threat of Japanese car imports in the 1980s, when it established “voluntary export restraints” on the number of Japanese vehicles that could be imported into the United States. This move helped insulate the U.S. auto industry for several years. In a protected environment, however, Detroit https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=194&to=195 9/25/2017 Page 3 of 9 automakers had less incentive to improve quality, design, and overall product appeal. Government intervention motivated by protectionism has been one of several factors that, over time, weakened Detroit’s ability to compete in the global auto industry. Protectionist policies may also lead to price inflation because tariffs can restrict the supply of a particular product. Tariffs may also reduce the choices available to buyers by restricting the variety of products available for sale. These examples illustrate that government intervention may lead to adverse unintended consequences—unfavorable outcomes of policies or laws. In a complex world, legislators and policymakers cannot foresee all possible outcomes. The problem of unintended consequences suggests that government intervention should be planned and implemented with great care. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=194&to=195 9/25/2017 Page 4 of 9 Rationale for Government Intervention Why does a government intervene in trade and investment activities? There are four main motives. Tariffs and other forms of intervention allow governments to: 1. Generate revenue. For example, the “Hamilton Tariff,” enacted July 4, 1789, was the second statute passed by the newly founded United States, providing revenue for the federal government. Today, Ghana and Sierra Leone generate more than 25 percent of their total government revenue from tariffs. 2. Ensure citizen safety, security, and welfare. For example, governments pass laws to prevent importation of harmful products such as contaminated food. 3. Pursue economic, political, or social objectives. In most cases, tariffs and similar forms of intervention are intended to promote job growth and economic development. 4. Serve company and industrial interests. Governments may devise regulations to stimulate development of home-grown industries. Special interest groups often advocate trade and investment barriers that protect their interests. Consider the recent trade dispute between Mexico and the United States over Mexican cement. The U.S. government imposed duties of about $50 per ton on the import of Mexican cement after U.S. cement makers lobbied Congress. The stakes were huge, as Mexican imports can reach 10 percent of U.S. domestic cement consumption. Mexico proposed substituting import quotas in place of the tariffs. The two governments have negotiated for years to resolve the dispute.6 https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=194&to=195 9/25/2017 Page 5 of 9 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. Trade and investment barriers can be considered either defensive or offensive. Governments impose defensive barriers to safeguard industries, workers, and special interest groups and to promote national security. Governments impose offensive barriers to pursue strategic or public policy objectives, such as increasing employment or generating tax revenues. Let’s review the specific rationale for government intervention. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=194&to=195 9/25/2017 Page 6 of 9 Defensive Rationale Four major defensive motives are particularly relevant: protection of the nation’s economy, protection of an infant industry, national security, and national culture and identity. Protection of the National Economy Proponents argue that firms in advanced economies cannot compete with those in developing countries that employ low-cost labor. In the opening story, labor activists called for government intervention to prevent the outsourcing of jobs from Europe and North America to India. Protectionists demand trade barriers to curtail the import of low-priced products, fearing that advancedeconomy manufacturers will be undersold, wages will fall, and home-country jobs will be lost. In response, critics counter that protectionism is at odds with the theory of comparative advantage, according to which nations should engage in more international trade, not less. Trade barriers interfere with country-specific specialization of labor. When countries specialize in the products they can produce best and then trade for the rest, they perform better in the long run, delivering superior living standards to their citizens. Critics also charge that blocking imports reduces the availability and increases the cost of products sold in the home market. Industries cannot access all the input products they need. Finally, protectionism can trigger retaliation, resulting in foreign governments imposing their own trade barriers, which reduces sales prospects for exporters. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=194&to=195 9/25/2017 Page 7 of 9 Protection of an Infant Industry In an emerging industry, companies are often inexperienced and lack the latest technologies and know-how. They may also lack the scale typical of larger competitors in established industries abroad. An infant industry may need temporary protection from foreign competitors. Governments can impose temporary trade barriers on foreign imports to ensure that young firms gain a large share of the domestic market. Protecting infant industries has allowed some countries to develop a modern industrial sector. For example, government intervention allowed Japan and South Korea to become dominant players in the global automobile and consumer electronics industries. Once in place, such protection may be hard to remove. Industry owners and workers tend to lobby to preserve government protection. Infant industries in many countries (especially in Latin America, South Asia, and Eastern Europe) have shown a tendency to remain dependent on government protection for many years. Protected companies may become inefficient, costing the nation’s citizens higher taxes and higher prices for the products produced by the protected industry.7 https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=194&to=195 9/25/2017 Page 8 of 9 National Security Countries impose trade restrictions on products viewed as critical to national defense and security, such as military technology and computers that help maintain domestic production in security-related products. For example, Russia blocked a bid by German engineering giant Siemens to purchase the Russian turbine manufacturer OAO Power Machines, on grounds of national security. The Russian government has strict legislation that limits foreign investment in sectors considered vital to Russia’s national interests.8 Countries may also impose export controls , government measures intended to manage or prevent the export of certain products or trade with certain countries. For example, many countries prohibit exports of plutonium to North Korea because it can be used to make nuclear weapons. The United States generally blocks exports of nuclear and military technology to countries it deems state sponsors of terrorism, such as Iran, Libya, and Syria. Export control A government measure intended to manage or prevent the export of certain products or trade with certain countries. Ethical Connections North Korea is a dictatorship with a poor record of human rights and one of the world’s lowest living standards. Australia, Canada, the European Union, and the United States have long imposed trade embargos against North Korea, due to national security concerns. International trade is known to improve economic conditions in poor countries, and foreign government sanctions are making North Korea’s terrible poverty even worse. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=194&to=195 9/25/2017 Page 9 of 9 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. National Culture and Identity https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=194&to=195 9/25/2017 Page 1 of 7 https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=196&to=197 9/25/2017 Page 2 of 7 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. National Culture and Identity Should foreign entities, say the Japanese or the Saudis, be allowed to purchase national landmarks such as the Eiffel Tower or Rockefeller Center? In most countries, certain occupations, industries, and public assets are seen as central to national culture and identity. Governments may impose trade barriers to restrict imports of products or services seen to threaten such national assets. Switzerland has imposed trade barriers to preserve its longestablished tradition in watchmaking. In the United States, authorities opposed Japanese investors’ purchase of the Seattle Mariners baseball team, because it is viewed as part of the national heritage. France does not allow significant foreign ownership of its TV stations because of concerns about foreign influence on French culture. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=196&to=197 9/25/2017 Page 3 of 7 To safeguard its national culture, the French government prevents foreign companies from owning television and movie companies in France. Shown here is Cannes, the site of France’s popular film festival. Source: © Guillaume Tunzini/Fotolia https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=196&to=197 9/25/2017 Page 4 of 7 Offensive Rationale Offensive rationales for government intervention fall into two categories: national strategic priorities and increasing employment. National Strategic Priorities Government intervention sometimes aims to encourage the development of industries that bolster the nation’s economy. It is a proactive variation of the infant industry rationale and related to national industrial policy. Countries with many high-tech or high value-adding industries, such as information technology, pharmaceuticals, car manufacturing, or financial services, create better jobs and higher tax revenues than economies based on low valueadding industries, such as agriculture, textile manufacturing, or discount retailing. Accordingly, governments in Germany, South Korea, and numerous other countries have devised policies that promote the development of relatively desirable industries. The government may provide financing for investment in high-tech or high value-adding industries, encourage citizens to save money to ensure a steady supply of loanable funds for industrial investment, and fund public education to provide citizens the skills and flexibility they need to perform in key industries.9 Increasing Employment Governments often impose import barriers to protect employment in designated industries. Insulating domestic firms from foreign competition stimulates national output, leading to more jobs in the protected industries. The effect is usually strongest in import-intensive industries that employ much labor. For example, the Chinese government has traditionally required foreign companies to enter its huge markets through joint ventures with local Chinese firms. This policy creates jobs for Chinese workers. A joint venture between Shanghai Automotive Industry Corporation (SAIC) and Volkswagen created jobs in China. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=196&to=197 9/25/2017 Page 5 of 7 Instruments of Government Intervention Principal instruments of trade intervention and the traditional forms of protectionism are tariffs and nontariff trade barriers. Individual countries or groups of countries, such as the European Union (http://www.europa.eu), can impose these barriers. In aggregate, barriers constitute a serious impediment to cross-border business. The United Nations estimated that trade barriers alone cost developing countries more than $500 billion in lost trading opportunities with developed countries every year.10 Exhibit 8.3 highlights the most common forms of government intervention and their effects. Tariffs Some countries impose export tariffs, taxes on products exported by their own companies. For example, Russia charges a duty on its oil exports with the intention of generating government revenue and maintaining high oil stocks within Russia. The most common type of tariff, however, is the import tariff, a tax levied on imported products. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=196&to=197 9/25/2017 Page 6 of 7 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. EXHIBIT 8.3 Types and Effects of Government Intervention Source: Based on the Office of the United States Trade Representative, retrieved from http://www.ustr.gov. Import tariffs are usually ad valorem—that is, they are assessed as a percentage of the value of the imported product. Or a government may impose a specific tariff—a flat fee or fixed amount per unit of the imported product—based on weight, volume, or surface area, such as barrels of oil or square meters of fabric. A revenue tariff is intended to raise money for the government. A tariff on cigarette imports, for example, produces a steady flow of revenue. A protective tariff aims to protect domestic industries from foreign competition. A prohibitive tariff is one so high that no one can import any of the items. The amount of a tariff is determined by examining a product’s harmonized code. Products are classified under about 8,000 different unique codes in the harmonized tariff or harmonized code schedule, a standardized system used worldwide. Without this system, firms and governments might have differing opinions on product definitions and the tariffs charged. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=196&to=197 9/25/2017 Page 7 of 7 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. EXHIBIT 8.4 A Sampling of Import Tariffs, Percentages https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=196&to=197 9/25/2017 Page 1 of 7 https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=198&to=199 9/25/2017 Page 2 of 7 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. EXHIBIT 8.4 A Sampling of Import Tariffs, Percentages Source: Based on World Tariff Profiles 2011, World Trade Organization, retrieved from www.wto.org. Note: Exhibit shows the average, most favored nation applied tariff. Import tariffs can generate substantial revenue for national governments. This helps explain why they are common in developing economies. Even in advanced economies, tariffs provide a significant source of revenue for the government. The United States charges tariffs on many consumer, agricultural, and labor-intensive products. The U.S. typically collects high tariffs (often 48 percent) on imports of basic, low-quality shoes, and low tariffs (just 9 percent) on luxury shoes. Low-income shoe buyers end up paying the highest tariffs. The European Union applies tariffs of up to 191 percent on meat, 118 percent on cereals, and 106 percent on sugar and confectionary products.11 Exhibit 8.4 provides a sample of import tariffs in selected countries. Despite its reputation as a challenging market to enter, Japan maintains average tariffs for nonagricultural products at low levels. Under the North American Free Trade Agreement (NAFTA), Canada, Mexico, and the United States have eliminated nearly all tariffs on product imports from each other. However, Mexico maintains significant tariffs with the rest of the world—21.5 percent for agricultural products and 7.1 percent for nonagricultural goods. India’s tariffs are relatively high, especially in agriculture, where the average rate is 31.8 percent. India’s tariff system lacks transparency, and officially published tariff information is sometimes hard to find. China has reduced its tariffs since joining the World Trade Organization (WTO, www.wto.org) in 2001, but trade barriers remain high in some areas. In Africa, over half of all workers are employed in agriculture. Significant tariffs and other trade barriers in the advanced economies hinder imports of agricultural goods from Africa, which worsens already-severe poverty in many African countries. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=198&to=199 9/25/2017 Page 3 of 7 Because high tariffs inhibit free trade and economic growth, governments have tended to reduce them over time. This was the primary goal of the General Agreement on Tariffs and Trade (GATT; now the WTO). Countries as diverse as Chile, Hungary, Turkey, and South Korea have liberalized their previously protected markets, lowering trade barriers and subjecting themselves to greater competition from abroad. Exhibit 8.5 illustrates trends in average world tariff rates over time. Notice that developing economies have been lowering their tariff rates since the early 1980s. Continued reductions represent a major driver of market globalization. Nontariff Trade Barriers Nontariff trade barriers are government policies or measures that restrict trade without imposing a direct tax or duty. They include quotas, import licenses, local content requirements, government regulations, and administrative or bureaucratic procedures. The use of nontariff barriers has grown substantially in recent decades. Governments sometimes prefer them because they are easier to conceal from the WTO and other organizations that monitor international trade. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=198&to=199 9/25/2017 Page 4 of 7 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. EXHIBIT 8.5 Trends in Average Tariff Rates, Percentages Source: Based on The World Bank, http://www.data.worldbank.org. Quotas restrict the physical volume or value of products that firms can import into a country. In a classic type of quota, the U.S. government imposed an upper limit of roughly 2 million pounds on the total amount of sugar that can be imported into the United States each year. Sugar imports that exceed this level face a tariff of several cents per pound. The upside is that U.S. sugar producers are protected from cheaper imports, giving them a competitive edge over foreign sugar producers. The downside is that U.S. consumers and producers of certain types of products, such as Hershey’s and Coca-Cola, pay more for sugar. It also means companies that manufacture products containing sugar may save money by moving production to countries that do not impose quotas or tariffs on sugar. Governments can impose voluntary quotas, under which firms agree to limit exports of certain products. These are also known as voluntary export https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=198&to=199 9/25/2017 Page 5 of 7 restraints, or VERs. For example, import quotas in the European Union led to an impasse in which millions of Chinese-made garments piled up at ports and borders in Europe. The EU impounded the clothing because China had exceeded the voluntary import quotas it had negotiated with the EU. The action created hardship for European retailers, who had ordered their clothing stocks several months in advance.12 Governments occasionally require importing firms to obtain an import license , a formal permission to import, which restricts imports in a way that is similar to quotas. (Do not confuse import licenses with “licensing,” a strategy for entering foreign markets in which one firm allows another the right to use its intellectual property in return for a fee.) Governments sell import licenses to companies on a competitive basis or grant the licenses on a first-come, firstserved basis. This tends to discriminate against smaller firms, which typically lack the resources to purchase them. Obtaining a license can be costly and complicated. In some countries, importers must pay hefty fees to government authorities. In other countries, they must deal with bureaucratic red tape. In Russia a complex web of licensing requirements limits imports of alcoholic beverages. Until the 1990s, the government of India imposed the “license raj,” an especially elaborate system of licenses that regulated establishing and running businesses in the country. Import license Government authorization granted to a firm for importing a product. Local content requirements require manufacturers to include a minimum of local value added—that is, production that takes place locally. Local content requirements are usually imposed in countries that are members of an economic bloc, such as the EU and NAFTA. The so-called rules of origin requirement specifies that a certain proportion of products and supplies, or of intermediate goods used in local manufacturing, must be produced within the bloc. For a car manufacturer, the tires or windshields it purchases from another firm are intermediate goods. When the firm does not meet this https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=198&to=199 9/25/2017 Page 6 of 7 requirement, the products become subject to trade barriers that member governments normally impose on nonmember countries. Thus, producers within the NAFTA zone of Canada, Mexico, and the United States pay no tariffs on the products and supplies they obtain from each other, unlike countries such as China or the United Kingdom that https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=198&to=199 9/25/2017 Page 7 of 7 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=198&to=199 9/25/2017 Page 1 of 10 https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=200&to=201 9/25/2017 Page 2 of 10 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. are not part of NAFTA. Roughly 60 percent of the value of a car manufactured within NAFTA must originate within the NAFTA member countries. If this condition were not met, the product became subject to the tariffs charged to non-NAFTA countries. Country Realities Construction and zoning rules vary from country to country. In the United Kingdom, a law restricts new buildings from blocking sunlight received by neighboring structures. The law was passed in the twelfth century, when everything was lit with candles. Developers must negotiate with neighbors and pay steep compensation when new buildings block their sunlight. The law deters foreign FDI in Britain’s construction industry. Source: Bloomberg Businessweek, “The Trouble with London’s Right to Light,” April 23–29, 2012, pp. 25–26. Government regulations and technical standards are another type of nontariff trade barrier. Examples include safety regulations for motor vehicles and electrical equipment, health regulations for hygienic food preparation, labeling requirements that indicate a product’s country of origin, technical standards for computers, and bureaucratic procedures for customs clearance, including excessive red tape and slow approval processes. The European Union strictly regulates food that has been genetically modified (GM), a policy that blocks some food imports into Europe from the United States. In China, the government requires foreign firms to obtain special permits to import GM foods. Chinese government censorship of material it considers subversive has hindered Google’s attempts to enter China’s huge Internet market.13 Governments may impose administrative or bureaucratic procedures that hinder the activities of importers or foreign firms. For example, the opening story revealed how India’s business sector is burdened by countless regulations, standards, and administrative hurdles at the state and federal levels. In Mexico, government-imposed bureaucratic procedures led United Parcel Service to temporarily suspend its ground delivery service across the https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=200&to=201 9/25/2017 Page 3 of 10 U.S.-Mexican border. Similarly, the United States barred Mexican trucks from entering the United States on the grounds that they were unsafe. Business regulations vary worldwide. Many countries in Africa and Latin America impose countless bureaucratic procedures that hinder commercial activities and business start-ups. By contrast, Australia, Canada, Ireland, New Zealand, Singapore, and the United Kingdom impose relatively few such procedures.14 Saudi Arabia is home to various restrictive practices that hinder international trade. Every foreign business traveler to the Arab kingdom must hold an entry visa that can be obtained only by securing the support of a sponsor—a Saudi citizen or organization who vouches for the visitor’s actions. Because few Saudis are willing to assume such responsibility, foreigners who want to do business in Saudi Arabia face great difficulty.15 Convoluted administrative procedures are widespread in national customs agencies. The revenue generated by tariffs depends on how customs authorities classify imported products. Products often appear to fit two or more tariff categories. For example, a sport utility vehicle could be classified as a truck, a car, or a van. Each of these categories can entail a different tariff. Depending on the judgment of the customs agent, the applicable tariff might end up being high or low. Because thousands of categories exist for customs classification, a product and its corresponding tariff can be easily misclassified, by accident or intent. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=200&to=201 9/25/2017 Page 4 of 10 Investment Barriers As we saw in the opening story on India, countries also impose restrictions on FDI and ownership that restrict the ability of foreign firms to invest in some industry sectors or acquire local firms. Excessive restrictions in India prevent the approval of countless investment proposals that could produce billions of dollars in revenue to the local economy and government. Worldwide, FDI and ownership restrictions are particularly common in such industries as broadcasting, utilities, air transportation, military technology, and financial services, as well as industries in which the government has major holdings, such as oil and key minerals. The Mexican government restricts FDI by foreign investors to protect its oil industry, which is deemed critical to the nation’s security. The Canadian government restricts foreign ownership of local movie studios and TV networks to protect its indigenous film and TV industries from excessive foreign influence. FDI and ownership restrictions are particularly burdensome in the services sector because services usually cannot be exported and providers must establish a physical presence in target markets to conduct business there. Occasionally, governments impose investment barriers aimed at protecting home-country industries and jobs. Currency controls restrict the outflow of widely used currencies, such as the dollar, euro, and yen, and occasionally the inflow of foreign currencies. Controls can help conserve especially valuable currency or reduce the risk of capital flight. They are particularly common in developing economies. Some countries employ a system of dual official exchange rates, offering exporters a relatively favorable rate to encourage exports, while importers receive a relatively unfavorable rate to discourage imports. Currency control Restrictions on the outflow of hard currency from a country or on the inflow of foreign currencies. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=200&to=201 9/25/2017 Page 5 of 10 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. Currency controls both help and harm firms that establish foreign subsidiaries through FDI. They favor companies when they export their products from the host country but harm those that rely heavily on imported parts and components. Controls also restrict the ability of MNEs to repatriate their profits—that is, transfer revenues from profitable operations back to the home country. As an example, in Venezuela, currency controls have led to a shortage of dollars and other hard currencies. Multinational firms avoid doing business in Venezuela because strict currency rules limit the amount of profits they can take out of the country or limit their ability to receive payment for imports at reasonable prices. Venezuela imposed the controls to keep imports inexpensive and maintain a base of hard currencies in the country.16 https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=200&to=201 9/25/2017 Page 6 of 10 State-owned oil company PEMEX (Petroleos de Mexico) benefits from investment barriers in Mexico that prevent foreign firms from gaining control of Mexican oil companies. Source: © Keith Dannemiller/Alamy https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=200&to=201 9/25/2017 Page 7 of 10 Subsidies and Other Government Support Programs Subsidies are monetary or other resources that a government grants to a firm or group of firms, intended either to encourage exports or simply to facilitate the production and marketing of products at reduced prices, to help ensure the involved companies prosper. Subsidies come in the form of outright cash disbursements, material inputs, services, tax breaks, the construction of infrastructure, and government contracts at inflated prices. For example, the French government has provided large subsidies to Air France, the national airline. Subsidy Monetary or other resources that a government grants to a firm or group of firms, usually intended to encourage exports or to facilitate the production and marketing of products at reduced prices, to ensure the favored firms prosper. The Closing Case focuses on European government support of Airbus, the leading European manufacturer of commercial aircraft. Perhaps the ultimate examples of subsidized firms are in China. Several leading corporations, such as China Minmetals ($39 billion annual sales) and Shanghai Automotive ($34 billion annual sales), are in fact state enterprises wholly or partly owned by the Chinese government, which provides them with huge financial resources. Indeed, state-owned enterprises account for more than 40 percent of China’s economic output.17 Critics argue that subsidies confer unfair advantages on recipients by reducing their cost of doing business. In India, the government provides massive subsidies to state-owned oil companies, which allow them to offer gasoline at very low prices. Foreign MNEs such as Royal Dutch Shell cannot compete profitably against rivals that offer such prices and consequently avoid doing business in the market.18 The WTO prohibits subsidies when it can be proven that they hinder free trade. Subsidies, however, are hard to define. For example, when a government provides land, infrastructure, https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=200&to=201 9/25/2017 Page 8 of 10 telecommunications systems, or utilities to the firms in a corporate park, this is technically a subsidy. Yet many view this type of support as an appropriate public function. In Europe and the United States, governments frequently provide agricultural subsidies to supplement the income of farmers and help manage the supply of agricultural commodities. The U.S. government grants subsidies for more than two dozen commodities, including corn, soybeans, wheat, cotton, and rice.19 In Europe, the Common Agricultural Policy (CAP) is a system of subsidies that represents about 40 percent of the EU’s budget, amounting to tens of billions of euros annually. The CAP and U.S. subsidies have been criticized for promoting unfair competition and high prices because they tend to prevent developing economies from exporting their agricultural goods to Europe and the United States. Subsidies encourage overproduction and therefore lower food prices at home, making agricultural imports from developing countries less competitive.20 Governments sometimes retaliate against subsidies by imposing countervailing duties , tariffs on products imported into a country to offset subsidies given to producers or exporters in the exporting country. In this way, the duty serves to cancel out the effect of the subsidy, eliminating the price advantage the exporters would otherwise obtain. Countervailing duty Tariff imposed on products imported into a country to offset subsidies given to producers or exporters in the exporting country. Dumping Pricing exported products at less than their normal value, generally less than their price in the domestic or third-country markets, or at less than production cost. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=200&to=201 9/25/2017 Page 9 of 10 Subsidies may allow a manufacturer to practice dumping —that is, to charge an unusually low price for exported products, typically lower than that for domestic or third-country customers, https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=200&to=201 9/25/2017 Page 10 of 10 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=200&to=201 9/25/2017 Page 1 of 7 https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=202&to=203 9/25/2017 Page 2 of 7 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. or even lower than the cost to manufacture the good.21 The European Union has provided billions of euros in subsidies every year to EU sugar producers, which allowed Europe to become one of the world’s largest sugar exporters at artificially low prices. Without the subsidies Europe would be one of the world’s biggest sugar importers. The Ministry of Economy, Trade, and Industry in Japan is typical of national federal agencies that promote international trade and investment. Source: SeanPavonePhoto/Shutterstock Dumping violates WTO rules because it amounts to unfair competition. But dumping is hard to prove because firms usually do not reveal data on their cost structures. A large MNE that charges very low prices could conceivably drive competitors out of a foreign market, achieve a monopoly, and then raise prices later. Governments in the importing country often respond to dumping by imposing an antidumping duty —a tax imposed on products deemed to be dumped and thereby causing injury to producers of competing products in https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=202&to=203 9/25/2017 Page 3 of 7 the importing country. The WTO allows this practice.22 The duties are generally equal to the difference between the product’s export price and their normal value. Antidumping duty A tax imposed on products deemed to be dumped and causing injury to producers of competing products in the importing country. Government subsidies are not always direct or overt. For example, governments may support home-country businesses by funding R&D, granting tax exemptions, and offering business development services such as market information, trade missions, and privileged access to key foreign contacts. Most countries have agencies and ministries that provide such services to facilitate the international activities of their own firms. Examples include the Department of Foreign Affairs and International Trade in Canada (www.dfaitmaeci.gc.ca), U.K. Trade & Investment in the United Kingdom (www.uktradeinvest.gov.uk), and the International Trade Administration of the U.S. Department of Commerce (www.doc.gov). Related to subsidies are governmental investment incentives , transfer payments or tax concessions made directly to individual foreign firms to entice them to invest in the country. Hong Kong’s government put up most of the cash to build the Hong Kong Disney park (www.park.hongkongdisneyland.com). While the park and facilities cost about $1.81 billion, the government provided Disney an investment of $1.74 billion to develop the site. Investment incentive Transfer payment or tax concession made directly to foreign firms to entice them to invest in the country. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=202&to=203 9/25/2017 Page 4 of 7 Recently, Austin, Texas, and Albany, New York, competed for the chance to have the Korean manufacturer Samsung Electronics (www.samsung.com) build a semiconductor plant in their regions. Austin offered $225 million worth of tax relief and other concessions in its successful bid to attract Samsung’s $300 million plant, estimated to create nearly 1,000 new jobs locally. To entice MNEs to establish local production facilities, the country of Macedonia offers such incentives as low corporate taxes, immediate access to utilities and transportation, and financial support for training workers (see www.investinmacedonia.com). Such incentives often help the economic development in a particular region or community. In the 1990s, Germany encouraged foreign companies to invest in the economically disadvantaged East German states by providing tax and investment incentives. The government of Ireland has undertaken various initiatives aimed at promoting Ireland as a place to do business. It targeted foreign companies in the high-tech sector—including medical instruments, pharmaceuticals, and computer software—and offered preferential corporate tax rates of 12 percent. These targeted efforts paid dividends by creating substantial new employment and helping diversify the Irish economy away from agricultural activities. Governments also support domestic industries by adopting procurement policies that restrict purchases to home-country suppliers. Several governments require that air travel purchased with government funds be booked with home-country carriers. Such policies are especially common in countries with large public sectors, such as China and Russia. In the United States, government agencies favor domestic suppliers unless their prices are high compared to foreign suppliers. In Japan, government agencies often do not even consider foreign bids, regardless of pricing. Public procurement agencies often impose requirements that effectively exclude foreign suppliers. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=202&to=203 9/25/2017 Page 5 of 7 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. Consequences of Government Intervention As illustrated in Exhibit 8.5 , average tariffs have declined over time. Simultaneously, as shown in Exhibit 8.6 , world trade and GDP have flourished. Decreasing trade barriers are a major factor in the growth of global commerce and consequently in rising incomes around the world. Firms that participate actively in international trade and investment not only improve their performance but also contribute to reducing global poverty.23 One way of evaluating the effects of government intervention is to examine each nation’s level of economic freedom, defined as the “absence of government coercion or constraint on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself. In other words, people are free to work, produce, consume, and invest in the ways they feel are most productive.”24 The Index of Economic Freedom measures economic freedom in 179 countries. Exhibit 8.7 shows the degree of economic freedom for each country in the Index for 2012, based on criteria such as the level of trade barriers, rule of law, level of business regulation, and protection of intellectual property rights.25 The Index classifies virtually all the advanced economies as “free,” all the emerging markets as either “free” or “mostly free,” and all the developing economies as “mostly unfree” or “repressed,” underscoring the close relationship between limited government intervention and economic freedom. Economic freedom flourishes when government supports the institutions necessary for that freedom and provides an appropriate level of intervention and regulation. In 2010 for the first time, the United States fell into the second highest category, due to increased U.S. federal government intervention in that nation’s economy, following the recent global financial crisis. The United Kingdom scores especially well on business freedom and property rights. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=202&to=203 9/25/2017 Page 6 of 7 Canada has been a strong proponent of the Anti-Counterfeiting Trade Agreement (ACTA), which established an international framework for combating infringement of intellectual property rights.26 EXHIBIT 8.6 Relationship between Tariffs, World GDP, and the Volume of World Trade Sources: Based on International Monetary Fund World Economic Outlook Database, at www.imf.org; UNCTAD, at http://www.unctadstat.unctad.org; World Bank, http://www.data.worldbank.org. Note: Tariffs given as average percent (red line), World GDP given in billions of U.S.$ (blue column), and Volume of World Trade given in billions of U.S.$ (purple column). Left axis measures Tariffs. Right axis measures World GDP and Volume of World Trade. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=202&to=203 9/25/2017 Page 7 of 7 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=202&to=203 9/25/2017 Page 1 of 4 https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=204&to=205 9/25/2017 Page 2 of 4 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=204&to=205 9/25/2017 Page 3 of 4 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. EXHIBIT 8.7 Countries Ranked by Level of Economic Freedom, 2012 Sources: Based on 2012 Index of Economic Freedom, The Heritage Foundation, Washington, DC, and the Wall Street Journal, New York, accessed at http://www.heritage.org. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=204&to=205 9/25/2017 Page 4 of 4 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=204&to=205 9/25/2017 Page 1 of 9 https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=206&to=207 9/25/2017 Page 2 of 9 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. Government intervention and trade barriers raise ethical concerns for developing economies. For example, United States import tariffs on clothing and shoes often exceed 20 percent. The tariffs hurt poor countries like Bangladesh, Pakistan, India, and several nations in Africa, where clothing and shoe exporters are concentrated. United States’ tariffs on imports from Cambodia are far higher than on imports from the United Kingdom. The tariffs that confront less-developed economies are often several times those faced by the richest countries.27 Government intervention can also offset harmful effects. For example, trade barriers can create or protect jobs. Subsidies can help counterbalance harmful consequences that disproportionately affect the poor. In Denmark, for example, globalization has affected thousands of workers whose jobs have been shifted to other countries with lower labor costs. The Danish government provides generous subsidies to the unemployed, aimed at retraining workers to upgrade their job skills or find work in other fields.28 https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=206&to=207 9/25/2017 Page 3 of 9 Evolution of Government Intervention A century ago, trade barriers worldwide were relatively high. The trading environment worsened through two world wars and the Great Depression. In 1938, the United States passed the Smoot-Hawley Tariff Act, which raised U.S. tariffs to near-record highs of more than 50 percent, compared to only about 4 percent today. Tariffs that other countries imposed to retaliate against Smoot-Hawley choked off foreign markets for U.S. agricultural products, leading to plummeting farm prices and many bank failures. In an effort to revive trade, governments began to reduce restrictive tariffs. By the late 1940s, prudent policymaking had begun to substantially reduce tariffs worldwide. In the 1950s, Latin America and other developing nations adopted protectionist policies aimed at industrialization and economic development. Governments imposed high tariffs and quotas on imports from the developed world, established government-supported enterprises to make the products they formerly imported, and sought to substitute local production for imports. Known as import substitution, the approach did not succeed. Companies enjoyed big government subsidies and the protection of high tariffs and quotas. However, these enterprises never became competitive in world markets or raised living standards to the levels of free-trading countries. Meanwhile, the protected industries required ongoing subsidies. Most countries that experimented with import substitution eventually rejected it. By contrast, from the 1970s onward, Singapore, Hong Kong, Taiwan, and South Korea achieved rapid economic growth by encouraging the development of export-intensive industries. Their model, known as export-led development, proved much more successful than import substitution. These countries, along with others in East Asia, such as Malaysia, Thailand, and Indonesia, substantially increased living standards and gained strong international trading links. A rising middle class helped transform these countries into competitive economies. Elsewhere in Asia, Japan had launched an ambitious program of industrialization and exportled development. The country’s rise from poverty in https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=206&to=207 9/25/2017 Page 4 of 9 the 1940s to one of the world’s wealthiest countries by the 1980s has been called the Japanese miracle. The feat was achieved with the help of national strategic policies, including tariffs that fostered and protected Japan’s infant industries such as automobiles, shipbuilding, and consumer electronics. India once embraced a model of high trade and investment barriers, state intervention in labor and financial markets, a large public sector, heavy business regulation, and central planning. The model contributed to the nation’s poor economic performance over several decades. Beginning in the early 1990s, however, India began to open its markets to foreign trade and investment. Trade liberalization and privatization of state enterprises have progressed slowly, but reforms have fueled much progress. Between 1992 and 2012, India’s average annual income rose from about $330 in real terms to more than $1,400 in 2012, an impressive achievement. After adopting communism in 1949, China relied on centralized economic planning, in which agriculture and manufacturing were controlled by state-run industries. The country remained relatively closed to international trade until the 1980s, when it began to liberalize its economy. In 2001, China joined the WTO and committed to reducing trade barriers. Trade has stimulated the Chinese economy. By 2012, its GDP was more than ten times the 1995 level, and the value of exports had reached nearly $1.9 trillion. China has become a leading exporter of manufactured products and home to numerous large MNEs that compete with Western firms. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=206&to=207 9/25/2017 Page 5 of 9 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. General Agreement on Tariffs and Trade In 1947, twenty-three nations signed the General Agreement on Tariffs and Trade (GATT), the first major effort to systematically reduce trade barriers worldwide. The GATT created: (1) a process to reduce tariffs through continuous negotiations among member nations; (2) an agency to serve as watchdog over world trade; and (3) a forum for resolving trade disputes. The GATT introduced the concept of most favored nation (renamed normal trade relations in 1998), according to which each signatory nation agreed to extend the tariff reductions covered in a trade agreement with a trading partner to all other countries. Thus, a concession to one country became a concession to all. Eventually, the GATT was superseded by the WTO in 1995 and grew to include about 150 member nations. The organization proved extremely effective and resulted in the greatest global decline in trade barriers in history. The Global Trend feature highlights the founding and current progress of the WTO. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=206&to=207 9/25/2017 Page 6 of 9 Bangladesh is a major clothing exporter that faces high tariffs. Here, women work at Dhaka, the Bangladesh capital and a center of garment manufacturing. Source: Liba Taylor/Alamy https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=206&to=207 9/25/2017 Page 7 of 9 Global Trend The World Trade Organization and Collapse of the Doha Round Based in Geneva, Switzerland, the World Trade Organization (www.wto.org) is the main watchdog for world trade and counts some 150 countries as its members. The WTO works to ensure world trade operates smoothly, fairly, and with as few restrictions as possible. Since joining the WTO in 2001, for example, China has gradually reduced import tariffs and quotas. Most recently, the WTO has been working to reduce trade barriers in the agricultural and services sectors. Services like the expertise of a lawyer or an accountant are intangible. Consequently, as they do not pass through ports or customs stations, governments usually cannot impose tariffs on them. Thus, services are subject to various nontariff trade barriers. For example, some countries in Europe refuse to license foreign insurance companies. In transportation, the United States and numerous other nations require their own merchandise fleets to carry their country’s cargo, creating a barrier to foreign-based cargo handlers. Governments also restrict services by setting licensing and professional standards that may be difficult for foreigners to meet. Regulations usually ensure that law, medicine, accounting, and other professions are undertaken by people who are educated locally, speak the national language, and are socialized according to local standards and norms. Standards in one country are usually not recognized by other countries. Thus, lawyers, doctors, accountants, and many other professionals face restrictions when attempting to do business abroad. The Doha Development Agenda was a round of WTO negotiations launched in Qatar in 2001 that sought to reduce barriers in the services sector. The WTO wants to ensure that banks, hotel chains, insurance firms, tour operators, transport companies, and other service firms enjoy the same trade and investment freedoms that apply to goods producers. The Doha Agenda also sought freer trade in agricultural goods, where https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=206&to=207 9/25/2017 Page 8 of 9 restraints are particularly burdensome to developing countries. Free global trade in agricultural products is the best way to ensure widespread access and lower prices for food. Doha was the first round of WTO negotiations in which big emerging markets, especially Brazil, China, and India, played a strong role. The unique circumstances of such countries have increased the complexity of negotiations. Unfortunately, the talks collapsed in 2008 when trade negotiators were unable to reach agreement. The main reason was that, under WTO rules, all nations were required to agree to all parts of the final deal. This proved impossible for various reasons. For example, China and India insisted on protecting the agricultural sectors in their countries. India alone has more than 200 million farmers, and the Indian government is reluctant to expose them to international competition. In the wake of Doha’s collapse, many nations are choosing to concentrate on negotiating bilateral (two-country) and regional trade deals instead. As of mid-2012, the Doha round of talks had not yet restarted. Sources: P. Coy, “Free Trade: After the Impasse,” BusinessWeek, August 11, 2008, p. 29; “Beyond Doha,” Economist, October 11, 2008, pp. 30–33; Carolyn Evans, “Bilateralism, Multilateralism, and Trade Rules,” FRBSF Economic Letter, January 9, 2012, pp. 1–5; Oxford Analytica Daily Brief Service, “International: Stalled Doha Spurs Trade Discrimination,” February 12, 2010, p. 1; United States Trade Representative, “National Trade Estimate Report,” 2011, retrieved from http://www.ustr.gov; World Trade Organization, 2007, retrieved from http://www.wto.org. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=206&to=207 9/25/2017 Page 9 of 9 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=206&to=207 9/25/2017 Page 1 of 9 https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=208&to=209 9/25/2017 Page 2 of 9 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. Intervention and the Global Financial Crisis The recent global recession and financial crisis have raised new questions about government’s role in business and the world economy. The crisis arose largely from inadequate regulation and insufficient enforcement of current regulations in the banking and finance sectors. In response, governments worldwide increased regulation and examined ways to improve enforcement. For example, the U.S. government has increased the power of its Treasury Department, Federal Reserve System, and Federal Deposit Insurance Corporation (FDIC). The European Central Bank is creating a new agency that aims to take aggressive action in needed areas. The European Union has increased oversight of multinational banks and supervision of financial institutions. The United Nations has called for greater transparency in financial activities and closure of loopholes that allow excessive speculation in global finance.29 Some governments increased protectionism in an effort to safeguard jobs and wage levels. Argentina and Brazil, for example, increased import tariffs on numerous products. Russia raised tariffs on dozens of goods, including cars and combine harvesters.30 Hoping to jumpstart economic growth, governments also increased subsidies to their own industries. The EU granted more than $50 billion in aid to Daimler (Germany), Skoda (Czech Republic), and other struggling carmakers in Europe. The government of the United Kingdom provided substantial subsidies to U.K. banks and financial institutions. China has pumped hundreds of billions of dollars into its own economy.31 In addition to the harmful fallout of the recession and financial crisis, rising protectionism impacted international commerce. Ripple effects of government reforms are extending beyond the banking and financial areas.32 https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=208&to=209 9/25/2017 Page 3 of 9 How Firms Can Respond to Government Intervention Although managers’ initial tendency might be to avoid markets with high trade and investment barriers or excessive government intervention, this course is not usually practical. Depending on the industry and country, firms generally must cope with protectionism and other forms of intervention. In extractive industries such as aluminum and petroleum, for example, companies may have little choice but to operate in nations that impose formidable barriers. The food-processing, biotechnology, and pharmaceutical industries also encounter countless laws and regulations abroad. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=208&to=209 9/25/2017 Page 4 of 9 Strategies for Managers We’ve seen that China, India, and numerous other countries in Africa, Asia, Latin America, and Eastern and Central Europe feature extensive trade barriers and government involvement. Yet many firms seek to target emerging markets and developing economies because of the huge long-term potential they offer.33 Firms devise various strategies to manage harmful government intervention. Research to Gather Knowledge and Intelligence Experienced managers continually scan the business environment to identify the nature of government intervention and to plan market-entry strategies and host-country operations. They review their return-on-investment criteria to account for the increased cost and risk of trade and investment barriers. For example, the EU is devising new guidelines that affect company operations in areas ranging from product liability laws to standards for investment in European industries. Choose the Most Appropriate Entry Strategies Tariffs and most nontariff trade barriers apply to exporting, whereas investment barriers apply to FDI. Most firms choose exporting as their initial entry strategy. However, if high tariffs are present, managers should consider other strategies, such as FDI, licensing, and joint ventures that allow the firm to operate directly in the target market, avoiding import barriers. For example, Taiwan’s Foxconn, a contract manufacturer for Apple and other electronics firms, built a factory in Brazil partly to avoid the country’s high tariffs on imported goods. However, even investment-based entry is affected by tariffs if it requires importing raw materials and parts to manufacture finished products in the host country. Tariffs usually vary with https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=208&to=209 9/25/2017 Page 5 of 9 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. the form of an imported product. To minimize tariff costs, many companies ship manufactured products “knocked-down” and assemble them in the target market. In countries with relatively high tariffs on imported personal computers, importers often bring in the parts and assemble the computers locally. Eastman Kodak (www.kodak.com) imports parts and components into the United States, which it then uses to manufacture photographic equipment. Kodak could produce the finished equipment abroad, but the tariff on parts and components is lower. By manufacturing in the United States, Kodak avoids paying higher tariffs.34 Many firms lobby national governments, such as Germany’s parliament in Berlin, for lower barriers to trade and investment. Source: © Bernd Kröger/Fotolia https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=208&to=209 9/25/2017 Page 6 of 9 Take Advantage of Foreign Trade Zones In an effort to create jobs and stimulate local economic development, governments establish foreign trade zones (also known as free trade zones or free ports). A foreign trade zone (FTZ) is an area within a country that receives imported goods for assembly or other processing and subsequent reexport.35 Products brought into an FTZ are not subject to duties, taxes, or quotas until they, or the products made from them, enter into the non-FTZ commercial territory of the country where the FTZ is located. Firms use FTZs to assemble foreign dutiable materials and components into finished products, which are then re-exported. Alternatively, firms may use FTZs to manage inventory of parts, components, or finished products that the firm will eventually need at some other location. In the United States, for example, Japanese carmakers store vehicles at the port of Jacksonville, Florida, without having to pay duties until the cars are shipped to U.S. dealerships. Foreign trade zone (FTZ) An area within a country that receives imported goods for assembly or other processing and re-export. For customs purposes the FTZ is treated as if it is outside the country’s borders. FTZs exist in more than seventy-five countries, usually near seaports or airports. They can be as small as a factory or as large as an entire country. The United States is home to several hundred FTZs used by thousands of firms. The Colon Free Zone (www.colonfreezone.com), located on the Atlantic side of the Panama Canal, is an enormous FTZ where products are imported, stored, modified, repacked, and re-exported without being subject to tariffs or customs regulations. The many private firms and wholesalers that set up shop inside the huge zone transship their merchandise from Panama to other parts of the Western Hemisphere and Europe. Some firms obtain FTZ status within their own physical facilities. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=208&to=209 9/25/2017 Page 7 of 9 A successful experiment with FTZs has been maquiladoras —export- assembly plants in northern Mexico along the U.S. border that produce components and finished products, usually destined for the United States. Since the 1960s, “maquilas” have imported materials and equipment on a tariff-free basis for assembly or manufacturing and then re-exported the assembled products. Today under NAFTA, maquiladoras employ millions of Mexicans who assemble clothing, furniture, car parts, electronics, and other goods. The arrangement enables firms from the United States, Asia, and Europe to tap low-cost labor, favorable duties, and government incentives while serving the U.S. market. Maquilas account for about half of Mexico’s exports. Maquiladoras Export-assembly plants in northern Mexico along the U.S. border that produce components and typically finished products destined for the United States on a tariff-free basis. Seek Favorable Customs Classifications for Exported Products One approach for reducing exposure to trade barriers is to have exported products classified in the appropriate harmonized product code. As noted earlier in this chapter, many products can be classified within two or more categories, each of which may imply a different tariff. For example, some telecommunications equipment can be classified as electric machinery, electronics, or measuring devices. The manufacturer should analyze the trade barriers on differing categories to ensure exported products are classified under the lowest tariff code. Or the manufacturer may be able to modify the exported product in a way that helps minimize trade barriers. South Korea faced a quota on the export of nonrubber footwear to the United States. By shifting manufacturing to rubber-soled shoes, Korean firms greatly increased their footwear exports. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=208&to=209 9/25/2017 Page 8 of 9 Take Advantage of Investment Incentives and Other Government Support Programs Obtaining economic development incentives from host- or home-country governments is another strategy to reduce the cost of trade and investment barriers. When Mercedes built a factory https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=208&to=209 9/25/2017 Page 9 of 9 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=208&to=209 9/25/2017 Page 1 of 10 https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=210&to=211 9/25/2017 Page 2 of 10 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. in Alabama, it benefitted from reduced taxes and direct subsidies provided by the Alabama state government. When Siemens built a semiconductor plant in Portugal, it received subsidies from the Portuguese government and the EU. Incentives cover nearly 40 percent of Siemens’s investment and training costs. In Europe, Japan, and the United States, governments increasingly provide incentives to entice firms to set up shop within their borders. In addition to cash outlays, incentives also include reduced utility rates, employee training programs, tax holidays, and construction of new roads and other infrastructure. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=210&to=211 9/25/2017 Page 3 of 10 Lobby for Freer Trade and Investment More nations are liberalizing markets to create jobs and increase tax revenues. The trend results partly from the efforts of firms to lobby domestic and foreign governments to lower their trade and investment barriers. The Japanese have achieved much success in reducing trade barriers by lobbying U.S. and European governments. In China, domestic and foreign firms lobby the government to relax protectionist policies and regulations that make China a difficult place to do business. Foreign firms often hire former Chinese government officials to help lobby their former colleagues.36 European automakers have obtained various concessions by lobbying individual state governments in the United States. BMW leased its 1,039-acre factory site in South Carolina at an annual rent of one dollar. The private sector lobbies federal authorities to undertake government-to-government trade negotiations, aimed at lowering barriers. Private firms bring complaints to world bodies, especially the WTO, to address unfair trading practices of key international markets. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=210&to=211 9/25/2017 Page 4 of 10 Closing Case Government Intervention at Airbus and Boeing In the 1960s, United States companies such as Boeing (www.boeing.com) and McDonnell Douglas were the dominant players in global aircraft manufacturing. Boeing was founded in 1916 in Seattle, and had many years to develop the critical mass necessary to become the world’s leading aerospace manufacturer. During World War II and the subsequent Cold War years, Boeing was the recipient of many lucrative contracts from the U.S. Department of Defense. In Europe, no single country possessed the means to launch an aerospace company capable of challenging Boeing. Manufacturing commercial aircraft is complex and capital-intensive and requires a highly skilled workforce. In the 1970s, the governments of France, Germany, Spain, and the United Kingdom formed an alliance, supported with massive government subsidies, to create Airbus S.A.S. (www.airbus.com). By 1981, the four-country alliance succeeded in becoming the world’s number-two civil aircraft manufacturer. Airbus launched the A300, among the best-selling commercial aircraft of all time. Airbus also created the A320, receiving more than 400 orders before its first flight and becoming the fastest-selling large passenger jet in aviation history. By 1992, Airbus had captured roughly one-third of the global commercial aircraft market. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=210&to=211 9/25/2017 Page 5 of 10 Government Support for Airbus Since the 1940s, European governments have pursued public policies based on democratic socialism. Under this system, the government plays a strong role in the national economy and provides key services such as health care, mass transit, and sometimes banking and housing. Most Europeans are accustomed to government playing a significant role in guiding the national economy. In this context, Airbus has benefitted enormously from government support. The firm has received tens of billions of euros of subsidies and soft loans from the four founding country governments and the EU. Airbus must repay the loans only if it achieves profitability. Government aid has financed, in whole or part, every major Airbus aircraft model. European governments have forgiven Airbus’s debt, provided huge equity infusions, dedicated infrastructure support, and financed R&D for civil aircraft projects. Airbus is currently a stock-held company jointly owned by the British, Germans, French, and Spanish. It is based in Toulouse, France, but has R&D and production operations scattered throughout Europe. European governments justify their financial aid to Airbus on several grounds. First, Airbus R&D activities result in the development of valuable new technologies. Second, Airbus provides jobs to some 53,000 skilled and semiskilled Europeans. Third, its value-chain activities attract massive amounts of capital into Europe. Finally, Airbus generates enormous tax revenues. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=210&to=211 9/25/2017 Page 6 of 10 Complaints about Unfair Government Intervention Boeing and the U.S. government have long complained about the massive subsidies and soft loans that were responsible not only for Airbus’s birth, but also for its ongoing success. The outcry became louder in the 2000s, when Airbus surpassed Boeing in annual sales, becoming the world’s leading commercial aircraft manufacturer. Boeing has argued that Airbus never would have gotten this far without government support. In 2005, the U.S. Trade Representative brought its case to the WTO. The case arose because EU member states approved $3.7 billion in new subsidies and soft loans to Airbus. The case alleged that financial aid for the A350, A380, and earlier Airbus aircraft qualified as subsidies under the WTO’s Agreement on Subsidies and Countervailing Measures (ASCM) and that the subsidies were actionable because they adversely affected international trade. Under the ASCM, subsidies to specific firms or industries from a government or other public bodies are prohibited. Airbus had applied to the governments of France, Germany, Spain, and the United Kingdom for aid to launch its model A350. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=210&to=211 9/25/2017 Page 7 of 10 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. In 2011, the WTO ruled that EU aid to Airbus had caused Boeing to lose market share in Asia and other markets. EU officials argued that government subsidies to Airbus were permissible and that it was up to individual EU countries to decide whether to provide them. However, the WTO also ruled that Boeing received more than $5 billion in U.S. government subsidies in the development of the 787 Dreamliner. Government Support for Boeing The EU argues the United States government has indirectly subsidized Boeing through massive defense contracts paid via tax dollars. The U.S. government gave Boeing more than $23 billion in indirect government subsidies by means of R&D funding and other indirect support from the Pentagon and NASA, the nation’s space agency. Boeing is at liberty to use the knowledge acquired from such projects to produce civilian aircraft. The state of Washington, Boeing’s primary manufacturing and assembly location, has provided the firm with tax breaks, infrastructure support, and other incentives totaling billions of dollars. The EU also has a case at the WTO regarding Boeing’s relations with Japanese business partners. Boeing entered an alliance with Japan’s Mitsubishi, Kawasaki, and Fuji to build the 787 Dreamliner. The Japanese firms provided billions in soft loans, repayable only if the aircraft is commercially successful. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=210&to=211 9/25/2017 Page 8 of 10 New Aircraft from Airbus and Boeing In 2007, Airbus launched the A380, an innovative airplane with an upper deck extending the entire length of the fuselage and a cabin that provides 50 percent more floor space than Boeing’s largest aircraft. The A380 can seat between 555 and 853 passengers, depending on the seating configuration. It has a maximum range of 15,000 kilometers (8,000 nautical miles). The total cost to develop and launch the A380 reached 15 billion euros (U.S. $21 billion), partly supported by funding from European governments. Boeing successfully launched the 787 Dreamliner in 2007 and is ahead of Airbus in launching innovative and fuel-efficient aircraft. Airbus is developing a mid-sized A350 model to compete with Boeing’s 787. In 2008, the government of China established a company to make passenger jumbo jets, part of its quest to challenge Boeing and Airbus in the global aircraft industry. China Commercial Aircraft Co. was established in Shanghai amid forecasts that China’s domestic market for commercial aircraft will increase fivefold by 2026. Global Financial Crisis The recent global financial crisis adversely impacted Airbus and Boeing. Both companies had to reduce output and lay off thousands of workers. Following sharp drops in passenger traffic, airlines grounded planes and cut routes. Longer term, Airbus aims to reorganize its global operations, outsource more manufacturing, and sell all or part of six factories. It has begun to produce aircraft in the United States. Airbus and Boeing are generating much new business from emerging markets, and ramped up production substantially to meet anticipated demand. In 2012, however, an industry expert warned that both Airbus and Boeing were producing too many commercial aircraft, risking a potential global glut. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=210&to=211 9/25/2017 Page 9 of 10 AACSB: Reflective Thinking Skills, Ethical Understanding and Reasoning Abilities Case Questions 1. Where do you stand? Do you think EU subsidies and soft loans to Airbus are fair? Why or why not? What advantages does Airbus gain from free financial support from the EU governments? Are complaints about EU subsidies fair in light of Europe’s history of democratic socialism? 2. Do you believe U.S. military contracts with Boeing amount to subsidies? Have these types of payments provided Boeing with unfair advantages? Justify your answer. 3. Assuming that Airbus cannot compete without subsidies and loans, is it likely that the EU will discontinue its financial support of Airbus? Is it in the EU’s interests to continue supporting Airbus? Justify your answer. 4. In the event the WTO rules against Airbus and tells it to stop accepting subsidies and soft loans, how should Airbus management respond? What new approaches can management pursue to maintain Airbus’s lead in the global commercial aircraft industry? Sources: Doug Cameron and David Kesmodel, “Warning is Issued about Plane Glut,” Wall Street Journal, February 23, 2012, pp. B6–B6; Corporate profiles of Airbus and Boeing at http://www.hoovers.com; K. Epstein & J. Crown, “Globalization Bites Boeing,” BusinessWeek, March 24, 2008, p. 32; D. Gauthier-Villars & D. Michaels, “Airbus Buyers Get French Aid,” Wall Street Journal, January 27, 2009, p. B4; Max Kingsley-Jones, “Throwing Down the Gauntlet,” Airline Business, October 2011, pp. 28–30; N. Luthra, “Boeing to Sell India $2.1 Billion in Planes,” Wall Street Journal, January 6, 2009, p. B4; D. Michaels, “Airbus Trims Jumbo Output as Carriers Defer Orders,” Wall Street Journal, May 7, 2009, p. B1; Pilita Clark, Joshua Chaffin, and James Politi, “WTO Rules that Boeing Received $5.3bn in Aid,” Financial Times, April 1, 2011, p. 19; “China to Make Jumbo Jetliners, Trim Roles of Boeing, Airbus,” Wall Street Journal, May 12, 2008, p. B4; “How Airbus Flew Past Its American Rival,” Financial Times, March 17, 2005, p. 6; J. Lunsford and D. Michaels, “Bet on Huge Plane Trips Up Airbus,” Wall Street Journal, June 15, 2006, p. A1; Stephan Wittig, “The WTO Panel Report on Boeing subsidies: A Critical Assessment,” Intereconomics, May 2011, pp. 148–153. Note: The authors acknowledge the assistance of Stephanie Regales with this case. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=210&to=211 9/25/2017 Page 10 of 10 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=210&to=211 9/25/2017 Page 1 of 24 https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=212&to=213 9/25/2017 Page 2 of 24 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. Chapter Essentials MyManagementLab Go to mymanagementlab.com to complete the problems marked with this icon . Key Terms antidumping duty https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=212&to=213 9/25/2017 Page 3 of 24 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 202 countervailing duty https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=212&to=213 9/25/2017 Page 4 of 24 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 201 currency control https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=212&to=213 9/25/2017 Page 5 of 24 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 200 customs https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=212&to=213 9/25/2017 Page 6 of 24 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 193 dumping https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=212&to=213 9/25/2017 Page 7 of 24 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 201 export control https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=212&to=213 9/25/2017 Page 8 of 24 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 195 foreign trade zone (FTZ) https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=212&to=213 9/25/2017 Page 9 of 24 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 209 import license https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=212&to=213 9/25/2017 Page 10 of 24 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 199 investment incentive https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=212&to=213 9/25/2017 Page 11 of 24 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 202 maquiladoras https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=212&to=213 9/25/2017 Page 12 of 24 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 209 nontariff trade barrier https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=212&to=213 9/25/2017 Page 13 of 24 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 193 protectionism https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=212&to=213 9/25/2017 Page 14 of 24 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 193 quota https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=212&to=213 9/25/2017 Page 15 of 24 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 194 subsidy https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=212&to=213 9/25/2017 Page 16 of 24 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 201 tariff https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=212&to=213 9/25/2017 Page 17 of 24 PRINTED BY: ncastater@mail.barry.edu. Printing is for personal, private use only. No part of this book may be reproduced or transmitted without publisher's prior permission. Violators will be prosecuted. 193 https://jigsaw.vitalsource.com/api/v0/books/9780133558036/print?from=212&to=213 9/25/2017 Page 18 of 24 Summary In this chapter, you learned about: 1. The nature of government intervention Despite the value of free trade, governments often intervene in international business. Protectionism refers to national economic policies designed to restrict free trade and protect domestic industries from foreign competition. Government intervention arises typically in ...
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