Chapter 6
Business-Government
Trade Relations
Chapter Preview
• Describe the political, economic, and
cultural reasons nations intervene in trade
• Identify the methods that nations use to
promote trade
• Describe the methods that nations use to
restrict trade
• Discuss the main institutions of the global
trading system
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International Business 4e
Chapter 6 - 2
Political Motives
Protect
jobs
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Preserve
national
security
Respond to
“unfair”
trade
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Gain
influence
Chapter 6 - 3
Economic Motives
Potential results
Protect infant
industries
Protect emerging
industries during
development from
global competition
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+ National income increases
–
–
–
–
Wrong industries protected
Firms grow complacent
Consumer prices rise
Public funds poorly spent
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Chapter 6 - 4
Economic Motives
Potential results
Pursue strategic
trade policy
Help companies
achieve economies of
scale and gain a firstmover advantage
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+ Global industry created
– Firms’ efficiency reduced
– Domestic costs increase
– Special interests benefit
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Chapter 6 - 5
Cultural Motives
Nations block imports
deemed harmful
Protect national
identity
Usual suspects
are US media and
consumer goods
Result of increased
globalization
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International Business 4e
Chapter 6 - 6
Trade Promotion and Restriction
Trade promotion
methods
Trade restriction
methods
 Tariffs
 Subsidies
 Quotas
 Export financing
 Embargoes
 Foreign trade zones
 Local content requirements
 Special government agencies
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 Administrative delays
 Currency controls
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Chapter 6 - 7
Subsidies
Financial assistance in the form of cash, tax
breaks, price supports, etc.
Potential results
+ Increased competitiveness
– Encourage inefficient firms
– Increased consumer prices
– Overuse of resources
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Chapter 6 - 8
Export Financing
Financing such as low-interest loans and loan guarantees
Export-Import Bank of the United States




Working capital loan guarantees
Credit information on nation or firm abroad
Export credit insurance against loss
Loan guarantees to buyers of U.S. goods
and much more…
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International Business 4e
Chapter 6 - 9
Foreign Trade Zones
 Designated geographic
region in which merchandise
is allowed to pass through
with lower customs duties
(taxes) and/or fewer
customs procedures
 Purpose is to increase
employment and trade
within the nation
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Chapter 6 - 10
Special Government Agencies
Organize trade missions for
officials and businesses
Operate export-promotion offices
at locations abroad
Help import products the home
nation does not produce
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Chapter 6 - 11
Tariffs
Government tax levied on a product as it enters or leaves a nation
Potential results
 Export tariff
+ Protect domestic firms
 Transit tariff
from competitors
+ Generate income for the
government
 Import tariff
– Reduce competitiveness
of home-based firms
– Raise consumer prices
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International Business 4e
Chapter 6 - 12
Import and Export Quotas
Restriction on the amount of a good that can enter
or leave a country during a certain period of time
Import Quotas
Export Quotas
1.
Protect domestic
producers of a good
2.
Force outside firms to
compete for market
access
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1.
Retain an adequate
domestic supply of a
product
2.
Restrict world supply of a
product to raise its price
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Chapter 6 - 13
Embargoes
Complete ban on trade (imports and exports)
in one or more products with a particular country
Most restrictive
nontariff trade
barrier
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Often used to
achieve political
goals
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Can be difficult
for a nation to
enforce
Chapter 6 - 14
Local Content Requirements
Laws that domestic producers
must supply a specific amount
of a good or service
Forces international companies to
employ local resources (usually labor)
in production process
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International Business 4e
Chapter 6 - 15
Administrative Delays
Regulatory controls or
bureaucratic rules to slow
imports into a country
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
Inconvenient ports for imports

Product-damaging inspections

Understaffed customs offices

Lengthy licensing procedures
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Chapter 6 - 16
Currency Controls
Restrictions on the
convertibility of a nation’s
currency
Limit the amount of
globally accepted
currency available to
pay for imports
Set an unfavorable
exchange rate when
paying for imports
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International Business 4e
Chapter 6 - 17
General Agreement on
Tariffs and Trade (GATT)
Treaty designed to promote free trade by
reducing tariffs and nontariff barriers to trade
Uruguay Round
Extended coverage to services
Improved intellectual property rules
Reduced trade barriers in agriculture
Established the WTO
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International Business 4e
Chapter 6 - 18
World Trade Organization (WTO)
International organization that regulates
trade between nations
Normal trade relations (“most-favored-nation status”)
Dispute Settlement Body
Dumping and antidumping duties
Doha Round of trade talks
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International Business 4e
Chapter 6 - 19
Chapter Review
• Describe the political, economic, and
cultural reasons nations intervene in trade
• Identify the methods that nations use to
promote trade
• Describe the methods that nations use to
restrict trade
• Discuss the main institutions of the global
trading system
© Prentice Hall, 2008
International Business 4e
Chapter 6 - 20