week 7 IBM

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  • Created by: jmf00632
  • Created on: 27-12-19 20:52
what is economic integration
agreement among countries in a geographic region to reduce and ultimately remove, tariff and non tariff barriers to the free flow of goods or services and factors of production among each other
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which means....
Economic integration means no protectionism
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what does the gov beleive will happen?
•Governments believe that domestic producers will become more efficient as a result of foreign competition but there are some protection to ”young” domestic firms
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what does centralizing production create?
•Firms can realize potentially enormous cost economies by centralizing production in those locations where the mix of factor costs, skills, and investment incentives, is optimal
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benefits of regional integration (4)
Improve market efficiency; Share the costs of public goods or large infrastructure projects; Decide policy cooperatively and have an anchor to reform; Have a building block for global integration;
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benefits of regional integration (1)
Reap other non-economic benefits, such as peace and security.
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least intergrated areas?
1.free trade area e.g. NAFTA, EFTA 2. Customs union e.g. gold cooperation council
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most integrated areas?
1. common matrket e.g. mercosur 2. economic union e.g. EU 3. Political union e.g. US
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What does trade creation focus on?
the producer
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defintio of trade creation
trade flows are redirected due to the formation of a free trade area or a customs union.
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when does trade creation occur?
occurs when low cost producers within the free trade area replace high cost domestic producers
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definition of trade diversion
trade is diverted from a more efficient exporter towards a less efficient one by the formation of a free trade agreement or a customs union.
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when does trade diversion occur?
occurs when higher cost suppliers* within the free trade area replace lower cost external suppliers (e.g. Question 16)
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what does WTO stand for?
world trade organisation
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what are world trade organisation rules in place? (WTO)
Regarding a free trade agreement, WTO rules are expected to prevent trade diversion
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An example of a world trade organisation (WTO) rule?
(e.g. WTO antidumping regulations
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what is a a protectionism principle?
means they try to protect their own companies so they make rules to protect fdi (q15)
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what 7 instruments does trade policy use?
tariffs, subsidies, import quotas, voluntary export restraints, local content requirements, administrative policies, and antidumping duties.
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who gains from tariffs
The government gains, because the tariff increases government revenues. Domestic producers gain, because the tariff affords them some protection against foreign competitors by increasing the cost of imported foreign goods
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who loses from tariffs
Consumers lose because they must pay more for certain imports
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so tariffs are.....
generally pro-producer and anti-consumer. While they protect producers from foreign competitors, this restriction of supply also raises domestic prices
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what do tariffs reduce?
import tariffs reduce the overall efficiency of the world economy. They reduce efficiency because a protective tariff encourages domestic firms to produce products at home that, in theory, could be produced more efficiently abroad.
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what are the conequences of this? example?
The consequence is an inefficient utilization of resources. For example, tariffs on the importation of rice into South Korea have led to an increase in rice production in that country; however, rice farming is an unproductive use of land in South Kor
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who has been succ in limiting tariffs?
GATT and WTO
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what a sibisidies
A subsidy is a government payment to a domestic producer. Subsidies take many forms, including cash grants, low-interest loans, tax breaks, and government equity participation in domestic firms
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who gains from subsidies?
domestic producers gain from subsideis , as their international competitiveness is increased as a result
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how do subsidies help domestic producers?
they lower production cost -(1) competing against foreign imports and (2) gaining export markets
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who / what does subsidies benefit?
they help domestic firms achieve a dominant position in industries in which economies of scale are important and the world market is not large enough to profitably support industries
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examples
(aerospace and semiconductors are two such industries).
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what can subsidies help a firm achieve?
subsidies can help them achieve a first-mover advantage in an emerging industry (just as U.S. government subsidies, in the form of substantial R&D grants. If this is achieved, further gains to the domestic economy arise from the employment and tax r
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disadvantages of subsiidies?
1. government subsidies must be paid for, typically by taxing individuals and corporations. 2.• many subsidies are not that successful at increasing the international competitiveness of domestic producers. Rather, they tend to protect the inefficient
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import quota definition
direct restriction on the quantity of some good that may be imported into a country. The restriction is usually enforced by issuing import licenses to a group of individuals or firms.
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an example of a quota?
• For example, the United States has a quota on cheese imports. The only firms allowed to import cheese are certain trading companies, each of which is allocated the right to import a maximum number of pounds of cheese each year.
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what is a voluntary export restraint? (VER)
quota on trade imposed by the exporting country, typically at the request of the importing country's government
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example?
the limitation on auto exports to the United States enforced by Japanese automobile producers in 1981. A response to direct pressure from the U.S. government, this VER limited Japanese imports to no more than 1.68 million vehicles per year
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What is a local content requirtment?
a requirement that some specific fraction of a good be produced domestically
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examples
The requirement can be expressed either in physical terms (e.g., 75 percent of component parts for this product must be produced locally) or in value terms (e.g., 75 percent of the value of this product must be produced locally).
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why would developing countries use local content requirement?
used by developing countries to shift their manufacturing base from the simple assembly of products whose parts are manufactured elsewhere into the local manufacture of component parts.
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why would developed countries use local content requirment?
They have also been used in developed countries to try to protect local jobs and industry from foreign competition
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benefits of local content rerulations?
provide protection for a domestic producer of parts in the same way an import quota does: by limiting foreign competition
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what are the aggregate economic effects of local content reg?
• same as import quota - domestic producers benefit, but the restrictions on imports raise the prices of imported components. In turn, higher prices for imported components are passed on to consumers of the final product with higher final prices
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so who really benefit from local content reg?
local content regulations tend to benefit producers and not consumers.
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admin trade policy definition
are bureaucratic rules designed to make it difficult for imports to enter a country
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examples
It has been argued that the Japanese are the masters of this trade barrier. In recent decades Japan's formal tariff and nontariff barriers have been among the lowest in the world.
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anti-dumping policy definition
Dumping is viewed as a method by which firms unload excess production in foreign markets
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examples
1997, when two South Korean manufacturers of semiconductors, LG Semicon and Hyundai Electronics, were accused of selling dynamic random access memory chips (DRAMs) in the U.S. market at below their costs of production.
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what 2 paths do government intervention take?
political - concerned with protecting the interests of certain groups within a nation (normally producers), often at the expense of other groups (normally consumers)
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example
e.g. protecting enviro or human rights
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the other path that government intervention takes?
economical - typically concerned with boosting the overall wealth of a nation (to the benefit of all, both producers and consumers.
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what are the 6 political arguments for intervention?
national security, retaliation, protecting consumers, Furthering Foreign Policy Objectives Governments, protecting human rights, protecting the enviro
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national securities
Countries argue that it is necessary to protect certain industries because they are important for national security. Defense-related industries often get this kind of attention (e.g., aerospace, advanced electronics)
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retaliation
Some argue that governments should use the threat to intervene in trade policy as a bargaining tool to help open foreign markets and force trading partners to "play by the rules of the game."
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who have used this threat?
The U.S. government has used the threat of punitive trade sanctions to try to get the Chinese government to enforce its intellectual property laws
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consequences of threats?
intervention may liberalize trade and bring with it resulting economic gains. It is a risky strategy, however. A country that is being pressured may not back down and instead may respond to the imposition of punitive tariffs by raising trade barriers
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protecting consumers
Many governments have long had regulations to protect consumers from unsafe products. For example, in 2003 several countries, including Japan and South Korea, decided to ban imports of American beef after a single case of mad cow disease was found in
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Furthering Foreign Policy Objectives Governments
A government may grant preferential trade terms to a country with which it wants to build strong relations. Trade policy has also been used several times to pressure or punish "rogue states" that do not abide by international law or norms
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example
in 1996 the U.S. Congress passed the Helms-Burton Act. This act allows Americans to sue foreign firms that use property in Cuba confiscated from them after the 1959 revolution.
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protecting human rights
e.g. labour, age e.ct.
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protecting the enviro
One argument made by environmental organizations is that there is a strong relationship between income levels and environmental pollution and degradation (i.e., industrial development leads to more pollution). – safeguards need to be ut in place
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what are the 2 economic arguments for intervention?
Infant Industry Argument and the strategic trade policy
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Infant Industry Argument
. According to this argument, many developing countries have a potential comparative advantage in manufacturing, but new manufacturing industries cannot initially compete with established industries in developed countries.
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so to sum it up the argument is.....
. the argument is that governments should temporarily support new industries (with tariffs, import quotas, and subsidies) until they have grown strong enough to meet international compete
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new trade theory argument......
. The new trade theory argues that in industries in which the existence of substantial economies of scale implies that the world market will profitably support only a few firms. this connects to....
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StrategicTrade Policy argument - has 2 components - component 1:
according to the strategic trade policy argument, a government should use subsidies to support promising firms that are active in newly emerging industries.
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second component of the strategic trade policy argument....
it might pay a government to intervene in an industry by helping domestic firms overcome the barriers to entry created by foreign firms that have already reaped first-mover advantages
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Card 2

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which means....

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Economic integration means no protectionism

Card 3

Front

what does the gov beleive will happen?

Back

Preview of the front of card 3

Card 4

Front

what does centralizing production create?

Back

Preview of the front of card 4

Card 5

Front

benefits of regional integration (4)

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Preview of the front of card 5
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