International Business

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Subsidies
* A subsidy - a government payment to a domestic producer * Subsidies help domestic producers
* compete against low-cost foreign imports
* gain export markets
* Consumers typically absorb the costs of subsidies
Tariffs
* Tariffs
* increase government revenues
* provide protection to domestic producers against foreign competitors by increasing the cost of imported foreign goods * force consumers to pay more for certain imports
* So, tariffs are unambiguously pro-producer and anti-consumer, and tariffs reduce the overall efficiency of the world economy Local content requirements
* A local content requirement demands that some specific fraction of a good be produced domestically * can be in physical terms or in value terms
* Local content requirements benefit domestic producers and jobs, but consumers face higher prices Trade Policy
* Administrative trade polices - bureaucratic rules that are designed to make it difficult for imports to enter a country * These polices hurt consumers by denying access to possibly superior foreign products Dumping

* Dumping - selling goods in a foreign market below their cost of production, or selling goods in a foreign market at below their “fair” market value * a way for firms to unload excess production in foreign markets * may be predatory behavior, with producers using substantial profits from their home markets to subsidize prices in a foreign market with a view to driving indigenous competitors out of that market, and later raising prices and earning substantial profits Comparative and Absolute Advantage

* comparative advantage - a country should specialize in the production of those goods that it produces most efficiently and buy the goods that it produces less efficiently from other countries * A country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it Regional Integration Pros and Cons

Pro
* Expand market size
* Achieve scale economies and enhanced productivity
* Attract investment from outside the bloc
* Acquire stronger defensive political postures
Con
* Trade creation
* Trade diversion
* Loss of national identity
* Sacrifice of autonomy
* Failure of small or weak forms etc.
Effects of trade barriers
* Trade theory suggests why dispersing production activities globally can be beneficial * However, trade barriers may limit a firm’s ability to do so * trade barriers raise the cost of exporting

* quotas limit exports
* firms may have to locate production activities within a country to meet local content regulations * the threat of future trade barriers can influence firm strategy * All of these can raise costs above what they may have been in a world of free trade Mercantilism

* Mercantilism (mid-16th century) - it is in a country’s best interest to maintain a trade surplus - to export more than it imports * it advocated government intervention to achieve a surplus in the balance of trade * it viewed trade as a zero-sum game (one in which a gain by one country results in a loss by another) * Mercantilism is problematic and not economically valid, yet many political views today have the goal of boosting exports while limiting imports by seeking only selective liberalization of trade Eclectic theory

* Product life cycle - Vernon (mid-1960s ) proposed the product life-cycle theory - as products mature both the location of sales and the optimal production location will change affecting the flow and direction of trade New trade theory

New trade theory (1970s) suggests
1. Because of economies of scale (unit cost reductions associated with a large scale of output), trade can increase the variety of goods available to consumers and decrease the average cost of those goods...
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