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Geringer_IB2e_PPT_Mod05_accessible21.pptxPolitical Forces That Affect Global Trade
Module 5
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Learning Objectives
5-1 Describe the goals of nationalizing and privatizing business.
5-2 Explain government protection and stability and their importance to business.
5-3 Describe the role of country risk assessment in international business.
5-4 Explain the political motivations for government intervention in trade and the major types of government trade restrictions.
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Linking Political and Economic Dimensions in International Trade
Venezuela was the fifth nation to join Mercosur in 2012. One aim of Mercosur was to strengthen democratic principles in the region.
In 2016, presidents of Argentina, Brazil, and Paraguay met to discuss suspending Venezuela which was not meeting membership requirements, based on examples of human rights violations and a lack of democratic order.
Failing to meet standards within a three-month period, Venezuela was suspended from membership.
Mercosur members clearly linked political and humanitarian behaviors with economic benefits of international trade.
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Governments and the Ownership of Business 1
Nationalization: Why Governments Get Involved
Nationalization: the taking of private property by a government to make it public.
Motivated by the belief that government can manage a public good or necessity better than the private, profit-driven sector.
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Governments and the Ownership of Business 2
Privatization: Why Governments Sell Businesses
Privatization: the selling of government owned property to the private sector to gain more efficiency in business operations, to raise money or to change in political climate/philosophy.
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Critical Thinking Question
Why might a government-owned firm have an unfair advantage over privately owned companies?
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A government owned firm may have advantages over private firms in the areas of government support, taxes, reduced costs of inputs, and subsidies, all of which could lead to lower costs. Also, government-owned firms may have government-legislated monopolies. They also may have preferential treatment by the government.
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Government Stability and Protection 1
Stability: Issues with Lack of Peace and Predictability
Stable government maintains itself in power and whose fiscal, monetary, and political policies are predictable and not subject to sudden, radical changes.
Instable government cannot maintain itself in power or makes sudden, unpredictable, or radical policy changes.
Protection From Unfair Competition
Protect the economic activities of citizens.
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Government Stability and Protection 2
Protection from Terrorism, Cybercrime, and Other Threats
Terrorism: unlawful acts of violence committed for a wide variety of reasons.
Kidnapping: provide source of operating funds for terrorists.
Piracy: hijacking and kidnapping on the seas.
Cybercrime: any illegal Internet-mediated activity that takes place in electronic networks.
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Figure 5.2 Global Kidnapping Risk Map 2017
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Source: Red24, Threat Forecast 2017, p. 61, https://www.agcs.allianz.com, accessed September 17, 2018.
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Table 5.1 Maritime Piracy Incidents, 2013 to 2017
| Number of Piracy Incidents | Africa | Asia | Latin America and the Caribbean | Rest of World | Total Incidents |
| 2013 | 79 | 167 | 18 | 0 | 264 |
| 2014 | 55 | 183 | 5 | 2 | 245 |
| 2015 | 70 | 202 | 8 | 1 | 281 |
| 2016 | 122 | 101 | 27 | 1 | 251 |
| 2017 | 151 | 95 | 71 | 4 | 321 |
Sources: Oceans Beyond Piracy, The State of Maritime Piracy 2017, http://oceansbeyondpiracy.org/reports/sop, accessed September 17, 2018; and ICC International Maritime Bureau, Piracy and Armed Robbery Against Ships, http://www.allaboutshipping.co.uk, accessed September 17, 2018.
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Country Risk Assessment and Countermeasures to Threats 1
Country Risk Assessment (CRA)
An assessment of a country’s economic situation and politics to determine how much risk to employees, property, and investment exists for the firm doing business there.
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Figure 5.3 Sample Country Risk Rankings from Economist.com
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Source: “Risk Briefing,” The Economist Group, 2014.
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Country Risk Assessment and Countermeasures to Threats 2
Types of Countermeasures
Know country and region so risk-assessment is realistic.
Insurance and outsourced skills, such as hostage negotiations, as needed to cope with crisis.
Train for daily living skills: varying driving routes, awareness of surroundings, antiterrorism training.
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Government Intervention in Trade 1
Reasons for Restricting Trade
Provide for National Defense
Certain industries need protection from imports because they are vital to security.
Economists say this is a weak argument and used to gain emotional advantage.
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Government Intervention in Trade 2
Reasons for Restricting Trade continued
Impose Sanctions
Inflict economic damage, punish, or encourage change of behavior.
Seldom achieve their goal.
Produce collateral economic damage.
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Government Intervention in Trade 3
Reasons for Restricting Trade continued
Protect an Infant or Dying Industry
Give infant industries a change to grow and build comparative advantage.
Without this, lower-cost imports will underprice in local market.
Slow down impact of dying industry—move capital into other sectors.
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Government Intervention in Trade 4
Reasons for Restricting Trade continued
Protect Domestic Jobs
“Cheap foreign labor” argument does not hold up—wages don’t account for all production costs.
Argument has strong emotional appeal.
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Government Intervention in Trade 5
Reasons for Restricting Trade continued
Ensure Fair Competition
Import duty to bring cost of imports up to cost of domestic goods.
Don’t ban imports but equalize them.
Consumer impact: import duty increases the price they pay.
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Government Intervention in Trade 6
Reasons for Restricting Trade continued
Retaliate
Dumping defined in three ways.
Selling product abroad for less than cost of production.
Selling product abroad for less than price in home market.
Selling product abroad for less than price to third-party countries.
Predatory dumping.
Social dumping.
Environmental dumping.
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Government Intervention in Trade 7
Reasons for Restricting Trade continued
Retaliate continued
Subsidies: Financial contributions, provided directly or indirectly by a government, that confer a benefit, including grants, preferential tax treatment, and government assumption of normal business expenses.
Countervailing duties: Additional import taxes levied on imports that have benefited from export subsidies.
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Figure 5.4 Agricultural Producer Support by Country, Selected Organization for Economic Co-Operation and Development and Developing Nations
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Global Debate
This debate centers around the subject of sugar subsidies and questions whether they are “sweet for producers but sour for food manufacturers and consumers.”
U.S. sugar tariffs went into place in 1789 and sugar imports are currently limited by quotas. These protect a relatively small group of growers in 18 states and costs U.S. consumers and businesses an estimated $4 billion a year.
Sugar accounts for less than one percent of U.S. agricultural sales but have received an estimated 17 percent of all agricultural political contributions since 1990. Some note this as “a very effective lobby.”
Should sugar continue to be a protected commodity?
Should the U.S. consumer continue to fund protection for U.S. sugar farmers? Why or why not?
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1. This question’s response rests on the cogency of the argument. U.S. consumers pay usually more than twice the world market price for their sugar, and thus, higher prices for sugar-intense goods. Free markets would be more in line with the U.S. cultural values. Sugar farmers are a small part of the agricultural sector and would take the hit and be forced to adjust to worldwide efficiencies or find something else to farm.
The protection for sugar is political and has been a part of U.S. trade policy since 1789. So it is an entrenched practice. For this practice, sugar users have been paying. There would be an adjustment required were the U.S. to move to the global market, and that may have a political price that politicians, who influence the trade policy, may not be willing to pay.
2. Most responses to this question may well lead toward non-protection, because such trade distortions are funded by consumers, they protect the U.S. farmers’ inefficient operations, and they increase business costs. All of the standard arguments for protection could support an argument that U.S. sugar farmers should be protected.
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Government Intervention in Trade 8
Tariff Barriers
Tariffs
Taxes on imported goods for the purpose of raising their price to reduce competition for local producers or stimulate local production.
Ad Valorem Duty
An import duty levied as a percentage of the invoice value of imported goods.
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Government Intervention in Trade 9
Tariff Barriers continued
Specific Duty
A fixed sum levied on a physical unit of an imported good.
Compound Duty
A combination of specific and ad valorem duties.
Variable Levy
An import duty set at the difference between world market prices and local government-supported prices.
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Government Intervention in Trade 10
Nontariff Barriers
NTBs are all forms of discrimination against imports other than import duties.
Quantitative Barriers
Numerical limits for specific goods imported during specific period.
Voluntary Export Restraints
VERs are export quotas imposed by exporting nation.
Orderly marketing arrangements are formal agreements.
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Government Intervention in Trade 11
Nontariff Barriers continued
Nonquantitative Nontariff Barriers
Direct government participation in trade.
Customs and other administrative procedures.
Government and private standards.
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Get That Job! From Backpack to Briefcase
Fernando Villanueva
Fernando Villanueva shares his transition from undergraduate studies to international work. His approach began in high school and involved study in France. After graduation, he took a traineeship with AIESEC, a student-run international nonprofit organization that provides leadership training and internship opportunities. His adjustment difficulties in his overseas assignment had to do with recognizing that his cultural assumptions were not always shared and that he could learn rather than teach.
Would you consider an international internship, traineeship, or volunteer position to build your global mind-set? Share your strategy for developing your international management skills.
Courtesy of Fernando Villanueva
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Most students will have begun to think through these questions and will be able to share their developing strategy. For those who have not begun this process, this question can serve to motivate them. Discussion in class can be helpful, since, for many students not raised in an internationally minded environment, such a first step can be challenging.
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MiniCase
The minicase “Chocolate: Is Your Treat the Result of Unfair Labor and the Exploitation of Child Labor?” explores the question of the use of child slave labor on the Ivory Coast. Nearly 60 percent of the world’s cocoa comes from the Ivory Coast where it is estimated that more than 500,000 children work in hazardous conditions, many of which are thought to be victims of human trafficking. It’s highly likely that all chocolate treats enjoyed by consumers have their start on the Ivory Coast.
Should labor practices in another country be a relevant consideration in international trade? Why or why not?
With regard to trade in products such as cocoa, what options are available to governments, businesses, and consumers for dealing with practices such as child labor or slave labor in other countries? What are the implications associated with each of these options?
How would international trade theorists view the Fair Trade movement?
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1. This question offers an opportunity for students to reason through the ethical issues and the business realities of child labor. One approach is to position the late economist Friedman’s position on social responsibility of business (the fiduciary responsibility to shareholders to achieve the best possible business results within a legal framework) against a broader notion of the social responsibility of business, such as the stakeholder theory.
From a pragmatic view, the Internet and increased monitoring of corporate activities by watchdog groups, including the UN suggests that consumers may demand greater levels of social responsibility. Rather than face boycotts, trade sanctions, and certification requirements, businesses may want to meet consumer expectations for social responsibility before such responsibility becomes legislated.
2. Governments can establish trade boycotts and certification requirements. These approaches carry compliance costs to the business and slow down or constrain the movement of supplies. They could also increase the cost of the raw materials.
Businesses can self-regulate, and this approach could create a win-win situation. The child labor situation could be addressed over time, to include child education and training. Product costs would increase, but these costs consumers are willing to pay.
Consumers can show their support for humane work conditions through fair-trade organizations and their own shopping and consumption patterns.
3. The Fair Trade movement could be understood as an international subsidy to farmers from their consumers. The subsidy depends on the farmers’ following certain social, environmental and labor practices.
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Accessibility Content: Text Alternatives for Images
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Figure 5.2 Global Kidnapping Risk Map 2017 – Text Alternative
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Countries with the lowest risk include North America, Australia, Mongolia, Western Europe, and Japan.
Countries with a moderate risk include Argentina, Russia, China, India, Iran, Turkey, and parts of Africa.
Countries with the highest risk include Libya, Afghanistan, Yemen, Mexico, Venezuela, Colombia, Brazil, and parts of Africa.
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Figure 5.3 Sample Country Risk Rankings from Economist.com – Text Alternative
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The countries are ranked from highest to lowest with 100 equal to the highest level of operational risk.
Somalia ranks highest at 85.
Venezuela, Yemen, Congo, and Libya rank between 80 and 85.
North Korea, Iraq, Sudan, and Afghanistan rank between 70 and 80.
Nigeria ranks at 65.
Russia ranks at 50.
China and Mexico ranks at 45.
United States ranks at 20.
Singapore ranks lowest at 10.
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Figure 5.4 Agricultural Producer Support by Country, Selected Organization for Economic Co-Operation and Development and Developing Nations – Text Alternative
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Producer support is lowest in Australia, New Zealand, South Africa, Brazil, Mexico, and the United States.
It is slightly higher in Canada, China, the European Union, Israel, and Russia.
It is the highest in Iceland, Japan, Korea, Norway, and Switzerland.
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