Transcript free trade
B200 TUTORIAL WEEK EIGHT By the end of the Markets module you should be able to: • Describe the role of markets and market economies as social institutions that co-ordinate economic activity. • Describe the role and behaviour of various socioeconomic agents such as households, firms and governments. • Use the various models of the nature of market competition and of market power. • Recognise the existence and nature of market competition and of market power. • Describe the ways in which Governments may try to remedy market failures and the limitations of this process of state intervention. • Deemonstrate the importance of the international dimension of economic activity in both current and historical contexts. • Describe the diversity of market economics. Chapter 8 International Trade by Lipsey and Chrystal This chapter examines some of the issues of international trade. Introduction • International Trade, refers to exchange of goods and service that take place across international boundaries. • There is substantial evidence to show that international trade and economic growth are positively linked. • In this chapter we explain why trade increases output and incomes. Source of the gains from trade • An economy that engages in international trade is called an open economy. One that does not is called a closed economy. A situation where a country does no foreign trade is called autarky. The advantages realized as a result of trade are called the gains from trade. • Interpersonal, interregional and international trade: International trade is necessary to achieve the gains that international specialization makes possible. Trade allows each individual, region, or nation to concentrate on producing those goods and services that it produces efficiently while trading to obtain goods and services that it does not produce efficiently. There are 2 sources of gain from trade: 1- the gain from specialization with given costs: Absolute advantage: a country is said to have an absolute advantage over another in the production of good X when an equal quantity of resources can produce more X in the first country than in the second. Comparative advantage: refer to points 1-4 page 178. 2- The gain from specialization with variable costs: Real production costs, measured in terms of resources used, often falls as the scale of output increases (economies of scale). Countries gain experience in particular tasks worker and managers become more efficient in performing tasks. Cost tend to fall through learning by doing. Terms of trade • Measures the quantity of imported goods that can be obtained per unit of goods exported. = (index of export price / index of import price) * 100 • A rise in the index is referred to as a favourable change in a country’s terms of trade. It means that more can be imported per unit of goods exported than previously. • A decrease in the index of the terms of trade is called unfavourable change. The theory of commercial policy • Government policy toward international trade is known as commercial policy. • Complete freedom from interference with trade is known as a free trade policy. • Any departure from free trade designed to give some protection to domestic industries from foreign competition is called protectionism. • Free trade allows all countries to be specialized in producing products in which they have a comparative advantage. • It allows the maximization of world production, making it possible on average for each consumer in the world to consume more goods. • Free trade improves every one living standard but not always. The Case for Protectionism Two kinds of arguments for protection are commonly offered: 1. Objectives other than maximizing national income (p.181): • Non-economic advantage of diversification: the government might decide that there are distinct social advantages in encouraging a more diverse economy. • Risk of specialization: one such risk is that technological advance may render its major product obsolete. • National defence: the country should be responsible to produce defence product and not count on other countries. • Protection of specific groups: elite people will have special protection, more monopoly, large share and higher income. 2. Maximizing national income as a reason for protectionism: • To alter the terms of trade. • To protect against ‘unfair’ actions by foreign firms and government: tariffs may be used to prevent foreign industries from gaining an advantage over domestic industries. • To protect infant industries, trade restriction protect small industries from foreign competition while they grow up and when they are large enough they will be able to produce as cheaply as foreign rival (competitor) and thus will be able to compete without protection. • To encourage learning by doing, protecting a domestic industry from foreign competition may give its management time to learn to be efficient, and its labour force time to acquire the needed skills. • To create or exploit a strategic trade advantage in producing or marketing some new product that is expected to generate profit. Many of today’s high-tech industries have falling average costs because their large fixed costs of product development. Method of protection There are 2 main types of protection policy that government provide for their domestic industries. Both types cause the price of the imported goods to rise and its quantity to fall. - Policies that directly raise prices, the most common policy of this type is ‘tariff’ tariff affect both foreign and domestic producers and also domestic consumers. By increase amount of tariff the imported product price increase, so the import fall and foreign products sell less. So the domestic products rises as does the quantity produced domestically and domestic producer earn more. - Policies that directly lower quantities of imported product. Importing countries set a maximum on the quantity of some products imported or enter into agreements through voluntary export restriction. Global Commercial Policy There are many international agreements that govern current commercial policies: • GATT, General Agreement on Tariff & Trade. Each member country agrees not to make unilateral tariff increases. This prevents the outbreak of tariff wars in which countries raise tariff to protect particular domestic industries and to retaliate against other countries tariff increase. • WTO, World Trade Organization. It creates a new legal structure for multilateral trading. All members have equal shared rights and obligations. Types of regional agreement There are 3 standards forms of regional trade agreement: 1. Free trade area (FTA) , allows for tariff-free trade among the member countries but it leaves each member to impose its own trade restriction on import from the other countries. 2. A Custom Union, free trade area plus an agreement to establish common barriers to trade with the rest of the world. 3. A common market, is a custom union that also has free movement of labour and capital among its members. Activities • Activity 6 (page 35 of the Markets Study Guide) • Skills (page 36 of the Markets Study Guide) Tutor led discussion Your tutor will lead a discussion on these key points from chapter 8: • Why do nations trade with each other? • What is the difference between a nation’s ‘absolute advantage’ and its ‘comparative advantage’? • Is a nation’s comparative advantage fixed over time or can it change? Should a nation deliberately try to change its comparative advantage? • What reasons other than differences in comparative advantage may lead to gains from trade? • What factors determine the distribution of the gains from trade across the trading parties? Can one trading nation gain more than the other? • Is it possible that a country may actually lose as a consequence of its international trading activity rather than gaining from it? • What are the legitimate arguments for restricting international trade? Can a country gain by temporarily protecting its ‘infant industries’ from the pressures of international competition? • What is strategic trade theory? How did Europe create a comparative advantage in aircraft production when it had none earlier? • What are the possible risks of a policy of protectionism? Chapter 10 Multinational Corporations By Sodersten In this chapter we study the operation of multinational corporations. Answer the following: • Why do businesses go multinational? • What are the problems that an organisation may face when it goes multinational? • What are the benefits that MNCs may bring to their host nations? • What are the disadvantages that MNC investment may bring to their host nations? • Should developing countries encourage MNC investment in their economies? Should they try to regulate MNC activity? - Much of the world’s commerce is done through corporations that operate beyond the borders of any single country. It is estimated that 37,000 multinational corporations do business around the world. - United Nations agencies refer to transnational corporations (TNCs); other experts prefer the terms multinational corporation (MNC), multinational enterprise (MNE), or global corporation. There is no common agreement as to which of these terms is best. - Corporations that do business across national borders are sometimes so large that their annual revenues from worldwide operations exceed the value of goods and services (gross domestic product) of entire nations. For example, General Motors had revenues of $ 164 billion in 1996, more than the entire GDP of Norway ($114 billion) or Thailand ($130 billion) what is a multinational corporation (MNC)? There are many definitions of the MNC. MNCs are “ enterprises which own or control production or service facilities outside the country in which they are used.” • The MNC is an agency of direct, as opposed to portfolio, investment in foreign countries. • It is not always incorporated or private. It can be a cooperative or state-owned entity. • Almost every large business organization has some direct or indirect involvement with foreign countries, but only when an enterprise confronts one or more of the problems of designing, producing, marketing, or financing its products or services within and among foreign nations does it become truly multinational. • some observers view some MNCs as stateless or borderless, meaning that if they choose, they can locate their world headquarters anywhere. • some are national firms with international operations. Even a company such as Switzerland’s Nestle, despite the fact that 98 percent of its sales and 95 percent of its assets are outside the home country, is not likely to move its headquarters for many reasons. The typical MNC cannot easily escape its home environment. • MNC have foreign nationals in top-management positions. For example, the top executives of Coca-Cola include nationals from Australia, Ireland, Italy, and Austria. Why do businesses go multinational? • Going abroad is, of course, profit . management would like to manufacture in those countries where it finds the greatest competitive advantage, would like to buy and sell anywhere in the world to take advantage of the most favorable price to the company, advantage of labor cost, trade agreements, and currency fluctuations; • MNCs help governments to improve economy through employment, sales and profits, tax, improve technology, improve people skills, social stability, productivity of local market, high competition in local market, ….. What are the problems that an organisation may face when it goes multinational? • Problems: relating to operating in a new and unfamiliar environment, coordination of the activity of subsidiaries located in different parts of the world, cross cultural issues. What are the benefits that MNCs may bring to their host nations? • Increase growth rate of host nation through investment, • New technologies or managerial competencies (skills and experience) • Stimulation of competition inducing domestic rivals to be more innovative and competitive. • Development of supporting industries or complementary activities. • Encourage new business industries, • Provide products and services that raise the standard of living , ….. For example, France offered lucrative inducements to get the Mercedes-Benz Swatch mobile factory to locate in France in 1995 In the United States, South Carolina brought a BMW plant to Spartanburg partly with inducements. California, Tennesee, and other states brought Japanese automobile plants to their areas with various inducements. What are the disadvantages that MNC investment may bring to their host nations? Host countries have a long list of complaints about foreign MNCs that operate within their borders • • • • Challenge to Nation- State rules, They want control of their economies and want to achieve their economic, political, and social objectives. The power of the MNC can influence each of these objectives and in so doing may challenge the sovereignty, or the supreme political power, of the government. Inequities , import raw materials from home country but not from host country, avoidance of taxes and giving the best management jobs to MNC home-country citizens. Interference with Economic Objectives for example The MNCs have the strength to attract bank loans which otherwise might be available for local businesses, or an MNC may wish to locate a plant in an area of prosperity when the host country would prefer its location in an underdeveloped region. Social Disruption, The introduction of different mores, habits, behavior, and ethical values, plus new products, management styles, distribution systems, more money, and technology, do affect local ways of thinking and doing things. Some locals may applaud the changes, while others deplore them. • • • • Environmental Degradation, Many nations are becoming more concerned about the impact of MNCs on their environment. Imperialism, Many of the awakening (developing) nations look on foreign managers with fear and distrust as the embodiment (picture) of an old, nor easily forgotten, exploitative (unfair) colonialism. Symbol of annoyance and Antipathy , The LDCs have grievances about their position in the world that have nothing to do with the MNC, but the MNC is a convenient (suitable) visible target for their anger Destruction (affect and damage) of local competition, repatriation (send home) of profits and no investment in the local economy, problems of footloose industry including uncertainty in the labour market. Should developing countries encourage MNC investment in their economies? Should they try to regulate MNC activity? • The above are broad generalizations that vary, of course, from country to country. Sometimes the complaints are completely justified; at other times they are more perceived than real. • But even in some of the highly industrialized countries there are resentments against foreign investment and restraints are imposed on foreign firms. • Hong Kong impose few restrictions (limits) on foreign investments. Sweden treats foreign MNCs as it does its domestic companies. China has many restrictions.