Incoterms 2010 and International Business - 101
Incoterms 2010 and International Business - Wild - Quick Study - Chapter 6
Incoterms 2010 and International Business - 101
International Business: The Challenges of Globalization, 8th Edition, Wild & Wild
Incoterms 2010 and International Business - Wild - Quick Study - Chapter 6
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Quick Study
Quick Study 1
- Q: Free trade is the pattern of imports and exports that occurs in the what?
A: It is the pattern of imports and exports that occurs in the absence of trade barriers.
- Q: For what political reasons does a government intervene in trade?
A: (1) Practically every government restricts imports that threaten jobs in the domestic economy. (2) Governments restrict certain imports for national security reasons because the nation must have access to a domestic supply of certain items in the event of war. Agriculture is often protected for national security because a nation importing food could face starvation in war. (3) A government often threatens to restrict imports coming from a nation that restricts its own imports. (4) The largest nations may get involved in trade to gain influence over smaller nations. For example, Japan has influence among many Asian nations because they rely on Japan for a large amount of their imports and exports. (5) Nations restrict exports containing high technology and those with “dual uses.” They also restrict imports to protect domestic sources in case of war.
- Q: What are some economic reasons why a government intervenes in trade?
A: One economic motive for a nation to intervene in trade is protection of young (infant) industries from competition. According to the infant industry argument, a country’s emerging industries need protection from international competition during their development phase until they become sufficiently internationally competitive. However, drawbacks of this policy include: (1) Governments may not identify industries worth protecting and those not to protect. (2) Protection from international competition can cause domestic companies to become complacent. (3) It can be political suicide to remove protection once it has been given. (4) Consumers can wind up paying more if domestic companies are protected and do not become highly competitive. (5) A main argument of this policy is that small businesses often cannot obtain financing is less true today than in the past.
Another economic motive for intervention is pursuit of a strategic trade policy. The new trade theorists believe government intervention can help companies take advantage of economies of scale and be first movers in their industries. First-mover advantages result because economies of scale limit the number of companies that an industry can sustain. Supporters of strategic trade policy argue that strategic trade policies result in increased national income. However, drawbacks of this strategy are: (1) because it fosters inefficiencies and high costs, following a strategic trade policy can be very damaging to a nation’s economy in hard times; (2) those industries with the best political connections might benefit most from such a policy; and (3) strategic trade policies can spark destructive competition and even trade wars among nations.
- Q: Some people see the products of what country as the greatest threat to local cultures around the world?
A: Some people see the products of the United States as the greatest threat to local cultures around the world. The main cultural motive for government intervention in trade is protection of national identity. For example, France has laws that guarantee French artists a minimum amount of airtime on French radio programs and Canada is considering doing something similar. Governments also block imports of products they think might be harmful to the nation’s culture. They also restrict the importation of certain services such as media and entertainment in order to protect budding artists and others in these industries.
Quick Study 2
- Q: Financial assistance from a government to domestic producers is called what?
A: Governments employ the use of subsidies to assist domestic companies in fending off international competitors. One drawback of subsidies is that they can cause companies to become complacent about increasing efficiency and cutting costs. This can cause companies to overuse resources—an especially difficult problem in developing and emerging countries. Because subsidies are generally funded through tax revenues earned from sales and income taxes, critics charge that they amount to corporate welfare on behalf of consumers.
- Q: What are the hoped-for outcomes of a foreign trade zone?
A: A foreign trade zone (FTZ) is a designated geographic region in which merchandise is allowed to pass through with lower customs duties (taxes) or fewer customs procedures. FTZs promote the most trade when they are established as low-cost assembly points for companies manufacturing products that will then be shipped out to other international markets. An example of an FTZ is the location of Japanese car plants in U.S. states that are administered by the U.S. Department of Commerce.
- Q: What are some of the ways that governments provide export financing?
A: Export financing can help a nation increase exports. A government can offer its companies financing to expand their export activities—financing that they would otherwise be unable to obtain. Governments can also offer to guarantee the loans of its domestic companies that will use the money to expand their exports. Such loans and loan guarantees are often crucial to the export success of small and midsize companies because they often have a far greater need for cash than large, established exporters.
Quick Study 3
- Q: Why might a government impose a tariff on a product?
A: There are two main reasons why countries impose tariffs and they are: (1) to protect domestic producers and (2) to generate revenues.
- Q: Why might a government impose a quota on a product?
A: A government may impose an import quota to protect domestic producers by placing a limit on the amount of goods allowed to enter the country. This helps domestic producers maintain their market shares and prices because competitive forces are restrained.
- Q: A stipulation that a portion of a product be sourced domestically is called what?
A: A local content requirement is a law that stipulates a specified amount of a good or service be supplied by producers in the domestic market. It’s designed to force foreign companies to employ local resources in production processes—particularly labor.
Quick Study 4
- Q: The first system of multilateral agreements to promote free trade was called what?
A: The GATT was designed to promote free trade by reducing both tariff and nontariff barriers to trade. The GATT was formed in 1947 and early success began to wane in the 1980s. Between 1947 and 1988, it helped to reduce average tariffs from 40 percent to 5 percent and multiply the volume of international trade by 20 times. But by the middle to late 1980s, rising nationalism worldwide and trade conflicts led to a nearly 50 percent increase in nontariff barriers to trade. Also, services (not covered by the original GATT) had become increasingly important—accounting for between 25 and 30 percent of total world trade. It was clear that a revision of the treaty was necessary, and in 1994 a new round of trade talks were concluded. A more recent round of talks, begun in 2001, has been disappointing and appears deadlocked.
- Q: What are the main goals of the World Trade Organization?
A: The WTO is the international organization regulating trade among nations. WTO agreements are essentially contracts among member nations that commit them to maintaining fair and open trade policies. The Dispute Settlement Body goes to work as soon as a member nation files a complaint. The rulings of the Body cannot be ignored or blocked by members. Offenders must realign their trade policies according to WTO guidelines or suffer financial penalties and perhaps trade sanctions.
Dumping occurs when a company exports its product at a lower price than it normally charges in its domestic market. The WTO cannot punish the country in which the company accused of dumping is based. The WTO can rule only on the retaliatory actions of other nations. The WTO allows a country to retaliate if it can show that dumping is actually occurring, calculate the damage to its own companies, and show that the damage is significant. Finally, because countries, not companies, give subsidies, the WTO regulates and rules on the actions of both parties in a dispute over subsidies.
- Q: Exporting a product at a price that is lower than that normally charged domestically or one that is lower than production costs can expose a firm to charges of what?
A: Dumping is when a company exports a product at a price that is either lower than the price normally charged in its domestic market or lower than the cost of production.
Down with Dumping
6-19 Q: People love finding a bargain on their favorite items while shopping. But few people would likely want those items made in the home market (and expanding employment) if it meant paying a higher price for them. Do you agree with this sentiment? Explain.
A: Many people would agree with the sentiment expressed in this statement. The attitude would likely change dramatically, however, if the person were to suddenly find his or her own job threatened by a cheap import being dumped on the domestic market.
6-20 Q: Do you think that people from different cultures would respond differently to the above question? If so, identify which cultures.
A: People from individual-oriented cultures would probably be more likely to agree with the statement than would people from very group-oriented cultures. For example, many Japanese would probably disagree with the statement because they would see the dumping as a threat to many people in their nation with whom they are inextricably linked and with whom they feel obligated to assist if possible.
6-21 Q: The WTO cannot punish individual companies, but can only direct the actions toward governments of countries. Why do you think the WTO was not given authority to charge individual companies with dumping? Explain.
A: The task of investigating the actions of individual companies would no doubt overwhelm the resources of an organization the size of the WTO even. Investigating each company against which a complaint was brought would be very time consuming and expensive. Besides, the members of the WTO are not individual companies but the governments of nations in which companies are based. Also, if the WTO had authority to charge individual companies with offenses, charges of political favoritism would probably increase over that which already occurs at the governmental level.
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