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Unformatted text preview: INTB 3350 — FALL 2009 AREAS OF FOCUS ——> STUDY GUiDE #002 CHAPTERS 6, 7, 8, 9 8: 10 TEST #002 Cha ter #006 *4 Areas of Focus “Be familiar with the instruments of Trade Policy, Case for Government Intervention 8: Future of the WTO: Unresolved issues and the Doha Round sections.” Instruments of Trade Policy Trade policy uses seven (7) main instruments: [1] Tariffs, [2] subsidies, [3] import quotas, [4] voluntary export restraints, [5] local content requirements, [6] administrative policies and [7] anti-dumping duties. Tariffs are the oldest and simplest instrument of trade policy. They are also the instrument that GATT and WTO have been most successful in limiting. A fall in tariff barriers in recent decades has been accompanied by a rise in nonutariff barriers, such as subsidies, quotas, voluntary export restraints, and antidumping duties. The Case for Government Intervention Arguments for government intervention take two paths: (1) potitical and (2) economic. Political arguments for intervention are concerned with protecting the interests of certain groups within a nation (normally producers), often at the expense of other groups (normalty consumers). The political aspect of centers on: job preservation, protecting industries deemed important for national security, retaliating against unfair foreign competition, protecting consumers for “dangerous” products, furthering the goals of foreign policy, and advancing the human rights of individuals in exporting countries. Economic arguments for intervention are typicain concerned with boosting the overall wealth of a nation (to the benefit of all, both producers and consumers). The economic aspect centers on: the deveIOpment of the new trade theory and strategic trade poEicy. The economic arguments for government intervention have undergone a renaissance in recent years. Until the early 19805, most economists saw iittle benefit in government intervention and strongly advocated a free trade policy. This position has changed at the margins with the development of strategic trade policy, although strong arguments stiil remain for sticking to a free trade stance. The Future of the WTO: Unresolved Issues and the Doha Round Much remains to be done on the international trade front. Four issues at the forefront of the current agenda of the WTO are (1) the increase in antidumping policies, (2) the high ievel of protectionism in agriculture, (3) the tack of strong protection for intellectual property rights in many nations, and (4) continued high tariff rates on non-agricultural goods and services in many nations. Ail of the issues that still persist were discussed at Doha (in the Persian Gulf state of Qatar) should be seen as a game plan for negotiations. The agenda includes cutting tariffs on industriai goods and services, phasing out subsidies to agricultural producers, reducing barriers to cross—border investment, and limiting the use of antidumping Jaws. Cha ter #007 —> Areas of Focus “Be familiar with the Foreign Direct investment in the World Economy, Theories of Foreign Direct Investment, and Benefits & Costs of FDI.” Foreign Direct investment in the World Economy When discussing foreign direct investment, it is important to distinguish between the flow of FDI and the stock of FDI. The flow of FD! refers to the amount of FD! undertaken over a given time period (normally a year). The stock of FDI refers to the total accumulated value of foreign—owned assets at a given time. We also talk of outflows of FDl, meaning the flow out of a country, and inflows of FDI, the flow of FDI into a country. Theories of Foreign Direct investment The theories of FDI approach the various phenomena of FDi from three complementary perspectives. One set of theories seeks to explain why a firm wiil favor direct investment as a means of entering a foreign market when two other alternatives, exporting and licensing, are open to it. Another set of theories seeks to explain why firms in they same industry often undertake FDl at the same time, and why they favor certain locations over others as targets for foreign direct investment. These theories try to explain the observed pattern of foreign direct investment flows. A third theoreticai perspective, known as the “eclectic paradigm", attempts to combine the two other perspectives into a singie holistic expianation of foreign direct investment. Exporting, licensing, internaiization theory, market imperfections, oligopoly, multi-point competition, location-specific advantages and externalities are all terms related to these theories. Benefits & Costs of PD] The main Host (receiving)-Country Benefits of inward PM for a host country arise from resource—transfer effects, employment effects, balance- of—payments effects, and effects on competition and economic growth. The three primary Host-Country Costs are (1) possible adverse effects on competition within the host nation, adverse effects on balance of payments, 7 ..4 and the perceived loss of national sovereignty and autonomy. The main Home (source)—Country Benefits of FDI arise from three sources, (1) the home country’s balance of payments benefits from the inward flow of foreign earnings, (2) benefits the home country from outward FDI arise from employment effects, (3) benefits arise when the home-country lVlNE learns valuable skills from its exposure to foreign markets that can subsequently be transferred back to the home country. Home—Country Costs consist of three primary things, (1) the balance of payments suffers from the initial capital outflow required to finance the EDI; however, this is usually offset by the subsequent inflow of foreign earnings. (2) The current account of the balance of payments suffers if the purpose of the foreign investment is to serve the home market from a lowucost production location. (3) The current account of the balance of payments suffers if the PD] is a substitute for direct exports. Cha ter #008 —> Areas of Focus “Be familiar with the Levels of Economic Integration, Case for Regional Integration, Case against Regional integration, and Regional Economic Integration in the Americas.” Levels of Economic Integration Several levels of economic integration are possible in theory. From least integrated to most integrated, they are a free trade area, a customs union, a common market, an economic union, and a full political union. Case for Regional Integration The case for regional integration is both economic and political. The economic case for integration is based on the benefits of unrestricted free trade, which allows for free flow of goods between countries and factors of production. The political case for integration is based on the benefits of linking neighboring economies and making them increasingly dependent on each other creates incentives for political cooperation between the neighboring states and reduces the potential for violent conflict. In addition, by grouping their economies, the countries can enhance their political weight in the world. Case Against Regional Integration Some economists have expressed concerns that the benefits of regional integration have been oversold, while the costs have often been ignored. They point out that the benefits of regional integration are determined by the extent of trade creation, as opposed to trade diversion. A regional free trade agreement will benefit the world only if the amount of trade it creates exceeds the amount it diverts. Regional Economic Integration in the Americas I No other attempt at regional economic integration comes ciose to the EU in its boldness or potentiai implications for the world economy, but regional economic integration is on the rise in the Americas. The most significant attempt is the North American Free Trade Agreement (NAFTA). In addition to NAFTA, severe! other trade biocs are in the offing in the Americas, the most significant of which appear to be the Andean Community and MERCOSUR. Also negotiations are under way to establish a hemisphere— wide Free Trade Area of the Americas (FTAA). NAFTA, The Andean Community, MERCOSUR, Central American Common Market, CAFTA (Central America Free Trade Agreement), CARECOM (Caribbean Community), CSME (Caribbean Single Market & Economy), ASEAN (Association of Southeast Asian Nations) and APEC (Asia-Pacific Economic Cooperation) are ali related to this topic. Cha ter #009 —> Areas of Focus “Be familiar with the Functions of Foreign Exchange Market, Economic Theories of Exchange Rate Determination and Currency Convertability." Functions of Foreign Exchange Market - The foreign exchange market serves two main functions. The first is to convert the currency of one country into the currency of another. The second is to provide some insurance against foreign exchange risk, by which they mean the adverse consequences of unpredictable changes in exchange rates. Economic Theories of Exchange Rate Determination - At the most basic ievel, exchange rates are determined by the demand and suppty of one currency relative to the demand and suppr of another. The Law of One Price, Purchasing Power Parity, the Fisher Effect, the international Fisher Effect and the Bandwagon Effect are all related to this topic. Currency Con vertabiiity 1! Due to government restrictions, a significant number of currencies are not freely convertible into other currencies. Freely convertible, externaily convertible, non-convertible, capital flight and countertrade are ail aspects of this topic. “Be familiar with the Focus on Managerial Impiications.” I it is critical that international business understand the infiuence of exchange rates on the profitability of trade and investment deals. Foreign exchange risk is usually divided into three main categories: (1) transaction exposure, (2) translation exposure and (3) economic exposure — all of 4 which are in the terms & definitions sheet. In an effort to reduce translation and transaction exposure, firms utiiize (1) lead strategy and (2) lag strategy. Cha ter #010 —> Areas of Focus “Be familiar with the Introduction, Bretton Woods System, Floating Exchange Rate Regime, Fixed versus Floating Exchange Rates and Crisis Management by the IMF.” Introduction The international monetary system refers to the institutional arrangements that govern exchange rates. The world's four major trading currencies, the US. dollar, the EU’s euro, the Japanese Yen and the British Pound - all float freeiy against each other. Thus, their exchange rates are determined by market forces and fluctuate against each other day to day, if not minute to minute. However, the exchange rates of many currencies are not determined by the free play of market forces; other institutional arrangements are adopted. Bretton Woods System in 1944, at the height of World War II, representatives from 44 countries met a Bretton Woods, New Hampshire to design a new international monetary system. With the coltapse of the gotd standard and the Great Depression of the 19308 fresh in their minds, these statesmen were determined to build an enduring economic order that would facilitate postwar economic growth. The agreement reached at Bretton Woods established two muitinationat institutions — the International Monetary Fund (IMF) and the World Bank. Floating Exchange Rate Regime The floating exchange rate regime that followed the collapse of the fixed exchange rate system was formalized in January 1976 when IMF members met in Jamaica and agreed to the rutes for the international monetary system that are in piace today. The main elements were: (1) floating rates were declared acceptable, (2) gold was abandoned as a reserve asset and (3) total annual lMF quotas were increased to $41 biliion. The EMF continued its role of helping countries cope with macroeconomic and exchange rate problems, within a radicaliy different exchange rate regime. Fixed versus Floating Exchange Rates The breakdown of the Bretton Woods system has not stopped the debate about the relative merits of fixed versus floating exchange rate regimes. The case in support of floating exchange rates has two main elements: (1) monetary policy autonomy and (2) automatic trade balance adjustments. The case for fixed exchange rates rests on arguments about monetary discipline, speculation, uncertainty, and the lack of connection between the trade balance and exchange rates. Crisis Management by the IMF I Many believed that the collapse of the Bretton Woods system in 1973 would diminish the role of the IMF within the internationai monetary system. Although no major country has drawn on IMF funds since the 1970s, the IMF has expanded its activities over the past 30-years. In 1997, The IMF implemented its largest rescue package, committing more than $110 billion in short~term loans to three troubled Asian countries «~— South Korea, Indonesia and Thailand. This was followed by additional rescue packages in Turkey, Russia, Argentina and Brazil. These activities have continued mainly due to periodic financial crises that usually occur among the world’s developing nations. ...
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This note was uploaded on 04/24/2010 for the course MARK 3336 taught by Professor Cox during the Spring '10 term at University of Houston - Downtown.

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