China reduced its tariffs since joining the wto in

•
China reduced its tariffs since joining the WTO in 2001.
•
Firms bypass tariffs by entering countries via FDI.
E.g., Toyota built factories in the U.S. partly to avoid
tariffs.
International Business: The New Realities
8-15

Subsidies
•
Subsidies are government grants (monetary or other
resources) to firm(s), intended to ensure their
survival or success by facilitating production at
reduced prices, or encouraging exports.
•
Grants include cash, tax breaks, infrastructure
construction, or government contracts at inflated
prices.
International Business: The New Realities
8-16

Subsidies (cont’d)
•
Subsidies are government grants (monetary or other
resources) to firm(s), intended to ensure their
survival or success by facilitating production at
reduced prices, or encouraging exports.
•
Grants include cash, tax breaks, infrastructure
construction, or government contracts at inflated
prices.
8-17
Examples
● In China, Shanghai Automotive ($12b ann. sales) and
numerous other MNEs are partly owned by the Chinese
government, and receive huge financial resources.
● Europe and the U.S. provide huge agricultural subsidies
to farmers. EU subsidies represent 40% of the EU budget.

Economic Freedom
•
Economic freedom is the absence of government
coercion so that people can work, produce,
consume, and invest however they want to.
•
The Index of Economic Freedom assesses the rule of
law, trade barriers, regulations, and other criteria.
•
Virtually all advanced economies are ‘free’
•
Emerging markets are either ‘free’ or ‘mostly free’
•
Most developing economies are ‘mostly unfree’ or
‘repressed’
•
Economic freedom flourishes with appropriate of
intervention; too much regulation harms the economy
International Business: The New Realities
8-18

Evolution of Government Intervention
•
Protectionist tendencies, the Great Depression, and
isolationism shaped early 20th century world trade.
•
The Smoot-Hawley Act (1938) raised U.S. tariffs to
more than 50% (compared to only 3% today).
•
Progressive trade policies reduced tariffs after WWII.
•
In 1947, 23 nations signed the General Agreement
on Tariffs and Trade (GATT). The GATT:

reduced tariffs via continuous worldwide trade
negotiations;

created an agency to supervise world trade; and

created a forum for resolving trade disputes.
International Business: The New Realities
8-19

The GATT (cont’)
•
The GATT introduced the concept of most favored
nation (renamed normal trade relations ), according
to which each member nation agreed to extend the
tariff reductions covered in a trade agreement with
one country to all other countries. A concession to
one became a concession to all.