IB Final

Administrative delays.

It states that a country's emerging industries need protection from international competition during their development until they become sufficiently competitive.

Government officials often make trade-related decisions based on political motives because a politician's career can depend on pleasing voters and getting reelected. Yet a trade policy based purely on political motives is seldom wise in the long run. The main political motives behind government intervention in trade include protecting jobs, preserving national security, responding to other nations' unfair trade practices, and gaining influence over other nations. Protect Jobs- Short of an unpopular war, nothing will oust a government faster than high rates of unemployment. Thus, practically all governments become involved when free trade creates job losses at home. Preserve National Security-Industries considered essential to national security often receive government-sponsored protection. This is true for both imports and exports. Respond to "Unfair" Trade- Many observers argue that it makes no sense for one nation to allow free trade if other nations actively protect their own industries. Governments often threaten to close their ports to another nation's ships or to impose extremely high tariffs on its goods if the other nation does not concede on some trade issue that is seen as being unfair. In other words, if one government thinks another nation is not "playing fair," it will often threaten to retaliate unless certain concessions are made. Gain Influence- Governments of the world's largest nations may become involved in trade to gain influence over smaller nations. The United States goes to great lengths to gain and maintain control over events in all of Central, North, and South America, and the Caribbean basin.

Import.

local content requirement.

Economic motive.

Embargo

advertise in other countries to promote the nation's exports

agriculture

free trade

International companies can store goods in these zones without incurring taxes, before shipping them to other countries.

they protect domestic producers

Protection of national identity

It is difficult for governments to identify the industries worth protecting.

Export financing

Cultural imperialism

It forces companies from other countries to employ local resources in their production processes.

Companies become more reliant on protection.

Dumping

Gaining influence over other nations.

anti-dumping duty

International Product Life Cycle Theory-The international product life cycle is used to explain foreign direct investment. The international product life cycle theory states that a company will begin by exporting its product and later undertake foreign direct investment as a product moves through its life cycle. In the new product stage, a good is produced in the home country because of uncertain domestic demand and to keep production close to the research department that developed the product. In the maturing product stage, the company directly invests in production facilities in countries where demand is great enough to warrant its own production facilities. In the final standardized product stage, increased competition creates pressures to reduce production costs. In response, a company builds production capacity in low-cost developing nations to serve its markets around the world. Market Imperfections (Internalization)-A market that is said to operate at peak efficiency (prices are as low as they can possibly be) and where goods are readily and easily available is said to be a perfect market. But perfect markets are rarely, if ever, seen in business because of factors that cause a breakdown in the efficient operation of an industry-called market imperfections. Market imperfections theory states that, when an imperfection in the market makes a transaction less efficient than it could be, a company will undertake foreign direct investment to internalize the transaction and thereby remove the imperfection. There are two important market imperfections-trade barriers and specialized knowledge. Eclectic Theory-The eclectic theory states that firms undertake foreign direct investment when the features of a particular location combine with ownership and internalization advantages to make a location appealing for investment. A location advantage is the advantage of locating a particular economic activity in a specific location because of the characteristics (natural or acquired) of that location. These advantages have historically been natural resources such as oil in the Middle East, timber in Canada, or copper in Chile. But the advantage can also be an acquired one such as a productive workforce. An ownership advantage refers to company ownership of some special asset, such as brand recognition, technical knowledge, or management ability. An internalization advantage is one that arises from internalizing a business activity rather than leaving it to a relatively inefficient market. The eclectic theory states that, when all of these advantages are present, a company will undertake FDI. Market Power Theory-Firms often seek the greatest amount of power possible in their industries relative to rivals. The market power theory states that a firm tries to establish a dominant market presence in an industry by undertaking foreign direct investment. The benefit of market power is greater profit because the firm is far better able to dictate the cost of its inputs and/or the price of its output.

to raise company budgets for increased research and development activities

Differential tax rates

Replaces jobs in the home nation.

the low-wage, 130-mile-wide strip along the U.S.-Mexico border that comprises a special economic region

Increased market access for the home country.

Market imperfection

Host countries to restrict FDI

location

False

vertical integration

To keep balance of payments under control

portfolio

newly industrialized nations

sunset industries

maturing product stage

protect the balance of payments

FDI

The desire to increase a firm's global competitiveness drives many cross-border mergers and acquisitions.

the construction of an entirely new steel manufacturing subsidiary overseas

tends to increase the long-term competitiveness of firms

regional trading block

customs union

It eliminated all tariffs and nontariff trade barriers on goods originating from within North America.

that has been proposed to create the largest free trade area on the planet

makes prices between markets more transparent

common market

Benefits of Regional Integration-Nations engage in specialization and trade because of the potential for gains in output and consumption. Higher levels of trade between nations should result in greater specialization, increased efficiency, greater consumption, and higher standards of living. 1. Trade Creation-Economic integration removes barriers to trade and/or investment for nations belonging to a trading bloc. The increase in the level of trade between nations that results from regional economic integration is called trade creation. One result of trade creation is that consumers and industrial buyers in member nations are faced with a wider selection of goods and services not previously available. Another result of trade creation is that buyers can acquire goods and services at lower cost after removal of trade barriers such as tariffs. Furthermore, lower-priced products tend to drive higher demand for goods and services because they increase purchasing power. 2. Greater Consensus-The World Trade Organization (WTO) works to lower barriers on a global scale. Efforts at regional economic integration differ in that they comprise smaller groups of nations-ranging from several countries to as many as 30 or more. The benefit of trying to eliminate trade barriers in smaller groups of countries is that it can be easier to gain consensus from fewer members as opposed to, say, the 153 countries that comprise the WTO. 3. Political Cooperation-There can also be political benefits from efforts toward regional economic integration. A group of nations can have significantly greater political weight than each nation has individually. Thus, the group, as a whole, can have more say when negotiating with other countries in forums such as the WTO. Integration involving political cooperation can also reduce the potential for military conflict between member nations. In fact, peace was at the center of early efforts at integration in Europe in the 1950s. The devastation of two world wars in the first half of the twentieth century caused Europe to see integration as one way of preventing further armed conflicts. 4. Employment Opportunities-Regional integration can expand employment opportunities by enabling people to move from one country to another to find work or, simply, to earn a higher wage. Drawbacks of Regional Integration-Some of the drawbacks of regional integration are as follows. 1. Trade Diversion-The flip side of trade creation is trade diversion-the diversion of trade away from nations not belonging to a trading bloc and toward member nations. Trade diversion can occur after the formation of a trading bloc because of the lower tariffs charged among member nations. It can actually result in increased trade with a less-efficient producer within the trading bloc and reduced trade with a more efficient, nonmember producer. In this sense, economic integration can unintentionally reward a less efficient producer within the trading bloc. Unless there is other internal competition for the producer's good or service, buyers will likely pay more after trade diversion because of the inefficient production methods of the producer. 2. Shifts in Employment-The formation of a trading bloc promotes efficiency by significantly reducing or eliminating barriers to trade among its members. The surviving producer of a particular good or service, then, is likely to be the bloc's most efficient producer. Industries requiring mostly unskilled labor, for example, tend to respond to the formation of a trading bloc by shifting production to a low-wage nation within the bloc. 3. Loss of National Sovereignty-Successive levels of integration require that nations surrender more of their national sovereignty. The least amount of sovereignty that must be surrendered to the trading bloc occurs in a free trade area. By contrast, a political union requires nations to give up a high degree of sovereignty in foreign policy. This is why a political union is so hard to achieve. Long histories of cooperation or animosity between nations do not become irrelevant when a group of countries forms a union. Because one member nation may have very delicate ties with a nonmember nation with which another member may have very strong ties, the setting of a common foreign policy can be extremely tricky.

Maastricht Treaty

trade creation

free trade area

European monetary union

Copenhagen criteria

most members trade more with nonmembers than they do with each other

Council of the EU

EU

European parliament

strengthen the multilateral trading system

agree to treat trade with all nonmember nations in a similar manner

safeguard the regions economic and political stability

political union

regional economic integration

to reduce risk for lenders

governments of nations in which they are sold do not regulate them

bonds

forward

conducting a currency swap

this is a direct quote on the yen

booking centers

The U.S. dollar became a vehicle currency after World War II when all of the world's major currencies were tied indirectly to the dollar because it was the most stable currency.

London Interbank Offer Rate (LIBOR)

exchange rate

securitization

currency option

capital market

reduces the cost of issuing a bond

difference between the bid and the ask quotes for a currency

currency swap

True

hedging

buy

protect currencies from speculators

spot rate

Nominal interest rate=real interest rate+inflation

PPP purchasing power parity

Weight made it expensive to transport

currency hedging

improves its profits

exports on world markets declines and the price of its imports increases

Movement in a currency's exchange rate affects the activities of both domestic and international companies. For example, exchange rates influence demand for a company's products in the global marketplace. A country with a currency that is weak (valued low relative to other currencies) will see a decline in the price of its exports and an increase in the price of its imports. Lower prices for the country's exports on world markets can give companies the opportunity to take market share away from companies whose products are priced high in comparison. Furthermore, a company improves profits if it sells its products in a country with a strong currency (one that is valued high relative to other currencies) while sourcing from a country with a weak currency. For example, if a company pays its workers and suppliers in a falling local currency and sells its products in a rising currency, the company benefits by generating revenue in the strong currency while paying expenses in the weak currency. Yet managers must take care not to view this type of price advantage as permanent because doing so can jeopardize a company's long-term competitiveness. Exchange rates also affect the amount of profit a company earns from its international subsidiaries. The earnings of international subsidiaries are typically integrated into the parent company's financial statements in the home currency. Translating subsidiary earnings from a weak host country currency into a strong home currency reduces the amount of these earnings when stated in the home currency. Likewise, translating earnings into a weak home currency increases stated earnings in the home currency.

Bretton Woods agreement

monetary policy

law of one price

fundamental analysis

prices of financial instruments reflect all publicly available information at any given time

devaluation

very few are accurate

do not reflect all publicly available information

fiscal policy

increases the price of the imports

forward exchange rates

It reduced the risk in exchange rates.