LESSON 1: GLOBALIZATION

1. Learning objectives:
LO 1-1 Understand what is meant by the term globalization.
LO 1-2 Recognize the main drivers of globalization.
LO 1-3 Describe the changing nature of the global economy.

2. Introduction
The world economy today

✔ Fewer self-contained national economies with high barriers to cross-border trade and
investment
✔ A more integrated global economic system with lower barriers to trade and investment

✔ Over $5 trillion in foreign exchange transactions daily

✔ Over $19 trillion of goods and $5 trillion of services being sold across national borders

✔ The establishment of international institutions

Today’s world reflects globalization

✔ Declining barriers to cross-border trade and investment

✔ Advances in transportation and telecommunications

✔ Material culture similar all over the world

✔ National economies merging into integrated global economic system

3. What Is Globalization?
▪ Globalization refers to the trend towards a more integrated and interdependent world
economy
▪ Two key facets of globalization

✔ The globalization of markets

▪ Glo focus on suppliers => firm (upstream )
▪ firm=> customers (downstream)

✔ The globalization of production

▪ Facet: a part of a subject

3.1 The Globalization of Markets

✔ The merging of historically distinct and separate national markets into one huge global
marketplace

✔ In many markets today, the tastes and preferences of consumers in different nations are
 converging upon some global norm

▪ Coca Cola, McDonald’s, IKEA, Starbucks, Apple

3.2 The Globalization of Production (outsource)

✔ Sourcing of goods and services from locations around the globe to take advantage of
national differences in the cost and quality of factors of production (labor energy,
land, and capital)
✔ Lower overall cost structure
✔ Improve the quality or functionality of the product to compete more effectively
✔ Being only undertakes engineering design, marketing and sales, final assembly –
everything else is outsourced globally
▪ Currently rethinking this strategy
Case Study

The Globalization of Production continued

✔ Early outsourcing was primarily for manufacturing
✔ Today, modern communications technology allows companies to outsource services

✔ Impediments to globalization
Impediment (n): something that makes progress, movement, or achieving something difficult
or impossible
▪ Formal (government intervention) and informal trade barriers (culture)
 ▪ Barriers to foreign direct investment
▪ Transportation costs
▪ Economic and political risk
▪ Managerial challenge

4. The Emergence of Global Institutions

LESSON 2: National Differences in Political, Economic, and Legal Systems

1. Learning Objectives

LO 2-1 Understand how the political systems of countries differ.

LO 2-2 Understand how the economic systems of countries differ.

LO 2-3 Understand how the legal systems of countries differ.

LO 2-4 Explain the implications for management practice of national differences in

political economy.

2. Introduction

3. What is a Political Systems?

▪ Political system: the system of government in a nation

▪ Political systems can be assessed in terms of the degree to which they:

✔ Emphasize collectivism as opposed to individualism

✔ Are democratic or totalitarian

Assessed according to
- the degree to which the country emphasizes collectivism as opposed to individualism
- the degree to which the country is democratic (dân chủ) or totalitarian (độc tài)

Definition:
3.1 Collectivism
3.2 Individualism
3.3 Democratic
A democracy is a country in which power is held by elected representatives.
3.4 Totalitarian: of or relating to a government that has almost complete control over the
lives of its citizens and does not permit political opposition

4. What is an Economic Systems?

▪ Political ideology and economic systems are connected
▪ There are three types of economic systems: the market economy, the command economy,
and the mixed economy
✔ A market-based economic system is likely in countries where individual goals are given
primacy over collective goals
✔ State-owned enterprises and restricted markets are common in countries where
collective goals are dominant
4.1 Market Economy

✔ In a pure market economy the goods and services that a country produces (all
productive activities are privately owned, and the quantity in which they are produced
is determined by supply and demand

▪ Supply must not be restricted by monopolies

▪ The role of government is to encourage free and fair competition between private
producers

4.2 Command Economy

✔ In a pure command economy the goods and services that a country produces, the
quantity in which they are produced, and the price at which they are sold are all planned
by the government

▪ All businesses are state-owned, and have little incentive to control costs and be
efficient

▪ Because there is no private ownership, there is little incentive to better serve

consumer needs

▪ Dynamism and innovation are absent

4.3 Mixed economics

✔ A mixed economy includes some elements of a market economy and some elements of
a command economy

▪ Governments take over troubled firms considered vital to national interests

(governments tend to own firms that are considered important to national
security)

✔ The number of mixed economies in the world today is falling

5. What is the link between Political Ideology and Economic System?

6. What is a Political Systems?

▪ The legal system of a country refers to the rules, or laws, that regulate behavior, along with
the processes by which the laws of a country are enforced and through which redress for
grievances is obtained
=> the system in a country is influenced by the prevailing political system
▪ A country’s legal system is important because laws:
✔ Regulate business practice
✔ Define the manner in which business transactions are to be executed
✔ Set down the rights and obligations of those involved in business transactions
6.1 Different Legal Systems

✔ Common law ( thông luật/án tiền lệ): based on tradition, precedent, and custom : US,
UK
▪ Found in most of Great Britain’s former colonies, including the United States,
Based on tradition, precedent and custom

✔ Civil law (luật dân sự): based on detailed set of laws organized into codes
▪ Found in more than 80 countries, including Germany, France, Japan, and
Russia

✔ Theocratic law (luật thần quyền): based on religious teachings

▪ Islamic law is the most widely practiced

6.2 How are contracts enforced in different legal systems?

6.2.1 Definition
6.2.2 Differences in Contract Law
✔ The United Nations Convention on Contracts for the International Sales of Goods
(CISG) ( công ước liên hợp quốc về hợp mua bán hàng hoá quốc tế ) establishes a
uniform set of rules governing certain aspects of the making and performance of
everyday commercial contracts between sellers and buyers who have their places of
business in different nations
▪ Countries that adopt CISG signal to other nations that they will treat the
Convention’s rules as part of their law

6.2.3 Property Rights and Corruption

✔ Property rights: the legal rights over the use to which a resource is put and over the
use made of any income that may be derived from that resource
✔ Private action: theft, piracy, blackmail, and the like by private individuals or groups

✔ Public action: public officials extort income or resources from property holders
⮚ Excessive taxation, requiring expensive licenses or permits from property holders, or
taking assets into state ownership without compensating the owners
Corruption is present in all countries to some degree, however when a country has a high level of
corruption:

▪ Foreign direct investment falls

▪ International trade falls
▪ Economic growth falls

6.2.4 The Protection of Intellectual Property

✔ Intellectual property: property that is the product of intellectual activity

 ▪ Patents: give the inventor exclusive rights to the manufacture, use, or sale of that
invention
▪ Copyrights: exclusive legal rights of authors, composers, playwrights, artists,
and publishers to publish and dispose of their work as they see fit
▪ Trademarks: designs and names, often officially registered, by which
merchants or manufacturers designate and differentiate their products
Example:

6.2.5 The Protection of Intellectual Property continued

- Product Safety Laws set certain standards to which a product must adhere
- Product liability involves holding a firm and

✔ The protection of intellectual property rights differs greatly from country to country

✔ 185 nations are members of the World Intellectual Property Organization

▪ Paris Convention for the Protection of Industrial Property: agreement signed

by 170+ countries to protect intellectual property rights

⮚ Enforcement is lax in many nations especially in China and Thailand

 LESSON 3: National Differences in Economic Development

1. Learning objectives:
LO 3-1 Explain what determines the level of economic development of a nation.

LO 3-4 Explain the implications for management practice of national differences in political
economy.

2. Differences in Economic Development

A country’s level of economic development affects its attractiveness as a possible market or
production location for firms
✔ A common measure is gross national income (GNI) (GNI) measures the total
annual income received by residents of a nation -> GNI Per capita
=> GNI per person figures can be misleading because they don’t consider differences in the cost
of living
✔ A purchasing power parity (PPP) adjustment provides a more direct comparison of
living standards in different countries (based on the living cost of US)

Official figures can be misleading

✔ Unrecorded cash transactions can be significant

⮚ India’s black or shadow economy may be around 50% of GDP

⮚ The EU estimates that the shadow economy accounted for 10% of GDP in the
UK and France in 2012, 24% in Greece, and 32% in Bulgaria

Broader Conceptions of Development

✔ Amartya Sen - development should be assessed less by material output and more by the
capabilities and opportunities that people enjoy
✔ The UN created the Human Development Index based on life expectancy, education
attainment, and whether average incomes are sufficient to meet the basic needs of life
in a country

▪ Reflects Sen’s ideas and gauges a country’s economic development and likely future growth
rate
▪ The HDI is scaled from 0 to 1
▪ <0,5 low human development (the quality of life is poor)
▪ 0,5 to 0,8 medium human development
▪ >0,8 high human development

3. Political Economy and Economic Progress

Innovation and Entrepreneurship are the Engines of Growth

✔ For a country to sustain long term economic growth, the business environment needs to
be conducive to innovation and entrepreneurial activity
 ✔ Innovation - new products, new processes, new organizations, new management
practices, and new strategies

✔ Entrepreneurs first commercialize innovative new products and processes

Radical Innovation Incremental Innovation

Facebook, Smartphone (Apple) slight change ( little by little)

make a big chance to the firm/world

Innovation and Entrepreneurship require a Market Economy

✔ Countries with high economic freedom have high economic growth and richer citizens

▪ Hong Kong, Switzerland, Singapore, the U.S., Canada, and Germany

✔ Countries that lack economic freedom also fail to achieve respectable economic growth

Innovation and Entrepreneurship require Strong Property Rights

✔ Individuals and businesses must have the opportunity to profit from innovative ideas
✔ Hernando de Soto – developing world will not benefit from capitalism until property
rights are better defined and protected

The Required Political System

✔ Democratic regimes tend to be more conducive to long-term economic growth than

dictatorships – even the benevolent kind

▪ Limiting human freedom also suppresses human development and therefore

limits progress

Economic Progress Begets/( to cause) Democracy

✔ Democracy is often a consequence of economic growth
▪ South Korea and Taiwan
✔ This has contributed to the attitude of many Western governments towards human
rights violations in China
▪ If China establishes a free market system, it is hoped that greater individual
freedom and democracy will follow

Geography, Education, and Economic Development

✔ Geography - influences economic policy, and thus economic development
▪ Favorable geography facilitates trade which can promote economic growth
✔ Education levels
▪ Investment in education promotes faster economic development
 LESSON 4: Differences in Culture

1. Learning objectives:
LO 4-1 Explain what is meant by the culture of a society.

LO 4-2 Identify the forces that lead to differences in social culture.

LO 4-3 Identify the business and economic implications of differences in culture.

LO 4-4 Recognize how differences in social culture influence values in business.

LO 4-5 Demonstrate an appreciation for the economic and business implications of cultural change.

2. Introduction

▪ Cross-cultural literacy - an understanding of how cultural differences across and within

nations can affect the way in which business is practiced
▪ There may be a relationship between culture and the costs of doing business in a country or
region
▪ Culture is not static/constant – it can and does evolve
▪ Multinational enterprises can be engines of cultural change

3. What is Culture?
Values and Norms
✔ Values - provide the context within which a society’s norms are established and
justified
✔ Norms - the social rules that govern the actions of people toward one another
▪ Folkways - the routine conventions of everyday life

▪ Mores (very serious, you must have to follow - không được ăn thịt người) -
norms that are seen as central to the functioning of a society and to its social life

Culture, Society, and the Nation-State

✔ Society reflects people who are bound together by a common culture

▪ Nation-states are political creations that can contain a single culture or several
cultures

▪ Some cultures embrace several nations

▪ Also possible to talk about culture at different levels within societies

4 The Determinants of Culture

✔ The values and norms of a culture evolve based on:

▪ Prevailing political and economic philosophies

 ▪ A society’s social structure

▪ The dominant religion, language, and education

Figure 4.1 The Determinants of Culture

4.1 Social Structure

▪ A society's social structure is its basic social organization

✔ Two dimensions to consider

▪ The degree to which the basic unit of social organization is the individual, as
opposed to the group

▪ The degree to which a society is stratified (arranged in separate layers) into classes
or castes

4.1.1 Individuals and Groups

✔ Group - an association of two or more individuals who have a shared sense of identity
and who interact with each other in structured ways on the basis of a common set of
expectations about each other’s behavior
▪ The Individual

✔ Emphasized in Western countries

✔ Individual achievement and entrepreneurship are promoted
✔ Fosters managerial mobility
✔ Encourages job switching, competition between individuals rather than team building,
and a lack of loyalty to the firm

▪ The Group

✔ Emphasized in non-Westernized countries (Japan)

✔ Cooperation and teamwork are encouraged and life time employment is common
✔ Individual initiative and creativity may be suppressed ( to end something by force)
4.1.2 Social Stratification

- All societies are stratified on a hierarchical basis into social categories, or social strata

▪ Usually defined by characteristics such as family background, occupation, and

income
- Societies differ in terms of

▪ The degree of mobility between social strata

▪ The significance attached to social strata in a business context

Four basic principles of social stratification

1. It is a trait of society, not a reflection of individual differences
2. It carries over a generation to the next generation
3. It is generally universal, but variable
4. It involves not just inequality but also beliefs

- Social mobility - the extent to which individuals can move out of the strata into which they
are born

▪ Caste system (hệ thống đẳng cấp) - social position is determined by the family
into which a person is born, and change in that position is unlikely (very difficult
or almost impossible to move out that social position)

▪ Class system (hệ thống giai cấp) - the position a person has by birth can be
changed through achievement or luck
▪ Social mobility in class system varies from society to society
▪ Class system in U.S. less pronounced than in Britain

4.2 Religious and Ethical Systems

▪ Religion - a system of shared beliefs and rituals that are concerned with the realm of the
sacred

▪ Ethical system – a set of moral principles, or values, that are used to guide and shape
behavior
▪ Religions with the greatest following
✔ Christianity - thiên chúa giáo (2.20 billion adherents) - adherent (n): Hội viên
✔ Islam - đạo hồi (1.60 billion adherents)
✔ Hinduism - đạo Hindu (1.10 million adherents)
✔ Buddhism - đạo Phật (535 million adherents)
✔ Confucianism - Nho giáo shapes culture in many parts of Asia
4.3 Language
▪ Countries differ in terms of language or means of communication
▪ There are two forms language:
✔ Spoken
✔ Unspoken
▪ Language is one of the defining characteristics of culture

4.3.1 Spoken Language

✔ Countries with more than one spoken language often have more than one culture

▪ Chinese is the mother tongue of the largest number of people in the world

▪ English is the most widely spoken language in the world, and is becoming the
language of international business

4.3.2 Unspoken Language

✔ Unspoken language - nonverbal cues

▪ Examples include facial expressions and hand gestures

▪ Can be important for communication

▪ Personal space

✔ Many nonverbal cues are culturally bound and because they may be interpreted
differently, can result in misunderstandings

LESSON 5: Ethics, Corporate Social Responsibility, and Sustainability

1. Learning objectives:
LO 5-1 Understand the ethical issues faced by international businesses.

LO 5-2 Recognize an ethical dilemma.

LO 5-3 Identify the causes of unethical behavior by managers.

LO 5-4 Describe the different philosophical approaches to ethics.

LO 5-5 Explain how managers can incorporate ethical considerations into their decision making.
 LESSON 6: International Trade Theory

1. Learning objectives:
LO 6-1 Understand why nations trade with each other.

LO 6-2 Summarize the different theories explaining trade flows between nations.

LO 6-3 Recognize why many economists believe that unrestricted free trade between nations will
raise the economic welfare of countries that participate in a free trade system.

LO 6-4 Explain the arguments of those who maintain that the government can play a proactive role
in promoting national competitive advantage in certain industries.

LO 6-5 Understand the important implications that international trade theory holds for management
practice.

2. Introduction
▪ Economists argue that free trade stimulates economic growth and raising the standard of living

▪ Many theories explain why free trade is beneficial

3. An Overview of Trade Theory

Free trade refers to a situation where a government does not attempt to influence through quotas or
duties what its citizens can buy from another country or what they can produce and sell to another
country
• Mercantilism (16th and 17th centuries) encouraged exports and discouraged imports
• Adam Smith (1776) promoted unrestricted free trade
• David Ricardo (19th century) built on Smith ideas
• Eli Heckscher and Bertil Ohlin (20th century ) refined Ricardo’s work

The Benefits of Trade

• Specialize in the manufacture and export of products that can be produced most
efficiently in that country
• Import products that can be produced more efficiently in other countries
• Gains arise because international trade allows a country to specialize in the manufacture
and export of products

The Pattern of International Trade

Ricardo’s theory of comparative advantage
▪ Trade patterns reflect differences in labor productivity
Heckscher and Ohlin
▪ Trade reflects the interplay between the proportions in which the factors of
production are available in different countries and the proportions in which they
are need for producing particular goods
Ray Vernon
▪ Trade patterns reflect a product’s life cycle
 Paul Krugman’s new trade theory

✔ The world market can only support a limited number of firms in some industries

✔ Trade will skew toward those countries that have firms that were able to capture first
mover advantages

Michael Porter’s theory

✔ Country factors explain a nation’s dominance in the production and export of certain
products

Trade Theory and Government Policy

✔ Mercantilism makes a case for government involvement in promoting exports and

limiting imports

✔ Smith, Ricardo, and Heckscher-Ohlin promote unrestricted free trade

✔ New trade theory and Porter justify limited and selective government intervention to
support the development of certain export-oriented industries

3.1 Mercantilism: chủ nghĩa trọng thương

Mercantilism (mid-16th century): it is in a country’s best interest to maintain a trade surplus
- to export more than it imports
Wealth is equal to possession of gold and silver. Encouraging exports, discouraging imports
✔ Advocated government intervention to achieve a surplus in the balance of trade

✔ Viewed trade as a zero-sum game: one in which a gain by one country results in a loss
by another
3.2 Absolute advantage
▪ Smith (1776) - countries differ in their ability to produce goods efficiently
▪ A country has an absolute advantage in the production of a product when it is more efficient
than any other country in producing it
▪ According to Smith
✔ Trade is not a zero-sum game
✔ Countries should specialize in the production of goods for which they have an absolute
advantage and then trade these goods for the goods produced by other countries

3.3 Comparative advantage

▪ Ricardo (1817): What happens when one country has an absolute advantage in the production
of all goods?
▪ Proposed the theory of comparative advantage

✔ A country should specialize in the production of those goods that it produces most
efficiently and buy the goods that it produces less efficiently from other countries, even
if this means buying goods from other countries that it could produce more efficiently
itself

The Gains from Trade

▪ The theory of comparative advantage - trade is a positive sum game in which all gain

✔ Potential world production is greater with unrestricted free trade than it is with
restricted trade

✔ Provides a strong rationale for encouraging free trade

 Qualifications and Assumptions
1. Only two countries and two goods
2. Zero transportation costs
3. Similar prices and values
4. Resources are mobile between goods within countries, but not across countries
5. Constant returns to scale
6. Fixed stocks of resources
7. No effects on income distribution within countries

Extensions of the Ricardian Model

✔ Suppose the following assumptions are relaxed

1. Resources move freely from the production of one good to another within a
country

2. There are constant returns to scale

3. Trade does not change a country’s stock of resources or the efficiency with which
those resources are utilized
\
✔ Immobile Resources
▪ Resources do not always move freely from one economic activity to another
▪ Governments may help retrain displaced workers
✔ Diminishing Returns

▪ The simple model assumes constant returns to specialization: the units of

resources required to produce a good are assumed to remain constant
▪ An assumption of diminishing returns is more realistic since not all resources are
of the same quality and different goods use resources in different proportions

✔ Dynamic Effects and Economic Growth

▪ Trade might increase a country's stock of resources as increased supplies become
available from abroad

▪ Free trade might increase the efficiency of resource utilization, and free up

resources for other uses

3.4 Heckscher-Ohlin Theory
Heckscher and Ohlin: Comparative advantage reflects differences in national factor endowments:
the extent to which a country is endowed with resources such as land, labor, and capital
*Be endowed with something: to have a particular quality or feature.
✔ This theory has common sense appeal
▪ Export goods that make intensive use of those factors that are locally abundant
▪ Import goods that make intensive use of factors that are locally scarce

The Leontief Paradox

✔ Leontief (1953): Since the U.S. was relatively abundant in capital, it would export
capital intensive goods and import labor-intensive goods
▪ Leontief found that U.S. exports were less capital intensive than U.S. imports
✔ Possible explanations
▪ The U.S. has a special advantage in producing products made with innovative
technologies that are less capital intensive
▪ Differences in technology lead to differences in productivity which then drives
trade patterns

3.5 The Product Life Cycle Theory

Vernon (mid-1960s ) proposed product life-cycle theory

✔ As products mature both the location of sales and the optimal production location will
change affecting the flow and direction of trade

▪ At the time, the wealth and size of the U.S. market gave a strong incentive to
U.S. firms to develop new products

Product Life-Cycle Theory in the 21st Century

✔ The product life cycle may not be as relevant today

▪ Many products are now introduced in Japan or South Korea

▪ Many new products are also introduced simultaneously into the U.S., Europe,
and Asia

⮚ Firms use globally dispersed production from the start

3.6 New Trade Theory

▪ Trade can increase the variety of goods available and decrease the average cost of those goods
because of economies of scale: unit cost reductions associated with a large scale of output
▪ When the output required to attain economies of scale represents a significant proportion of
total world demand, the global market may only be able to support a small number of firms

Increasing Product Variety and Reducing Costs

✔ Without trade
 ▪ A small nation may not be able to support the demand necessary for producers to
realize required economies of scale, and so certain products may not be produced
✔ With trade
▪ A nation may be able to specialize in producing a narrower range of products and
then buy the goods that it does not make from other countries
▪ Each nation then simultaneously increases the variety of goods available to its
consumers and lowers the costs of those goods

Economies of Scale, First-Mover Advantages, and the Pattern of Trade

✔ Firms with first mover advantages (the economic and strategic advantages that accrue
to many entrants into an industry) will develop economies of scale and create barriers
to entry for other firms

▪ The pattern of trade we observe in the world economy may be the result of first
mover advantages and economies of scale.

Implications of New Trade Theory

✔ Nations may benefit from trade even when they do not differ in resource endowments
or technology
✔ A country may predominate in the export of a good simply because it was lucky enough
to have one or more firms among the first to produce that good
✔ New trade theory at a variance with Heckscher-Ohlin theory
✔ New trade theory useful in explaining trade patterns

New trade theory provides an economic rationale for a proactive trade policy that is at variance with

other free trade theories

3.7 National Competitive Advantage: Porter’s Diamond

● Porter believed existing theories of international trade only told part of the story
● Wanted to explain why a nation achieves international success in a particular industry
● Four attributes of a nation that shape the environment in which local firms compete –
Porter’s Diamond
● Chance and government can influence the national diamond
3.7.1 Factor Endowments

✔ Hierarchies among factors

▪ Basic: natural resources, climate, location, demographics

▪ Advanced: communication infrastructure, skilled labor, technological know-how

▪ Advanced factors more significant for competitive advantage

▪ Basic factors can provide an initial advantage that is extended by investment in

advanced factors

3.7.2 Demand Conditions

✔ The nature of home demand for an industry’s product or service

✔ Influence the development of capabilities

▪ Sophisticated and demanding customers pressure firms to be more competitive and to produce
high quality, innovative products

3.7.3 Related and supporting industries

✔ The presence of supplier industries and related industries that are internationally
competitive

✔ Investing in these industries can spill over and contribute to success in other industries

▪ Successful industries tend to be grouped in clusters in countries which then prompts

knowledge flows between firms

3.7.4 Firm strategy, Structure, and Rivalry

✔ Different nations are characterized by different management ideologies which either
help them or do not help them build national competitive advantage
✔ There is a strong association between vigorous domestic rivalry and the creation and
persistence of competitive advantage in an industry

Evaluating Porter’s Theory

✔ If Porter is correct, his model should predict the pattern of international trade in the real
world
• Countries should export products from industries where the diamond is favorable
• Countries should import products from areas where the diamond is not favorable
✔ So, far there has been little empirical testing of the theory
 LESSON 7: Government Policy and International Trade

1. Learning objectives:
LO 7-1 Identify the policy instruments used by governments to influence international trade flows.

LO 7-2 Understand why governments sometimes intervene in international trade.

LO 7-3 Summarize and explain the arguments against strategic trade policy.

LO 7-4 Describe the development of the world trading system and the current trade issue.

LO 7-5 Explain the implications for managers of developments in the world trading system.

2. Introduction
Free trade refers to a situation where a government does not attempt to restrict what its citizens can
buy from another country or what they can sell to another country

✔ While many nations are nominally committed to free trade, they tend to intervene in
international trade to protect the interests of politically important groups

2 The case for Government Intervention

2.1 Political Arguments

- Concerned with protecting the interests of certain groups within a nation (normally
producers) often as the expense of either groups ( normally consumers)

Political Arguments for intervention

- Protecting jobs and Industries

- Protecting national security
- Retailiating
Use intervention as a bargaining tool and force trading partners to “play by the rules
of the game”
- Protecting consumers: ban unsafe products
- Furthering foreign policy objectives
Grant preferential trade terms to a country it wants to build relations with
Pressure or punish “rogue” states
- Protecting human rights

2.2 Economic arguments

- Concerned with boosting the overall wealth of a nation (to the benefit of all, both producers
and consumers)

Economic Arguments for intervention

- The infant industry argument
An industry should be protected until it can develop and be viable and competitive
internationally
This argument has been criticized because it is useless it makes the industry more
efficient and if a country has the potential to develop a viable competitive position, its firms
should be capable of raising necessary funds
 - Strategic trade policy
By appropriate actions, government

3. Instruments of trade policy

Seven main instruments of trade policy
1. Tariffs: thuế quan
2. Subsidies: trợ cấp
3. Import quotas: hạn ngạch nhập khẩu
4. Voluntary export restraints: hạn chế xuất khẩu tự nguyện
5. Local content requirements : yêu cầu hàm lượng nội địa hoá
6. Administrative policies : chính sách về hành chính
7. Antidumping duties: thuế chống bán phá giá

Nontariff barriers include

1. Subsidies
2. Quotas
3. Voluntary export restraints
4. Antidumping duties

3.1 Tariffs

✔ A tariff is a tax levied on imports that effectively raises the cost of imported products
relative to domestic products

▪ Specific tariffs: levied as a fixed charge for each unit of a good imported

▪ Ad valorem tariffs: levied as a proportion of the value of the imported good

The elements pay for tariff: mainly consumers or sometimes foreign firms
The elements receive the amount of money from tariffs: government and domestic firms

▪ Increase government revenues

▪ Provide protection to domestic producers against foreign competitors by increasing the cost of
imported foreign goods
▪ Force consumers to pay more for certain imports
▪ Tariffs are generally pro-producer and anticonsumer
▪ Import tariffs reduce the overall efficiency of the world economy

3.2 Subsidies

✔ Subsidy: a government payment to a domestic producer

✔ Subsidies help domestic producers

 ▪ Compete against low-cost foreign imports

▪ Gain export markets

✔ Consumers typically absorb the costs of subsidies

3.3 Import Quotas and Voluntary Export Restraints

✔Import quota
▪ A direct restriction on the quantity of some good that may be imported into a
country
✔Tariff rate quota
▪ A hybrid of a quota and a tariff where a lower tariff is applied to imports within
the quota than to those over the quota
✔Voluntary export restraint (VER)
▪ Quota on trade imposed by the exporting country, typically at the request of the
importing country’s government
✔Quota rent
▪ The extra profit that producers make when supply is artificially limited by an
import quota

3.4 Export Tariffs and Bans

✔ Export tariff is a tax placed on the export of a good

▪ Goal is to discriminate against exporting

✔ Export ban is a policy that partially or entirely restricts the export of a good

▪ Ban of exports of U.S. crude oil in 1975 to ensure sufficient supply of domestic
oil at home

3.5 Local Content Requirements (LCR)

✔ A local content requirement demands that some specific fraction of a good be

produced domestically

▪ Can be in physical terms or in value terms

✔ Local content requirements benefit domestic producers and jobs, but consumers face
higher prices

3.6 Administrative Policies

✔ Administrative trade policies: bureaucratic rules that are designed to make it difficult
for imports to enter a country
 ✔ These policies hurt consumers by denying access to possibly superior foreign products
Antidumping Policies

✔ Dumping: selling goods in a foreign market below their cost of production, or selling
goods in a foreign market at below their “fair” market value

▪ Objective is to protect domestic producers from unfair foreign competition

▪ May be predatory behavior, with producers using substantial profits from their
home markets to subsidize prices in a foreign market with a goal of driving
indigenous competitors out, and later raising prices and earning substantial
profits

✔ U.S. firms that believe a foreign firm is dumping can file a complaint with the
government

▪ If the complaint has merit, antidumping duties, also known as countervailing

duties may be imposed