International Business Exam #2

Front 1

Protectionism

Back 1

Raise prices to consumers while benefiting producers

Opposite of Free Trade (How governments

intervene);

Front 2

How Governments Intervene:

Back 2

1. Tariffs

2. Subsidies

3. Import Quotas

4.Voluntary Export Restraints

5.Local Content Requirements

6. Administrative Policies

Front 3

Tariffs

Back 3

Taxes levied on imports. (Oldest barrier & easiest for the WTO to limit)

Example: IBM / U.S. STEELE

Front 4

Specific Tariff

Back 4

Fixed Charge for each unit imported

Front 5

Ad Valorem Tariff

Back 5

Taxes a percentage of the value of the imported good.

2002: 15-20% Tariff on Chinese imported steel

Front 6

Susbsidies

Back 6

Government payments to local producers

Front 7

Import Quotas

Back 7

Restrict the quantity of a good being imported into the country

Example: Limits put on cheese imports

Front 8

Tariff Rate Quotas

Back 8

Lower tax is applied to imports within the quota than to those over the quota

Front 9

Quota Rent

Back 9

Extra profit that producers make when supply is limited by an import quota

Front 10

Voluntary Export Restraints

Back 10

quotas on trade imposed by the EXPORTING COUNTRY

Example: 1980- Japanese (automotive industry) decided to restrain voluntarily IOT avoid lobbying/risk of taxation.

Front 11

Local Content Requirements

Back 11

Specific fraction of a good must be produced locally.

Example: Buy American Act-(Government Agencies buying products) 51% of the good must be manufactured in the U.S

Front 12

Administrative Policies

Back 12

rules designed to make it difficult for imports to enter a country.

Example: Japanese FedEx packages were required to be searches for pornographic material.

Front 13

Dumping

Back 13

Selling goods in a foreign market below their cost of production and/or fair market value. IN ORDER TO DRIVE DOMESTIC COMPANIES OUT OF BUSINESS (Predatory behavior)

Front 14

Antidumping Policies (Countervailing)

Back 14

Punish foreign firms that are dumping & protect local producers from unfair competition.

Front 15

Political Arguments for Government Intervention

Back 15

1. Protecting Jobs

2. Protecting industries that are important for national security

3. Retaliating to unfair foreign competition

4. Protecting consumers from dangerous products

5. Furthering the goals of foreign policy

6. Protecting human rights of individuals in exporting countries

Front 16

Protecting Jobs:

Back 16

The most common political reason for trade restriction

Front 17

Protecting Industries deemed important for national security:

Back 17

Industries such as aerospace/electronics

Example: South Korean Auto Industry

Front 18

Protecting consumers from dangerous products:

Back 18

Chinese toy manufacturers (lead)

Front 19

Furthering goals of foreign policy

Back 19

preferential trade terms can be granted to countries that a government wants to build strong relationships with

Front 20

Economic Arguments for Government Intervention:

Back 20

1. The Infant Industry argument

2. Strategic Trade Policy

Front 21

The Infant Industry Argument

Back 21

An industtry should be protected until it can develop and be viable and competitive internationally

Example: Japanese car companies being tarriffed by South Korea

Front 22

Strategic Trade Policy

Back 22

Governments help firms achieve first mover advantages

Example: Boeing in the 1950s/60s

Front 23

Trade Creation

Back 23

When low cost producers replace high cost domestic producers within the free trade area

Front 24

Trade Diversion

Back 24

When higher cost suppliers within free trade area replace lower cost external suppliers

Front 25

Size of Country Effect

Back 25

Micro benefit of Regionalization

Front 26

Free Trade Area

Back 26

Eliminates all barriers to the trade of goods and services among member countries.

Front 27

Customs Union

Back 27

Eliminates trade barriers between member countries and adopts a common external trade policy

Front 28

Common Market

Back 28

Has no barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production/

Front 29

Economic Union

Back 29

Involves the free flow of products/factors of production between members

Front 30

Political Union

Back 30

involves a central political apparatus that coordinates the economic, social, and foreign policy of member states.

Front 31

European Free Trade Association (EFTA)

Back 31

Norway, Iceland, Liectenstein & Switzerland (The most enduring free trade area)

Front 32

North American Free Trade Agreement (NAFTA)

Back 32

United States, Canada & Mexico

Front 33

Andean Pact

Back 33

A pact between Bolivia, Columbia, Ecuador & Peru. (Example of a customs union)

Front 34

Levels of Regional Economic Integration

Back 34

1. Free Trade Area

2. Customs Union

3. Common Market

4.Economic Union

5. Political Union

Front 35

Political Structure of the European Union

Back 35

1. European Council

2. European Commission

3. Council of the European Union

4.European Parliament

5. The Court of Justice

Front 36

European Council

Back 36

Resolves major policy issues and sets policy directions

Front 37

European Commision

Back 37

Responsible for implementing aspects of EU law and monitoring member states to ensure they are complying with EU laws

Front 38

Council of the European Union

Back 38

THe ultimate controlling authority within the EU

Front 39

European Parliament

Back 39

Debates legislation proposed by the commision and forwarded to it by council

Front 40

The COurt of Justice

Back 40

The supreme appeals court for EU law

Front 41

The Maastricht Treaty

Back 41

Committed the EU to adopt a single currency (The Euro)

Established: January 1, 1999

Front 42

Arguments in support of NAFTA

Back 42

Mexico would benefit from

Increased jobs

More rapid economic growth.

U.S./Canada would benefit from:

Access to a large, prosperous market.

Lower Prices for consumers on goods produced in Mexico

Low cost labor/ ability to be more competitive on world markets

Front 43

Arguments against NAFTA

Back 43

Jobs would be lost and wage levels would decline

Mexican workers would migrate north

Pollution would increase

Mexico would lose sovereignty

Front 44

The Foreign Exchange Market

Back 44

Used to convert the currency of one country into the currency of another.

Provides insurance against exchange risks

Front 45

Exchange Rate

Back 45

The rate at which one currency is converted into another

Front 46

Currency Speculation

Back 46

The short term movement of funds from one currency to another hoping to profit from shifts in exchange rates

Front 47

Hedging

Back 47

When a firm insures itself against exchange risks

Front 48

Spot Exchange Rate

Back 48

The rate at which a foreign exchange dealer converts one currency into another currency on a PARTICULAR DAY

Front 49

Forward Exchange Rate

Back 49

the rate used for hedging in the forward market (typically for 30, 90, or 180 days)

Front 50

The Most Important Trading Centers:

Back 50

London

New York

Tokyo

Singapore

Front 51

Forward Exchanges

Back 51

2 parties agree to exchange currency and execute the deal at some specific date in the future

Front 52

Arbitrage

Back 52

The process of buying a currency low and selling it high

Front 53

How Exchange Rates are Determined?

Back 53

A country's price inflation

A country's interest rate

Market Psychology

Front 54

Vehicle Currency

Back 54

The dollar is used as a vehicle currency to facilitate the change of other currencies

Front 55

Reserve Currency

Back 55

2

Front 56

The Bandwagon Effect

Back 56

When expectations by traders turn into self-fulfilling prophecies.

Example: The country focus on the1997 fall of the Korean Won

Front 57

Purchasing Power Parity (PPP)

Back 57

Argues that given relatively efficient markets, the price of a basket of goods should be roughly equivalent in each country.

Front 58

Freely Convertible Currency

Back 58

Both residents and non-residents are allowed to purchase an unlimited amount of foreign currency with the domestic currency

Front 59

Externally Convertible Currency

Back 59

Only non-residents can convert their domestic currency into foreign currency without limitations.

Front 60

Non-Convertible Currency

Back 60

Neither residents or non-residents can convert their domestic currency into foreign currency.

Front 61

Exchange Rate Systems

Back 61

1

Front 62

Fundamental Analysis

Back 62

1

Front 63

Foreign Direct Investment

Back 63

When a firm invests directly in new facilities to produce/market in a foreign country

Front 64

Types of Foreign Direct Investments

Back 64

1. Greenfield Investments (Establishing a wholly new operation)

2. Mergers and Acquisitions

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Mergers and Acquisitions

Back 65

Purchase or partnership with existing firms within the country

Front 66

Greenfield Investments

Back 66

Establishing a wholly new operation in a foreign country

Front 67

The Flow of FDI

Back 67

the amount of FDI undertaken over a given time period

Front 68

The stock of FDI

Back 68

the total accumulated value of foreign owned assets at a given time

Front 69

Why Choose FDI?

Back 69

Exporting

Licensing

Internalization Theory

Front 70

Internalization Theory (Market Imperfections Theory)

Back 70

Suggests that licensing has 3 major drawbacks compared to FDI:

firm could give valuable technical info to a foreign competitor

Doesn't give the firm control over manufacturing, marketing and strategy

the firm's competitive advantage may be based on its management, marketing and manufacturing