Implications of the Global Trading System

Development of the global trading system benefits international companies by promoting free trade through the reduction of both tariffs and nontariff barriers to international trade. The GATT treaty was successful in its early years, and its revision significantly improved the climate for trade. Average tariffs on merchandise trade were reduced and subsidies for agricultural products were lowered. Firms also benefited from an agreement that extended the principle of nondiscrimination to cover trade in services. The revision of GATT also clearly defined intellectual property rights—giving protection to copyrights, trademarks and service marks, and patents. This encourages firms to develop new products and processes because they know their rights to the property will be protected.

Creation of the WTO is also good for international firms because the various WTO agreements commit member nations to maintaining fair and open trade policies. Both domestic and international firms based in relatively poor nations should benefit most from future rounds of trade negotiations. Because poor nations tend to export agricultural products and textiles, their firms in these industries will benefit from wealthy nations reducing barriers to imports in these sectors. Companies based in poor countries should also benefit from better cooperation among poor countries and their further integration into the global trading system.

Chapter Summary

1. Describe the political, economic, and cultural motives behind governmental intervention in trade.

■ Political motives behind government intervention in trade include: (a) protecting jobs, (b) preserving national security, (c) responding to other nations’ unfair trade practices, and (d) gaining influence over other nations.

■ Economic reasons for government intervention in trade are: (a) protection of infant industries and (b) promotion of a strategic trade policy.

■ The infant industry argument says that a country’s emerging industries need protection from international competition during their development until they become sufficiently competitive, but this may reduce competitiveness and inflate prices.

■ Strategic trade policy argues for government intervention to help companies take advantage of economies of scale and be first movers in their industries; but this may cause inefficiency, higher costs, and trade wars.

■ The most common cultural motive for trade intervention is protection of national identity.

2. List and explain the methods governments use to promote international trade.

■ A subsidy is financial assistance to domestic producers in the form of cash payments, low interest loans, tax breaks, product price supports, or other form.

■ Although subsidies are intended to help domestic companies fend off international competitors, critics say that they amount to corporate welfare and are detrimental in the long term.

■ Export financing includes loans at below-market interest rates, loans that would otherwise be unavailable, and loan guarantees that a government will repay a loan if the company defaults.

■ A foreign trade zone (FTZ) is a designated geographic region in which merchandise is allowed to pass through with lower customs duties (taxes) and/or fewer customs procedures.

■ Special government agencies organize trips abroad for trade officials and businesspeople and open offices abroad to promote home country exports.

3. List and explain the methods governments use to restrict international trade.

■ A tariff is a government tax levied on a product as it enters or leaves a country; its three types are the export tariff, transit tariff, and import tariff.

■ An import tariff can be an ad valorem tariff, specific tariff, or compound tariff.

■ A restriction on the amount of a good that can enter or leave a country during a certain period of time is called a quota.

■ Import quotas protect domestic producers, whereas export quotas maintain adequate supplies domestically or increase the world price of a product.

■ A complete ban on trade with a particular country is an embargo.

■ Local content requirements are laws stipulating that a specified amount of a good or service be supplied by producers in the domestic market.

■ Imports can also be discouraged using administrative delays (regulatory controls or bureaucratic rules) or currency controls (restrictions on currency convertibility).

4. Discuss the importance of the World Trade Organization in promoting free trade.

■ The General Agreement on Tariffs and Trade (GATT) was a treaty designed to promote free trade by reducing tariff and nontariff barriers to trade.

■ The Uruguay Round of GATT negotiations: (a) for the first time included trade in services, (b) defined intellectual property rights, (c) reduced trade barriers in agriculture, and (d) created the World Trade Organization (WTO).

■ The three goals of the WTO are to help the free flow of trade, to help negotiate further opening of markets, and to settle trade disputes between its members.

■ A key component of the WTO is the principle of nondiscrimination called normal trade relations, which requires WTO members to treat all members equally.

■ Dumping is said to occur when a company exports a product at a price either lower than the price it normally charges in its domestic market or lower than the cost of production.

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