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 CHAPTER 2 International trade and investment: measurement and theories 39

7 Hire a given level of nationals.

8 Establish a joint venture with domestic participation.

9 Achieve a minimum level of domestic equity participation.

This is an interesting list of the frustrations felt by MNCs as it reflects the potential benefits that
the receiving country could experience. The failure of this agreement perhaps shows that ultimately the
relationship has to be built on trust rather than international agreements that are potentially unenforceable.
No agreement since the MAI has come remotely close to the full list of these requirements.

USING THE WEB

For further information on trade agreements consult the homepage of the World Trade Organization at
[Link]/. The OECD has maintained the text of the MAI on its website; search online for ‘OECD MAI’
or [Link]/investment/internationalinvestmentagreements/[Link].

Trade disputes
Countries seek to promote free trade so that their companies seeking to export goods are able to compete
in foreign markets without discrimination. Economic theories also advocate free trade as the basis of
greater wealth for all. For this reason, countries are members of organizations such as the WTO and
the OECD, which seek to encourage free trade for just these reasons. Yet countries also seek to restrict
free trade in order to protect domestic industry from foreign competition and, in doing so, cause trade
disagreements.
It is the specific task of the WTO to resolve multilateral trade disputes through an adjudication process.
The main problems with this process are, first, that it takes time and, second, the disputed unfair trade
practice remains in place during the consultation procedure. The WTO itself gives as a case study a dispute
over discrimination against the import of Venezuelan petrol in January 1995 that took two and a half years
to settle. The WTO allows a certain degree of retaliation including actions taken against dumping (selling
at an unfairly low price), actions to counteract subsidies by foreign countries to promote their exports and
emergency measures to limit imports in order to give temporary protection to domestic industries. Thus, a
kind of low level ‘trade war’ is permitted within the negotiating framework. It is important to remember
that the WTO is a member-driven organization; there are no powers of enforcement. All settlements are by
agreement. Therefore, most countries or groups of countries, including the US and the EU, have at various
times been accused of unfair trade practices. The job of the WTO is to prevent such actions escalating
to the point where countries impose tariffs and quotas indiscriminately. The reason why countries do
not want to be seen to be overtly in breach of WTO decisions is partly because of the risk of retaliation,
but also history. The Smoot Hawley Tariff Act of 1930 raised tariffs to their highest level and provoked
retaliation by other major industrialized countries, followed by a catastrophic collapse in world trade.
Therefore in trying to protect against imports, the US suffered a decline in exports as well and an overall
adverse effect on economic activity. US real exports (after adjusting for general price changes) fell by over
30 per cent and GDP fell by over 25 per cent between 1930 and 1933, events that have always been seen
as closely linked. This example above all others serves as a warning from history.
The argument about imports, however, remains. Foreign imports compete with local production
causing unemployment, sometimes in areas of high unemployment. In theory, such workers should retrain
for more productive employment and unemployment should be temporary. The loss of salary should,
therefore, only be short term and in the long run such workers should be better off. Unfortunately, the
theory does not specify the length of time for the short term. Governments are often in power only for the
short term and have to address these problems. Therefore the problem is finely balanced as countries try
to argue that their exports should not be restricted but the exports of certain other countries (imports to
them) should be restricted.

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40 PART I THE INTERNATIONAL FINANCIAL ENVIRONMENT

Consider the following situations that commonly occur:

1 The firms based in one country are not subject to environmental restrictions and, therefore, can produce at a
lower cost than firms in other countries.

2 The firms based in one country are not subject to child labour laws, have lower employment costs and are
able to produce products at a lower cost than firms in other countries.

3 The firms based in one country are allowed by their government to offer bribes to large customers when
pursuing business deals in a particular industry. They have a competitive advantage over firms in other
countries that are not allowed to offer bribes.

4 The firms in one country receive subsidies from the government, as long as they export the products. The
exporting of products that were produced with the help of government subsidies is commonly referred to
as dumping. These firms may be able to sell their products at a lower price than any of their competitors in
other countries.

5 The firms in one country receive tax breaks if they are in specific industries. This practice is not necessarily a
subsidy, but it is still a form of government financial support.

In all of these situations, firms in one country may have an advantage over firms in other countries
through lower social and environmental standards (e.g. situations 1 and 2), lower standards of governance
(e.g. 3 and 4) and differences in regulatory regimes that have the effect of creating an advantage (e.g. 5).
Every government uses strategies that may give its local firms an advantage in the fight for global market
share. Thus, the playing field in the battle for global market share is probably not even across all countries.
Yet, there is no formula that will ensure a fair battle for market share. Regardless of the progression of
international trade treaties, governments will always be able to find strategies that can give their local
firms an edge in exporting. Suppose, as an extreme example, that a new international treaty outlawed all
of the strategies described above. One country’s government could still try to give its local firms a trade
advantage by attempting to maintain a relatively weak currency. This strategy can increase foreign demand
for products produced locally because products denominated in a weak currency can be purchased at a
low price. In this respect Germany can be said to have benefitted from the Greek crisis, which lowered the
value of the euro.5

Using the exchange rate as a policy. At any given point in time, a group of exporters may claim that they
are being mistreated and lobby their government to adjust the currency so that their exports will not be
as expensive for foreign purchasers. Note that when exports are purchased, the foreign purchaser has in
effect to buy the currency and then with that currency buy the product or service. Thus, a cheaper currency
will be the same as lowering the price of the product. In 2004, European exporters claimed that they were
at a disadvantage because the euro was too strong. Meanwhile, US exporters claimed that they could not
compete with China because the Chinese currency (yuan) was maintained at an artificially weak level
(8.277 yuan:$l). In June 2010 the Chinese yuan abandoned its peg to the dollar and has since revalued by
over 20 per cent, potentially making Chinese exports more expensive and imports into China cheaper. Why
should the Chinese government allow this to happen? As we have seen, competitive trading is sometimes
seen as lowering standards, but it also has a more virtuous side in that it requires cooperation between
the buyer and seller. The US as a large ‘customer’ of Chinese exports and investments, has considerable
influence on Chinese policy. Broadly speaking it is in China’s interests that the US does not start to impose
tariffs on Chinese exports. Clearly, this adjustment was not sufficient given the tariffs imposed on Chinese
imports by the US in 2018.

USING THE WEB

For the latest trade disputes go to the WTO website and search online for ‘WTO trade disputes
examples’, currently at [Link]/english/tratop_e/dispu_e/find_dispu_cases_e.htm.

Copyright 2023 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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