REVIEWER IN IBT - Tariffs encouraged domestic firm to

produce products at home that could be

Free trade- refers to a situation in which a government
produced more efficiently abroad.
does not attempt to restrict what its citizen can buy
- Inefficient utilization of resources
from or sell to another country.
- Rice farming is unproductive use of land
Obama administration placed 3-year tariff on tire in south korea.
imports from China. Tariff designed to protect
Export tariffs are far less common than import tariffs.
American producers from low-cost Chinese imports
Two objectives: to raise revenue for the government
and helping to create jobs in the U.S tire industry.
and to reduce exports from sector often for political
However, it can also raise the average price of tires, reasons.
leaving them with less money to spend on other goods
Subsidy is a government payment to domestic
and services.
producer
GATT and WTO are creations of a series of
Subsidies in many forms: cash grants, low-interest
multinational treaties. Its purpose is to lower barriers
loans, tax breaks and government equity participation
to the free flow goods and services between nations.
in domestic firms.
Trade policy uses seven main instruments: tariffs,
By lowering production cost, subsidies help domestic
subsidies, import quotas, voluntary export restraints,
producers in 2 ways: competing against foreign
local content requirements, administrative policies
imports and gaining export markets.
and anti-dumping duties.
Agriculture tends to be on of the largest beneficiaries
Tariffs are the oldest and simplest instrument of trade
of subsidies in most countries.
policy. It is a tax levied on imports (exports).
Advocates of strategic trade policy favor subsidies to
Specific tariffs are levied as fixed charge for each unit
help domestic firms achieve a dominant position in
of good imported.
those industries in which economies of scale are
Ad valorem tariffs are levied as proportion of the important and world market is not large enough to
value of imported good. profitably support more than few firms.

Tariffs placed on imports to protect domestic Subsidies can help a firm achieve a first-mover
producers from foreign competition by raising the advantage in an emerging industry.
price of imported goods.
Import quota is a direct restriction on the quantity of
Government gains because the tariff increases some good that may be imported into a country. It is
government revenues enforced by issuing import licenses to a group of
individual or firm.
Domestic producers gain because tariffs afford some
protection against foreign competitors by increasing Tariff rate quota is a common hybrid of a quota and
the cost of imported foreign goods. tariff. A lower tariff rate is applied to imports within
the quota than those over the quota.
Consumer lose because they must pay more for
certain imports. Tariff rate quotas are common in agriculture where
their goal is to limit imports over quota.
Effects of import tariffs:
Voluntary export restraints (VER) is a quota imposed
(1) tariffs generally pro-producers and anti- by exporting country, typically at the request of the
consumer importing country’s government.
(2) reduce the overall efficiency of the world
economy.
BY: DIANA ROSE MAGADIA
Foreign producers agree to VER because they fear Political arguments for intervention are concerned
more damaging punitive tariffs or import quotas with protecting the interest of certain groups within a
might follow if they do not. nation (normally producers) at the expense of other
group (normally consumer)
Agreeing to VER is seen as way to make the best of a
bad situation by appeasing protectionist pressures in a Economic arguments for intervention are typically
country. concerned with boosting the overall wealth of a nation
(to the benefit of all, both producers and consumers)
Quota rent is the extra profit that producers make
when supply is artificially limited by an import quota. Political arguments for government intervention cover
a range of issues, including preserving jobs,
Local content requirement is a requirement that some
protecting industries deemed important for national
specific fraction of a good be produced domestically.
security, retaliating against unfair foreign competition,
-can be expressed in physical terms and in value terms protecting consumers from "dangerous" products,
furthering the goals of foreign policy, and advancing
-some parts of product must be produced locally or the human rights of individuals in exporting countries.
portion of the value of the product must be produced
locally. Protecting jobs and industries from unfair foreign
competition– most common political argument for
Local content regulation provide protection for government intervention
domestic producers of parts in the same way an
import quota does: by limiting foreign competition. Common Agricultural Policy (CAP) was design to
protect jobs of Europe’s political powerful farmers by
Administrative policies are bureaucratic rules restricting imports and guaranteeing prices.
designed to make it difficult for imports to enter a
country. It has been argued that Japanese are the National security- countries sometimes argue that it is
masters of this trade barriers. necessary to protect certain industries because they
are important for national security.
Anti-dumping policies/ dumping in international trade
is defined as selling goods in a foreign market at Retaliation is when both countries-imposed barriers
below their cost of production or below their fair
Country that is being pressured may not back down
market value.
and instead may respond to the imposition of punitive
Fair market value of a good is normally judged to be tariffs by raising trade barriers of its own.
greater than its cost of production because the former
Protecting consumers - Many governments have long
includes “fair” profit margin.
had regulations to protect consumers from unsafe
Dumping is viewed as a method by which firms products.
unload excess production in foreign markets.
-the ban was motivated by a desire to protect
Anti-dumping policies are designed to punish foreign European consumers from the possible health
firms that engage in dumping. consequences of eating meat from animals treated
with growth hormones.
The ultimate objective is to protect domestic
producers from unfair foreign competition. -GMO issues

Countervailing duties are anti-dumping duties Furthering Foreign Policy Objectives- U.S. Congress
passed the
Arguments for government intervention take two
paths: political and economic Helms-Burton Act. This act allows Americans to sue
foreign firms that use property in

BY: DIANA ROSE MAGADIA

Cuba confiscated from them after the 1959 revolution. that it might pay a government to intervene in an
Later in 1996, Congress passed a industry by helping domestic firms overcome the
barriers to entry created by foreign firms that have
similar law, the D'Amato Act, aimed at Libya and
already reaped first-mover advantages.
Iran.
a beggar-thy-neighbor policy that boosts national
Protecting Human Rights- important element of
foreign policy for many democracies. income at the expense of other countries
Protecting the Environment- has become an important Krugman may be right about the danger of a strategic
policy objective of many nations. trade policy leading to a trade war
there is a strong relationship between income levels GATT and WTO- referee could monitor trade between
and environmental pollution and degradation (i.e., the countries, make sure that no side cheats, and
industrial development leads to more pollution). Thus, impose sanctions on a country if it does cheat in the
to the extent that international trade leads to higher trade game.
income levels, it can also be expected to lead to a
Corn Laws placed a high tariff on imports of foreign
decline in environmental quality.
corn
Carbon dioxide is the greenhouse gas at the center of
Smoot-Hawley Act Aimed at avoiding rising
concerns over global warming.
unemployment by protecting domestic industries and
two of the world's largest producers of carbon diverting consumer demand away from foreign
dioxide, the United States and China products, erected an enormous wall of tariff barriers.
A second argument made with regard to The WTO acts as an umbrella organization that
environmental regulations is that in order to save encompasses the GAIT along with two new sister
money, corporations will move production to bodies, one on services and the other on intellectual
countries where environmental regulations are lax. property.
The infant industry argument is by far the oldest General Agreement on Trade in Services (OATS) has
economic argument for government intervention taken the lead to extending free trade agreements to
services
New trade theory argues that in industries in which
the existence of substantial economies of scale Trade-Related Aspects of Intellectual Property Rights
implies that the world market will profitably support (TRIPS) is an attempt to narrow the gaps in the way
only a few firms, countries may predominate in the intellectual property rights are protected around the
export of certain products simply because they have world and to bring them under common international
firms that were able to capture first-mover advantages rules.
The strategic trade policy argument has two Foreign direct investment (FDI) occurs when a firm
components: appropriate actions, a government can invests directly in facilities to produce or market a
help raise national income if it can somehow ensure product in a foreign country
that the firm or firms that gain first-mover advantages
greenfield investment, which involves the
in an industry are domestic rather than foreign
establishment of a new operation in a foreign country
enterprises. Thus, according to the strategic trade
policy argument, a government should use subsidies acquiring or merging with an existing firm in the
to support promising firms that are active in newly foreign country
emerging industries.

BY: DIANA ROSE MAGADIA

The flow of FDI refers to the amount of FDI some firms undertake foreign direct investment as a
undertaken over a given time period (normally a response to actual or threatened trade barriers such as
year). import tariffs or quotas.
The stock of FDI refers to the total accumulated value licensing may result in a firm's giving away valuable
of foreign-owned assets at a given time. technological know-how to a potential foreign
competitor
outflows of FDI, meaning the flow of FDI out of a
country licensing does not give a firm the tight control over
manufacturing, marketing, and strategy in a foreign
inflows of FDI, the flow of FDI into a country.
country that may be required to maximize its
Gross fixed capital formation summarizes the total profitability
amount of capital invested in factories, stores, office
such capabilities are often not amenable to licensing
buildings, and the like.
FDI is more profitable than licensing:
FDI can be seen as an important source of capital
investment and a determinant of the future growth (1) when the firm has valuable know-how that
rate of an economy cannot be adequately protected by a licensing
contract; (2) when the firm needs tight control
mergers and acquisitions are quicker to execute than
over a foreign entity to maximize its market
greenfield investments foreign firms are acquired
share and earnings in that country; and (3)
because those firms have valuable strategic assets,
when a firm's skills and know-how are not
such as brand loyalty, customer relationships,
amenable to licensing.
trademarks or patents, distribution systems,
production systems, and the like. Oligopoly is an industry composed of a limited
number of large firms
It is easier and perhaps less risky for a firm to acquire
those assets than to build them from the ground up Multipoint competition arises when two or more
through a greenfield investment. enterprises encounter each other in different regional
markets, national markets, or industries
they can increase the efficiency of the acquired unit
by transferring capital, technology, or management FDI has both benefits and costs. FDI can benefit a
skills. host country by bringing capital, skills, technology,
and jobs, but those benefits come at a cost. When a
Exporting involves producing goods at home and then
foreign company rather than a domestic company
shipping them to the receiving country for sale.
produces products, the profits from that investment go
Licensing involves granting a foreign entity (the abroad. Many countries are also concerned that a
licensee) the right to produce and sell the firm's foreign-owned manufacturing plant may import many
product in return for a royalty fee on every unit sold components from its home country, which has
negative implications for the host country 's balance-
FDI is expensive because a firm must bear the costs of-payments position.
of establishing production facilities in a foreign
country or of acquiring a foreign enterprise. main benefits of inward FDI for a host country arise
from resource-transfer effects, employment effects,
FDI is risky because of the problems associated with balance-of-payments effects, and effects on
doing business in a different culture where the rules of competition and economic growth.
the game may be very different.
Foreign direct investment can make a positive
contribution to a host economy by supplying capital,
technology, and management resources that would
BY: DIANA ROSE MAGADIA
otherwise not be available and thus boost that The concern is that key decisions that can affect the
country's economic growth rate host country's economy will be made by a foreign
parent that has no real commitment to the host
FDI brings jobs to a host country that would
country, and over which the host country's
otherwise not be created there. The effects of FDI on
government has no real control
employment are both direct and indirect.
balance of payments benefits from the inward flow of
Direct effects arise when a foreign MNE employs a
foreign earnings.
number of host-country citizens. Indirect effects arise
when jobs are created in local suppliers as a result of positive employment effects arise when the foreign
the investment and when jobs are created because of subsidiary creates demand for home-country exports.
increased local spending by employees of the MNE.
home-country MNE learns valuable skills from its
Balance-of-payments accounts track both its exposure to foreign markets that can subsequently be
payments to and its receipts from other countries transferred back to the home country
current account tracks the export and import of goods regional economic integration we mean agreements
and services. among countries in a geographic region to reduce, and
ultimately remove, tariff and nontariff barriers to the
Current account deficit, or trade deficit as it is often
free flow of goods, services, and factors of production
called, arises when a country is importing more goods
between each other
and services than it is exporting.
European Free Trade Association (EFTA). Established
possible adverse effects on competition within the
in January 1960, EFTA currently joins four countries
host nation, adverse effects on the balance of
Norway, Iceland, Liechtenstein, and Switzerland-
payments, and the perceived loss of national
down from seven in 1995 -three EFTA members,
sovereignty and autonomy.
Austria, Finland, and Sweden
foreign MNEs may have greater economic power than
customs union eliminates trade barriers between
indigenous competitors. If it is part of a larger
member countries and adopts a common external
international organization, the foreign MNE may be
trade policy.
able to draw on funds generated elsewhere to
subsidize its costs in the host market, which could Andean Community formerly known as the Andean
drive indigenous companies out of business and allow Pact, established free trade between member countries
the firm to monopolize the market. and imposes a common tariff, of 5 to 20 percent, on
products imported from outside.
initial capital inflow that comes with FDI must be the
subsequent outflow of earnings from the foreign common market, has no barriers to trade between
subsidiary to its parent company. Such outflows show member countries, includes a common external trade
up as capital outflow on balance-of-payments policy, and allows factors of production to move
accounts. freely between members
when a foreign subsidiary imports a substantial Mercosur, the South American grouping of Argentina,
number of its inputs from abroad, which results in a Brazil, Paraguay, and uruguay (Venezuela has also
debit on the current account of the host country's applied to join), hopes to eventually establish itself as
balance of payments. a common market
FDI is accompanied by some loss of economic economic union involves the free flow of products
independence. and factors of production between member countries
and the adoption of a common external trade policy,
but it also requires a common currency,
BY: DIANA ROSE MAGADIA
harmonization of members' tax rates, and a common policy, a common industrial policy, and special
monetary and fiscal policy concessions for the smallest members, Bolivia and
Ecuador.
political union in which a central political apparatus
coordinates the economic, social, and foreign policy Mercosur originated in 1988 as a free trade pact
of the member states. between Brazil and Argentina. The modest reductions
in tariffs and quotas accompanying this pact
regional economic integration can be seen as an
reportedly helped bring about an 80 percent increase
attempt to achieve additional gains from the free flow
of trade and investment between countries beyond in trade between the two countries in the late 1980
those attainable under international agreements such Costa Rica, El Salvador, Guatemala, Honduras, and
as the WTO. It is easier to establish a free trade and Nicaragua attempted to set up a Central American
investment regime among a limited number of Common Market.
adjacent countries than among the world community.
Central America Free Trade Agreement, or CAFTA,
Linking neighboring economies and making them the aim is to lower trade barriers between the United
increasingly dependent on each other creates States and the six countries for most goods and
incentives for political cooperation between the services.
neighboring states and reduces the potential for
violent conflict. Caribbean Community. Referred to as CARICOM
foreign exchange market is a market for converting
the currency of one country into that of another
Trade creation occurs when high-cost domestic country.
producers are replaced by low-cost producers within
the free trade area. It may also occur when higher cost Exchange rate is simply the rate at which one
external producers are replaced by lower-cost external currency is converted into another.
producers within the free trade area. Each country has a currency in which the prices of
Trade diversion occurs when lower-cost external goods and services are quoted. In the United States, it
suppliers are replaced by higher-cost suppliers within is the dollar ($ ); in Great Britain, the pound (£); in
the free trade area France, Germany, and other members of the euro zone
it is the euro (€); in Japan, the yen(¥); and so on.
European Union (EU) is the product of two political
factors: (1) the devastation of Western Europe during foreign exchange market is to provide some insurance
two world wars and the desire for a lasting peace, and against the risks that arise from such volatile changes
(2) the European nations' desire to hold their own on in exchange rates, commonly referred to as foreign
the world's political and economic stage. exchange risk. Although the foreign exchange market
offers some insurance against foreign exchange risk, it
European Council represents the interests of member cannot provide complete insurance.
states
The foreign exchange market serves two main
European Commission is responsible for proposing functions. The first is to convert the currency of one
EU legislation, implementing it, and monitoring country into the currency of another. The second is to
compliance with EU laws by member states. provide some insurance against foreign exchange risk,
or the adverse consequences of unpredictable changes
NAFTA- eliminate all tariffs on bilateral trade
in exchange rates.
between Canada and the United States
Currency speculation typically involves the short-term
ANDEAN COMMUNITY internal tariff reduction
movement of funds from one currency to another in
program, a common external tariff, a transportation
the hopes of profiting from shifts in exchange rates
BY: DIANA ROSE MAGADIA
carry trade involves borrowing in one currency where A currency is nonconvertible when neither residents
interest rates are low, and then using the proceeds to nor nonresidents are allowed to convert it into a
invest in another currency where interest rates are foreign currency.
high
Countertrade refers to a range of barter-like
When two parties agree to exchange currency and agreements by which goods and services can be
execute the deal immediately, the transaction is traded for other goods and services. Countertrade can
referred to as a spot exchange. Exchange rates make sense when a country's currency is
governing such "on the spot" trades are referred to as nonconvertible
spot exchange rates. The spot exchange rate is the rate
Transaction exposure is the extent to which the
at which a foreign exchange dealer converts one
income from individual transactions is affected by
currency into another currency on a particular day.
fluctuations in foreign exchange values. Such
Spot exchange rates are reported on a real-time basis exposure includes obligations for the purchase or sale
on many financial websites of goods and services at previously agreed prices and
the borrowing or lending of funds in foreign
forward exchange occurs when two parties agree to
currencies.
exchange currency and execute the deal at some
specific date in the future Translation exposure is the impact of currency
exchange rate changes on the reported financial
currency swap is the simultaneous purchase and sale
statements of a company. Translation exposure is
of a given amount of foreign exchange for two
concerned with the present measurement of past
different value dates
events.
The foreign exchange market is not located in any one
Lead strategy involves attempting to collect foreign
place. It is a global network of banks, brokers, and
currency receivables (payments from customers}
foreign exchange dealers connected by electronic
early when a foreign currency is expected to
communications systems
depreciate and paying foreign currency payables (to
arbitrage, buying a currency low selling it high suppliers} before they are due when a currency is
expected to appreciate.
Inflation is a monetary phenomenon. It occurs when
the quantity of money in circulation rises faster than A lag strategy involves delaying collection of foreign
the stock of goods and services, that is, when the currency receivables if that currency is expected to
money supply increases faster than output increases. appreciate and delaying payables if the currency is
expected to depreciate.
international monetary system refers to the
The Fisher Effect states that a country's "nominal" institutional arrangements that govern exchange rates
interest rate (i) is the sum of the required "real" rate of
interest (r ) and the expected rate of inflation over the pegged exchange rate means the value of the currency
period for which the funds are to be lent (I). is fixed relative to a reference currency, such as the
U.S. dollar, and then the exchange rate between that
A country's currency is said to be freely convertible currency and other currencies is determined by the
when the country's government allows both residents reference currency exchange rate
and nonresidents to purchase unlimited amounts of a
foreign currency with it. a dirty float (as opposed to a clean float) because the
central bank of a country will intervene in the foreign
A currency is said to be externally convertible when exchange market to try to maintain the value of its
only nonresidents may convert it into a foreign currency if it depreciates too rapidly against an
currency without any limitations. important reference currency.
BY: DIANA ROSE MAGADIA
fixed exchange rate, in which the values of a set of The initial rate, the spot exchange rate when the
currencies are fixed against each other at some budget is adopted.
mutually agreed on exchange rate.
The projected rate, the spot exchange rate forecast for
Pegging currencies to gold and guaranteeing the end of the budget period (i.e., the forward rate).
convertibility is known as the gold standard.
• The ending rate, the spot exchange rate when the
Accounting has often been referred to as "the budget and performance are being compared.
language of business." This language finds expression
With three of these five combinations-II, PP, and EE-
in profit-and-loss statements, balance sheets, budgets,
the same exchange rate is used for translating both
investment analysis, and tax analysis.
budget figures and performance figures into the
Accounting information is the means by which firms corporate currency. All three combinations have the
communicate their financial position to the providers advantage that a change in the exchange rate during
of capital, enabling them to assess the value of their the year does not distort the control process. This is
investments and make decisions about future resource not true for the other two combinations, IE and P E. In
allocations. those cases, exchange rate changes can introduce
distortions. The potential for distortion is greater with
Financial management in an international business
IE; the ending spot exchange rate used to evaluate
includes three sets of related decisions: (1) investment
performance against the budget may be quite different
decisions, decisions about what activities to finance,
from the initial spot exchange rate used to translate
(2) financing decisions, decisions about how to
the budget. The distortion is less serious in the case of
finance those activities, and (3) money management
P E because the projected exchange rate considers
decisions, decisions about how to manage the firm's
future exchange rate movements
financial resources most efficiently
Capital budgeting is the technique financial managers
Accounting standards are rules for preparing financial
use to try to quantify the benefits, costs, and risks of
statements; they define what is useful accounting
an investment. This enables top managers to compare,
information. Auditing standards specify the rules for
in a reasonably objective fashion, different investment
performing an audit-the technical process by which an
alternatives within and across countries so they can
independent person (the auditor) gathers evidence for
make informed choices about where the firm should
determining if financial accounts conform to required
invest its scarce financial resources
accounting standards and if they are also reliable.
Political risk tends to
Transnational financing occurs when a firm based in
one country enters another country's capital market to be greater in countries experiencing social unrest or
raise capital from the sale of stocks or bonds. disorder and countries where the underlying nature of
Transnational investment occurs when an investor the society makes the likelihood of social unrest high.
based in one country enters the capital market of When political risk is high, there is a high probability
another nation to invest in the stocks or bonds of a that a change will occur in the country's political
firm based in that country. environment that will endanger foreign firms there.
The International Accounting Standards Board In analyzing a foreign investment opportunity, the
(IASB) has emerged as a major proponent of additional risk that stems from its location can be
standardization. The IASB was formed in March 2001 handled in at least two ways. The first method is to
to replace the International Accounting Standards treat all risk as a single problem by increasing the
Committee (IASC), which had been established in discount rate applicable to foreign projects in
1973. countries where political and economic risks are
perceived as high.
budget is the main instrument of financial control
BY: DIANA ROSE MAGADIA
The higher the discount rate, the higher the projected
net cash flows must be for an investment to have a
positive net present value.

it can be argued that rather than using a higher

discount rate to evaluate such risky projects, which
penalizes early cash flows too heavily, it is better to
revise future cash flows from the project downward to
reflect the possibility of adverse political or economic
changes sometime in the future

BY: DIANA ROSE MAGADIA