978-0078112638 Chapter 6 Lecture Note

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CHAPTER 6

Political and Trade Forces

Learning Objectives

LO 6-1 Discuss nationalization and privatization of business.

LO 6-2 Explain what terrorism is and the range of activities that terrorists can engage in, as well

as countermeasures that companies and their employees might take.

LO 6-3 Evaluate the importance to business of government stability and policy continuity.

LO 6-4 Explain country risk assessment by international business.

LO 6-5 Discuss types of trade restrictions and the arguments for imposing them.

NOTE:

International business statistics, data, and facts about countries, regions, governments, and companies can

change rapidly and dramatically. We recommend that you update this information regularly.

As an adopter of this text, McGraw-Hill offers you a complementary online resource each month, the

International Business Newsletter. The IB Newsletter gives you an array of timely and relevant articles,

videos, country profiles, teaching suggestions, and data resources to add breadth, depth, and richness to

the ever-changing topic of international business.

iGlobe is also a way to keep your courses current. In partnership with PBS, iGlobe is a free video

service for McGraw-Hill adopters that allows you to download breaking news videos onto your desktop

to show in class or online. Updated monthly, these streaming videos are complete with teaching notes and

discussion questions. Key concepts for each video are identified to save you time! Visit

www.mhhe.com/ball13e, or talk to your McGraw-Hill sales representative for more information about

iGlobe or the IB Newsletter.

Overview

International business has become increasingly more sensitive to political forces as it plans operations. A

welcoming political atmosphere permits business to flourish even though the country is poor in natural

resources. The opposite holds, as well, and some countries blessed with natural resources are poor

because of government instability or hostility.

Political advocacy organizations of the left and right, are important to business. They spend hundreds of

millions of dollars to lobby in Washington and U.S. State capitals as well as in Brussels and European

country capitals, and in other countries.

Terrorism disrupts business as managers or their families are kidnapped and held for ransom or as offices

or factories are bombed or burned.

One function of government is to protect its businesses from violence and destruction, domestic and

foreign. Not all countries have succeeded in doing that, and terrorism adversely affects business in many

countries. Government stability and policy continuity toward business are important for business to

succeed. However, management cannot take stability and continuity for granted. These factors must be

factored into the country screening and selection process.

Of increasing importance to international business is forecasting risks in countries where they may wish

to do business. The procedure is called country risk assessment (CRA).

Tariff and nontariff barriers are used as political tools by governments to influence the conditions of trade

and achieve other political objectives.

Suggestions and Comments

1. There are studies of the efficiency of government-owned industries as compared to privately

owned business. Some assignments in those studies could prove interesting.

2. Terrorism and traditional hostilities are other subjects very much in the public’s attention. You

might use media material to illustrate the points of terrorist and traditional hostilities’ effects on

business. A quick web search will identify accessible and timely sources, many with imbedded

video content.

3. Tariff and nontariff trade barrier issues appear regularly in the press. Students can be

encouraged to check the U.S. tariff rates at http://dataweb.usitc.gov/scripts/tariff.asp

Student Involvement Exercises

1. Your students may have some interesting views on terrorism, for example, on whether it is a

legitimate political tool or on what measures governments should use to suppress it.

2. Discuss new forms of terrorism.

3. The area of personal risk for the international businessperson provokes good discussion.

Exploration of the inclination to generalize from one incident reported in the international press

is a good way to start. Consider discussing ways that business people can reduce risks

associated with terrorism or other threats to travelers and business in foreign countries.

4. Tariff barriers tend to surprise students. An issue to explore is how the existence of tariffs

relates to a country’s membership in the WTO.

Guest Lecturers

1. Professors of political science could expand on the connections between politics and trade.

2. Economics professors could be helpful. For example, professors of history of economic

thought, state and local governments, or international economics might discuss the

backgrounds and relative economic performance of government-owned and privately owned

businesses.

3. Someone from the local police department may be willing to speak about terrorism and

counter-measures against terrorism.

4. Local import /export people have experience with tariff and nontariff barriers. Often they are

delighted to have a chance to share ways they deal with these barriers to trade.

Worldview

This Worldview is entitled, “Terrorism in Second Life,” and it examines terrorism activities that have

occurred in a virtual world environment called “Second Life.” These terrorism activities have resulted

from a range of concerns and complaints, and some of them have targeted companies operating in the

virtual world. Companies have responded to the resulting confusion and disruptions in a number of ways:

some companies cleaned up the area in the virtual world, some closed their stores, some engaged in

various terrorism management or prevention activities. The U.S. Congress even convened a formal

hearing to examine potential links between terrorism activities in a virtual world like Second Life and

terrorism in the real world, or “First Life.” This Worldview provides an interesting basis for class

discussion about terrorism, both in the real world and in the increasing number of virtual realms –

whether they are virtual worlds such as Second Life or even in social media such as Facebook. The

discussion may be prompted with questions such as: “What is terrorism? What is the goal of terrorists?,”

“Is there a legitimate basis for concern regarding terrorist activities in virtual worlds and similar activities

in the real world?,” or “What options would companies have for responding to the potential for (or actual

incidents of) terrorism in a virtual realm?”

Global Debate

The focus of this Global Debate, entitled “Sugar Subsidies: Sweet for Producers, Not for Consumers,” is

the long history of government subsidies for the United States domestic sugar industry. The discussion

examines the history of these subsidies (originating in 1789), the scope of the protection (only allocating

imports based on tariffs allocated among 40 nations and limited to about 15 percent of the U.S. market

demand), and the implications (the price of raw sugar in the U.S. averages more than double the world

price, costing American businesses and consumers an estimated $4 billion per year and contributing to the

offshoring of jobs and business, and excess domestic sugar production and protectionism harms foreign

sugar producers as well as contributing to environmental problems in the U.S.). The benefits of this

protectionism are concentrated among a very small number of companies in the U.S., and efforts to

reform protection of the sugar industry have had limited success. Most students are unaware of the extent

of protection of domestic industries, so this example of the sugar industry surprises them and provides a

foundation for exploring the issues in greater depth. The issue of protectionism and subsidies can be

discussed through questions such as, “Why would the U.S. sugar industry have historically received

protection and subsidies? Are these reasons still relevant today? How might foreign sugar producers be

harmed by the existence of subsidies and protectionist policies in the U.S. or other developed country

markets? Why would subsidies, such as those supporting the American sugar producers, remain in

existence for such a long time, even in the face of large domestic budget deficits? How could these

support programs be reduced?”

The Global Path Ahead

The focus of this The Global Path Ahead explores a student’s efforts to gain international experience,

both as a high school student living with a host family in France and then for two years after graduation

while working on an AIESEC traineeship in the Czech Republic. He discusses some of the challenges of

learning about the ways business is done, bureaucratic barriers, and working with local governments. The

Global Path Ahead also includes a range of resources that discuss different aspects of geopolitics, as well

as websites that contain useful information on different aspects of geopolitical issues and for careers

involving international politics and country risk assessment.

Mini-Case 6.1, “Is Your Chocolate the Result of Unfair Exploitation of Child Labor?”

This mini-case provides an opportunity for students to consider the extent to which some of their favorite

treats may be linked to the exploitation of child labor in emerging markets. The mini-case examines the

production of cocoa, the key ingredient in chocolate, in the primary production region of West Africa. In

this region, particularly in Côte d’Ivoire, hundreds of thousands of the workers are children, most of them

under the age of 14. The discussion explores the exploitation of these child laborers, including the hazards

and deplorable working conditions they suffer and the vicious cycle that they and their own children fall

into. Both private industry and government have raised the issue to global levels of awareness but the

problem persists and, in fact, many if not most consumers of chocolate are unaware of the nature and

extent of this problem. Boycotts and trade sanctions imposed on offending countries generate only

minimal results. Fair-trade practices are being implemented to encourage farmers and producers to

initiate appropriate social, labor, and environmental practices. This serves as a starting point for a

stimulating class discussion on the topic of “Should labor practices in another country be a relevant

consideration in international trade? Why or why not?,” “With regard to trade in products such as cocoa,

what options are available to governments, businesses, and consumers for dealing with practices such as

child labor or slave labor in other countries? What are the implications associated with each of these

options?,” and “How would international trade theorists view the fair-trade movement?” Potential

answers to these questions would be:

1. Should labor practices in another country be a relevant consideration in international trade? Why or

why not?

This question offers an opportunity for students to reason through the ethical issues and the business

From a pragmatic view, the Internet and increased monitoring of corporate activities by watchdog

2. With regard to trade products such as cocoa, what options are available to governments, businesses

and consumers for dealing with practices such as child labor or slave labor in other countries? What

are the implications associated with each of these options?

Governments can establish trade boycotts and certification requirements. These approaches carry

3. How would international trade theorists view the fair–trade movement?

Lecture Outline

I. Introductory Vignette: Branding and Re-Branding a Country

A. Political and trade forces are important to a country’s attractiveness for attracting foreign

direct investment and for participating in international trade. This vignette discusses the efforts of

a new country, Kosovo, and an existing country, Israel, to influence the way their nations are

viewed internationally as attractive places for participating in international business activities.

II. Government Ownership of Business

A. Why Firms are Nationalized

1. Government suspects the company is concealing profits.

2. Government believes it can run the company more profitably.

3. Ideology

4. Job preservation – put dying industries on life support systems to save jobs

5. Because government pumped money into a weak industry, and control usually follows

the money, and

6. Happenstance, as with the nationalization of German-owned companies during and after

WW II.

B. Unfair Competition – between government and privately owned companies. Complaints by

the private companies include:

1. Government companies can cut prices aggressively because they do not have to make

profits.

2. Cheaper financing

3. They get government contracts

4. They get export assistance

5. They hold down wages with government assistance

III. Privatization

A. During the 1980s and 1990s many countries sold state-owned assets to private buyers. The

countries were in Asia, Europe, Latin America and North America; Britain has been a leader in

the movement under former prime minister Margaret Thatcher.

B. Privatization does not always involve ownership transfer from government to private hands.

Governments may contract out the management of some activities, or may lease state-owned

facilities to private entities. Most studies indicate privately run businesses are

more efficiently run than government companies. Show Fig. 6.1 for the percentages of privatization by

region.

IV. Government Protection

An historic function of government of whatever ideology has been the protection of economic

activities–farming, mining, manufacturing or whatever–within its geographic area of control. The

activities must be protected from foreign invasion and domestic terrorism.

A. Terrorism

1. Worldwide: Al Qaeda, the Irish Republican Army (IRA), Hamas, Hezballah, Abu Nidal,

and other Islamic fundamentalist groups, the Basque separatist movement (ETA), the

Japanese Red Army, and the German Red Army Faction. The 1995 bombing Oklahoma

City was domestic terrorism.

2. Kidnapping for Ransom is a terrorist tactic.

3. Paying Ransom Becomes Counterproductive

4. Countermeasures by Industry:

a. kidnapping, ransom and extortion (KRE) insurance

b. antiterrorist schools with specialized training

c. kidnap negotiating specialists

d. caution by informed executives

e. specialized equipment – cars

5. Chemical and Biological Terrorism: a growing threat that can create home-grown

terrorists

V. Government Stability

1. Government’s ability to maintain itself in power

2. Stability or permanence of a government’s policies

A. Stability and Instability: Examples and Results

1. Instability in Zimbabwe

a. Robert Mugabe destroyed the country’s economic infrastructure.

b. Government instability or sudden policy changes make successful conduct of

business difficult or impossible

VI. International Companies (ICs) – about half of world’s 100 biggest economic units are firms

1. Increasingly seen as desirable for developing country growth

2. IC financial size gives them strong negotiation position

3. May get help from home country governments in negotiations with host countries

VII. Country Risk Assessment (CRA)

It has become extremely important for a company or bank considering selling to, investing in or

lending to a foreign entity–government or private–to first identify and measure the risks. The

risks are compared to those that could be expected from expending the efforts and funds at home

or in a different foreign country. These risks are typical considerations and each provides

Information Content for CRA:

A. Types of Country Risks:

1. Political

a. War

b. Revolution

c. Coup

d. Elections of different governments/political parties in control

2. Economic or financial

a. Balance of payments deficits

b. High inflation

c. Questionable loan repayments

d. Labor conditions – low productivity, militant labor unions

e. Taxes

f. Currency convertibility

g. Tariffs & quotas

h. Questionable fair trials

i. Terrorism

B. Information Content for CRA – varies by nature of business and length of time required to

yield a satisfactory return

C. Who Does Country Risk Assessing?

CRA may be done by experts working for the company. Companies also may subscribe to

outside CRA services or have special studies prepared.

• Business Environment Risk Intelligence (BERI) S.A.

• Business Monitor International

• Coface

• Control Risk Solutions

• Economist Intelligence Unit (EIU)

• Euromoney

• Eurasia Group

• STRATFOR

• Harvard Business Review’s Global Risk Navigator

• The PRS Group

• Standard and Poor’s Rating Group

• Moody’s Investor Services.

IX. Trade Restrictions

A. Arguments for Trade Restrictions and their rebuttal:

1. National Defense

2. Sanctions to Punish Offending Nations

3. Protect Infant (or Dying) Industry

3. Protect Domestic Jobs from Cheap Foreign Labor

4. Scientific Tariff or Fair Competition

5. Retaliation

6. Dumping – selling a product abroad for less than the average cost of production in

exporting nation, the market price in the exporting nation, or the price to third countries.

Predatory dumping is a tactic to put competitors out of business

7. New Types of Dumping:

Social dumping – unfair competition from lower labor costs and poor working

conditions

Environmental dumping – unfair competition from lax environmental standards

Financial services dumping – unfair competition from low bank a capital-asset

ratio requirements

Cultural dumping – unfair competition from cultural barriers aiding local firms

Tax dumping – unfair competition from differences in corporate tax t rates or

special breaks

8. Subsidies and countervailing duties

9. Other arguments – permit diversification of the domestic economy or improve the balance

of trade

B. Tariff Barriers – tariffs and import duties are taxes on imported goods to raise their selling

price to reduce competition for competitive domestic goods

1. Ad Valorem, Specific and Compound Duties

a. ad valorem – import duty stated as a percentage of the invoice value of the product

b. specific duty – a fixed sum of money charged for a specified physical unit of the

product

c. compound duty – a combination of specific and ad valorem duties

2. Official Prices – guarantees that minimum duty will be paid regardless of invoice price

2. Variable Levy – duty set at difference between market and local government supported

price

3. Lower Duty for More Local Input – duty set in a way that encourages more local input.

4. Nuisance tariffs – extremely low tariffs that require importers to go through a frequently

lengthy process of paying the tariffs, even if their low levels no longer

serve their original intention

C. Nontariff Barriers (NTBs)

1. Quantitative – quotas set numerical limits to specific goods for import

Absolute quota – limits quantity of import for a year

Global quota – fixed quantity without regard to source

Allocated quota – importing nation assigns quantities to specific countries

Tariff-rate quota – a stipulated amount of product is permitted to enter duty-free

or at a low rate, then much higher duty for subsequent

imports

Voluntary Export Restraints (VERs) – export quotas imposed by exporting nation

2. Orderly Marketing Arrangements – are VERs negotiated between exporting and importing

nations

3. Nonquantitative Nontariff Barriers



Direct government participation in trade – government procurement policies and

minimum local content

Customs and other administrative procedures – discriminate against imports or

favor exports

Standards – to protect health and safety of citizens

X. Costs of Barriers to Trade

Consumers pay significantly higher prices to preserve local jobs through import constraints