Protecting Domestic Employment

Protecting Consumers
A government may levy a tariff on products that it feels could endanger its population. For example, South Korea may place a tariff on imported beef from the United States if it thinks that the goods could be tainted with a disease.

Infant Industries

The use of tariffs to protect infant industries can be seen by the Import Substitution Industrialization (ISI) strategy employed by many developing nations. The government of a developing economy will levy tariffs on imported goods in industries in which it wants to foster growth. This increases the prices of imported goods and creates a domestic market for domestically produced goods while protecting those industries from being forced out by more competitive pricing. It decreases unemployment and allows developing countries to shift from agricultural products to finished goods.

Criticisms of this sort of protectionist strategy revolve around the cost of subsidizing the development of infant industries. If an industry develops without competition, it could wind up producing lower quality goods, and the subsidies required to keep the state-backed industry afloat could sap economic growth.

National Security
Barriers are also employed by developed countries to protect certain industries that are deemed strategically important, such as those supporting national security. Defense industries are often viewed as vital to state interests, and often enjoy significant levels of protection. For example, while both Western Europe and the United States are industrialized, both are very protective of defense-oriented companies.

Retaliation

Countries may also set tariffs as a retaliation technique if they think that a trading partner has not played by the rules. For example, if France believes that the United States has allowed its wine producers to call its domestically produced sparkling wines "Champagne" (a name specific to the Champagne region of France) for too long, it may levy a tariff on imported meat from the United States. If the U.S. agrees to crack down on the improper labeling, France is likely to stop its retaliation. Retaliation can also be employed if a trading partner goes against the government's foreign policy objectives.
There are several types of tariffs and barriers that a government can employ:

Specific tariffs

Ad valorem tariffs
Licenses
Import quotas
Voluntary export restraints
Local content requirements
Specific Tariffs
A fixed fee levied on one unit of an imported good is referred to as a specific tariff. This tariff can vary according to the type of goods imported. For example, a country could levy a $15 tariff on each pair of shoes imported, but levy a $300 tariff on each computer imported.

Ad Valorem Tariffs

The phrase "ad valorem" is Latin for "according to value," and this type of tariff is levied on a good based on a percentage of that good's value. An example of an ad valorem tariff would be a 15% tariff levied by Japan on U.S. automobiles. The 15% is a price increase on the value of the automobile, so a $10,000 vehicle now costs $11,500 to Japanese consumers. This price increase protects domestic producers from being undercut but also keeps prices artificially high for Japanese car shoppers.

Non-Tariff Barriers to Trade

Licenses
A license is granted to a business by the government and allows the business to import a certain type of good into the country. For example, there could be a restriction on imported cheese, and licenses would be granted to certain companies allowing them to act as importers. This creates a restriction on competition and increases prices faced by consumers.

Import Quotas

An import quota is a restriction placed on the amount of a particular good that can be imported. This sort of barrier is often associated with the issuance of licenses. For example, a country may place a quota on the volume of imported citrus fruit that is allowed.

Voluntary Export Restraints (VER)

This type of trade barrier is "voluntary" in that it is created by the exporting country rather than the importing one. A voluntary export restraint (VER) is usually levied at the behest of the importing country and could be accompanied by a reciprocal VER. For example, Brazil could place a VER on the exportation of sugar to Canada, based on a request by Canada. Canada could then place a VER on the exportation of coal to Brazil. This increases the price of both coal and sugar but protects the domestic industries.

Local Content Requirement

Instead of placing a quota on the number of goods that can be imported, the government can require that a certain percentage of a good be made domestically. The restriction can be a percentage of the good itself or a percentage of the value of the good. For example, a restriction on the import of computers might say that 25% of the pieces used to make the computer are made domestically, or can say that 15% of the value of the good must come from domestically produced components.

In the final section, we'll examine who benefits from tariffs and how they affect the price of goods.

Who Benefits from Tariffs?
The benefits of tariffs are uneven. Because a tariff is a tax, the government will see increased revenue as imports enter the domestic market. Domestic industries also benefit from a reduction in competition, since import prices are artificially inflated.

Unfortunately for consumers—both individual consumers and businesses—higher import prices mean higher prices for goods. If the price of steel is inflated due to tariffs, individual consumers pay more for products using steel, and businesses pay more for steel that they use to make goods. In short, tariffs and trade barriers tend to be pro-producer and anti-consumer.

The effect of tariffs and trade barriers on businesses, consumers, and the government shifts over time. In the short run, higher prices for goods can reduce consumption by individual consumers and by businesses. During this period, some businesses will profit, and the government will see an increase in revenue from duties.

In the long term, these businesses may see a decline in efficiency due to a lack of competition, and may also see a reduction in profits due to the emergence of substitutes for their products. For the government, the long-term effect of subsidies is an increase in the demand for public services, since increased prices, especially in foodstuffs, leave less disposable income.

How Do Tariffs Affect Prices?
Tariffs increase the prices of imported goods. Because of this, domestic producers are not forced to reduce their prices from increased competition, and domestic consumers are left paying higher prices as a result. Tariffs also reduce efficiencies by allowing companies that would not exist in a more competitive market to remain open.

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A supply chain is a network between a company and its suppliers to produce and distribute a specific product to the final buyer. This network includes different activities, people, entities, information, and resources. The supply chain also represents the steps it takes to get the product or service from its original state to the customer.

supply chain is an entire system of producing and delivering a product or service, from the very beginning stage of sourcing the raw materials to the final delivery of the product or service to end-users. The supply chain lays out all aspects of the production process, including the activities involved at each stage, information that is being communicated, natural resources that are transformed into useful materials, human resources, and other components that go into the finished product or service.

Mapping out a supply chain is one of the critical steps in performing an external analysis in a strategic planning process. The importance of clearly laying out the supply chain is that it helps a company define its own market and decide where it wants to be in the future. In developing corporate-level strategies, a company often needs to make decisions on whether to operate a single line of business or enter into other related or unrelated industries.

Each stage of a supply chain is essentially a different industry, for example, raw material extraction and manufacturing. The supply chain enables a company to understand others that are involved in each of the stages, and thereby provides some insights on the attractiveness or competitiveness in industries the company might want to enter in the future.

Let’s look at two different examples of a supply chain.

Generic Supply Chain
The generic supply chain begins with the sourcing and extraction of raw materials. The raw materials are then taken by a logistics provider to a supplier, which acts as the wholesaler. The materials are taken to a manufacturer, or probably to various manufacturers that refine and process them into a finished product.

Afterward, it goes to a distributor that wholesales the finished product, which is next delivered to a retailer. The retailer sells the product in a store to consumers. Once the consumer buys it, this completes the cycle, but it’s the demand that then goes back and drives the production of more raw materials, and the cycle continues.

Companies develop supply chains so they can reduce their costs and remain competitive in the business landscape.

Supply chain management is a crucial process because an optimized supply chain results in lower costs and a faster production cycle.

Understanding Supply Chains

A supply chain involves a series of steps involved to get a product or service to the customer. The steps include moving and transforming raw materials into finished products, transporting those products, and distributing them to the end-user. The entities involved in the supply chain include producers, vendors, warehouses, transportation companies, distribution centers, and retailers.

A supply chain is a network between a company and its suppliers to produce and distribute a specific product or service.

The entities in the supply chain include producers, vendors, warehouses, transportation companies, distribution centers, and retailers.
The functions in a supply chain include product development, marketing, operations, distribution, finance, and customer service.
Supply chain management results in lower costs and a faster production cycle.
The elements of a supply chain include all the functions that start with receiving an order to meeting the customer's request. These functions include product development, marketing, operations, distribution networks, finance, and customer service.

Supply chain management is a very important part of the business process. There are many different links in this chain that require skill and expertise. When supply chain management is effective, it can lower a company's overall costs and boost profitability. If one link breaks down, it can affect the rest of the chain and can be costly.

liable Suppliers
An efficient supply chain management process requires reliable suppliers. This means they produce a quality product that meets the manufacturer’s needs, and the product is delivered on time.

Assume, for example, that XYZ Furniture manufactures high-end furniture, and that a supplier provides metal handles and other attachments. The metal components need to be durable so they can be used on the furniture for years, and the metal parts shipped to XYZ should work as intended. The supplier must be able to fill the manufacturer’s orders and ship metal parts to meet XYZ’s production needs. These steps are necessary to produce a quality product that is shipped to a customer in a timely manner.

Supply Chain and Deflation
The evolution and increased efficiencies of supply chains have played a significant role in curbing inflation. As efficiencies in moving products from A to B increase, the costs in doing so decrease, which lowers the final cost to the consumer. While deflation is often regarded as a negative, supply chain efficiencies are one of the few examples where deflation is a good thing.

As globalization continues, supply chain efficiencies become more optimized, which keeps the pressure on input prices.

the factors that affect Foreign Direct Investment.

1. Wage rates
A major incentive for a multinational to invest abroad is to outsource labour intensive production to countries with lower wages. If average wages in the US are $15 an hour, but $1 an hour in the Indian sub-continent, costs can be reduced by outsourcing production. This is why many Western firms have invested in clothing factories in the Indian sub-continent.
• However, wage rates alone do not determine FDI, countries with high wage rates can still attract higher tech investment. A firm may be reluctant to invest in Sub-Saharan Africa because low wages are outweighed by other drawbacks, such as lack of infrastructure and transport links.
2. Labour skills
Some industries require higher skilled labour, for example pharmaceuticals and electronics. Therefore, multinationals will invest in those countries with a combination of low wages, but high labour productivity and skills. For example, India has attracted significant investment in call centres, because a high percentage of the population speak English, but wages are low. This makes it an attractive place for outsourcing and therefore attracts investment.
3. Tax rates
Large multinationals, such as Apple, Google and Microsoft have sought to invest in countries with lower corporation tax rates. For example, Ireland has been successful in attracting investment from Google and Microsoft. In fact it has been controversial because Google has tried to funnel all profits through Ireland, despite having operations in all European countries.
4. Transport and infrastructure
A key factor in the desirability of investment are the transport costs and levels of infrastructure. A country may have low labour costs, but if there is then high transport costs to get the goods onto the world market, this is a drawback. Countries with access to the sea are at an advantage to landlocked countries, who will have higher costs to ship goods.
5. Size of economy / potential for growth
Foreign direct investment is often targeted to selling goods directly to the country involved in attracting the investment. Therefore, the size of the population and scope for economic growth will be important for attracting investment. For example, Eastern European countries, with a large population, e.g. Poland offers scope for new markets. This may attract foreign car firms, e.g. Volkswagen, Fiat to invest and build factories in Poland to sell to the growing consumer class. Small countries may be at a disadvantage because it is not worth investing for a small population. China will be a target for foreign investment as the new emerging Chinese middle class could have very strong demand for the goods and services of multinationals.
6. Political stability / property rights
Foreign direct investment has an element of risk. Countries with an uncertain political situation, will be a major disincentive. Also, economic crisis can discourage investment. For example, the recent Russian economic crisis, combined with economic sanctions, will be a major factor to discourage foreign investment. This is one reason why former Communist countries in the East are keen to join the European Union. The EU is seen as a signal of political and economic stability, which encourages foreign investment.
Related to political stability is the level of corruption and trust in institutions, especially judiciary and the extent of law and order.
7. Commodities
One reason for foreign investment is the existence of commodities. This has been a major reason for the growth in FDI within Africa – often by Chinese firms looking for a secure supply of commodities.
8. Exchange rate
A weak exchange rate in the host country can attract more FDI because it will be cheaper for the multinational to purchase assets. However, exchange rate volatility could discourage investment.
9. Clustering effects
Foreign firms often are attracted to invest in similar areas to existing FDI. The reason is that they can benefit from external economies of scale – growth of service industries and transport links. Also, there will be greater confidence to invest in areas with a good track record. Therefore, some countries can create a virtuous cycle of attracting investment and then these initial investments attracting more. It is also sometimes known as an agglomeration effect.
10. Access to free trade areas.
A significant factor for firms investing in Europe is access to EU Single market, which is a free trade area but also has very low non-tariff barriers because of harmonisation of rules, regulations and free movement of people. For example, UK post-Brexit is likely to be less attractive to FDI, if it is outside the Single Market.
Evaluation
There are many different factors that determine foreign direct investment (FDI) and it is hard to isolate individual factors, given there are many different variables. It also depends on the type of industry. For example, with manufacturing FDI, low wage costs tend to be the most important, as they are a labour intensive industry. For service sector FDI, macro-economic stability and political openness tend to be more important.
Also, it depends on the source of FDI, American firms may value political openness more than Chinese firms. Or American firms may have a preference for countries where English is spoken more.

the advantages and disadvantages of countertrade.

Countertrade is an umbrella term used to describe many different types of transactions
each in “which the seller provides a buyer with goods or services and promises in return to purchase goods or services from the buyer”. Countertrade may or may not involve the use of currency, as in barter

A counter purchase trade agreement is similar to a buy-back transaction, but

differs in that the output that the seller of the plant agrees to buy is unrelated to
the plant. An offset transaction can be viewed as a counter purchase trade agreement involving the aerospace/defence industry.

Forms of Countertrade

a) Barter - The direct exchange of goods between traders. Barter requires a double coincidence of wants.
b) A clearinghouse arrangement is a form of barter in which the traders agree to
buy a certain amount of goods from each other. They set up accounts with each
other that are debited and credited as needed. At the maturity of the arrangement,
the parties settle up in cash or merchandise.
c) A switch trade is the purchase by a third party of one country’s clearing
agreement balance for hard currency.
d) A buy-back transaction involves a technology transfer via the sale of a
manufacturing plant. The seller of the plant agrees to buy back some of the output
of the plant once it is constructed.
A counter purchase trade agreement is similar to a buy-back transaction, but
differs in that the output that the seller of the plant agrees to buy is unrelated to
the plant.
f) An offset transaction can be viewed as a counterpurchase trade agreement
involving the aerospace/defense industry.

Disadvantages of Countertrade

There are various disadvantages of countertrade:
(i) It is inefficient.
(ii) Some claim that such transactions tamper with the fundamental operation of free
markets, and therefore resources will be used inefficiently.
(iii) Transactions that do not make use of money represent a huge step backwards in economic development.

Advantages of Countertrade

Countertrade conserves cash and hard currency. Advantages also include the
improvement of trade imbalances, the maintenance of export prices, enhanced economic development, increased employment, technology transfer, market expansion, increased
profitability, less costly sourcing of supply reduction of surplus goods from inventory, and the development of marketing expertise.

Generalizations about Countertrade

There are advantages and disadvantages associated with countertrade. It can benefit both parties and in some circumstances is the only trade possible. Whether countertrade transactions are good or bad for the global economy, it appears certain that they will increase in the near future as world trade increases.

techniques utilized by international firms to mitigate foreign exchange exposure resulting from international trade transactions.

There are various types of hedging techniques. Some of the hedging techniques include:
(i) Futures hedge,
(ii) Forward hedge,
(iii)Money market hedge, and
(iv)Currency option hedge.

Futures Hedge

A futures hedge involves the use of currency futures. To hedge future payables, the firm may purchase a currency futures contract for the currency that it will needed. To hedge future receivables, the firm may sell a currency futures contract for the currency that it will be receiving.

Forward Hedge

A forward hedge differs from a futures hedge in that forward contracts are used instead of
futures contract to lock in the future exchange rate at which the firm will buy or sell a currency.

Forward contracts are common for large transactions, while the standardized futures contracts involve smaller amounts

Money Market Hedge

A money market hedge involves taking one or more money market position to cover a
transaction exposure.

Often, two positions are required. For account payables, the company needs to borrow in the home currency and invest in the foreign currency.

If interest rate parity (IRP) holds, and transaction costs do not exist, a money market hedge will yield the same result as a forward hedge. This is so because the forward premium on a forward rate reflects the interest rate differential between the two currencies.
Currency Option Hedge

A currency option hedge involves the use of currency call or put options to hedge transaction exposure. Since options need not be exercised, firms will be insulated from adverse exchange rate movements, and may still benefit from favorable movements.

However, the firm must assess whether the premium paid is worthwhile.

the FACTORS AFFECTING INTERNATIONAL TRADE FLOWS

Impact of Inflation
A relative increase in a country’s inflation rate will decrease its current account, as imports increase and exports decrease

Impact of National Income

A relative increase in a country’s income level will decrease its current account, as imports increase.

Impact of Government Restrictions

A govern Why are firms motivated to expand their business internationally? ment may reduce its country’s imports by imposing tariffs on imported goods, or by enforcing a quota. Note that other countries may retaliate by imposing their own trade restrictions. Sometimes though, trade restrictions may be imposed on certain products for health and safety reasons.

Impact of Exchange Rates

If a country’s currency begins to rise in value, its current account balance will decrease as imports increase and exports decrease.
Note that the factors are interactive, such that their simultaneous influence on the balance of trade is a complex one.

The following events had increased the international trade:

a. Removal of the Berlin Wall
b. Single European Act
c. NAFTA
d. Inception of the Euro
e. European Union Expansion