1. WK3 Agenda Hot topic: News? Facebook, Lecture PPT Change the date for this week Wednesday class to Friday June 18, 2010 morning. No class last week of July FDI Decision Homework Trade Theory Discovery PBS Video and script, US-China Tire Trade Government Intervention Homework 1 MIB, BBA 2010

2. Trade Theory Discovery What are the major products exporting from these countries (Saudi Arabia, Thailand, Brazil, Norway, China, and the US.)? Any explanation? Hecsksher-Ohlin Theory Countries will export goods that make intensive use of those factors that are locally abundant. Countries will import goods that make intensive use of factors that are locally scarce. How would you explain Thai international marriage? MIB, BBA 2010 2

3. Trade Theory Discovery How can you explain this chart? Product Life Cycle Theory MIB, BBA 2010 3

4. Trade Theory Discovery Raymond Vernon PLC Theory Initially produced and sold in the US. as demand grow in other developed countries, U.S. firms will begin to export. Overtime, demand would grow in other advanced countries making it worthwhile for foreign producers to begin producing in their home market. Once the products become more standard and price are competitive. Then the low cost foreign location would switch to be exporters. MIB, BBA 2010 4

5. Trade Theory Discovery How do we gain trade surplus? When will we get trade deficit? Examples? Mercantilism MIB, BBA 2010 5

6. Origami Trade Theory In 10 minutes Divide the students into 4 groups. 2 groups fold the airplanes 2 groups fold the elephants Report your output on the board. MIB, BBA 2010 6

7. Origami Trade Theory Absolute Advantage Division of labor Specialization. Do what you’re good at then combine later. If one country has absolute advantage for all products, should it produces all products? Impossible Comparative Advantage Opportunity Cost MIB, BBA 2010 7

8. Trade Theory Discovery What do these three universities(Ramkamhang, Sukothai, and Ratjabhat) have in common? What are their differences? Differentiation? New trade theory Economies of scale are significant! First mover advantage can gain a scale base cost advantage that later entrants find it difficult to match. Is this theory conflict with our sufficient economy เศรษฐกิจพอเพียง? How can we combine both ways? MIB, BBA 2010 8

9. Trade Theory Discovery What’s the success factors for a business in a particular industry? Michael Porter tried to explain why nation achieve international success in a particular industry. Four attributes that promote or impede the creation of competitive advantage: MIB, BBA 2010 9

10. US-China Tire Trade Tensions What’s the story about? What’s the rationale for government intervention? What are other intervention tools that the government can use? Why Chinese companies don’t do like Bridgestone? MIB, BBA 2010 10

11. Government Intervention Homework In group of 4 or 5. Find 2 articles that are related to the government intervention. Your report should explain: Statement of the problem. Reasons for fixing the problem. How did the government try to fix the problem? What are the effects to all parties involved? Local producers, consumers, foreign producers, etc. MIB, BBA 2010 11

12. WK3.2 Agenda Hot topics: Thaicom, Seminar & Porter’s Diamond Student Lecture Mind map & Homework MIB, BBA 2010 12

13. Overview of Free Trade Theory Free Trade : a situation that the government does not attempt to influence through quotas or dutieswhat its citizen can buy from another country or what they can produce and sell to another country How can we create a win-win situation? Eastern-How do you divide the inheritance? Western-How can we win the Olympic game? Hybrid-Have fun together? 13 MIB, BBA 2010

14. The Benefit of Trade Smith, Ricardo, and Heckscher-Ohlin show why it is beneficial for a country to engage in international trade. International Trade allows a country: To specialize in the manufacture and export of products that it can produce efficiently. Import products that can be produced more efficiently in other countries. How much the Quad countries accounted for exporting the world’s merchandise? 14 MIB, BBA 2010

15. Trade Theory and Government Policy MIB, BBA 2010 15

16. Mercantilism Mercantilism: 16th century economic philosophy: a country should promote exports and discourage imports—maintain trade surplus. Mercantilism advocate government intervention to achieve a surplus in the balance of trade. It views trade as a zero sum game—one country gain, another country loss. Disadvantages include: short term, retaliation, not all available products, balance cycle(But for how long? In reality, it’s not just two countries.) 16 MIB, BBA 2010

17. Absolute Advantage Adam Smith: TheWealth of Nations: countries differ in their ability to produce goods efficiently. A country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it. SpecializeTrade From our discovery game, What country has an absolute advantage in producing airplane? Elephant? 17 MIB, BBA 2010

18. Absolute Advantage Without trade: each country could enjoy the products only what they can produce. If each country specialize in what it has an absolute advantage and trade for the other product (assuming the same production rate as before) The US.would produce 46 airplanes. Thailand would produce 8 elephants. The result is a positive sum game with more total products to enjoy. Will it be lower price and better quality? When we free up our labor work, do you see the possible problem of shifting industry? What if a country has an absolute advantage in the productions of all goods? Should it still trade? 18 MIB, BBA 2010

19. Comparative Advantage Ricardo Comparative Advantage: Countries should specialize in the goods that they produce most efficiently. Countries should buy goods that they produce less efficiently from other countries, even if they can produce more efficiently than other countries. Opportunity cost: brain surgeon with cleaning lady, manager with subordinates (save time) Without trade: Thailand production rate is 1 elephant to 5 planes, and 1 elephant to 4 planes for American. Opportunity cost for American to make an elephant is 4 planes which is less than the opportunity cost of Thailand 5 planes. Therefore, America has a comparative advantage in making an elephant. If they trade 1 elephant for 4.5 planes, American gain more planes than by making it domestically(4). Thailand also gain because use only 4.5 planes to get 1 elephant instead of making 5 planes domestically to get an elephant. Is it worth trading? -Transportation cost -Currency exchange rate -Reality has more than 2 countries and 2 products. -Switching cost 19 MIB, BBA 2010

20. Extensions of the RicardianModel vs. Samuelson Critique Resources do not always move freely from one economic activity to another, and job losses may occur i.e. shift textile to software Unrestricted Free trade is beneficial, because of the diminishing returns, the gain may not be as great as the simple model would suggest. Do you know the difference in solving diminishing return between the East and the West? Opening a country to trade: Might increase a country stock of resources: more supplies from abroad Might increaseresource utilization, and free up resources for other uses Might increase economic growth Paul Samuelson argues that dynamic gain from trade may not always be beneficial “20% cheaper at Wal-Mart does not necessarily make up for the wage losses”. The ability to offshore services jobs that were traditionally not internationally mobile may have the effect of a mass inward migration into the U.S. where wages would then fall. 20 MIB, BBA 2010

21. Heckscher-Ohlin Theory What determines the products for which a country will have a comparative advantage? Eli Hecksher and Bertil Ohlin argued that comparative advantage arises from differencesin national factor endowment (land, labor, and capital). Hecksher-Ohlin theory predicts that countries will export goods that make intensive use of those factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce. Leontief Paradox 21 MIB, BBA 2010

22. Product Life Cycle Theory Raymond Vernon PLC Theory Initially produced and sold in the US. as demand grow in other developed countries, U.S. firms will begin to export. Overtime, demand would grow in other advanced countries making it worthwhile for foreign producers to begin producing in their home market. Once the products become more standard and price are competitive. Then the low cost foreign location would switch to be exporters. Good explanation for electronic production during the 70s such as photocopies and camera. Less valid these days due to globalization. 22 MIB, BBA 2010

23. New Trade Theory New trade theory suggest that the ability of firms to gain economies of scale(avg. cost decrease as the number of units produce increase) can have important implication on international trade. i.e. Microsoft New trade theory suggest that: Economy of scale not only decrease the average cost but also increase the variety of those goods: without trade, the variety of goods and the scale of productions are limit by the size of the market.For example, AjSupapak&BBAstudents@UBU. If we trade with Ramkamhang, AjSupapak&BBA students plus AjRamkamheng and the long distance learning students. Then grade all the students together. More teacher and students variety with economies of scale students. Will you do that when you become the instructors? First mover advantage: First mover advantage can gain a scale base cost advantage that later entrants find it difficult to match i.e. Boeing and Airbus, AIS, DTAC, and Truemove. 23 MIB, BBA 2010

24. Implication of New Trade Theory Nations may benefit from trade evenno difference in resource endowment and technology. A country may dominate in the export of the goods because they are lucky to be the first mover. While this is at variance with Heckscher-Ohlin theory, it does not contradict comparative advantage (identify a source of comparative advantage). Government should use trade policy that nurture and protect firms and industries where first mover advantages and economies of scale are important Proton Malaysian car vs. Thai Took Took, Detroit Hub 24 MIB, BBA 2010

25. National Competitive Advantage: Porter’s Diamond Michael Porter tried to explain why nation achieve international success in a particular industry. Four attributes that promote or impede the creation of competitive advantage: MIB, BBA 2010 25

26. Factor Endowments Factor endowment: a nation’s position in factors of production necessary to compete in a given industry. A nation’s position in factors of production can lead to competitive advantage. Factors -Basic: natural resources, climate, location -Advanced: skilled labor, infrastructure, tech know-how MIB, BBA 2010 26

27. Demand Conditions Refers to the nature of home demand for the industry’s product or service. The home demand influences the development of capabilities. Sophisticated and demanding customers pressure firms to be competitive. 27 MIB, BBA 2010

28. Relating and Supporting Industries Relating and supporting industries: presence of suppliers or related industries that are internationally competitive. The benefit of investments in advanced factors that are internationally competitive can spill over into an industry Better communication, exchange of cost-saving ideas, inventions with those suppliers. Competition among these suppliers leads to lower prices, higher quality products, and technical innovations in the market. Successful industries tends to be group in clusters in countries i.e. silicon valley 28 MIB, BBA 2010

29. Firm Strategy, Structure, and Rivalry MIB, BBA 2010 29

30. Evaluating Porter’s Theory What can the government do in each component? Do we need all four components to be successful? Uniden, Thai Sanitary Ware MIB, BBA 2010 30

31. Implications for Managers MIB, BBA 2010 31

32. Mind Map Summary MIB, BBA 2010 32

33. 33 The Political Economy Free Trade: government do not attempt to restrict what its citizens can buy from or sell to another country Fair Trade: managed trade, or government actively interveneto ensure that domestic firms exports receive an equitable share of foreign market and that imports are controlled to minimize losses (domestic jobs, market share, etc.) Why do government intervene in trade? What are their tools? Will there be a problem with the intervention? MIB, BBA 2010

34. Rationale For Government MIB, BBA 2010 34

35. Instruments of Trade Policy MIB, BBA 2010 35

36. Tariffs Tariffs: a tax levied on imports or exports (cost of the product ↑) Specific tariffs: levied as a fixed charge for each unit of a good imported i.e. $3/barrel of oil, Ad valorem tariffs: levied as a proportion of the value of the imported good (% of the market value of the imported good) Tariffs increase government revenue, provide protection to domestic producers against foreign competitors by increasing the cost of imported goods and force consumers to pay more Tariffs are pro-producers, anti-consumer, and reduce the overall efficiency of the world economy MIB, BBA 2010 36

37. Subsidies Subsidies: a government payment to a domestic producer i.e. cash grant, low interest loans, tax breaks Consumers typically absorb the costs of subsidies (Consumers pay tax=>Subsidies) Subsidies help domestic producers in two ways: Help them compete against low cost foreign imports Help them gain export markets i.e. Japan tied-aid package to reduce the risk of nonpayment for oversea sales: export telecommunication by aiding loan for railway or electric power projects Reality? Price never goes down. MIB, BBA 2010 37

38. 38 Import Quotas and Voluntary Export Restraints Import quota: a direct restriction on the quantity of some good that may be imported into a country Tariffs rate quota: a hybrid of quota and tariff where a lower tariff is applied to imports within the quota than those over the quota i.e. sugar sales in the U.S. Voluntary export restraints: quotas on trade impose by the exporting country, typically at the request of the importing country’s government i.e. US-Japan auto industry A quota rent: the extra profit that producers make when supply is artificially limited by an import quota=> Japanese car in the US during the 80s Import quotas and VERs benefit domestic producers by limiting import competition, but they raise the prices of imported goods. MIB, BBA 2010

39. 39 Local Content Requirements Local content requirement: a requirement that some fraction of a good be produced domestically i.e. Buy America Act 51%, import license, Thai auto local content in 2000, German Beer local water content. What’s the effect of this policy? Local content requirement benefit domestic producers, but consumers face higher prices. Encourage FDIinstead of exporting. MIB, BBA 2010

40. 40 Administrative Policies Administrative policies: bureaucratic rules designed to make it difficult for imports to enter a country i.e. Fed Ex in Japan, Mexican Customs delays at the border. These policies hurt consumers by denying access to possibly superior foreign products. MIB, BBA 2010

41. 41 Antidumping Policies Dumping: selling goods in a foreign market below their costs of production or fair market value Dumping enables firms to unload excess production in foreign markets Dumping as a predatory behavior: producers using profit from their home markets to subsidize prices in a foreign market with a view to driving indigenous competitors out of that market, and later raising price and earning substantial profits Antidumping policies or countervailing duties are designed to punish foreign firms that engage in dumping and protect domestic producers from unfair foreign competition i.e. U.S. Canadian softwood industry, EU and Korean semiconductor MIB, BBA 2010

42. Summary MIB, BBA 2010 42

43. 43 Implication for Managers Trade barriers and firm strategy: Firm should consider relocation to produce in that country when Trade barriers raise the cost of exporting VERs may limit a firm ability to sell in that country (Japan auto industry and its suppliers; although higher cost in the U.S.) To conform to local requirement. Policy implications: lobby for free trade, ask for government protection (but be careful with trade retaliation and inefficiency). MIB, BBA 2010