To set the stage for our discussion of

the various competing theories of international trade,

we need to first quickly run through some key definitions.

The idea here is that,

in order to better understand international trade from a business perspective,

we must first learn its language and jargon.

So here are some of

the most important terms.

Protectionism is one of the most charged words in international trade,

and almost always has a negative connotation.

In this key definition,

Protectionism represents a trade strategy explicitly designed to

shield Domestic Industries from foreign competition using tools like tariffs,

quotas and other non-tariff barriers.

This makes protectionism the antithesis and arch-enemy of free trade.

The key concept of mercantilism is closely related to protectionism.

The central theory behind mercantilism which dates back to the 16th century,

is that a country will be better off if it

a masses wealth through trade with other nations.

Of course, one important means to this mercantilist end is for

a country to use protectionist measures to shield one's domestic markets.

However, mercantilist nations do not merely protect their own markets.

True mercantilist nations in today's modern trading arena,

will also use a variety of unfair trade practices,

like export subsidies and currency manipulation to stimulate their exports as well.

And one sign of a successful mercantilist nation,

is that it runs chronic trade surpluses with its trading partners.

As a business executive,

if you are considering opening new markets,

you will do well to carefully assess how protectionist and mercantilist,

the country you are considering may be.

If that country is indeed protectionist,

maybe very difficult to penetrate that market and you may encounter

both hidden costs and unwelcome regulatory surprises.

On the other hand, if you are

a domestic manufacturer faced with rising foreign competition,

you may very well welcome more protectionist measures by

your government and may even lobby in the political arena for such protection.

This of course raises some interesting ethical issues in business.

For example, you may find yourself lobbying for

a protectionist measure that may help your own industry,

but hurt the country overall.

As just noted, both tariffs and quotas are

protectionist tools used by countries to restrict imports.

The economic difference between the two is a simple one.

A quota represents a numerical limit on the importation of a product.

For example, one country might limit the amount of cars that can

be imported from another country to say, one million units.

In contrast, a tariff represents a tax or duty that is imposed on imported good.

The effective result is to restrict the importation of the good by raising its price,

and thereby reducing purchases by consumers.

As for the political difference between tariffs and quotas,

and is quite an interesting story in and of

itself that I will share with you in the later module.

For now, let's move on to non-tariff barriers.

You can think of non-tariff barriers as a set of

far more subtle protectionist measures that countries may use to protect their markets.

Often, such non-tariff barriers are bureaucratic or regulatory in nature.

For example, a country may restrict imports

under the guise of unjustified sanitary conditions.

This has been a tactical gambit some countries of

the world had used to block the import of agricultural products,

like beef or soybeans.

Similarly, a country may adopt unreasonable packaging,

labeling or product standards while they buy domestic rule for government purchases,

may likewise, indirectly limit the import of foreign products.

The key point here, is that a complex regulatory environment,

that indirectly raises the regulatory costs of

an importer can effectively function as a non-tariff barriers.

But also note this additional key point,

sometimes it is difficult to determine a country's intent.

Is that country simply adopting reasonable regulations and rules to protect

its citizens or is the real purpose to

restrict imports and thereby protect domestic industries?

These are two tools that mercantilist countries often use to stimulate their level of

exports above that which we would

observe in an otherwise free and fair global marketplace.

Take the case of export subsidies.

A domestic manufacturer might produce a good at cost for export.

The government might then write that manufacturer

a check that allows the manufacturer to actually make a profit.

As to why the government might do this,

one big reason is to create more jobs for its citizens.

Of course, when the government does this,

the result is fewer jobs in the country of the trading partner.

A classic mercantilist and zero sum game result that runs

contrary to both the letter and spirit of international trade agreements and rules.

As for currency manipulation,

some countries use an undervalued currency as a mercantilist tool.

With currency manipulation, a country seeks to undervalue its currency relative to

the level that the country's exchange rate would otherwise be at in a free market.

When a country undervalues its currency,

this provides two clear mercantilist benefits.

The first, is the cheaper currency makes it easier to export the country's products.

This helps create more jobs and production in the home country.

The second benefit is to make imports more expensive,

and thereby reduce the flow of imports.

This likewise helps increase the number of jobs in

the country because there is less foreign competition.

The theft of intellectual property,

is another common mercantilists tool that is

frequently used today in the international trading arena.

One method here is to steal the designs,

processes or trade secrets of foreign competitors often through the use of cyberattacks.

Such theft reduces the costs of the nation's industry because its businesses

don't have to pay for the research and development

needed to develop the intellectual property to begin with.

And for certain industries like Automobiles,

Aviation and Pharmaceuticals, R&D costs can be quite large.

A second method of intellectual property theft is to

simply reverse engineer the product of a foreign competitor.

In many countries, it is impossible to stop such theft because

these countries lack an adequate legal system to allow victims to file suit.

Still a third method is to produce Counterfeit copies of

a product without regard for a foreign nation's patents and rights.

Important point to note here from an individual business perspective is that,

it is critical that executives protect their companies from intellectual property theft,

both at home and at their facilities abroad.

In this key definition,

dumping occurs when one country sells a product

to another country below its cost of actual production.

Such dumping is particularly prevalent in industries highly prone to

fluctuations in the business cycle and/or a tendency for overcapacity.

A poster child for this dumping problem is the steel industry.

It is not uncommon during recessions for companies to dump

their excess steel inventories onto the global market well below their costs.

And they do so,

as a means of keeping their factories running.

One response to such dumping has been the imposition of so-called countervailing tariffs.

In this key definition,

a countervailing tariff is a tax or duty that is imposed on

a foreign import in an attempt to bring the imported price up to its true market price.

The key concept here is that countervailing duties may be used to

level the playing field against an unfair mercantilist competitor.

In such cases, countervailing duties are not protectionist in a bad sense,

but simply designed as legitimate,

defensive measures to shield domestic industries from

mercantilist practices such as dumping and illegal export subsidies.

Okay, that's a pretty good overview of some of

the most important language and jargon of international trade.

Before moving on, why not take a few minutes to think about your own country.

Is it a free trader or a mercantilist?

Does it protect any particular industries or is it more of

a victim of the predatory trade practices of other nations?

These are important political issues which we will return to soon.

The Language and Jargon of International Trade

Strategic Business Management - Macroeconomics

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