Basic Business Info

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Protectionism and Tariffs: These are the Truths!

Completely free trade equalizes prices of tradable goods at home with those in world markets. Under trade, goods flow uphill from low-price to high-price markets.

A tariff raises the domestic prices of imported goods, leading to a decline in consumption and imports along with an increase in domestic production. Quotas have very similar effects and unlike tariffs, lower government tax revenues.

A tariff causes economic waste. The economy suffers losses from decreased domestic consumption and from the wasting of resources on domestic goods lacking comparative advantage. These losses generally exceed government tax revenues.

Most arguments for tariffs simply rationalize special benefits to particular pressure groups and cannot withstand economic analysis.

3 arguments that can stand up to careful scrutiny are the following:

a. The terms-of-trade or optimal tariff can in principle raise the real income of a large country at the expense of its trading partners.

b. In a situation of less-than-full employment, tariffs might push an economy toward fuller employment, but monetary or fiscal policies could attain the same employment goal with fewer inefficiencies than this beggar-thy-neighbour policy.

c. Sometimes, fledgling industries may need temporary protection in order to realize their true long-run comparative advantages.

What determines “Value added”?

The "value added" in a particular country – its product development, design, production, assembly, or marketing - depends on differences in labour costs and unique national attributes or skills.

Location-specific Advantages: What are some examples?

There are 4 factors that are pertinent to the location-specific theory, as follows:

1. Labour costs: Real wages vary significantly, not only between developing and industrialised countries, but also within the groups themselves.

2. Marketing factors: FDI decisions will obviously be affected by host-country characteristics like market size, market growth, stage of development, and the presence of local competition.

3. Trade barriers: These are used as an element of policy by many host countries trying to encourage inward investment.

4. Government policy: This has a significant effect on the “investment climate”. In any particular host country, either directly through fiscal and monetary policies and the regulatory regime, or indirectly through the general sociological environment.

Other theories that attempt to explain varying performances of subsidiaries operating in different foreign markets have also identified the following factors:

- tastes differ in different countries

- the production process is characterised by economies of scale

- the flow of information across national borders is restricted

- products undergo changes in production techniques and marketing characteristics over time.

Firm-specific Advantages: What are some examples?

A. Secure and preferential source of inputs to production (eg. raw materials)

B. Managerial expertise

C. Well-established brand name

D. Control over distribution channels, particularly in small countries

E. Capability to avoid market entry requirements (such as tariffs and quotas)

F. Other knowledge or patents that when sold takes on a “public good” nature. Essentially they become free and can produce no more revenues.

A Quotable Quote:

"The world's richest 200 companies have seen their profits grow by 362.4% since 1983; their combined sales are now HIGHER than the combined gross domestic product (GDP) of all but 10 nations on earth."

- Michael Moore (film-maker) (2002)

MNE Revenues: Are they for real?!

Today, the revenues of the top 200 corporations (MNEs) are growing at a faster rate than overall global economic activity. Between 1983 and 1999, their combined sales grew from the equivalent of 25% to 27.5% of world GDP. Moreover, between 1983 and 1999, the share of total sales of the Top 200 made up by service sector corporations increased from 33.8% to 46.7%. Therefore, MNEs’ profits clearly contribute a major part to the world's aggregate income.

A Tax Avoidance Story: Yes, the world is not fair!

In the past three years (to 2011), Starbucks paid NO corporation tax in the UK! Amazon paid £1.8m, despite earning a total revenue of £200m in the UK in 2011. Starbucks global chief financial officer Troy Alstead insisted “the company remains an extremely high tax payer globally but, as UK profits have been far from substantial”, claims, “respectfully, I can assure you there is no tax avoidance here.” Similarly, Matt Brittin, the head of Google’s northern European operation, defended the company’s practices. “Like any company you play by the rules [and] manage costs efficiently to offer fair value to shareholders.”

Critics responded that most of these companies proclaim a strong corporate responsibility ethos, yet the most basic responsibility they have is to pay their fair share [of taxes] into the common purse. The fact that they create jobs is an absurd argument. “We have to ensure that where companies are making money in the UK, they pay their fair share, and there is a duty to do all it can to ensure those rules are strictly and fairly adhered to.”

Google's Brittin told the investigating committee that "we comply with the law in the UK" and "it would be very hard for us to pay more tax here based on the way we are required to structure by the system." ABC News reports that critics responded by saying that the committee was "not accusing you of being illegal, we are accusing you of being immoral."