II. ECONOMIC & COMMERCIAL CONCEPTS & TERMS
The ability of a country to supply a particular product or class
of goods at lower costs than competing nations. See also comparative
advantage and competitiveness.
The economic and social costs of reallocating resources from
.domestic industries forced to contract as a result of international
competition. Although conventional international trade models
assumed that adjustment costs would be minimal --leading to
prescriptions of free trade and even unilateral trade liberalization --) industries employing
highly specialized production factors can face substantial adjustment
A condition in which prices of certain goods or services are
determined by government agencies, producer cartels, or industry
associations, rather than freely through market forces. Examples
include price controls imposed by governments during periods
of short supplies or high inflation; setting of shipping rates
or fares; and collusion among suppliers or importers of a commodity
to maintain price stability.
A system of industrial policy used
in Japan since the early 1960s. The term refers to official
or unofficial pronouncements from government officials, which
serve as guidelines to business concerning the application of
Japanese law or regulations. Such guidance may take the form
of a written opinion or a spoken remark. The informal character
to exclude foreign firms from inside information.
Airbus. Refers to commercial aircraft produced
by Airbus Industry, a government- backed consortium comprising
Aerospatiale (France), Daimler (Germany), British Aerospace
(United Kingdom), and Construcciones Aeronauticas SA (Spain).
Currently Airbus accounts for about one-third of the world market
for large commercial jets.
An agreement among firms in a particular industry by which each
participant is assigned certain customers or areas within which
it will be the exclusive or primary supplier.
Antitrust. Government regulation intended to maintain
competitive market structures, in order to protect trade and
commerce from monopolies and restraints on competition such
as collusive price-fixing and vertical restraints. Antitrust
in its modern form is primarily, a North American invention.
Other Western countries have been slower to adopt such regulation,
but in recent years most industrialized countries have enacted
laws broadly similar to those in the United States. See competition
of commodities or foreign exchange in one country or market,
followed by promptly re-selling in another market for a higher
The price at which a particular product or service would sell
in a transaction between unrelated buyers and sellers. It is
the functional opposite of "transfer pricing," in
which the buyer and seller are related --for example, as affiliated
units of a multinational corporation --and the price is influenced
Autarky. A policy that attempts to create a self-sufficient
national economy entirely insulated from international trade,
usually for ideological or strategic reasons. (A related concept,
applying to absolute sovereignty in political relations, is
referred to as autarchy.) Until the collapse of communism, many former
East Bloc countries pursued policies of autarky relative to
the capitalist world. The concept essentially denies or ignores
the possibility of mutually-beneficial international trade grounded
on the principle of comparative advantage.
of Payments. The
composite record of international transactions --i.e., trading,
borrowing, and lending --in which a country is involved during
a given time period, such as a calendar year or quarter. The
balance of payments includes commercial and government transactions
for goods and services, international direct investment and
bank transactions, and sales or purchases of foreign currencies
(or "official reserves"). The two main components
of the balance of payments are the current account and
the capital account. A
third component --the official settlements balance --records
the net increase or decrease in a country’s holdings of official
reserves; it bridges any remaining gap between the current account
and capital account balances, and is normally very small relative
Barter. The direct exchange of goods or services
for other goods or services, without the use of money as a medium
of exchange. Various forms of international transactions involving
barter are referred to as countertrade (Sec. I).
Unilateral measures taken by a country to improve internal economic
conditions --such as through massive import barriers or competitive
devaluations --without regard for adverse effects on
its trading partners. Such policies tend to provoke retaliation,
and were endemic in the period leading up to World War II. See
discussion under mercantilism.
Bilateralism. See discussion under multilateralism.
Commodity stocks managed by countries or international organizations
to moderate market price fluctuations. When prices rise above
a pre-set ceiling, buffer stocks are sold, lowering market prices.
When prices fall below an established floor price, buffer stocks
are purchased, raising prices. Buffer stocks can limit price
fluctuations in the short run, but are less effective and expensive
to maintain during long- term price declines. Buffer stocks
are a common feature in various countries' farm programs as
well as in some international commodity agreements (Sec.
Bundling. See tying contract.
Cabotage. In shipping, the transport of goods or
persons between ports within a single country.
A summary of a country's international borrowing and lending
transactions, including its foreign borrowing (investments by
foreigners in the home country) as well as its lending or investments
in other countries. Along with the current account, it
is one of the principal components of the overall balance
of producers (or producing countries) entering into a collusive
arrangement to regulate pricing, production, or marketing of
goods by members. The aim of a cartel is to restrict output
in order to raise prices; cartel members thereby gain the profit
advantages of a single monopoly, but --since they continue to
function as separate entities --without the offsetting efficiency
gains a monopoly may achieve through economies of large-scale
production. Cartels are illegal in the United States, but more
common in other countries (see competition policy). The Organization of Petroleum Exporting
OPEC (Sec. Ill) is
a prominent example of an international producer cartel. See
also allocation cartel.
c.i.f. An abbreviation (for "costs, insurance,
and freight") used in international trade statistics and
sales contracts. Transactions on c.i.f. basis mean the purchase
price includes all costs of moving the goods from the point
of embarkation to their destination. Until recently, most import
data were given in c.i.f. terms; increasingly, they are being
reported in f.o.b. terms.
An exporter's risk that a foreign customer may be unable to
pay for merchandise purchased under open account terms. Such
risk contrasts with political risk, which arises from government
actions and is unrelated to the financial condition or creditworthiness of the foreign customer.
See Foreign Credit I insurance Association (Sec III).
Commodity. Broadly defined, any article exchanged
in trade, but most commonly used to refer to raw materials,
including minerals and bulk-produced agricultural products.
Relative efficiency in production of one particular product
or class of goods over another class of goods. Differences in
comparative advantage among countries are the basis for mutually
beneficial specialization and trade. (Not to be confused with
absolute advantage, in
which comparison is made with other countries; for, even if
a country were absolutely more efficient than others in producing
every product, it could still benefit by specializing’ in --and
exporting --products in which its comparative advantage is highest,
and importing the other products.) In principle, an international
trading system organized around the concept of comparative advantage
should increase worldwide efficiency and standards of living.
In this sense, it is the basis for viewing international trade
as a "win-win proposition" rather than the "winners
and losers" model assumed by mercantilism. See
also terms of trade; free trade, industrial policy; and inter/intra-industry trade.
A broad category encompassing antitrust and
other policies to remedy the imperfectly competitive nature
of key industries. Includes what is termed "antitrust policy"
in the United States and "antimonopoly policy" in
most other countries, as well as regulation of state aids to
industry .Competition policy seeks to affect market structure
order to achieve market performance goals.
Trade- related competition policy issues include the impact
on international trade of restrictive business practices
including intra-firm agreements of multinational corporations
(e.g., transfer pricing); strategic partnerships, cartels and private restraints on bilateral
trade; distribution monopolies and the procurement practices
of private monopolies; and the impact on market structures of
mergers and acquisitions across borders. One approach to competition
policy seeks establishment of uniform antitrust rules in all
major countries. Short of such an ideal, other advocates argue,
competition policy should focus on elements in countries' economic
institutions that impede domestic and international, competition
and negotiate for their removal, along with multilateral negotiation
of new policy codes for the behavior of governments and firms.
See managed trade, strategic trade policy, and
restrictive business practices; see
also Export Trading Company Act (Sec. IV).
to internationally traded goods, refers to a country's or a
firm’s products being preferred by a significant share of the
world's consumers over competing products from other sources,
because of lower price, higher quality, superior performance
characteristics, more effective marketing, association with
better services such as delivery terms or guaranteed repairs,
or some combination of these factors (see competitiveness).
the same as comparative advantage.) A
market position established either by providing comparable buyer
value more efficiently than competitors, or by performing activities
at comparable cost but in unique ways that create more buyer
value through differentiation.
measurable results of competitiveness --i.e., the outcome of a country's or a firm's efforts in selling
or services in international trade. Frequently-used measures
of competitive performance are market share (share of total
sales from all sources in a given country, or of total world
exports of a particular product); trade balances (or export-import
ratios, which permit comparisons among industries of different
sizes); and revealed comparative advantage. Most measures of competitive performance
are flawed for purposes of policy analysis if used in isolation
(see discussion under terms of trade). Some
writers use the terms competitiveness and competitive performance interchangeably, thereby confusing
the cause with the effect.
Policies and Practices. Actions
by governments or firms to affect their competitive performance
in international markets. Such actions can
be legal (e.g., government-to-government lobbying or export
promotion) or illicit (e.g., bribery or deceptive trade practices),
and some are subject to multilateral agreements (e.g. tied aid
or concessional trade finance). Such practices may be undertaken
by nations or firms to compensate for or bolster their underlying
practices on the part of individual firms are usually termed
"unfair business practices," as distinguished from
unfair trade practices (Sec.1) which
are actionable under multilateral trade rules.
of a nation or firm to sell competitive goods
or services in international trade. Several aspects of competitiveness
are involved in shaping international trade patterns, and can
be categorized as:
Price Competitiveness --determined
by the interaction of four factors leading to competitive prices
on world markets: real input costs (material prices, wage rates,
and the cost of capital); productivity;
profit margins; and the exchange rate. Most firms have some
control over the first three factors but have no control over
the exchange rate. Government monetary and fiscal policies may
directly or indirectly affect the first and fourth factors,
while industrial targeting seeks to influence the second and third.
Changes in competitive factors do not always occur in unison;
shifts in one of the factors can be offset by movements in the
opposite direction by another factor .
Technological Competitiveness --representing
the ability to provide leading-edge technical capabilities,
superior performance characteristics, fuel economy, or reliability.
Technological competitiveness can sometimes be more important
than price competitiveness in international trade, particularly
in advanced-technology industries such as telecommunications
equipment and aerospace.
Commercial Competitiveness --reflecting
the vigor, creativity, and effectiveness of firms' entrepreneurial
activities, including marketing and distribution and the provision
of associated services that increase buyer value.
Apart from such fundamental aspects of competitiveness,
firms and governments sometimes try to manipulate competitive
outcomes by engaging in competitive policies and practices,
or in unfair trade practices ( Sec .I ). See also competitive performance and terms of trade .
Complementary Exporting. An arrangement in which a manufacturer markets
products internationally through the distribution channels of
another firm, usually a producer of similar but noncompeting
Concessional Sale. A sale on terms that are more generous than
normal commercial conditions would otherwise dictate. Such terms
may include reduced sales prices, special low-interest financing
or extended payment terms, or acceptance of a "soft"
currency in settlement of the transaction. Concessional sales
are often made in conjunction with foreign aid programs, but
they may also be an aspect of governmental or corporate competitive
policies and practices .
Consortium. A joint venture involving three or more participating entities.
Conventional International Law. International law arising from formal agreements
among nations, as contrasted with customary international
law, or international law that has developed
through custom and usage over time.
Convertibility. The ability of a nation's currency to be
exchanged for other currencies without governmental restriction
in settlement of current account transactions.
Currencies are convertible in varying degrees; a currency that
cannot be freely purchased or sold by nonresidents is said to
be inconvertible. See exchange controls (Sec. I).
Cost of Capital. For any given level of corporate risk,
the cost of capital faced by f1rn1s in a given country --a key
element of their competitiveness --is
essentially determined by four factors: (1) interest rates,
or the cost of borrowing, prevailing in the country; (2) tax
policies, including tax credits, depreciation schedules that
mayor may not be faster than the true rate of economic depreciation,
and the tax deductibility of interest costs; (3) .the firms'
capital structure or financial leverage --since they may raise
funds not only from borrowing but from equity, i.e., retained
earnings and new stock issues, which normally has a higher cost
that debt financing; and (4) the financial structure of industry
- -including "risk pooling" among affiliated firms
and banks --and firms' access to domestic and international
Cross-licensing. An arrangement in which a firm grants a
license to another firm to exploit proprietary rights in its
patents, trademarks, or trade secrets, in exchange for similar
licensure to use intellectual property rights of the recipient
Cross-subsidization. The use of financial resources accumulated
by a multinational f1rn1 in one part of the world to fight a
competitive battle in another region or country .See globalization.
Current Account. The portion of a country's balance of
records "visible" trade (exports and imports of goods),
"invisible" trade(income and expenditures for services),
interest payments, and transfer payments such as foreign aid.
A current account deficit is essentially offset and financed
by a capital account surplus
-- representing a net inflow of investment funds --and conversely,
a current account surplus will be matched by a capital account
deficit. Any gap remaining between the current and capital accounts
is bridged by changes in official reserves (recorded in the
official settlements balance).
Customary International Law. International law that has arisen from
custom and usage, and that is recognized and accepted as binding
even though not codified. See also conventional international
Cutthroat Competition. Predatory or discriminatory pricing practices
intended to drive out competition and establish market power.
Such practices are proscribed by antitrust
4 laws in the United States, but they are often employed in
other countries. See predation.
Deadweight Loss. The net cost to society due to market
government interventions such as trade restrictions --i.e.,
losses by consumers or producers that are not offset by gains
elsewhere, such as increased government revenues.
Defensive Investment. An investment undertaken in order to protect
larger commercial interests rather than for the return that
the investment itself generates.
De-industrialization. A term denoting a negative impact of international
competition on the overall size of a country's manufacturing
sector (also known as "hollowing-out"). Generally
refers to an absolute decline in industrial output or employment
rather than simply a decline relative to other sectors of the
economy (i.e., structural change).
Depreciation. A decline in the purchasing power of a
currency, relative to one or more .other currencies, as a result
of market forces rather than government action. See also devaluation.
Devaluation. The lowering of the value of a currency,
relative to one or more other currencies, as a result of deliberate
government action. Both depreciation and
devaluation tend to boost demand for the country's exports by
reducing their prices in .terms of foreign currencies, and to
reduce domestic demand for imports by raising their prices in
terms of the home currency. Devaluation can provide a short-term
boost to an economy encountering balance of payments imbalances
--by altering its price competitiveness --but generally has inflationary consequences.
Differentiation. A key element in firms' competitive
to market conditions in which a product can vary in some significant
way from firm to firm producing it, and purchasers demonstrate
preferences about which supplier to patronize in terms of these
non-price differences. Factors contributing to product differentiation
include quality and performance variations, special service
conditions, and advertising.
Direct Foreign Investment. The acquisition of productive resources
such as factories, mines, or transport facilities in a foreign
country. For an investment to be considered "direct,"
it must be large enough to give the investor control or significant
influence over the foreign operation. (Under US Commerce Department
regulations, the threshold for such a determination is acquisition
of 10 percent or more of the voting stock or capital in a foreign
venture.) Investments falling below the threshold of active
participation in management of the foreign entity are regarded
as "portfolio" investments.
Dual-Use Goods (or Technology). Refers to products or the technology embodied
in those products that are intended primarily for use as civilian
goods but which may be used or adapted for military purposes.