II. ECONOMIC & COMMERCIAL CONCEPTS & TERMSAbsolute Advantage. 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.
Adjustment Costs. 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 costs.
Administered Pricing. 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.
Administrative Guidance (Gyosei-Shido). 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 ofgyosei-shido tends 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.
Allocation Cartel. 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 policy.
Arbitrage. The purchase of commodities or foreign exchange in one country or market, followed by promptly re-selling in another market for a higher price.
Arm's Length Pricing. 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 accordingly.
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.
Balance 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 to them.
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).
Beggar- Thy-Neighbor Policy. 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.
Buffer Stocks. 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. I).
Bundling. See tying contract.
Cabotage. In shipping, the transport of goods or persons between ports within a single country.
Capital Account. 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 payments.
Cartel. A group 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 Countries, or 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.
Commercial Risk. 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.
Comparative Advantage. 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.
Competition Policy. 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 and market conduct, in 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).
Competitive. As applied 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).
Competitive Advantage. (Not 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.
Competitive Performance. The measurable results of competitiveness --i.e., the outcome of a country's or a firm's efforts in selling competitive goods 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.
Competitive 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 competitiveness. Illicit 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.
Competitiveness. The ability 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 products.
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 capital markets.
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 firm.
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 payments that 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 law.
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 imperfections or 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 advantage. Refers 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.
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