II. ECONOMIC & COMMERCIAL CONCEPTS & TERMS
Economic Nationalism. A policy that places highest priority on increasing the economic strength and competitiveness of national firms and reducing economic, vulnerability, if necessary at the expense of trading partners' political and economic interests, or at the risk of damage to international trading relationships. See also beggar- thy-neighbor policies, and mercantilism.
Economic Profit. The amount by which a producer's income exceeds total operating costs, including the cost of capital provided by the firm's owners. A zero economic profit means a firm is earning the normal, economy-wide rate of profit in the accounting sense, with investors receiving a rate of return no greater than the return their capital could earn elsewhere in the economy. Positive economic profits will typically attract new entrants (domestic and/or foreign) to the industry .Protectionism may be the response of domestic firms seeking to prevent such entry by foreign competitors, transforming a competitive industry to an oligopoly. Persistent negative economic profits can lead to a shakeout.
Economic Rent. The gain to a producer or resource owner resulting from a trade barrier or other restriction of supply that leads to a higher price than otherwise would occur. The existence or prospect of economic rents may promote unproductive rent-seeking activities by individuals or firms seeking to take advantage of them. See also quota rent.
Economic Vulnerability. In the context of trade relations, the proportion of a country's GNP accounted for by exports and imports is sometimes interpreted as a measure of its vulnerability to foreign events and economic conditions. (It is also used as a measure of economic "interdependence" with other states.) Since countries generally try to avoid being subject to the leverage of their suppliers, many make efforts to diversify their supply sources, even at the cost of higher prices. Political relationships with trading partners are an important element in determining vulnerability, since even a high level of trade dependence on a friendly ally is likely to create less vulnerability than trade with unfriendly states.
Economies of Agglomeration. Cost savings that occur when industrial flm1s are located in close proximity to each other and are able to share a common infrastructure network, such as transportation facilities, communications, and energy supplies.
Economies of Scale. (Also known as increasing returns to scale.) Cost savings that occur in production processes where higher output levels allow a firm to employ more productive technology --so that doubling inputs, for example, will result in more than a doubling of output. Economies of scale can be a source of international trade flows apart from comparative advantage if product differentiation exists and individual countries are unable to produce a full range of differentiated manufactures themselves (see intra- industry trade).
Economies of Scope. Cost savings that occur when reductions in average total costs can be achieved by increasing the number of distinct products manufactured by an enterprise. Economies of scope are possible when specialized inputs (e.g., expensive machinery or highly skilled labor) can be shared among different production processes --as, for example, when fighter aircraft and cruise missiles are produced in the same facility.
ECU. See European Currency Unit.
Effective Rate of Protection. The overall effect of a nation's tariff system on a specific domestic product, after taking into account the impact of trade restrictions on the industry's inputs. The effective rate of protection is the proportionate increase in value- added in an industry that is possible as a result of the whole structure of protection, on both the output and the inputs of the industry.
Entente. In commercial usage in Continental Europe, a synonym for a price-fixing agreement or cartel.
European Currency Unit (ECU). A unit of value based on a "currency basket" comprising specific amounts of the currencies of the EC member states. Each currency's share in the basket is weighted in line with the respective country's GNP and foreign trade. The ECU is issued by the European Monetary Cooperation Fund against the gold and US dollar deposits made by the member states' monetary authorities.
Excess Capacity. Occurs when a firm or industry is operating below cost-minimizing levels of output. "Permanent excess capacity" is said to exist in industries requiring very large physical plants for which the size of the domestic market may be inadequate to fully absorb the output --limiting firms in the industry to production levels where economies of scale will not be fully exploited. Such conditions may set the stage for international trade conflict, since firms experiencing excess capacity may resort to unfair trade practices (Sec.l) to expand markets for their output in other countries. At the same time, excess-capacity firms generally have higher unit costs than necessary , making them vulnerable to predation by foreign competitors.
Exclusive Dealing. See vertical restraints.
Export-Led Growth. A macroeconomic strategy focusing on expansion of the export sector --such as through export subsidies or competitive devaluation --as a way of boosting economic growth while avoiding the inflationary consequences of higher domestic spending. Especially if coupled with higher import barriers, such an approach can be a form of beggar-thy-neighbor policy. Moreover, by targeting export industries for expansion, resources are diverted from industries producing for the home market, with the result that industrial self-sufficiency may be delayed.
Export Management Company. See export trading company.
Export Platforms. Refers to countries such as Mexico, Taiwan, Singapore, Malaysia, and South Korea that established incentive programs beginning in the late 1960s to attract foreign direct investment oriented toward offshore production operations by corporations based in the United States and other industrialized countries. Incentives included import reductions on components, tax-free treatment of exports, and tax holidays. See globalization.
Export Trading Company. (Also known as an export management company.) A private firm that provides related-related services to other firms, usually smaller and mid- sized manufacturers that could not afford to maintain a separate export department on their own. Services provided by an export trading company can include locating foreign customers, arranging shipping and financing for exported goods, and performing foreign marketing functions. Compensation may be made on a commission basis, or through direct purchase and resale of the exported merchandise.
Externalities. Spillover benefits or costs arising from an economic activity that are not taken into account by producers, resulting in levels of production that are inappropriate from the standpoint of the economy as a whole. The presence of "positive externalities" or external benefits means that insufficient resources will be devoted to producing the product in question unless incentives (e.g., subsidies) are given to producers. For example, one of the important positive externalities affecting trade in high-technology products involves private research and development (R&D) activities, since firms may be unable to completely appropriate for themselves the payoffs from their R&D investments. In contrast, negative externalities (sometimes called "diseconomies") imply overproduction unless the activity is appropriately taxed or otherwise constrained by governmental authorities. Unchecked pollution by manufacturers is a commonly cited example of negative externalities.
Fair Trade. International trade involving shipments that do not benefit from government assistance. Fair trade --and the related concept of unfair trade practices ( Sec .I) --is almost always used in the context of policies or practices affecting exports, while free trade usually refers to the absence of barriers to imports. See also level .playing field.
f.a.s. An abbreviation (for "free alongside") used in international trade statistics and t sales contracts; a method of valuing traded goods that does not include the cost of shipment from the exporting to the importing country.
f.o.b. An abbreviation (for "free on board") used in international trade statistics and sales contracts; a method of valuing traded goods that includes the cost of transportation to the port of embarkation and the cost of loading the goods on a vessel, but does not include further shipment or insurance costs. Export data are usually reported in f.o.b. terms.
Forfeiting. A means of financing foreign trade based upon the transfer of debt obligations arising from the sale of goods and services, usually exports.
Free Trade. International trade that is unhampered by restrictive measures such as tariffs or non-tariff barriers. An ideal concept that plays a role in economic theory similar to that of the "perfect vacuum" in physics, since, except within economic unions, virtually no international trade is genuinely free of governmental interference. In practical terms, trade policy deliberations in all countries do not normally concern questions of whether free trade should be pursued, but rather of how much and what kind of government intervention is needed to serve the national interest. See also fair trade.
Futures Contract. A contract for goods, foreign exchange, or financial assets to be delivered at a certain future date on terms and at prices set in the contract. A large number of raw materials as well as some processed goods are commonly traded internationally in futures contracts.
Globalization. The process of dispersing elements of a firm is production and marketing across several countries. Historically, trade in globalized industries followed a hub-and- spokes pattern, with components and end-products moving between the home country and "offshore" manufacturing subsidiaries or affiliates. More recently, components and end-products have begun to be shipped among specialized production facilities in several countries, in order to take advantage of economies of scale, to circumvent trade barriers, or to match distinct activities with local competitive advantages. Globalization poses substantial scheduling, technical, and process coordination problems, as well as risks of supply being disrupted by national trade policies. It can result in a trade pattern in which many countries can have both imports and exports in the same product category (see intra-industry trade), depending on how they fit into the overall production network. In such an environment, attributing national origin to a product can be difficult, complicating international trade negotiations conducted on a traditional, country-to- country basis.
Heckscher-Ohlin Model. A theory for explaining international trade patterns in tern1S of differences in countries' supplies of productive factors (e.g., human and physical capital, raw material resources). The model was named for Swedish economists Eli Heckscher and Benil Ohlin. See also Ricardian Model.
High Technology. Products that embody relatively intensive research and development , (R&D) inputs, either directly at the final manufacturing stage or through the intern1ediate ..components used in their production. Numerous classification schemes have been proposed in academic studies and international discussions to designate high-technology industries, but all have shortcomings. (For example, technologically "mature" products such as industrial chemicals and consumer electronics make up a significant proportion of high technology as delineated by some R&D-based definitions; see discussion under product cycle.) As a rule of thumb, high-technology industries can be designated as those producing microelectronics, computers, telecommunications equipment, machine tools and robotics, aerospace equipment, scientific and precision instruments, medicine and biological compounds, and specialty chemicals including certain advanced materials.
Hollowing-out. See de-industrialization.
Horizontal Integration. The merger of two or more firn1s producing essentially the same product or service. See also vertical integration
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