II. ECONOMIC & COMMERCIAL CONCEPTS & TERMS
Imperfect Competition. When an industry is marked by imperfect competition, market prices send "incorrect signals" regarding resource availability and purchasers' needs. See market imperfections.
Import Substitution. A policy of promoting domestic production of goods that otherwise would be imported. Such programs may involve a combination of domestic subsidies and import restrictions, and are often justified on grounds of conserving foreign exchange. See also infant industry protection.
Increasing-Returns Industry. An industry requiring an exceptionally large or expensive physical plant, so that economies of scale (also known as increasing returns to scale) still exist at output levels saturating the firm's domestic market. Examples often cited are steel, aircraft, and many defense industries. Such industries --which may also be referred to as pern1anent excess-capacity industries, or natural monopolies --pose particular problems for international trade policy (see discussion under excess capacity).
Industrial Policy. A program of selective government interventions designed to change the sectoral composition of a country's economy by influencing the development of particular industries or sectors. Targeted sectors or industries may be aided through some combination of government loans and equity participation; tax incentives to promote investment; trade protection and export subsidies; preferential government procurement practices; or relief from regulatory constraints such as antitrust and environmental laws. Advocates claim that industrial policy can "shape comparative advantage" --recognizing that, even if all countries may gain through international trade, a country will gain most if it specializes in high-value-added, high-growth sectors. Critics claim that governments cannot do a better job than market forces in "picking winners," and that misguided attempts to do so --as occurred in the foI1I1er East Bloc countries --could make matters worse.
Industrial Targeting. Selection by a government of industries deemed important to the evolution of the economy, and encouraging their development through explicit policy measures. The teI1I1 usually connotes a more narrow spectrum of industrial policy measures focused specifically on increasing competitiveness in export markets.
Infant Industry Protection. Temporary import protection intended to help an industry that is not fully developed become established and competitive in world markets. The economic justification for infant industry protection is the prospect of decreasing costs as output expands and experience in production is acquired, which puts start-up firms at a competitive disadvantage vis-à-vis established world producers in the industry. Article 18 of the GATT permits LDCs to protect infant industries, but the restricting country may be required to compensate other GATT members that are adversely affected. See also import substitution.
Innovation. Putting into operation new techniques and other economically useful knowledge in a way that leads to commercial success. Innovation is not necessarily linked to the process of invention or discovery --it can, for example, involve putting into operation techniques invented or discovered elsewhere. Along with capital accumulation, the rate of innovation in an economy is crucial for expansion of its productive capacity and, hence, for its economic growth, improved standards of living, and international competitiveness.
Innovation Systems. The network of public- and private-sector institutions that initiate or import, modify, and diffuse new technology in a country .In current OECD discussions, the term encompasses ways in which a country organizes its systems of education, scientific research, and technological diffusion, and --in conjunction with macroeconomic and competition policies --their combined impact on the rate of innovation. Associated with the term is the concept that "technological trajectories" shaped by countries' differing innovation systems may set the stage for future trade conflict or collaboration.
Inter-Industry and Intra-Industry Trade. Inter-industry trade involves exchanges between countries that link complementary industries, such as steel and automobiles, reflecting differences in the trading partners' economic resources (i.e., differences in comparative advantage and consequent specialization). In contrast, intra-industry trade involves two-way international trade flows within a single industry --such as electronics --and often consists of highly specialized components and subassemblies in transactions between affiliated firms in different countries. About one-quarter of world trade consists of intra-industry trade, which plays an especially prominent role in trade in manufactured goods among the industrial nations (see globalization).
Internationalization. See globalization.
Invisibles. Items such as insurance and financial services that are included in a country's current account but are not recorded as merchandise imports or exports. See services.
Joint Venture. An international business undertaking involving a long-term commitment of funds, facilities, and services --as well as joint management and sharing of risks and profits --between two firms from different countries. Many countries impose restrictions on joint ventures, such as foreign equity limits, local control legislation, and restrictions on repatriation of dividends. If joint ownership of capital is involved, the partnership is known as an equity joint venture. If more than two companies are involved, it is usually called a consortium.
J-Curve. The expected adjustment path in a country's trade balance following a currency depreciation or devaluation. Because a change in the exchange rate alters the prices of exports and imports "in the pipeline" before it affects the volume of trade, the immediate impact on the trade balance is negative (as in the downward slope of a "1"). Eventually, after the change in prices begins to affect purchasing decisions, the volume of imports and exports should move in the desired direction and the trade balance will improve (the upward slope of the "1").
Laissez-Faire. See rules-oriented trade policy. The term originated in a French idiom essentially meaning "hands-off."
Learning Curve. A technological regularity observed in many leading-edge industries, in which the marginal cost of production tends to fall as output increases, due to firms' growing experience with innovative processes (sometimes called "learning by doing"). Because of the learning curve, substantial economies of scale are characteristics of high- technology industries --in which competitive advantages accrue to firms that are among the first to enter a promising new area --constituting a major premise for various countries' technology policy.
Level Playing Field. A concept or slogan employed by those calling for efforts to secure both free trade and fair trade. The term alludes to perceived inequities --including protectionism or unfair trade practices (Sec. I) --that "tilt" the conditions of international trade competition in favor of one or another of the participants.
Liberalism. In the context of trade policy, "liberal" usually means freedom from import controls or government restraints. Liberalism connotes a preference for reducing existing barriers to trade --in contrast with protectionism, or a preference for retaining or raising barriers to import competition. See also mercantilism and economic nationalism.
Liner Conference. In maritime transport, a group of shipping companies that jointly ..determine freight charges, sailing frequencies, and shipping capacity within a given geographic area.
Managed Trade. A trade policy approach that denies the practicability of traditional "laissez-faire" approaches to trade, and instead seeks to promote the development and international competitive position of key industries. The managed-trade approach has two main elements. First, it asserts that other governments --through various forms of industrial policy --actively subsidize, protect or otherwise support certain domestic industries in carving out a share in world markets, and concludes that any country failing to follow suit will place its own firms at a disadvantage relative to their foreign rivals. Second, it envisages a series of international agreements codifying "rules of the game" for such interventions. A third element suggested by some advocates of managed trade -- who argue that conventional trade agreements are ineffective in such an environment --is to set quantitative targets for imports or exports in various key industries, coupled with the use or threat of trade sanctions to enforce those outcomes. Sometimes referred to as "results-oriented trade policy," in contrast with rules-oriented trade policy.
Market Conduct. In a particular industry or market, refers to practices which, individually or in combination, shape the market performance characteristics that are the objective of competition policy. Market conduct is affected by the market structure of the industry, and is reflected in sellers' and buyers' pricing policies and practices, overt ~ and tacit inter-firm cooperation, product line and advertising strategies, R&D commitments and innovation, legal tactics --in enforcing patent rights, for example -- and investment in production facilities.
Market Imperfections or Market Failure. Often refers to two sources of departure from perfect competition, i.e., externalities and increasing returns to scale. Traditional international trade models do not take market imperfections fully into account, but are based on assumptions that perfect competition and constant returns to scale prevail in every market. Such models consequently may be inadequate for analyzing trade in such key sectors as aircraft, telecommunications equipment, semiconductors, and pharmaceuticals --where oligopolistic competition and substantial economies of scale frequently occur --as well as in other industries in which accrued knowledge, the learning curve, and R&D play an important role. See strategic trade policy.
Market Performance. The principal focus of competition policy, market performance refers to the degree to which a particular industry or market meets national objectives for production and allocative efficiency, technical progress, full employment, and promotion of equity in income distribution. Indicators of market performance include the size of gaps between actual and minimum feasible unit costs, price-cost margins, rates of change in output per hour of work, and the variability of employment over the business cycle. Instruments of competition policy --such as taxes and subsidies, international trade policies, price controls, and antitrust regulation --shape market performance through their effects on market structure and market conduct.
Market Power. The ability of an individual firm to exert control over prices prevailing in the markets for its products or services. The highest degree of market power is associated with a monopoly, although all firms except those in perfectly competitive markets possess some degree of market power. Countries' competition policies generally are aimed at curbing the perceived economic and political costs associated with market power.
Market Structure. Refers to the structure of an industry or market, as reflected in the number and size distribution of sellers and buyers, the degree of physical or subjective differentiation distinguishing competing sellers' products, the presence or absence of barriers to the entry of new firms, the degree to which firms are vertically integrated from raw material production to retail distribution, the extent of firms' product line diversification, and cost structures. Market structure affects market conduct, which in turn determines market performance characteristics that are the goal of competition policy.
Mercantilism. A once-prominent economic philosophy that equated national wealth and prowess with the accumulation of gold and other international monetary assets, and hence with running a persistent trade surplus. The mercantilist viewpoint has been discredited by modem economics, which has shown that national economic security and well-being are not necessarily related one way or another with trade surpluses or deficits (see discussion under trade balance). Nonetheless, mercantilist ideas continue to exert a powerful political hold in many countries, leading to demands for policies --such as tariff protection for domestic industries as well as export subsidies --designed to foster trade surpluses as keys to national economic strength. Since all countries cannot run .trade surpluses simultaneously, widespread pursuit of mercantilist policies tends to produce an unstable and conflict-ridden international trading system.
Multilateralism. An approach to trade policy focusing on multilateral negotiations (as opposed to bilateral negotiations or regional trade arrangements) as the most effective way of liberalizing trade in an interdependent global economy. Because concessions in one bilateral or regional deal may undermine concessions made to another trading partner in an earlier deal, basing a country's trade regime on a sequence of bilateral arrangements can be both technically demanding and politically divisive. In principle, multilateralism broadens the scope of possible deal-making by enabling "cross-trades" (e.g., concessions by country A that benefit country B, enabling country B to make concessions favoring country C, which then may be in a position to make concessions sought by country A.) In the absence of such cross-trades, liberalizing deals may be possible only if two countries each happen to be willing to offer the precise concessions that the other is seeking.
National Champions. Firms that are the focus of government efforts to consolidate a national industry through industrial targeting. Such policies may be prompted by a global shakeout --aimed at regrouping marginal companies around a "champion" as a counter to consolidation into multinational corporations --or as an alternative to permanent protection of noncompetitive firms.
Offshore Production. Manufacturing activities and assembly operations of foreign subsidiaries or affiliates. Beginning in 1963, US customs regulations --under Items 806.3 and 807 of the US Tariff Schedules, applying to imported articles assembled in whole or in part from US-fabricated components --provided a significant incentive to firms in the electronics and other industries to adopt an offshore assembly strategy, by applying duties only to the extent of the value added abroad. (Offshore production usually implies re-exports to the home country or to third-country markets, while the term screwdriver assembly refers to operations within the country where the completed products are to be sold.) See also export platforms and globalization.
Oligopoly. A domestic or international market structure comprising several firms, each of which is large enough to affect prices but none of which holds an uncontested monopoly position. While limited price competition may occur among sellers in an oligopoly, a single large producer may assume a leadership position in establishing prices or terms of sale that the other firms will tacitly follow. When concerned action or collusion occurs among oligopolistic firms, the association is known as a cartel.
Patent. The grant of an exclusive right to manufacture and market an invention for a specified time, based on a novel idea that provides a solution to a specific technological problem. See intellectual property rights (Sec. I).
Permanent Excess Capacity. See excess capacity.
Political Risk. The risk, borne by an exporter or international lender, that settlement of the importer's or borrower's obligation may be precluded by political or military conditions in a foreign country .See also commercial risk.
Portfolio Investment. A minority interest in a foreign venture from which income is .derived in the form of dividends. In contrast with direct investment, a portfolio investment position does not convey significant control over the management or operations of the foreign firm.
Predation. In international trade contexts, an aggressive pricing strategy in which a foreign producer prices below cost to drive domestic firms out of business, leaving the foreign firm with effective market power. Predation may involve pricing below marginal cost, possibly supported by government subsidies. Proponents of antidumping duties often justify such measures on grounds of preventing predation by foreign firms; critics maintain that a predatory pricing strategy is implausible in global industries that include many producers.
Price Competitiveness. See competitiveness.
Price Discrimination. The practice of charging unequal prices to different buyers of products that are essentially identical, when such pricing does not correspond to differences in supply cost. Dumping is a form of price discrimination which, in principle, can be maintained only if the exporter's home market is sheltered by trade barriers (preventing re-importation of goods which have been sold below cost in foreign markets).
Price-Fixing Agreement. See cartel.
Price Supports. A program of official measures, most commonly applied to agriculture, designed to stabilize or raise the price that producers receive for their products. Price supports may include cash payments, government purchases of output, or special financing programs.
Primary Commodity or Primary Product. An agricultural, forest, mineral, or fishery product sold in its original form, including such processing as may be necessary to make the product suitable for sale in international trade.
Product Cycle. The evolution of a production process from innovation through obsolescence, constituting a fundamental dynamic element in international competitiveness and trade patterns over time. For some products, production tends to "migrate" from country to country over the product cycle. Innovations tend to arise in high-income, high-wage countries where the payoff for economizing on labor is greatest; new products therefore appear in international trade initially as exports of the innovating country. As the technology matures, manufacturers seek to produce on a large scale as cheaply as possible (i.e., mass production with less-skilled labor), and production may be pulled to countries such as NIEs and LDCs with lower labor costs. Eventually, the product may recede in importance or become obsolete as it is displaced by newer innovations. The product cycle can be a key factor in globalization of some industries -- as well as a source of trade friction, since adjustment costs can be substantial as industries migrate internationally.
Protectionism. Restriction of international trade by a government in order to shelter domestic producers from foreign competitive pressures. Fundamentally at odds with the principle of comparative advantage.
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