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
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
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
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
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
--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
Liner Conference. In maritime transport, a group of shipping
companies that jointly ..determine freight charges, sailing
frequencies, and shipping capacity within a given geographic
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
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.
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,
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
--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
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
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
at regrouping marginal companies around a "champion"
as a counter to consolidation into multinational corporations
--or as an alternative to permanent protection of noncompetitive
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
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
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
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.