What are the implications for managers of developments in the world trading system? Why should a manager of an international firm care about the political economy of free trade or about the relative merits of arguments for free trade and protectionism?
- Trade barriers & firm strategy
Trade barriers constrain a firm's ability to disperse its production activities in multiple locations (which according to trade theories can be highly profitable).
Tariffs raise the cost of exporting → disadvantages to domestic firms.
Quotas limit the ability to serve a country from outside → disadvantage to domestic firms.
Local content regulations could force a firm to locate more production activities in a given market than it otherwise would have → decreasing efficiency and increasing costs since the optimal location for production is not being used.
Threat of anti-dumping action limits the ability to use aggressive pricing to gain market share → disadvantages to domestic firms.
- Policy implications
Government policies can have a direct impact on business and arise from the need for protectionism against the large influence business firms have on international trade. But as explained earlier, engaging in protectionism might end up with a firm denying themselves the opportunity to build a competitive advantage by constructing a globally dispersed production system. Encouraging protectionism can jeopardize a firm's own activities and sales overseas if other governments decide to retaliate as a response.