New world, New policy: Overcoming the Burden of Foreignness

burden of foreignnessWhy should we worry about misaligned participations in trade? According to the U.S. Department of Commerce, less than 1 percent of U.S. firms export. Tens of thousands of small-business manufacturers and service sector firms could export their goods and services, but do not. These companies often fear the challenges of going overseas. But all firms entering new markets face shortcomings and disadvantages when compared to local competitors. Due to a lack of local knowledge, unfamiliarity with market conditions, insufficient insights into consumer behavior, and newness to political decision making, all new entrants encounter a “burden of foreignness.” Policymakers need to help prospective exporters overcome this burden and successfully access new opportunities overseas.

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New World, New Policy: Buy American, Hire American

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President Trump has issued a new executive order focusing on so-called “Buy American, Hire American” policies. Making the announcement at the Snap-On Tools plant in Kenosha, Wisconsin, the President’s order directs various federal agencies to produce reports and recommendations on government procurement policies, with the goal of increasing domestic employment and production.

The Executive Order (found here) covers two broad areas of government policy: numerous “Buy American” laws and regulations, which set requirements that materials purchased by the government – say, steel for building a bridge – give preference to US domestic producers; and “Hire American,” which aim to address reported abuses of H1B visas that undermine high-skilled domestic labor.

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New World, New Policy: Dumping penalties – Give to Caesar what you owe to Caesar

money from all over the worldPresident Trump has issued a new executive order focusing on international cheaters, who do not pay their debts due to dumping penalties. The order targets the problem of unpaid special customs duties known as “Countervailing Duties” (CVD), levied on products from companies found guilty by an “anti-dumping” investigation.

First to the jargon: “Dumping” refers to a type of predatory trade practice. In its simplest form, it amounts to a company selling a product in a foreign market for less than it costs to make it. In theory, the goal of “dumping” is to drive down the price, and in doing so, muscle out smaller, weaker competition in order to later establish a monopoly status on that market. Under the rules of the World Trade Organization, dumping is a prohibited practice, and countries are permitted to levy special taxes on goods found to be unfairly dumped in their market in order to rebalance the price level. These tariffs are called “Countervailing Duties”, abbreviated as CVD.

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Balance trade by boosting exports through government promotion

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import_tax_0The Trump administration is attempting to lower imports in order to rebalance trade after decades of U.S. neglect toward economic relationships around the world.  Rebalancing should not only be done by applying the stick of import reductions, but also by export promotion.

Exports make a firm’s markets grow and change its home nation’s currency value. When U.S. exports increase, the dollar typically goes up in value.Shrinking exports tend to weaken the dollar. Exports also shape public opinion of globalization and offer the opportunity for economies of scale.Higher production volume often means a lower cost of production.Since high exports also make imports cheaper, a firm may achieve lower costs and higher profits, both at home and abroad, through exports.

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A Wall: Constrain, Protect, or Lead

Source: ChinaDaily

Picture Source: ChinaDaily- Cracks appear in the Great Firewall of China

“God created the world, the rest was made in China,” sings Lourd de Veyra. The concern about the Asian factory has lingered for decades. Overlooked has been its gradual strategic transformation from imitator to integrator, or even innovator.

Will China overtake the U.S. and become the new No.1 economy of the world? This anxiety seems as misplaced as earlier forecasts such as Japan’s economy surpassing the U.S. by 2000.

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