5-mg211-exporting.pdf

Serving Foreign Marketsby

ExportingThe International Business Environment

(Mg211)London School of Economics, Summer School 2013

Emanuel Ornelas

LSE Summer School, Mg211

Benefits of exporting New markets, greater demand Scale economies Hedging Others?


What are the determinants of the volume of bilateral trade?

The answers to those questions shed light on the costs and the facilitators of trade.

Is exporting for everyone?


France’s Exports

• Dependent variable: volume of trade between countries i and j• 92 countries, annual data for almost 3 decades

[Baxter and Kouparitsas (2008)]


So, is exporting for everyone?


Exporting: relatively rare activity Exporting firms are in the minority

• US: 5.5 million of firms; 4% export.• Among manufacturing firms, 18% export.

The ‘rareness’ of exporting vary by sector • Electric equipment industry: 38% export.• Furniture industry: 7% export.

Even for those firms that export, foreign markets are often not the main focus: on average, only 14% of their output is exported. This varies by sector, too:

• Computers industry: 21% of output is exported.• Beverage and tobacco industry: 7% of output is exported.

Despite the rareness of exporting, there are exporters in every manufacturing sector:


Costs of exporting

1. Transportation costs

Bigger impact on products with low value relative to weight

What implications for quality of exported vs. domestically sold products?


Example:Brazilian coffee, “basic” and “premium” Cost to sell coffee in Brazil:

Basic: £1 per kg Premium: £2 per kg Cost of premium relative to basic in Brazil: £2/£1 = 2

Transportation cost to the UK: £3 per kg Cost to sell each in the UK:

Basic: £4 per kg Premium: £5 per kg Cost of premium relative to basic in the UK: £5/£4 = 1.25


As a producer of coffee in Brazil, which type of coffee should you prioritize when exporting to the

UK?


Caveats “Shipping the good apples out” best when

all other things are equal—but often they are not Scale economies can differ depending on quality

of product; Demand can be more sensitive to quality in

domestic market.


Costs of exporting

2. Tariffs, quotas, and other policy-driven trade barriers


Import tariffs Wedge between export price and domestic

price of a product

pd = pe (1+)

pe = pd/(1+)


Import quotas Ceiling on how much can be imported of a

product

E ≤ Q


Tariffs vs. quotas Tariffs: defines wedge between export and

domestic prices Given wedge, market adjusts import volume

Quotas: defines import volume Given volume of imports, prices adjust

Does it matter whether the protection is through tariffs or quotas?


price

quantity

pw

pw+t

imports (free trade)

imports (tariff)

S

D

tariff t:


price

quantity

pw

p(Q)

imports (free trade)

Q

S

D

quota Q:


So, does it matter whether the protection is through tariffs or quotas?


Application: textiles and clothing Long history of discriminatory, unregulated quotas

Since the early 1970s, the Multi-Fibre Agreement (MFA) Estimated net loss for the U.S. with the quotas: $7

billion Or $63 per household (~ 5% of the median apparel

budget). Or $9,500 per job (~ 30% of the annual salary in the

industry). Uruguay Round of multilateral trade negotiations:

plan to eliminate quotas by 1 January, 2005.

LSE 2004-2005


Also changes in quality: With the elimination of the MFA quotas, the price

dropped the most for the lower-priced items An inexpensive T-shirt had a greater drop in price than a

more expensively priced item. China’s producers promoted a “quality

downgrading” in their exports to the US and the EU.

When a quota like the MFA is applied, producers tend to upgrade quality; the opposite happens when the quota is abolished.


Change in qualityChange in qualityChange in quality

The changes in quality:


Who sets protection levels? Governments.

Are governments free to adjust their tariffs as they wish?

Domestic pressures External commitments


Domestic pressures for protection Suppose government faces no external

commitments.

Why would a government protect the economy?


Effects of protection1. Domestic price of protected sectors ↑2. Variety of goods available for domestic

consumers ↓ Effects of protection on individual groups:

Hurts consumers Hurts companies buying imported inputs Benefits companies that compete with imports Benefits workers in protected sectors


Effects of protection

There are always losers and winners Net effect from protection?

(almost) always such that [total loss > total gain]

As the country moves away from the goods and sectors in which the country is relatively good at


Domestic pressures for protection Suppose government faces no external

commitments.

Again: why would a government protect the economy?


Entrepreneurs: 2 perspectives1. Import-competing firms2. Exporters

“Lobbying” plays a central role in shaping protection levels International businesspeople must be aware of

that, regardless of which category above they belong to.


Application: the end of the MFA and the China factor We have seen that, with the end of the

MFA in early 2005, there was a surge in textile imports in developed countries, especially from China.

Because of commitments at the World Trade Organisation, new quotas could not be imposed. Really?


Sequence of events: End of MFA on January 1, 2005 Numerous retailers switched purchases to China due to low

labour cost (relative to the quality of labour) Massive increase in imports of textiles and clothing from

China Pressure from Italian and French competitors for “action”

against China July, 2005: the EU (and soon after the US) imposed new

quantitative restrictions on Chinese imports of textiles and clothing While many retailers had multiple orders (including of bras)

already under way to Europe Orders had to wait at European ports until a solution was reached


Could the EU and the US re-impose quotas on China? Yes, because China joined the WTO after

the agreement to dismantle the MFA had already been concluded.

“Temporary” restraint on Chinese imports of textiles and clothing for 3 years, renewable for other 3 years Import growth limited to 7.5% per year during

that period.


Winners and losers? Losers?

Most high street retailers In the UK mainly Marks & Spencer (largest share

of the UK lingerie market) Consumers

Winners?


Who sets protection levels? Governments.

Are governments free to adjust their tariffs as they wish?

Domestic pressures External commitments


External commitments on governments’ trade policies

The World Trade Organisation

Preferential trade agreements

5-mg211-exporting.pdf

Documents

mg211lse summer school

pd1 lse summer school

product e qlse summer

quotas tariffs

premium cost

import volume quotas

volume of trade

export price