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Free trade policies

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Question 1: Suppose that a country announces that it is moving toward free trade by reducing its tariffs on intermediate inputs while maintaining its tariffs on final goods. What is your evaluation of the announced "free-trade" direction of the country's policy?

Question 2: A dollar appreciation against the Swiss franc is no guarantee that the dollar will "go further" than it previously did in acquiring Swiss goods. Do you agree ? Explain.

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Question 1: Suppose that a country announces that it is moving toward free trade by reducing its tariffs on intermediate inputs while maintaining its tariffs on final goods. What is your evaluation of the announced "free-trade" direction of the country's policy?

"Moving toward free trade" are the key words here. Certainly it is a step in the right direction, but obviously the country's trade policy is still to protect its finished goods producers. The overall result will be still to reduce the cost of finished products by increasing competition in the intermediate inputs. With more foreign competition in this intermediate market, domestic producers will need to price their intermediate inputs to the finished good market lower. Finished goods have the highest value added and so can still help protect the mature industries of the country.

A good example would be in the case of US clothing manufacturing. Tariffs for finished products are high (about 15%, depending on the fabric, etc.). So, this helps protect the clothing manufacturers of the US. But ...

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What is your evaluation of the announced "free-trade" direction of the country's policy?

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Financial Policies that Promote International Free Trade

Navigation Systems Inc. is a business that was founded in 1960 and is based in the United States. Its business is to design, manufacture, market, and support electronic systems used in aircraft and pleasure watercraft. At the time the business started out and continuing over the following two decades, the design and manufacturing was hardware based. The electronic navigation equipment consisted of circuit boards, integrated circuits, connectors, wire harnesses, and the mechanical assemblies such as chassis and covers all built in a traditional manufacturing facility. The products were completely hardware based. The company averaged an annual growth rate in sales of 3% per annum through 1980.

Starting in 1981, the designs for the Navigation Systems incorporated a microprocessor and an increasing number of integrated circuits. To support the microprocessor-based designs, Navigation Systems Inc. started to employ software engineers to write the software code that allowed the microprocessor and integrated circuits to function properly. In 1985, the products consist of 85% hardware and 15% software content.

The company's growth slowed in the late 1980s and throughout the 1990s to 1.5% per annum. By the end of the 1990s, the product composition consisted of 25% hardware and 75% software. The hardware and software made up the cost of goods sold, which is 48% of the sales. The management could not discern why the company's growth rate was only 1.5% per annum. In addition, the firm's profitability had been in a slow decline for over a decade. Some leaders felt that it was the increased number of competitors that was slowing the annual growth and decreasing profits. Others felt that the firm had not developed a sufficient core competency in software to be as efficient as it needed to minimize costs. Navigation Systems Inc. desperately needed a major change to increase sales and/or reduce costs to improve the profitability. One plan that is being considered is to move either the hardware or software to one of two candidate countries, China or India. You have been hired as a consultant to analyze the possibilities, make a recommendation on what path to follow, and assist in transition.

Library Research Assignment:

Your supervisor, the vice president of business development, has been asked to deliver a paper at an industry conference on the financial policies that promote trade in today's global economy. He has asked you to research the subject including the underlying assumptions, such as the forecasted/historical foreign direct investment (FDI) rates, economic outlook, trade forecasts for the next 5 years, and any possible alternative views (weaker economy, lower trade, etc.). To assist in his preparation, be sure to describe the drivers of international trade, including technology advancements. Please use the Library to research the financial policies that promote international free trade.

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