INTERNATIONAL BUSINESS Chapter 2

LECTURE 4

Chapter 2

The Dynamic Environment of International Trade

Global Perspective

Trade Barriers: An International Marketer’s

Minefield

Introduction Japan and US: Skis, baseball, rice French protect their film and broadcast

industry from foreign competition e. g. US: CNN (French version), American TV shows,

Neutrogena to Russia. Tariff for pharmaceuticals: 5% duty, soap 15%, cosmetics 20%.

An Overview

Yesterday’s competitive battles: Western Europe, Japan and US

Tomorrow’s competitive battles: Latin (South) America, Eastern Europe, China, Russia, India, Asia and Africa.

Worldwide competition and significant advantage of product availability

Satellite communication and global companies Tendency of protectionism gains momentum

The 20th to 21st Century Countries have been more interdependent, have

greater opportunities for international trade First half of the 20Th century: Two world wars and

recession Second half of the 20th century: World divides into

socialism and capitalism US infused capitalism to rest of the world Dissolution of colonial powers Benefits of the foreign economic assistance by US was

tremendous e. g. agricultural products, manufactured goods and services.

World trade and US multinationals

Rapid growth of war torn economies and previously underdeveloped countries led to new global marketing opportunities

During 1950s US companies started export By 1960s US MNC were facing two major

challenges: Resistance to FDI (in foreign countries) Increasing competition

Latin America: Expropriate (seize) USFDI Europe: Strong public demand to limit FDI

World trade and US MNC Cont .

US supremacy was challenged Competition arose from Japan, Germany,

other industrial world and many developing countries

Less developed countries were reclassified as newly industrialized countries e. g. Brazil, Mexico, China, S. Korea, Taiwan, Singapore, Hong Kong

World trade and US MNC Cont .

Developing countries like Venezuela, Chile and Bangladesh established state owned enterprises (SOE)that operated in other countries

Bangladesh, the sixth largest exporter of garments to US owns a mattress company in Georgia.

The Twenty First Century

Growth of US economy slowed down Organization for economic cooperation and

development (OECD) estimates that the economies of member countries will expand for the next 25 years

The WB estimates that Brazil, China, India, Indonesia and Russia will have a major share in world trade

Twenty first century Cont. . .

Thus economic power will shift from Japan, US and EU to Latin America, Eastern Europe, Asia and Africa

Companies are more efficient to improve productivity e. g. Matsushita continue to expand their global reach

Nestle is consolidating its dominance in global consumer markets by acquiring and marketing country’s local brands.

Balance of payment The system of accounts that records a

nation’s international financial transactions is called balance of payment

It is maintained on a double entry book keeping system as in assets and liabilities or debit and credit.

It is a record of condition

Balance of payment Cont . . .

There are three accounts: Current Account: Export, import and services plus

unilateral transfer of funds Capital account: Direct investment, portfolio

investment, short term capital movements to and from countries and the official

Reserve account: Export and import of gold, increases and decreases of foreign exchange and increase and decrease in liabilities to foreign central banks.

Protectionism: Logic and illogic

1. Protection of an infant industry2. Protection of the home market3. Need to keep money at home4. Encouragement of capital accumulation5. Maintenance of standard of living and real

wages6. Conservation of natural resources7. Industrialization of a low wage nation

Protectionism: Logic . . . Cont. . .

8. Maintenance of employment and reduction of unemployment

9. National defense10.Increase of business size11.Retaliation and bargaining

Free Trade vs. Trade Barriers Nations can trade freely with each other or

there are trade barriers. Free Trade: Nothing hinders or gets in the

way from two nations trading with each other.

Trade Barriers: Trade is difficult because things get in the way.

There are costs and benefits related to free trade as well as trade barriers.

Free Trade - Benefits When nations specialize and trade, total world

output or sales is increased. Companies can produce for foreign markets as well

as domestic markets (markets in the home country). This means there is potential for making more

money as there are more markets to sell goods or services in.

More variety of goods are available from a world market than just a domestic market.

Prices of goods are decreased through increased competition

Free Trade - Costs The domestic (home) country can lose money

because the foreign goods allowed into the market increase competition and make it less likely people will buy domestic products. Example: In the U.S., people might want to

buy a foreign automobile like a Honda or Toyota instead of an American made car.

Increased competition means lower prices. Less money will go into the domestic market

place and this can cause factories to be closed and jobs to be eliminated.

Trade Barriers – Three Types

Barriers to trade are things that hinder or get in the way of trading.

They can be cultural, physical , or economic. Cultural barriers: language, currency, belief

system. Physical barriers: mountains, rivers, etc.

Example: The Alps Mountains in Europe Economic barriers: government rules that restrict,

block or discourage international trade between countries.

Trade Barriers - Economic• The most common: trade barriers are:

tariffs, which are taxes on imports. quotas Voluntary export restraints (VERs) Boycotts and embargos Monetary barriers Standards (QA, Health) Antidumping penalties: Predatory pricing (Prices lower that

the cost)

Tariffs A tariff is a tax put on goods imported from abroad

and sometimes referred to as custom duties. It is the most used and most familiar type of trade

restriction. The effect of a tariff is to raise the price of the

imported product. It makes imported goods more expensive so that

people are more likely to purchase domestic products.

The money received from the tariff is collected by the domestic government.

Quotas A quota is a limit on the amount of goods that can

be imported. Putting a quota on a good creates a shortage, which

causes the price of the good to rise and makes the imported goods less attractive for buyers. This encourages people to buy domestic products.

A quota on shoes, for example, might limit foreign-made shoes to 10,000,000 pairs a year. If Americans buy 200,000,000 pairs of shoes each year, this would leave most of the market to American producers.

Voluntary Export Restraint – VER or Orderly Market Agreement (OMA)

This is a self imposed restriction by an exporting country to export certain commodity. Primarily this is a preemptive measure in view of the threat of restriction that the importing country may impose for import e. g. Japan imposed a VER on its auto exports into the U.S. as a result of American pressure in the 1980s. The VER subsequently gave the U.S. auto industry some protection against a flood of foreign competition.

Voluntary Export Restraint – VER or Orderly Market Agreement (OMA) Cont.

There are ways in which a company can avoid a VER. For example, the exporting country's company can always build a manufacturing plant in the country to which exports would be directed. By doing so, the company will no longer need to export goods, and should not be bound by its country's VER e. g. Honda built its manufacturing plant in Detroit during late eighties based on this policy.

Boycotts and Embargoes Boycotts and Embargoes are a

government order which completely prohibits trade with another country.

If necessary, the military actually sets up a blockade to prevent movement of merchant ships into and out of shipping ports.

Example: US for Iran, Iraq and Cuba

Embargoes (cont . . .) The embargo is the harshest type of trade

barrier and is usually enacted for political purposes to hurt a country economically and thus undermine the political leaders in charge.

Such was the case with the Cuban embargo which has been in place since the 1960s.

Monetary BarrierThis is imposed through Blocked currency Differential exchange rates (e. g. for desirable

goods one unit to one unit of currency, for less desirable 1 unit local currency to 2 unit of importing currency etc. and

Government approval requirement for securing foreign exchange

Standards It is imposed to protect health and safety. The standard varies from country to country Imposed for food items as well as items with

technical specifications e. g. Jute rope for ships etc.

Shelf life of medicines

Trade Barriers - Benefits Most barriers to trade are designed to

prevent imports from entering a country. Trade barriers provide many benefits:

protect homeland industries from competition protect jobs help provide extra income for the government. Decreases the costs of these goods – through increased competition

Trade Barriers - Costs

Tariffs increase the price of imported goods.

Less competition from world markets means there is an increase in the price.

The tax on imported goods is passed along to the consumer so the price of imported goods is higher.

International Trade Barriers

Common Arguments -Jobs Are Destroyed by Trade -Worker Wages Are Hurt by Trade. -National Security Is Threatened by Trade. -Special Industries with Unique and Substantial

Economic Potential will not mature without Protection from Trade.

-Unfair Competition Undermines the Benefits of Trade.

Major International Trade Agreements EU, NAFTA, ASEAN

The Omnibus Trade and Competitiveness Act

• Formed in 1988• Designed to deal with trade deficits,

protectionism, and overall fairness to trading partners.

• To deal the trading partners on ‘how they operate’ rather than ‘how we want them to behave’

• More a reciprocative Act

North American Free Trade Agreement (NAFTA)

Began on January 1, 1994Between Canada, the United

States and MexicoNAFTA pros and cons

Association of Southeast Asian Nations (ASEAN)

Established on August 8th, 1967

10 member countries -Brunei Darussalam, Cambodia,

Indonesia, Laos, Malaysia, Myanmar, Philippians, Singapore, Thailand, and Vietnam

European Union What is the EU?

27 member states

The Economic and Monetary Union (EMU): 16 member states -10th Year of the Euro

GATT The General Agreement on Tariffs and Trade

(GATT) was first signed in 1947. It regulates trade among 153 countries.

Was designed To provide an international forum That encouraged free trade between member states By regulating and reducing tariffs on traded goods Providing a common mechanism for resolving trade

disputes.

GATT Cont . . .• Conducted eight rounds of talks• The Uruguay Round, completed on December 15,

1993 after 7 years of negotiations, resulted in an agreement among 117 countries to reduce trade barriers and to create more comprehensive and enforceable world trade rules.

• The Uruguay Round agreement went into effect on January 1, 1995.

GATT Cont. . . The GATT's main objective was the

“Reduction of Barriers to International Trade”

This was achieved by reducing: Tariff barriers Quantitative Restrictions Subsidies on trade through a series of

agreements

GATT Cont. The agreement covers 3 main elements: 1. Trade shall be conducted on a

nondiscriminatory basis2. Protection shall be afforded domestic

industries through custom tariff3. Consultation shall be the primary method

to solve trade problems

GATT Cont. . .

Eliminate trade barriers on services through general Agreement on Trade and Services (GATS)

Trade related Investment Measures (TRIMs) established under GATT mentioning investment restriction can be a major trade barrier and can be challenged

Better integration of agricultural and textile areas into overall trading system

WTOThe World Trade Organization (WTO) reiterates the objectives

of GATT i. e. Reduction of Barriers to

International Trade

Functions of WTO Administering and Implementing the multilateral and plurilateral trade agreements Acting as a forum for multilateral trade negotiations Seeking to resolve trade disputes (e. g. genetically modified food) Overseeing national trade policies Cooperating with other international institutions Maintaining trade related database Acting as a watchdog of international trade Forum for successful negotiation to open markets in telecommunication and IT equipments

Skirting the spirit of GATT and WTO

• China was asked to become a WTO member and to show good faith in reducing tariffs and other restrictions on trade.

• When companies are found to dumping, the country places an extra tax on the product to offset the advantage o flower price.

• Countries are negotiating bilaterally e. g. USA and Singapore, EU with South American countries.

IMF

IMF member 181 countries.Objectives: Stabilization of foreign exchange

rates Establishment of freely convertible

currencies

IMF Cont. . .

To cope up with universally floating exchange rates IMF has developed Special Drawing Rights (SDRs)

SDR is in effect ‘PAPER GOLD’ represents an average base of value derived from the value of major currencies

WORLD BANK

Goals: Reduction in poverty Improvements in living standards by

promoting sustainable growth and investment in people

WORLD BANK Cont. There are five institutions in the world bank Group

each of which performs the following services: Provides loan, Providing technical assistance, Lending directly to the private sector Providing investors with investment guarantees

against non commercial risks like war etc Promoting increased flow of international

investment by providing facilities

Protests against Global Institutions

Basic complaints against WTO, IMF and others are as follows:

Environmental concerns Workers exploitation Domestic job losses Cultural extinction Higher oil prices Diminished sovereignty of nations