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RECENT WORLD TRADE
TRENDS
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WHEN INTERNATIONAL TRADE?
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DRIVERS
Worldwide trend of the economies of the world
becoming borderless and interlinked.
National economies merging into an
interdependent global economic system.
Declining trade and investment barriers
Perceived distances are shrinking due to advances
in transportation and telecommunications.
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The Shrinking Globe-The death of distance
1500-1840
1850-1930
1950s
1960s
Best average speed ofhorse-drawn coaches andsailing ships, 10mph.
Steam locomotives average 65mph.Steamships average 36mph.
Jet passenger aircraft
500-700mph.
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GAAT
(GENERAL AGREEMENT ONAGREEMENT ONTARIFFS & TRADE)TARIFFS & TRADE)
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General Agreement on Tariffs and Trade (GATT)
originated after World War II (1939-1945) as a charter forthe International Trade Organization (ITO), a proposed
specialized agency of the United Nations. GATT was
signed by 23 nations at a trade conference in 1947 and
became effective in January 1948. Although the ITOfailed to win ratification by the United States Congress in
1950 and never came into being, the GATT remained in
use to govern international trade. It is a treaty among
international trade organization in existence from 1948 to
1995.
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W.T.O.
(WORLD TRADE ORGANIZATION)
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W.T.O.
The World Trade Organization (WTO) is the only globalinternational organization dealing with the rules of trade
between nations. Its main function is to ensure that trade
flows as smoothly, predictably and freely as possible. . At
its heart are the WTO agreements, negotiated and signed
by the bulk of the worlds trading nations and ratified in theirparliaments. The goal is to help producers of goods and
services, exporters, and importers conduct their business.
Its an organization for liberalizing trade. Its a forum for
governments to negotiate trade agreements. Its a place forthem to settle trade disputes. It operates a system of trade
rules.
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Its a negotiating forum - The WTO is a place where member governments go, to
try to sort out the trade problems they face with each other. The first step is to talk.
The WTO was born out of negotiations, and everything the WTO does is the result of
negotiations.
Its a set of rules - At its heart are the WTO agreements, negotiated and signed by
the bulk of the worlds trading nations. These documents provide the legal ground-
rules for international commerce. They are essentially contracts, binding
governments to keep their trade policies within agreed limits.
It helps to settle disputes - Trade relations often involve conflicting interests.
Agreements, including those painstakingly negotiated in the WTO system, often
need interpreting. The most harmonious way to settle these differences is through
some neutral procedure based on an agreed legal foundation. That is the purpose
behind the dispute settlement process written into the WTO agreements.
Role of W.T.O.
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Principles of Trading System
Freer trade: gradually, throughnegotiation
Predictability: through binding and
transparency
Promoting fair competition
Encouraging development and economic
reform
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World Trade Organization: Rounds
Rounds of GATT
Multilateral Trade Negotiations
No. Years Name Accomplishments
1-5 1947-61 Reduced tariffs6 1964-67 Kennedy Tariffs + anti-dumping
7 1973-79 Tokyo Tariffs + NTBs
8 1986-94 Uruguay Tariffs, NTBs, Services, Intellectual Property,Textiles, Ag., Dispute Settlement, CreatedWTO
9 2001-? Doha ? (Doha Development Agenda)
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Foreign Direct Investment (FDI) is defined as
"investment made to acquire lasting interest in enterprises
operating outside of the economy of the investor."
The FDI relationship consists of a parent enterpriseand a foreign affiliate, which together form a Trans-
national Corporation (TNC).
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When is FDI Preferable to Trade?
Transportation costs too high for exporting
Tariff and non-tariff barriers very high
Lack of excess domestic capacity
Scale economies not significant in competitiveness(especially when products are more differentiated)
Location specific advantages such as natural resources
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Why Do Firms Invest Overseas?
Labour Market Imperfections
Intangible Assets
Vertical Integration
Product Life Cycle
Shareholder Diversification
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Labour Market Imperfections
Country Hourly Cost
Germany $27.37Japan $21.38
France/U.S. $17.10
Israel $9.06Taiwan $5.47
Mexico $2.57
Persistent wage
differentials across
countries exist. This
is one on the mainreasons MNCs are
making substantial
FDIs in less
developed nations.
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Intangible Assets
Coca-Cola has a very valuable asset in its closely
guarded secret formula.
To protect that proprietary information, Coca-Cola
has chosen FDI over licensing. Since intangible assets are difficult to package and
sell to foreigners, MNCs often enjoy a comparative
advantage with FDI.
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VerticalIntegration
MNCs may undertake FDI in countries where inputsare available in order to secure the supply of inputs at
a stable accounting price.
Vertical integration may be backward or forward:
Backward: e.g. a furniture maker buying a logging
company.
Forward: e.g. a U.S. auto maker buying a Japanese
auto dealership.
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Product Life Cycle
U.S. firms develop new products in the developed world for the
domestic market, and then markets expand overseas.
FDI takes place when product maturity hits and cost becomes an
increasingly important consideration for the MNC.
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Product Life Cycle
Quan
tity
Quanti
ty
The U.S.
Less advanced
countries
production
New product Maturing product Standardized product
New product Maturing product Standardized product
exports
consumption
cons
umption
imports
production
imports
exports
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Cisco
Networking major Cisco's CEO John Chambers announced a $1.1 billion
investment package for India. Chambers said that the company is also
considering India as a manufacturing base.
Intel: Intel Corporation said the company would invest more than $1
billion in the next five years to expand its operations in India and in localtechnology companies.
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Toyota
Global auto giant Toyota is setting up a gearbox manufacturing plant inIndia to serve the Asian market. Toyota is planning to invest around Rs
387 crore (Rs 3.87 billion) in collaboration with its mini-vehicle making
arm Daihatsu. The aim is to develop a compact car for the Indian market.
Besides, Toyota, Honda Motorcycle, Suzuki Motor (Maruti Suzuki) andKansai Paints are firming up plans to pump in foreign direct investment
(FDI) of at least $1.5 billion in the next three years.
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Telecom sector
LG Electronics has invested Rs 900 cr (Rs 9 billion) at Ranjangaon,Samsung has planned to set up a mobile manufacturing base in India.
Finnish mobile handset giant Nokia set up a manufacturing plant in
Chennai with an investment of up to $150 million to meet the booming
demand for its handsets in India. The Chennai unit will be Nokia's tenth mobile device production facility
globally and will roll out India-specific entry level and mid and upper
end GSM and CDMA handsets.
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Strategic Alliances
A strategic alliance is an arrangement
between two or more companies to pursue a
common business objective.
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Wal-Marts experience
Moved into other countries
Growth opportunities at home were becoming constrained
Create value by transferring core skills to markets where indigenous competitors lacked those skills
Preempt other retailers who were expanding globally
Discovered had to change US model
Differences in local taste, preferences and local infrastructure
Change store location, layout and stocking practices
Keep companys core strategies and operations emphasize everyday low prices & realize operating efficiencies from world class logistics management
and information systems
Benefits becoming transnational corporation
Enhanced bargaining power with suppliers
Ability to transfer valuable ideas from one country to another
Balance global standardization with local customization
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Success factors
FOCUS AND DIRECTION: Pharmaceutical giants like SmithKline
Beecham have linked arms with relative minnows to enter
unfamiliar fields like biotechnology. SmithKline Beecham's
necessities included tapping into drug-related research fields, like
biotechnology, where it had no position itself. Pilkington jointly owns float glass manufacture in Latin America
with its deadly European rival, St.Gobain. Since alliance with a
Japanese competitor was the key to expanding in automotive glass in
the US and other markets
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