The Dynamic Environment of International Trade Chapter 2, Chapter 10 McGraw-Hill/Irwin© 2005 The McGraw-Hill Companies, Inc. All rights reserved.

The Dynamic Environment of International Trade

Chapter 2, Chapter 10

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Learning Objectives

1. The basis for the reestablishment of world trade following World War II

1. The basis for the reestablishment of world trade following World War II

2. The importance of balance-of-payment figures to a country’s economy

2. The importance of balance-of-payment figures to a country’s economy

3. The effects of protectionism on world trade3. The effects of protectionism on world trade

4. The seven types of trade barriers4. The seven types of trade barriers

Chapter Learning Objectives

5. The importance of GATT and the World Trade Organization

5. The importance of GATT and the World Trade Organization

6. Introduction to EU6. Introduction to EU

7. The emergence of the International Monetary Fund and the World Bank Group

7. The emergence of the International Monetary Fund and the World Bank Group

The International Marketing Environment

7

3. ECONOMY

Environmentaluncontrollablescountry market A

Environmentaluncontrollablescountrymarket B

Environmentaluncontrollablescountrymarket C

1. Competition

1. Competition

2. TechnologyPrice Product

Promotion Place orDistribution

6. Geography andInfrastructure

Foreign Environment(Uncontrollables)

7. Structure ofDistribution

3. Economy

5. Political-Legal

Domestic environment(Uncontrollables)

(Controllables)

2 .Technology

4. Culture

5. Political-Legal

4. Culture

Target Market

U.S. Multinational in Europe - 1960’s

Fifteen years from now the world’s third greatest

industrial power, just after the United States and

Russia, may not be Europe, but American industry in

Europe.J.S. Servan Schreiber:

Le Defi American, 1967 What Happened?How about now? Asia? Or China?

Irwin/McGraw-Hill Copyright©2002 by The McGraw-Hill Companies, Inc. All rights reserve.

2-3

Introduction

Proliferation of trade and emergence of the global economyProliferation of trade and emergence of the global economy

Intensification of global competitionIntensification of global competition

More emerging marketsMore emerging markets

Developments in technology allow communications with global consumers and movement of goodsDevelopments in technology allow communications with global consumers and movement of goods

World Trade and U.S. Multinationals

1. Rapid growth of underdeveloped countries and new global marketing opportunities

2. Rising living standards have created marketing opportunities for U.S. firms

3. Resistance over domination of U.S. multinationals

4. Expropriation and domestication of U.S. investments in Latin America

5. In the Europe, U.S. multinationals were controlled tightly by protectionism laws

World Trade and U.S. Multinationals

1. Resurgence of competition from all over the world challenged the supremacy of American industry

2. Newly industrialized countries (NICs) such as Brazil, Mexico, South Korea, Taiwan, Singapore, and Hong Kong experienced rapid industrialization

3. Economic power evenly distributed with growth of MNCs from other countries (see Exhibit 2-2)

4. Establishment of the WTO5. Integration of European Union countries 6. Creation of NAFTA, AFTA, and APEC

21st Century: The First Decade and Beyond

With exception of China, slower economic growth in U.S. and other countries is currently evident.With exception of China, slower economic growth in U.S. and other countries is currently evident.

Faster growth rates expected in developing countries such as Brazil, China, India, Indonesia, and Russia.

Faster growth rates expected in developing countries such as Brazil, China, India, Indonesia, and Russia.

More trade expected in emerging markets, regional trade areas, and the established markets in Europe, Japan, and U.S.

More trade expected in emerging markets, regional trade areas, and the established markets in Europe, Japan, and U.S.

Companies need to be more efficient, improve productivity, expand global reach, and respond quickly.

Companies need to be more efficient, improve productivity, expand global reach, and respond quickly.

Greater growth in international sales expected by smaller firms.Greater growth in international sales expected by smaller firms.

Balance of Payments

1. When countries trade there are financial transactions among businesses or consumers of different nations

2. Money constantly flows into and out of a country 3. The system of accounts that records a nation’s international

financial transactions is called its balance of payments (BP)4. It records all financial transactions between a country’s firms,

and residents, and the rest of the world usually over a year 5. The BP is maintained on a double-entry bookkeeping system

Balance of PaymentsThe BP is the difference between receipts and payments

•merchandise export sales.

•money spent by foreign tourists.

•transportation.

•payments of dividends and interest from FDI abroad.

•new foreign investments in the U.S.

BP Receipts

•costs of goods imported.

•spending by U.S. tourists overseas.

•new overseas investments.

•cost of foreign military and economic aid.

BP Payments

Balance of PaymentsThe BP includes three accounts:

(1) current account—a record of all merchandise exports, imports, and services plus unilateral transfers of funds;

(1) current account—a record of all merchandise exports, imports, and services plus unilateral transfers of funds;

(2) the capital account—a record of direct investment, portfolio investment, and short-term capital movements to and from countries;

(2) the capital account—a record of direct investment, portfolio investment, and short-term capital movements to and from countries;

(3) the official reserves account—a record of exports and imports of gold, increases or decreases in foreign exchange, and increases or decreases in liabilities to foreign central banks;

(3) the official reserves account—a record of exports and imports of gold, increases or decreases in foreign exchange, and increases or decreases in liabilities to foreign central banks;

Balance of Payments and Exchange Rate

1. If a country’s expenditures consistently exceed its income, its standard of living falls

2. Its exchange rate vis-à-vis foreign monies declines3. When foreign currencies can be traded for more dollars, U.S.

products are less expensive for foreign customers and exports increase

4. Simultaneously foreign products are more expensive for U.S. buyers and the demand for imported goods is reduced

Protectionism: Logic and Illogic

Countries use protectionist measures to shield a country’s markets from intrusion by foreign competition and imports.Countries use protectionist measures to shield a country’s markets from intrusion by foreign competition and imports.

Arguments for Protectionism include:

1. maintain employment and reduce unemployment.2. increase of business size, and 3. retaliation and bargaining.4. protection of the home market. 5. need to keep money at home.6. encouragement of capital accumulation.7. maintenance of the standard of living and real wages.8. conservation of natural resources.9. protection of an infant industry 10. industrialization of a low-wage nation 11. national defense

Arguments for Protectionism include:

1. maintain employment and reduce unemployment.2. increase of business size, and 3. retaliation and bargaining.4. protection of the home market. 5. need to keep money at home.6. encouragement of capital accumulation.7. maintenance of the standard of living and real wages.8. conservation of natural resources.9. protection of an infant industry 10. industrialization of a low-wage nation 11. national defense

Protectionism: Logic and Illogic

In general, protectionism contributes to industrial inefficiency and makes a nation uncompetitiveIn general, protectionism contributes to industrial inefficiency and makes a nation uncompetitive

Arguments 9-11 above are considered valid for protectionism Arguments 9-11 above are considered valid for protectionism

Protectionism is implemented through the imposition of trade barriers, which include tariff barriers and non-tariff barriers

Protectionism is implemented through the imposition of trade barriers, which include tariff barriers and non-tariff barriers

Six Types of Non-Tariff Barriers

(2) Customs and Administrative Entry Procedures:1. Valuation systems2. Antidumping practices3. Tariff classifications4. Documentation requirements5. Fees

(2) Customs and Administrative Entry Procedures:1. Valuation systems2. Antidumping practices3. Tariff classifications4. Documentation requirements5. Fees

(1) Specific Limitations on Trade:1. Quotas2. Import Licensing requirements3. Proportion restrictions of foreign to

domestic goods (local content requirements)4. Minimum import price limits5. Embargoes

(1) Specific Limitations on Trade:1. Quotas2. Import Licensing requirements3. Proportion restrictions of foreign to

domestic goods (local content requirements)4. Minimum import price limits5. Embargoes

Six Types of Non-Tariff Barriers

(3) Standards:1. Standard disparities2. Intergovernmental acceptances of testing

methods and standards3. Packaging, labeling, and marking

(3) Standards:1. Standard disparities2. Intergovernmental acceptances of testing

methods and standards3. Packaging, labeling, and marking

(4) Government Participation in Trade:1. Government procurement policies2. Export subsidies3. Countervailing duties4. Domestic assistance programs

(4) Government Participation in Trade:1. Government procurement policies2. Export subsidies3. Countervailing duties4. Domestic assistance programs

Six Types of Non-Tariff Barriers

(5) Charges on imports:1. Prior import deposit subsidies2. Administrative fees3. Special supplementary duties4. Import credit discriminations5. Variable levies6. Border taxes

(5) Charges on imports:1. Prior import deposit subsidies2. Administrative fees3. Special supplementary duties4. Import credit discriminations5. Variable levies6. Border taxes

(6) Others:1. Voluntary export restraints2. Orderly marketing agreements

(6) Others:1. Voluntary export restraints2. Orderly marketing agreements

Monetary Barriers

In addition to the Six Types of Non-Tariff Barriers, monetary barriers are also used by countriesIn addition to the Six Types of Non-Tariff Barriers, monetary barriers are also used by countries

Three types of monetary barriers include:

1. Blocked currency: Blockage is accomplished by refusing to allow importers to exchange its national currency for the sellers’ currency.

2. Differential exchange rates: It encourages the importation of goods the government deems desirable and discourages importation of goods the government does not want by adjusting the exchange rate. The exchange rate for importation of a desirable product is favorable and vice-versa

3. Government approval: In countries where there is a severe shortage of foreign exchange, an exchange permit to import foreign goods is required from the government

Three types of monetary barriers include:

1. Blocked currency: Blockage is accomplished by refusing to allow importers to exchange its national currency for the sellers’ currency.

2. Differential exchange rates: It encourages the importation of goods the government deems desirable and discourages importation of goods the government does not want by adjusting the exchange rate. The exchange rate for importation of a desirable product is favorable and vice-versa

3. Government approval: In countries where there is a severe shortage of foreign exchange, an exchange permit to import foreign goods is required from the government

General Agreement on Tariffs and Trade (GATT)

1. GATT created as an agency to serve as watchdog over world trade and provide a process to reduce tariffs

2. GATT also provided a mechanism to resolve trade disputes bilaterally

GATT covers three basic areas:1. trade shall be conducted on a nondiscriminatory basis; 2. protection shall be afforded domestic industries

through customs tariffs, not through such commercial measures as import quotas; and

3. consultation shall be the primary method used to solve global trade problems.

GATT covers three basic areas:1. trade shall be conducted on a nondiscriminatory basis; 2. protection shall be afforded domestic industries

through customs tariffs, not through such commercial measures as import quotas; and

3. consultation shall be the primary method used to solve global trade problems.

3. GATT now replaced by the World Trade Organization

World Trade Organization (WTO)

1. It sets many rules governing trade between its 132 members

2. WTO provides a panel of experts to hear and rule on trade disputes between members, and, unlike GATT, issues binding decisions

Unlike GATT, is an institution, not an agreementUnlike GATT, is an institution, not an agreement

European Union (EU) – Economic & Political Integration

• expansion – deepening and broadening integration– European Coal and Steel Community, 1951

• six countries (Belgium, France, Germany, Italy, Luxembourg, the Netherlands)

– European Economic Community (EEC), 1957

• negative integration – absence of restrictions on movement of workers, goods, services

• Denmark, Ireland and UK admitted, 1972– European Union, 1993

• positive integration – actively fostering integration– Maastricht Treaty, 1992– Amsterdam Treaty, 1997

• 15 members currently– Greece (1986), Spain (1986), Portugal (1986),

Austria (1995), Finland (1995), Sweden (1995)– 10 candidate countries (Bulgaria, Czech Republic,

Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Romania, Slovenia, Slovakia, Turkey)

European Union (EU) – Institutions• legislative – shared legislative

powers• Council of the European Union

– ministers and heads of state of member countries

• European Parliament– direct election

• executive – European Commission– President and commissioners

appointed by member states– confirmed by European Parliament

• judiciary – Court of Justice

European Union (EU) – Economic Integration

• single market– free movement of people, capital (investment), goods

and services

• monetary union• the Euro

– comes into existence January, 1999

– banknotes and coins in circulation, January 2002

– national banknotes and coins withdrawn from use (February 2002)

• common labor market• Schengen Agreement, 1985

European Union (EU) – Political Integration

• political integration– common political institutions

• e.g. European Parliament

– common European citizenship• freedom of movements• fundamental rights• civil and political rights

– common social citizenship (limited)• access to social programs in other countries

– common currency• money traditionally symbol of sovereignty• requires integrated monetary policy

Association of Southeast Asian Nations (ASEAN)

BruneiBrunei

IndonesiaIndonesia

LaosLaos

MalaysiaMalaysia

MyanmarMyanmar

PhilippinesPhilippines

SingaporeSingapore

ThailandThailand

VietnamVietnam

Association of Southeast Asian Nations (ASEAN) + 3

BruneiBrunei

IndonesiaIndonesia

LaosLaos

MalaysiaMalaysia

MyanmarMyanmar

PhilippinesPhilippines

SingaporeSingapore

ThailandThailand

VietnamVietnam

JapanJapan

S. KoreaS. Korea

ChinaChina

Asia-Pacific Economic Cooperation (APEC)

AustraliaAustralia

BruneiBrunei

CanadaCanada

ChileChile

ChinaChina

Hong KongHong Kong

IndonesiaIndonesia

JapanJapan

South KoreaSouth Korea

MalaysiaMalaysia

MexicoMexico

New ZealandNew Zealand

Papua New GuineaPapua New Guinea

PeruPeru

PhilippinesPhilippines

Russia Russia

SingaporeSingapore

TaiwanTaiwan

Thailand Thailand

U.S.A.U.S.A.

VietnamVietnam

North American Free-Trade Area (NAFTA)

CanadaCanada

United StatesUnited States

MexicoMexico

The International Monetary Fund (IMF)

1. IMF was created to assist nations in becoming and remaining economically viable

2. It assists countries that seek capital for economic development and restructuring

3. IMF loans come with stipulations that borrowing countries slash spending and impose controls to curb inflation

4. It helps maintain stability in the world financial markets

Objectives of the IMF include:1. stabilization of foreign exchange rates 2. establish convertible currencies to

facilitate international trade3. lend money to members in financial

trouble

Objectives of the IMF include:1. stabilization of foreign exchange rates 2. establish convertible currencies to

facilitate international trade3. lend money to members in financial

trouble

World Bank Group (WBG)

The functions of the WBG include:The functions of the WBG include:

The goal of WBG is to reduce poverty and the improvement of living standards by promoting sustainable growth and investment in people.

The goal of WBG is to reduce poverty and the improvement of living standards by promoting sustainable growth and investment in people.

1. lending money to countries to finance development projects in education, health, and infrastructure;

2. providing assistance for projects to the poorest developing countries;

3. lending directly to the private sector in developing countries with long-term loans, equity investments, and other financial assistance;

4. provide investors with investment guarantees against “noncommercial risk,” so developing countries will attract FDI; and

5. provide conciliation and arbitration of disputes between governments and foreign investors

Protests Against Global Institutions

In 1999 “anti-capitalist protestors” complained against the WTO, and IMF, over the unintended consequences of globalization that include: In 1999 “anti-capitalist protestors” complained against the WTO, and IMF, over the unintended consequences of globalization that include:

1. environmental concerns

2. worker exploitation and domestic job losses

3. cultural extinction

4. higher oil prices, and

5. diminished sovereignty of nations