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International business 4 WORLD TRADE


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International business 4 WORLD TRADE

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International business 4 WORLD TRADE

  2. 2. WORLD TRADE Introduction : World trade expansion and growth depend on economic growth of world economy, relation among different countries, international liquidity and different forums which are working for promotion of foreign trade. Increase in world trade has positive relationship with the growth rate of different economies of the world. All economically advanced countries have higher percentage of foreign trade with their Gross Domestic Product.
  3. 3. MEANING OF WORLD TRADE World trade helps a country to utilize its natural resources and to export its surplus production. It is only because of world trade that oil-exporting countries are utilizing their natural resources and are able to increase the level of economic development of their countries. World trade helps the country to import technical know-how and thus the importing country can utilize world's best technology. At the time of natural calamity, a country can import food grains and other goods from abroad. World trade has helped the developing and least developed countries to import machinery, capital goods, technical know-how from industrially advanced countries. Trends in World Trade :Trends in world trade can be analysed in the following manner: (1) Increase in World's Exports : World's exports have increased significantly. In the year 1950, world's exports were only 55 billion dollars and in the year 2004, it has increased to 9,153 billion dollars. The main reason for increase in world's exports is reduction in tariff and non-tariff barriers, multilateral trade, increase in means of communication, transportation, etc.
  4. 4. (2) Top Exporters in Merchandising World Trade : In the year 2004, the largest exporting country in world trade is Germany. Its hare in total world's export is 10 per cent. The top five exporting countries of the world are: � Germany � USA � China � Japan � France India's ranking in world's export is 30th. Its share in total world's export is just 0.8 percent.
  5. 5. (3) Top Importers in Merchandising (Goods) World Trade : In the year 2004, the largest importer in world trade was U.S.A. Its share in world's imports was 16.1%. India's ranking in world's import is 23rd. India's percentage in world' import is just 1.0% The world's five big importers are: � U.S.A. � Germany � China � France � U.K. (4) World Trade in Services : Services is another area in which world trade is expanding very fast. Service sector mainly includes travel, tourism, banking, insurance, telecommunication, business outsourcing (call centres), IT enabled services, consultancy, media- services, software, advertising, transportation, etc.
  6. 6. (5) Exports of Developing Countries : Among developing countries, the top five countries in world trade are: � Hong Kong � Taiwan � Korea � China � Singapore Their combined share is 50% of exports of all developing countries. (6) Composition of World Trade : World Trade in terms of product groups comprise � Foodstuff, � Agricultural raw materials, � Fuels, � Ores and metals � Textiles � Chemicals � Machinery � Transport equipment � Gems and jewellery � Computer software � Leather products etc.
  7. 7. Nowadays trade in services like banking, software, shipping, telecommunication, travel, tourism etc. is increasing at a faster rate. Presently, World Trade includes engineering goods, capital goods, technology, computer software, services, chemicals, along with agricultural goods. So composition of world trade is changing and share of industrial goods and services is expanding at a faster rate, than traditional export items. (7) Growth of Regional Blocs in World Trade : Some of the leading blocs have improved their share in world trade. The objective of these blocs is to promote free trade and economic cooperation among different regions of globe. (8) Shift from Bilateral Trade to Multilateral Trade : Earlier, up to the year 1994, world trade was mainly bilateral. In bilateral trade, agreement is signed between two nations. With the growth in World Trade Organization, there is shift from bilateral to multilateral trade. In multilateral trade, trade agreements are signed among many nations at a time. (9) Shift from Restricted Trade to Free Trade : Earlier, various tariff and non-tariff restrictions were imposed on world trade. These restrictions were � Import quotas, � Custom duties
  8. 8. � Discriminatory transport charges � Voluntary import restraints � Licence system � Subsidies � Commercial prohibition etc. But now as per the directions of WTO, both tariff and non-tariff barriers to international trade have been reduced. In other worlds, free trade is increasing in the World Trade. (A) Macro Risks (B) Micro Risks (A) Macro Risks : By macro risk we mean, risks affecting all the multinational firms. The major macro risks are: (1) Forced Disinvestment : Governments may, as a matter of political philosophy, force firms to disinvest. Forced disinvestment may take place for variety of reasons such as: a) That the government believes that it may make better utilization resources b) It feels that such a take over may improve the image of the government c) Government wants to control these resources for strategic or developmental reasons. The forced disinvestments are legal under international law as long as it is accompanied by adequate compensations. Such a takeover does not involve the risk of total loss of assets, however, some times the compensation provided by the government may not match the expectation of company taken over by the governments
  9. 9. FORMS OF FORCED DISINVESTMENT (i) Takeovers/Nationalization : Usually takeovers and nationalization are done as a matter of political philosophy. While doing so, a general policy of takeover or nationalization is announced with a package of compensation. The company owners are asked to withdraw from the management for announced compensation which usually does not match with the expectation of the owners of company. (ii) Confiscation/Expropriation with or without Compensation : This is another form of forced disinvestment. In this the government expropriates legal title to property or the stream of income the company generates. Confiscation may be with a minimal compensation or even without compensation. (2) Unwelcomed Regulations : The purpose of these regulations is to
  10. 10. (3) Interface with Operations : Interface with operations refer to any government activity that makes it difficult for business to operate effectively. This risk includes such things as government's encouragement of unionization, government's expression of negative comments-about foreigners and discriminatory government support to locally owned and operated business. The governments generally engage in these kinds of activities when they believe that a foreign company's operation could be detrimental to local development or would harm the political interest of the government. (4) Social Strife : In any country there may be social strife arising due to ethnic, religious, tribal or civil tensions or natural calamities such as drought, etc. may cause economic dislocation. (B) Micro Risks : Micro risks are firm specific and affect every firm differently. The micro risks are: (1) Goal Conflicts with Economic Policies : Conflicts between objectives of multinational firms and host government have risen over such issues as the firm's impact on economic development, foreign control of key industries, sharing of ownership and control with local interest, impact on host country's balance of payment, influence on the exchange rate and control over export market, and of domestic versus foreign executives.
  11. 11. The economic policies of the government are geared to achieve sustainable rate of growth in per capital, gross national product, full employment, price stability external balance and fair distribution of income. The policies through which these objectives are to be achieved are as follows: � Monetary Policies � Fiscal Policies � Trade Policies and economic controls � Balance of Payment and Exchange Rate Policy. � Economic Development Policies. Each of these policies may conflict with the goals of MNCs. (2) Corruption and Bureaucratic Delays : Political corruption and blackmail contribute to the risk. Corruption is endemic to developing countries. If these bribes are not paid, either the projects are nor cleared or delayed through bureaucratic system to make the project instructions.