LECTURE 4 Chapter 2The 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 illogic1. 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 unemployment9. 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 countrys 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 countrys 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 BarriersCommon 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, Mal aysia, Myanmar, Philippians, Singapore, Thail and, 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 GATTs 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.
IMFIMF 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 BANKGoals: 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 InstitutionsBasic 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