Global Business Environment

1. Global Trade and Investment
Course: MBA
Subject: GLOBAL BUSINESS ENVIRONMENT
Unit: 3

2. GENERAL AGREEMENT ON TARIFF AND TRADE
And
WORLD TRADE ORGANISATION

3. BACKGROUND

4. PRINCIPLES ADOPTED BY GATT

5. Between 1947 and the last year of GATT there were 8 rounds of
negotiations between the participating countries.
Between 1947 and the last year of GATT there were 8 rounds of
negotiations between the participating countries.
The first 6 rounds were related to curtailing tariff rates. 7th round
included the non tariff obstacles.
The first 6 rounds were related to curtailing tariff rates. 7th round
included the non tariff obstacles.
The 8th round was entirely different from the previous rounds because it
included a number of new subjects for consideration. This 8th round was
known as “URUGUAY ROUND”.
The 8th round was entirely different from the previous rounds because it
included a number of new subjects for consideration. This 8th round was
known as “URUGUAY ROUND”.
The discussions at this round only gave birth to WORLD TRADE
ORGANISATION (WTO).
The discussions at this round only gave birth to WORLD TRADE
ORGANISATION (WTO).
ROUNDS OF GATT NEGOTIATION

6. Following the UR agreement, GATT was converted from a
provisional agreement into a formal international
organization called World Trade Organization (WTO), with
effect from January 1, 1995
FROM GATT TO WTO

7. World Trade Organization (WTO)
• The World Trade Organization (WTO) deals with the global rules of
trade between nations. Its main function is to ensure that trade
flows as smoothly, predictably and freely as possible.
• WTO is an organisation for liberalising trade, a forum for
governments to negotiate trade agreements and a place for them
to settle trade disputes
• At the heart of the system — known as the multilateral trading
system — are the WTO’s agreements, negotiated and signed by a
large majority of the world’s trading nations, and ratified in their
parliaments.
• The WTO has larger membership than GATT, with the numbers
being 153. India is one of the founder members of GATT.

8. Functions of WTO:
WTO is based in Geneva, Switzerland. Its functions
are:
Administering the multilateral trade agreements
which together make up the WTO
Acting as a forum for multilateral trade
negotiations
Seeking to resolve trade disputes
WTO is not a “Free trade” institution. It permits
tariffs and other forms of protection but only in
limited circumstances.

9. Principles of WTO
• Non discrimination
• Free Trade: Promote free trade between nations
through negotiations.
• Stability in the trading system: Member countries
are committed not to raise tariff and non tariffs
barriers arbitrarily.
• Promotion of Fair Competition: WTO provides for
transparent, fair and undistorted competition.
• It discourages unfair competitive practices such as
export subsidies and dumping.

10. TRIPS (Trade Related Intellectual Property Rights
Agreement)
• The agreement requires member countries to provide
patent protection to all products or processes in all
fields. The protection is granted subject to the
following three conditions:
– The product or process is a new one.
– It contains an inventive step.
– It is capable of industrial application for 20 years
from the grant of the patent

11. TRIPS (Trade Related Intellectual Property
Rights Agreement)
• TRIPS agreement covers the following seven
intellectual properties:
– Patents
– Copyright and other related Rights
– Geographical Indications
– Industrial Designs
– Trade marks
– Layout design of integrated circuits
– Undisclosed information including trade secrets

12. GATS (General Agreement on Trade in Services)
The GATS agreement covers four modes of supply for the delivery of services in cross-
border trade:
Criteria Supplier Presence
Mode 1: Cross-
border supply
Service delivered within the territory of the
Member, from the territory of another Member.
Eg: transborder data flows
Mode 2:
Consumption
abroad
Service delivered outside the territory of the
Member, in the territory of another Member, to
a service consumer of the Member. Eg :
Tourism
Service supplier not
present within the
territory of the
member
Mode 3:
Commercial
presence
Service delivered within the territory of the
Member, through the commercial presence of
the supplier (provision of services abroad
through FDI or representative offices).
Mode 4: Presence
of a natural person
Service delivered within the territory of the
Member, with supplier present as a natural
person (entry and temporary stay of foreign
consultants)
Service supplier
present within the
territory of the
Member

13. TRIMS (Trade Related Investment
Measures)
• TRIMS refers to certain conditions or restrictions
imposed by a government in respect of foreign
investment in the country.
• In the late 1980's, there was a significant increase in
foreign direct investment throughout the world.
• TRIMS are widely employed by developing countries.
The Agreement on TRIMs provides that no contracting
party shall apply any TRIM which is inconsistent with
the WTO articles

14. Anti Dumping Measures:
• The WTO Agreement provides clarity in the method of
determining that a product is dumped.
• A product is regarded as dumped when its export price is less
than the normal price in the exporting country or its cost of
production plus a reasonable amount of administrative, selling
and any other costs.
• Anti-dumping duties are to be imposed on goods that are
deemed to be dumped and causing injury to producers of
competing products in the importing country. These duties are
equal to the difference between the goods’ export price and
their normal value, if dumping causes injury.
• Countervailing measures - Action taken by the importing
country, usually in the form of increased duties to offset
subsidies given to producers or exporters in the exporting
country.

15. Evaluation of WTO
• The WTO members now account for over 97% of the
international trade indicating the potential of bringing
about an orderly development of international trade.
Benefits of WTO:
• GATT / WTO has made significant achievements in
reducing tariff and non tariff barriers to trade. Developing
countries too have been benefiting significantly.
• Liberalization of investments has been fostering economic
growth of a number of countries.
• It has a system in place to settle trade disputes between
nations.
• It has a mechanism to deal with violation of trade
agreements.

16. Drawbacks:
• Negotiations and decision making in the WTO
are dominated by the developed countries.
• Many developing countries do not have the
financial and knowledge resources to
effectively participate in WTO discussions and
negotiations.
• Due to the dependence of developing
countries on the developed ones, the
developed countries are able to resort to arms
twisting tactics.

17. Tariff: A tariff is a tax. It adds to the cost of imported goods and
is one of several trade policies that a country can enact.
Non-tariff barriers to trade (NTBs) are trade barriers that
restrict imports but are not in the usual form of a tariff. Some
common examples of NTB's are anti- dumping measures
and countervailing duties.
sanitary and phytosanitary measures (SPS):
• SPS measures refer to any measure, procedure, requirement,
or regulation, taken by governments to protect human,
animal, or plant life or health from the risks arising from the
spread of pests, diseases, disease causing organisms, or from‑
additives, toxins, or contaminants found in food, beverages,
or feedstuffs.

18. • Specific Tariffs : A fixed fee levied on one unit of an imported
good is referred to as a specific tariff. For example, a country
could levy a $15 tariff on each pair of shoes imported, but levy a
$300 tariff on each computer imported.
Ad Valorem Tariffs this type of tariff is levied on a good based on
a percentage of that good's value. An example of an ad valorem
tariff would be a 15% tariff levied by Japan on U.S. automobiles.
Import Quotas : An import quota is a restriction placed on the
amount of a particular good that can be imported.
• free trade area : Trade within the group is duty free but
members set their own tariffs on imports from non-members
(e.g. NAFTA).

19. The International
Monetary System

20. Introduction
 The international monetary system refers to
the institutional arrangements that countries
adopt to govern exchange rates

21. Introduction
International monetary systems are sets of
internationally agreed rules, conventions and
supporting institutions that facilitate international
trade, cross border investment and generally the
reallocation of capital between nation states

22. Introduction
 It addresses to solve the problems relating to
international trade:
a. Liquidity
b. Adjustment
c. Stability

23. The problem of Liquidity
 The problem of liquidity existed even in the
domestic transactions through barter
system
 Barter system was replaced by precious
metals as a medium of exchange and store
of value
 Gold standard system of international
payments came into existence

24. The Gold Standard
The first modern
international monetary
system was the gold
standard
Put in effect in 1850
Participants – UK,
France, Germany & USA
USAJapan
Gold
Trade

25. Gold Standard- I ( 1876-1913)
●In this system, each currency was linked to a weight
of gold
●Under gold standard, each country had to establish
the rate at which its currency could be converted to
a weight of gold
E.g. $ 20.67/ ounce ; Pound 4.247/ once

26. Gold Standard- I ( 1876-1913)
●Most of the countries used to declare par value
of their currency in terms of gold
●The problem was every country needed to
maintain adequate reserves of gold in order to
back its currency

27. The Gold Standard
● After World War I, the exchange rates were
allowed to fluctuate
● Since gold was convertible into currencies
of the major developed countries, central
banks of different countries either held gold
or currencies of these developed countries

28. The System of Bretton Woods
( 1944-71)
 In July, 1944, 44 countries met in Bretton
Woods, New Hampshire, USA – a new
International Monetary System was created
 John Maynard Keynes of Britain and Harry
Dexter White of USA were the key movers

29. The Bretton Woods Agreement
 Creation of International Monetary Fund (IMF)
to promote consultations and collaboration
on international monetary problems and
countries with deficit balance of payments
 Establish a par value of currency with
approval of IMF
 Maintain exchange rate for its currency
within one percent of declared par value

30. The Bretton Woods Agreement
 Each member to pay a quota into IMF pool –
one quarter in gold and the rest in their own
currency
 The pool to be used for lending
 Dollar was to be convertible to gold till
international instrument was introduced
 International Bank for Reconstruction and
Development (IBRD) was created to
rehabilitate war-torn countries and help
developing countries

31. The System of Bretton Woods
( 1944-71)
 So in effect this was a gold – dollar exchange
standard ( $35/ounce)- known as fixed
exchange rate system or adjustable peg
 Devaluation could not be resorted arbitrarily
 When BOP problem became structural i.e.
repetitive, devaluation upto ten percent was
permitted by IMF
 Thus each currency was tied to dollar directly
or indirectly

32. The end of the Bretton Woods System (1972–
81)
 The system dissolved between 1968 and
1973
 By March 1973, the major currencies began
to float against each other

33. The end of the Bretton Woods System
(1972–81)
IMF members have been free to choose any
form of exchange arrangement they wish
(except pegging their currency to gold):
 Allowing the currency to float freely
 Pegging it to another currency or a basket
of currencies
 Adopting the currency of another country,
participating in a currency bloc, or
 Forming part of a monetary union

34. Exchange Systems after 1973
• Exchange Rate systems are classified on the
basis of the flexibility that the monetary
authorities show towards fluctuations in the
exchange rates and are divided into two
categories:
1. Systems with a fixed exchange rate
( “fixed peg” or “hard peg”) and
2. Systems with a flexible exchange rate
( “Floating” systems)

35. Exchange Systems after 1973
• But as usual, between these two extreme positions
there exists also an intermediate range of different
systems with limited flexibility, usually referred to
as “soft pegs”

36. Exchange Rates Since 1973
• Since 1973, exchange rates have become more
volatile and less predictable than they were between
1945 and 1973, due to:
 Oil crisis -1971
 Loss of confidence in the dollar - 1977-78
 Oil crisis – 1979, OPEC increases price of oil
 Unexpected rise in the dollar - 1980-85
 Rapid fall of the dollar - 1985-87 and 1993-95
 Partial collapse of European Monetary System –
1992
 Asian currency crisis - 1997

37. Exchange Rates Since 1973
● The merits of each continue to be debated
● There is no agreement as to which system
is better
● Many countries today are disappointed
with the floating exchange rate system

38. Foreign Exchange Market

39. WHAT IS FOREIGN EXCHANGE
Foreign exchange is the mechanism by which the currency of
one country gets converted into the currency of another
country.
The conversion of currency is done by the banks who deal in
foreign exchange. These banks maintain stocks of one
currencies in the form of balances with banks

40. Operation of foreign exchange market:
Foreign exchange market operates either as:-
Spot Market: (Current Market)
Spot market for foreign exchange is that market which handles
only spot transaction or current transactions.
Principle characteristics:-
 Spot Market is of daily nature. It does not trade in future
deliveries.
 Spot rate of exchange is that rate which happens to prevail at the
time when transactions are incurred.

41. Forward Market:
Forward Market for foreign exchange is that market which
handles such transaction of foreign exchange as are meant
for future delivery.
Principles Characteristics:-
 It only caters to forward transaction.
 It determines forward exchange rate at which forward
transaction are to be honored.

42. Exchange Rate
►Fixed Exchange Rate System
Fixed rates provide greater certainty for exporters and
importers.
►Flexible Exchange Rate System
Flexible exchange rate or floating exchange rates change freely
and are determined by trading in the forex market.

43. International Economic
Institutions

44. Why were they created?
• To boost the economic cooperation among
countries
• To help a quicker recovery of the international
economy

45. The World Trade Organization
(WTO)
• In 1947 The General Agreement on Tariffs and
Trade (GATT) was formed
• In 1995 the WTO replaced the GATT
• General Director: Pascal Lamy
• Has 153 members
• Is located in Geneva, Switzerland
• Website: www.wto.int

46. Objectives
• Restrict barriers to international trade
• Set a framework for trade policies
• Check global economic policy-making
• Supervise the implementation, administration and operation
of the covered agreements in the Rounds of negotiation
• Provide a forum for negotiations and for settling disputes
• Review the national trade policies
• Assist developing, least-developed and low-income countries
through technical cooperation and training
• Economic research and analysis

47. The International
Monetary Fund (IMF)
• Created in 1946
• Has 185 members
• Is located in Washington D.C., USA
• Managed by Dominique Strauss-Kahn
• Website: www.imf.org

48. Objectives
• Promote global monetary cooperation
• Guarantee financial stability
• Assist the equilibrated growth of international trade by
the creation of a multilateral payment system
• Follow global economic trends and performance
• Supply a forum for policy dialogue

49. The World Bank
• Created as a result of the Bretton Woods
Conference in 1944
• Preside by Robert Zoellick
• Has 186 members
• Located in Washington D.C., USA
• Website: www.worldbank.org

50. Objectives
• Reach development and improve living standards by reducing
poverty,hunger, illiteracy and desease
• Supply financial and technical support to developing countries
• Create infrastructure
• Develop financial systems
• Protect individual and property rights
• Implement legal systems that encourages business
• Combat corruption

51. Criticism
• Free trade leads to a divergence instead of convergence
of income levels within rich and poor countries
• Comercial issues takes priority over depelopment
• Financial aid is always bound to conditionalities and they
retard social stability
• They are run by a small number of economically
powerful countries

52. INTERNATIONAL INVESTMENT AND FINANCING

53. Environment at International Level
• the knowledge of latest
changes in forex rates
• instability in capital
market
• interest rate fluctuations
• macro level charges
• micro level economic
indicators
• savings rate
• consumption pattern
• investment behaviour of
investors
• export and import trends
• Competition
• banking sector
performance
• inflationary trends
• demand and supply
conditions etc.
International financial management practitioners
are required the knowledge in the following fields.

54. International financial manager will
involve the study of
• exchange rate and currency markets
• theory and practice of estimating future exchange rate
• various risks such as political/country risk, exchange
rate risk and interest rate risk
• various risk management techniques
• cost of capital and capital budgeting in international
context
• working capital management
• balance of payment, and
• international financial institutions etc.

55. Features of International Finance
• Foreign exchange risk
• Political risk
• Expanded opportunity sets
• Market imperfections

56. Foreign exchange risk
• In a domestic economy this risk is generally ignored
because a single national currency serves as the main
medium of exchange within a country.
• When different national currencies are exchanged for
each other, there is a definite risk of volatility in
foreign exchange rates.
• The present International Monetary System set up is
characterized by a mix of floating and managed
exchange rate policies adopted by each nation keeping
in view its interests.
• In fact, this variability of exchange rates is widely
regarded as the most serious international financial
problem facing corporate managers and policy makers.

57. Political risk
• Political risk ranges from the risk of loss (or gain) from
unforeseen government actions or other events of a
political character such as acts of terrorism to outright
expropriation of assets held by foreigners.
• For example, in 1992, Enron Development
Corporation, a subsidiary of a Houston based Energy
Company, signed a contract to build India’s longest
power plant. Unfortunately, the project got cancelled
in 1995 by the politicians in Maharashtra who argued
that India did not require the power plant. The
company had spent nearly $ 300 million on the project.

58. Expanded Opportunity Sets
• When firms go global, they also tend to
benefit from expanded opportunities which
are available now.
• They can raise funds in capital markets where
cost of capital is the lowest.
• The firms can also gain from greater
economies of scale when they operate on a
global basis.

59. Market Imperfections
• domestic finance is that world markets today
are highly imperfect
• differences among nations’ laws, tax systems,
business practices and general cultural
environments

60. Sources
• http://www.slideshare.net/hh_hjs/gatt-and-wto-foundation-
15827439
• http://www.slideshare.net/manoharprasad/4-international-
monetary-system-part-i?related=1
• http://www.slideshare.net/jprateekkundu/foreign-exchange-
marketfinal-pptmy-15743008
• http://www.slideshare.net/guest8aee8b2/international-
economic-institutions
• http://www.slideshare.net/guest8aee8b2/international-
economic-institutions?related=3
• http://www.slideshare.net/ramusakha/international-
financial-management-20245001