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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 tradefollowing World War II

2. The importance of balance-of-payment figures

to a country’s economy

3. The effects of protectionism on world trade

4. The seven types of trade barriers



Chapter Learning Objectives

5. The importance of GATT and the World TradeOrganization

6. Introduction to EU

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 or

Distribution

6. Geography andInfrastructure

Foreign Environment(Uncontrollables)

7. Structure of Distribution

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

Fi f teen years from now the

world’s third greatest industrial

power, just after the United States and Russia, may no t be

Europe, bu t American indus try in

Europe.J.S. Servan Schreiber : Le Defi Amer ican, 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 economy

Intensification of global competition

More emerging markets

Developments in technology allow communications withglobal consumers and movement of goods



World Trade and U.S. Multinationals

1. Rapid growth of underdeveloped countriesand 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 werecontrolled tightly by protectionism laws



World Trade and U.S. Multinationals

1. Rebirth of competition from all over the worldchallenged the supremacy of American industry

2. Newly industrialized countries (NICs) such asBrazil, Mexico, South Korea, Taiwan, Singapore,and Hong Kong experienced rapidindustrialization

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

4. Establishment of the WTO

5. Integration of European Union countries6. Creation of NAFTA, AFTA, and APEC



21st Century: The First Decade and Beyond

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

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

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

Companies need to be more efficient, improveproductivity, expand global reach, and respond

quickly.

Greater growth in international sales expected bysmaller 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 internationalfinancial 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 Payments

The 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

home country

BP Receipts

•costs of goods imported.

•spending by home country

tourists overseas.•new overseas investments.

•cost of foreign military and

economic aid.

BP Payments



Balance of Payments

The BP includes three accounts:

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

(2) the capital account — a record of direct investment, portfolioinvestment, and short-term capitalmovements 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 inliabilities to foreign central banks;



Balance of Payments and Exchange Rate

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

2. Its exchange rate vis-à-vis foreign monies declines

3. When foreign currencies can be traded for more Rupees,Indian products are less expensive for foreign customers andexports increase

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



Protectionism: Logic and illogic

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

Arguments for Protectionism include:

1. maintain employment and reduce unemployment.

2. increase of business size, and3. 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 industry10. industrialization of a low-wage nation11.national defense



Protectionism: Logic and Illogic

In general, protectionism contributes to industrialinefficiency and makes a nation uncompetitive

Arguments 9-11 above are considered valid forprotectionism

Protectionism is implemented through theimposition 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 systems

2. 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 limits

5. Embargoes




(3) Standards:

1. Standard disparities2. Intergovernmental acceptances of testing

methods and standards3. Packaging, labeling, and marking

(4) Government Participation in Trade:1. Government procurement policies

2. Export subsidies3. Countervailing duties4. Domestic assistance programs




(5) Charges on imports:

1. Prior import deposit subsidies2. Administrative fees3. Special supplementary duties4. Import credit discriminations5. Variable levies

6. Border taxes

(6) Others:

1. Voluntary export restraints2. Orderly marketing agreements



Monetary Barriers

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

Three types of monetary barriers include:

1. Blocked currency: Blockage is accomplished by refusingto 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 anddiscourages importation of goods the government does notwant by adjusting the exchange rate. The exchange rate for

importation of a desirable product is favorable and vice-versa3. Government approval: In countries where there is a

severe shortage of foreign exchange, an exchange permitto import foreign goods is required from the government

G l A t T iff



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 commercialmeasures 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 132members

1. 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 agreement

E U i (EU) E i



European Union (EU) – Economic

& Political Integration

• expansion – deepening and broadeningintegration – 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




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




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

A i ti f S th t A i N ti



Association of Southeast Asian Nations

(ASEAN)

Brunei

Indonesia

Laos

Malaysia

Myanmar

Philippines

Singapore

Thailand

Vietnam

A i ti f S th t A i N ti



Association of Southeast Asian Nations

(ASEAN) + 3

Brunei

Indonesia

Laos

Malaysia

Myanmar

Philippines

Singapore

Thailand

Vietnam

Japan

S. Korea

China



Asia-Pacific Economic Cooperation (APEC)

Australia

Brunei

Canada

Chile

China

Hong Kong

Indonesia

Japan

South Korea

Malaysia

Mexico

New Zealand

Papua New Guinea

Peru

Philippines

Russia

Singapore

Taiwan

Thailand

U.S.A.

Vietnam



North American Free-Trade Area (NAFTA)

Canada

United States

Mexico



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 conditions that borrowing countries

reduce spending and impose controls to limit 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 tofacilitate international trade

3. lend money to members in financialtrouble



World Bank Group (WBG)

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.

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; and5. 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:

1. environmental concerns

2. worker exploitation and domestic job losses

3. cultural extinction

4. higher oil prices, and

5. diminished authority of nations

6 - dynamic environment of international trade

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