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The Dynamic Environment of International Trade

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1 The Dynamic Environment of International Trade
Chapter 2

2 Learning Objectives LO1 The basis for the reestablishment of world trade following World War II LO2 The importance of balance-of-payment figures to a country’s economy LO3 The effects of protectionism on world trade LO4 The several types of trade barriers LO5 The provisions of the Omnibus Trade and Competitiveness Act LO6 The importance of GATT and the World Trade Organization LO7 The emergence of the International Monetary Fund and the World Bank Group

3 Trade Barriers Barriers to trade are one of the major issues confronting international marketers They can be tariff or non-tariff barriers Countries continue to use non-tariff barriers for a variety of reasons Tariff barriers have reduced considerably in recent years Whether it is legislation regarding Pringles being the same potato chips in the UK and causing additional value added taxes for P&G or what percentage of California Rice can be mixed with “inferior” Japanese rice and still be labeled California Rice, these are examples of non-tariff trade barriers that can be used to prevent the easy entry of foreign companies into the country.

4 Media, global communications and technology has allowed world trade to flourish and expand in recent years. As Exhibit 2.1 illustrates, world trade is an important economic activity. Increased competition also leads to increased protectionism. The creation of the World Trade Organization (WTO) is one of the biggest advancement for free trade among countries. Trade statistics such as those listed in Exhibit 2.1 have often served to focus the attention of government officials around the world. We should however, view this data with caution. For example, although it is evident that the imbalance of trade is the biggest with China for the United States. However, often U.S. imports from China include a majority of parts made in other countries. The parts of the majority of computers assembled in China (Lenovo for example) are made in surrounding countries like Taiwan. Exhibit 2.1 Top Ten 2011 U.S. Trading Partners ($ billions, merchandise trade) 2-4

5 Over the past 30 years, U.S. dominance in export markets has diminished as Japan, Germany, and a number of newly industrialized countries such as South Korea and China have taken a larger share of world exports. Similarly, the industrialized nations of Germany, France, and the United Kingdom, faced a decline in world market share of largest corporations. This decline in the position of the U.S. and other industrialized countries was a relative decline, reflecting the faster economic growth of several other countries, particularly in Asia. 2-5

6 World Trade and U.S. Multinationals
Dominance of U.S. multinationals in the 1950s and 1960s Large investments by U.S. companies in Europe and Latin America Concern in Latin America resulting in expropriation of direct U.S. investments In Europe, there was strong public demand to limit foreign investment The threat felt by Europeans was best expressed in the popular book The American Challenge, published in 1968, in which the French author J. J. Servan-Schreiber wrote: “Fifteen years from now it is quite possible that the world’s third greatest industrial power, just after the United States and Russia, will not be Europe but American Industry in Europe. Already, in the ninth year of the Common Market, this European market is basically American in organization.” Servan-Schreiber’s prediction did not come true for many reasons as described in the following slides.

7 Source: Complied from annual reports of listed firms, 2012
The relative importance of U.S. multinational corporations (MNCs) after World War II declined where U.S. multinationals compete with strong corporations from Japan, Western Europe, Asia and many developing countries such as China and Mexico. This is forcing U.S. MNCs to examine new ways to remain competitive. From the 1960s to 2011, the U.S. moved from being the world's dominant industrial power to accounting for only 29 of the world’s 100 largest corporations (see Exhibit 2.3).  Countries once classified as less developed were reclassified as newly industrialized countries (NICs). NICs such as Brazil, Mexico, South Korea, Taiwan, Singapore, and Hong Kong went through experienced rapid industrialization in specific industries such as steel, shipbuilding, consumer electronics, auto mobiles, light aircraft, shoes, textiles, apparel, and more. In short, economic power and potential became more evenly distributed among countries and Servan-Schreiber warning to Europe about U.S. multinational domination did not come close to becoming true. Source: Complied from annual reports of listed firms, 2012 2-7

8 Exhibit 2.3 The Nationality of the World’s 100 Largest Industrial Corporations (size measured by annual revenues) Source: “2011 Global 500,” Fortune, , 2012. 2-8

9 Balance of Trade The balance of merchandise trade also reflected the changing role of the United States in world trade Between 1888 and 1971, the United States had a favorable balance of trade By 1971, the United States had a trade deficit of $2 billion that grew to at $160 billion in 1987 Trade deficit peaked in 2007, with the continued weakness in the U.S. dollar The positive consequence of the global financial crisis in 2008 in the United States was the halving of the U.S. trade deficit during 2009 from its high in 2007 Favorable balance of trade means that the U.S. sold more to other countries than it bought from them.

10 Balance of Payments When countries trade there are financial transactions among businesses or consumers of different nations Money constantly flows into and out of a country The system of accounts that records a nation’s international financial transactions is called its balance of payments (BP) It records all financial transactions between a country’s firms, and residents, and the rest of the world usually over a year The BP is maintained on a double-entry bookkeeping system As barriers to the free flow of goods, services, and capital have fallen over time, and as other countries increased their shares of world output, non-U.S. firms increasingly began to invest across national borders. If we look 20 years into the future, most forecasts now predict a rapid rise in the share of world output accounted for by developing nations such as China, India, Indonesia, Thailand, South Korea, Mexico, and Brazil, and a corresponding decline in the share of rich industrialized nations such as Great Britain, Germany, Japan, and the United States. The World Bank, for example, has estimated that if current trends continue, by 2020 the Chinese economy could be larger than that of the United States, while the economy of India will approach that of Germany. The World Bank also estimates that today's developing nations may account for more than 60 percent of world economic activity by 2020, while today's rich nations, which currently account for over 55 percent of world economic activity, may account for only about 38 percent by 2020. As these trends continue and economies become closely tied with each other, one way to impact the inflow of goods and services into the domestic market is through the use of protectionism. The Balance of Payments and it reflects the economic position of the country. The more protectionist a country is, it imports less and exports more and that is reflected in its Balance of Payments as a surplus. The U.S. has had a negative balance of payments in recent years and the country that accounts for a large portion of this deficit is China. This can be explained by the fact that a lot of the consumer goods sold in the United States are manufactured and imported into the United States and the amount of goods and services exported from the U.S. into China is relatively small.

11 Balance of Payments The BP is the difference between receipts and payments Receipts merchandise export sales. money spent by foreign tourists. transportation. payments of dividends and interest from FDI abroad. new foreign investments in the U.S. Payments costs of goods imported. spending by U.S. tourists overseas. new overseas investments. cost of foreign military and economic aid. 2-11

12 Balance of Payments A balance-of-payments statement includes three accounts the current account, a record of all merchandise exports, imports, and services plus unilateral transfers of funds the capital account, a record of direct investment, portfolio investment, and short-term capital movements to and from countries; and 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. Of the three, the current account is of primary interest to international business.

13 Exhibit 2.4 U.S. Current Account by Major Components, 2011 ($ billions)
2-13

14 Exhibit 2.6 What Would One U.S. Dollar Buy?
As the U.S. trade deficit has increased in magnitude, there is pressure to devalue the dollar. When foreign currencies can be traded for more dollars, it makes U.S. products less expensive for foreign customers and this increases exports But, foreign products become more expensive for U.S. customers. Exhibit 2.6 What Would One U.S. Dollar Buy? Source: The Wall Street Journal, 2012 2-14

15 Protectionism The reality of trade is this is a world of tariffs, quotas, and nontariff barriers and nontariff barriers designed to protect a country’s markets from foreign investment Although the World Trade Organization has been effective to some extent in reducing tariffs, countries still resort to measures of protectionism Countries use legal barriers, exchange barriers, and psychological barriers to restrict the entry of unwanted goods The complex distribution system in Japan, is a good example of a market structure creating a barrier to trade. Most recently the United States and other countries have accused China of keeping the value of its currency artificially low to boost exports and limit exports.

16 Arguments for Protectionism
maintain employment and reduce unemployment increase of business size, and retaliation and bargaining protection of the home market need to keep money at home encouragement of capital accumulation

17 Arguments for Protectionism
maintenance of the standard of living and real wages conservation of natural resources protection of an infant industry industrialization of a low-wage nation national defense

18 The Impact of Tariff (Tax) Barriers
Tariff Barriers tend to increase: Inflationary pressures Special interests’ privileges Government control and political considerations in economic matters The number of tariffs they beget via reciprocity

19 The Impact of Tariff (Tax) Barriers
Tariff Barriers tend to weaken: Balance-of-payments positions Supply-and-demand patterns International relations (they can start trade wars) Tariff Barriers tend to restrict: Manufacturer’ supply sources Choices available to consumers Competition

20 Six Types of Non-Tariff Barriers
(1) Specific Limitations on Trade: Quotas Import Licensing requirements Proportion restrictions of foreign to domestic goods (local content requirements) Minimum import price limits Embargoes (2) Customs and Administrative Entry Procedures: Valuation systems Antidumping practices Tariff classifications Documentation requirements Fees

21 Six Types of Non-Tariff Barriers
(3) Standards: Standard disparities Intergovernmental acceptances of testing methods and standards Packaging, labeling, and marking (4) Government Participation in Trade: Government procurement policies Export subsidies Countervailing duties Domestic assistance programs

22 Six Types of Non-Tariff Barriers
(5) Charges on imports: Prior import deposit subsidies Administrative fees Special supplementary duties Import credit discriminations Variable levies Border taxes (6) Others: Voluntary export restraints Orderly marketing agreements

23 Three Types of Monetary Barriers
Blocked currency: Blockage is accomplished by refusing to allow importers to exchange its national currency for the sellers’ currency. 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 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

24 The Omnibus Trade and Competitiveness Act (OTCA) 1988
Many countries are allowed to trade freely with the United States but do not grant equal access to U.S. products in their countries. To ease trade restrictions, the OTCA focused on correcting perceived injustice in trade practices. It dealt with trade deficits, protectionism, and the overall fairness of our trading partners.

25 The Omnibus Trade and Competitiveness Act (OTCA) 1988
Covers three areas for improving U.S. trade: market access, export expansion, and import relief

26 General Agreement on Tariffs and Trade (GATT)
Covers three basic areas: trade shall be conducted on a nondiscriminatory basis; protection shall be afforded domestic industries through customs tariffs, not through such commercial measures as import quotas; and consultation shall be the primary method used to solve global trade problems.

27 World Trade Organization (WTO)
Unlike GATT, WTO is an institution, not an agreement It sets many rules governing trade between its 132 members WTO provides a panel of experts to hear and rule on trade disputes between members, and, unlike GATT, issues binding decisions

28 WTO The Internet exposed protected industries to global competition
WTO was established January 1, 1995 through the Uruguay round of GATT ( ) Statutory powers to adjudicate trade disputes

29 WTO Permanent international organization
New legal and institutional foundation Platform for trade relations: collective debate, negotiation and adjudication Dispute settlement faster Evolution of GATS, TRIMS, TRIPS The World Trade Organization (like its predecessor GATT) is primarily responsible for regulating world trade and making sure nation-states adhere to the rules laid down in trade treaties signed by WTO member states. 147 nations that collectively accounted for 97 percent of world trade are members of the WTO, thereby giving the organization enormous scope and influence. The WTO is also responsible for facilitating the establishment of additional multinational agreements between WTO member states. Over its entire history, and that of the GATT before it, the WTO has promoted the lowering of barriers to cross-border trade and investment. In doing so, the WTO has been the instrument of its member states, which have sought to create a more open global business system unencumbered by barriers to trade and investment between countries. Without an institution such as the WTO, the globalization of markets and production is unlikely to have proceeded as far as it has. It is interesting to see the history of WTO’s dispute resolution among countries. See the “Banana Wars” (http://news.bbc.co.uk/2/hi/business/ stm) dispute that has been ongoing for over 16 years and the resolution in the case for an example of the role of the WTO and the type of disputes that it has ruled on. Immediately after the Banana Wars ruling, the EU filed a complaint with the WTO against the U.S. that establishing Foreign Sales Corporations (http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds108_e.htm) gives the U.S.an undue tax advantage and should not be allowed to make the playing field level for all countries.

30 The IMF and the World Bank
The International Monetary Fund (IMF) and the World Bank Group are two global institutions created to assist nations in becoming and remaining economically viable. These organizations play important roles in international trade: by helping maintain stability in the financial markets and by assisting countries that are seeking economic development and restructuring The International Monetary Fund (IMF) and the World Bank were both created in 1944 by 44 nations that met at Bretton Woods, New Hampshire. The task of the IMF was to maintain order in the international monetary system, and that of the World Bank was to promote economic development. In the 60 years since their creation, both institutions have emerged as significant players in the global economy. The World Bank is the less controversial of the two sister institutions. It has focused on making low-interest-rate loans to cash-strapped governments in poor nations that wish to undertake significant infrastructure investments (such as building dams or roads). The IMF is often seen as the lender of last resort to nation-states whose economies are in turmoil and currencies are losing value against those of other nations. Frequently, in the recent past, for example, the IMF has bailed out governments of troubled nation states, including Argentina, Indonesia, Mexico, Russia, South Korea, Thailand, and Turkey.

31 Protests Against Global Institutions
Beginning in 1999, what some are calling “anticapitalist protesters” began to influence the workings of the major global institutions such as the WTO. The basic complaint against the WTO, IMF, and others is unintended consequences of globalization: such as damage to the environment, sweat shops, domestic job losses, cultural extinction, higher oil prices, and diminished sovereignty of nations. The protest in Seattle, WA in 1999 during a WTO meeting got a lot of attention followed by protests during World bank/IMF meetings in Washington in 1999 and in Prague in The protest groups, have over time affected policy. For example, “antisweatshop” campaigns, mostly in America and mostly student-led, have had effects beyond college campuses. Given the successes associated with the generally peaceful efforts to influence policy of global institutions, we can expect more of the same in the future. 2-31


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