1. The Dynamic Environment of International Trade
Chapter 2
The Dynamic Environment of International Trade
McGraw-Hill/Irwin
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.

2. Introduction
Proliferation of trade and emergence of the global economy
Intensification of global competition
More emerging markets
Developments in technology allow communications with global consumers and movement of goods

4. World Trade and U.S. Multinationals
Rapid growth of underdeveloped countries and new global marketing opportunities.
Rising living standards have created marketing opportunities for U.S. firms.
Resurgence of competition from all over the world has challenged the supremacy of American industry.
Newly industrialized countries (NICs) such as Brazil, Mexico, South Korea, Taiwan, Singapore, and Hong Kong have experienced rapid industrialization.
Economic power is more evenly distributed with growth of MNCs from other countries (see Exhibit 2-2) 3.

6. 21st Century: The First Decade and Beyond
With exception of China, slower economic growth in U.S. and other countries is currently evident.
Faster growth rates are expected in developing countries such as Brazil, China, India, Indonesia, and Russia.
More trade is expected in emerging markets, regional trade areas, and the established markets in Europe, Japan, and U.S.
Companies need to be more efficient, improve productivity, expand global reach, and respond quickly.
Greater growth in international sales is expected by smaller firms.

7. 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.

8. 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 investments abroad
new foreign investments in the U.S.
BP Receipts
costs of goods imported
spending by U.S. tourists overseas
new overseas investments
cost of foreign military and economic aid
BP Payments

9. Balance of Payments The BP includes three accounts:
(1) current account—a record of all merchandise exports, imports, and services plus unilateral transfers of funds;
(2) the capital account—a record of direct investment, portfolio investment, and short-term capital movements 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 in liabilities to foreign central banks.

11. United States Current Account Balance
Percent +

12. Balance of Payments and Exchange Rate
If a country’s expenditures consistently exceed its income, its standard of living falls.
Its exchange rate vis-à-vis foreign monies declines.
When foreign currencies can be traded for more dollars, U.S. products are less expensive for foreign customers and exports increase.
Simultaneously foreign products are more expensive for U.S. buyers and the demand for imported goods is reduced.

13. Fluctuating U.S. Currency Rates

14. Protectionism: Logic and Illogic
Countries use protectionist measures (legal barriers, exchange barriers and psychological barriers) to shield a country’s markets from intrusion by foreign competition and imports.
Arguments for Protectionism include:
maintain employment and reduce unemployment
increase of business size
retaliation and bargaining
protection of the home market
need to keep money at home
encouragement of capital accumulation
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

15. Protectionism: Logic and Illogic
Arguments 9-11 above are considered valid for protectionism
In general, protectionism contributes to industrial inefficiency and makes a nation uncompetitive
Protectionism is implemented through the imposition of trade barriers, which include tariff barriers and non-tariff barriers

16. Protectionist Practices
Trade Barriers
Tariffs - a government imposed tax on goods entering its borders.
Quotas - unit or dollar limit applied to a particular type of good.
Voluntary Export Restraints - an agreement on the volume a country will export to another country.
Boycott - government boycott is an absolute restriction against the purchase and importation of certain goods from other countries.
Standards
To protect health, safety and product quality.

17. Protectionist Practices
Monetary Barriers
Blocked currency - refusing to allow importers to exchange national currency for the sellers’ currency.
Differential exchange rate - exchange rate becomes more/less favorable depending upon whether the product is desired or not wanted as an import.
Government approval to secure foreign exchange - requires an exchange permit.
Antidumping Penalties
Prevent from selling products below cost in order to undermine competition.

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
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

19. 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.
The bill covers three areas for improving
U.S. trade:
market access,
export expansion, and
import relief

20. The Omnibus Trade and Competitiveness Act (OTCA) 1988
Market access - the act allows the U.S. president to restrict a country’s products in the U.S. market and place a ban on U.S. government procurement policies for nations who do so to the U.S.
Export expansion - the act made it easier for U.S. firms to export.
Import relief - provides a menu of remedies for U.S. businesses adversely affected by imports (e.g., companies can petition the government for temporary relief so that they can adjust to competition).

21. General Agreement on Tariffs
and Trade (GATT)
GATT created as an agency to serve as watchdog over world trade and provide a process to reduce tariffs
GATT also provided a mechanism to resolve trade disputes bilaterally
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.
3. GATT paved the way for the World Trade Organization

22. World Trade Organization (WTO)
Unlike GATT, the 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.

23. The International Monetary Fund (IMF)
IMF was created to assist nations in becoming and remaining economically viable.
It assists countries that seek capital for economic development and restructuring.
IMF loans come with stipulations that borrowing countries slash spending and impose controls to curb inflation.
It helps maintain stability in the world financial markets .
Objectives of the IMF include:
stabilization of foreign exchange rates
establish convertible currencies to facilitate international trade
lend money to members in financial trouble

24. World Bank Group (WBG)
The goal of the WBG is to reduce poverty and the improvement of living standards by promoting sustainable growth and investment in people.
The functions of the WBG include:
lending money to countries to finance development projects in education, health, and infrastructure;
providing assistance for projects to the poorest developing countries;
lending directly to the private sector in developing countries with long-term loans, equity investments, and other financial assistance;
provide investors with investment guarantees against “noncommercial risk,” so developing countries will attract FDI; and
provide conciliation and arbitration of disputes between governments and foreign investors.

25. Protests Against Global Institutions
In 1999 “anti-capitalist protestors” complained against the WTO, and IMF, over the unintended consequences of globalization that include:
environmental concerns
worker exploitation and domestic job losses
cultural extinction
higher oil prices, and
diminished sovereignty of nations