1. Session Trade Environment

2. Topic Outline Investment Policies Trade Policies FTA’s Trade Restrictions MFN Investment Promotion

3. Weekly Activity: Market Globalisation Factors Consider this: Market Globalization Drivers depend on the nature of customer behavior and the structure of channels of distribution. List down some common market drivers that would influence you to sell overseas. With each driver, explain your reasoning. This Session

4. What is International Trade? Importing: buying goods & services from other countries. Exporting: selling goods & services to other countries.

5. Topic Example Video The following video explains the benefits of trade and investment policies to those countries in most need. Take note of the key points. http://www.youtube.com/watch?v=FE2JNUz9src

6. Trade & Investment Policies Government policies are designed to regulate, direct, and protect national activities. The exercise of these policies is the result of national sovereignty, which provides a government with the right to shape the environment of the country and its citizens. The domestic policy actions of most governments aim to increase the standard of living of citizens and to improve the quality of life, and to achieve full employment. These policies affect international trade and investment indirectly.

7. In more direct ways, a country may also pursue technology transfer from abroad or the exclusion of foreign industries to the benefit of domestic infant firms. Government officials can also develop regulations on imports to protect citizens. Nations institute foreign policy measures designed with domestic concerns in mind but explicitly aimed to exercise influence abroad. A major foreign policy goal is national security. Trade & Investment Policies

8. Global Governance Politics/Peace- United Nations Trade- World Trade Organization (WTO) Money/Finance- International Monetary Fund (IMF) Development- World Bank Overall- G8 Nations (USA, Canada, UK, France, Germany, Italy, Japan, and Russia) Other international institutions/bodies

9. Institutions in International Trade World Economic and Trade Environment WTO, IMF, and World Bank in the World Economy Role of the organizations Easing trade restrictions Protest against globalization Multinationals in the global economy Role of American, European, Japanese, and Third World multinationals on a timeline |_______|________|_______|_______|_______|_______I 1950 1960 1970 1980 1990 2000 2010

10. Global Marketing Environment The International Trade System: Restrictions—tariffs, quotas, embargos, exchange controls, and nontariff trade barriers. The World Trade Organization and GATT: Helps trade—reduces tariffs and other international trade barriers. Regional Free Trade Zones: Groups of nations organized to work toward common goals in the regulation of international trade.

11. International Organizations International Trade Organization (ITO) General Agreement on Tariffs and Trade (GATT) World Trade Organization (WTO)

12. Topic Example Video The following video is an outline of the history of the WTO and GATT. Take note of the key points. http://www.youtube.com/watch?v=1Xp75Egtvi8

13. International Trade Organization In 1948, the ITO represented an agreement among 53 countries to: Aid in international commercial policies, restrictive business practices, commodity agreements, employment and reconstruction, and economic development and international investment. It developed a constitution for a new United Nations agency. The ITO was never implemented.

14. General Agreement on tariffs & trade GATT started in 1947 as a set of rules to ensure nondiscrimination, transparent procedures, the settlement of disputes, and the participation of the lesser-developed countries in international trade. GATT used tariff concessions to limit the level of tariffs that would be imposed on other GATT members. The Most Favored Nation clause calls for each member country to grant every other member country the same treatment that it accords with any other country with respect to imports and exports.

15. The GATT’s Beginning General Agreement on Tariffs and Trade Developed as part of the Havana, Cuba conference in 1947 Provided forum for trade ministers to discuss barriers to international trade

16. The Role of the GATT Goal: to promote a free and competitive international trading environment benefiting efficient producers Accomplished by sponsoring multilateral negotiations to reduce tariffs, quotas, and other nontariff barriers

17. The History of GATT

18. ©2004 Prentice Hall10-18 The History of GATT

19. Most Favored Nation (MFN) Principle Sought to ensure that international trade was conducted on a nondiscriminatory basis Requires that any preferential treatment granted to one country must be extended to all countries If the US cut the tariff on imports of British trucks to 20%, it also had to reduce tariffs on imported trucks from all other members to 20%

20. Topic Example Video The following video presents an example of the MFN Principle and the issues associated with such status as highlighted between Pakistan and India. Take note of the key points. http://www.youtube.com/watch?v=bdQoNAE6ZU4

21. Exceptions to the MFN Principle Members permitted to lower tariffs to developing countries without lowering them for more developed countries Generalized system of preferences in U.S. Tariff Code Regional arrangements promote economic integration (e.g., EU and NAFTA)

22. World Trade Organization (WTO) Headquartered in Geneva, Switzerland Began January 1, 1995 Included 146 members and 30 observer countries as of June 2003

23. The World Trade Organization The WTO was introduced in 1995 and administers international trade and investment accords. In 2002, the Dola Round ended the first stage of implementation. The aim is to further hasten implementation of liberalization to help the impoverished and developing nations.

24. Goals of the WTO Promote trade flows by encouraging nations to adopt nondiscriminatory, predictable trade policies Reduce remaining trade barriers through multilateral negotiations Establish impartial procedures for resolving trade disputes among members

25. 1. It sets many rules governing trade between its 132 members 2. 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 World Trade Organisation

26. Differences between WTO and GATT GATT focused on promoting trade in goods; WTO’s mandate includes trade in goods trade in services international intellectual property protection trade-related investment WTO’s enforcement powers are stronger

27. WTO Trading System Principles

28. WTO Challenges The Cairns Group Multifibre Agreement General Agreement on Trade in Services (GATS) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) Trade-Related Investment Measures Agreement (TRIMS)

29. Enforcement of WTO Decisions Country failing to live up to the agreement may have a complaint filed against it WTO panel evaluates complaint If found in violation, the country may be asked to eliminate the trade barrier If country refuses, WTO will allow complaining country to impose comparable trade barriers on the offending country

30. 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 stipulations that borrowing countries slash spending and impose controls to curb 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 to facilitate international trade 3.lend money to members in financial trouble Objectives of the IMF include: 1.stabilization of foreign exchange rates 2.establish convertible currencies to facilitate international trade 3.lend money to members in financial trouble

31. Topic Example Video The following video explains the history of the International Monetary Fund and the World Bank. Take note of the key points. http://www.youtube.com/watch?v=_xgxCf05Kmw

32. World Bank Group (WBG) 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; and 5. provide conciliation and arbitration of disputes between governments and foreign investors The functions of the WBG include:

33. Global Policy Environment Three major changes have occurred over time in the global policy environment: a reduction of domestic policy influence; a weakening of traditional international institutions; and a sharpening of the conflict between industrialized and developing nations.

34. Domestic Policy Influences Currency flows have increased from an average daily trade volume of $18 billion in 1980 to $1.2 trillion in 2001. As a result, currency flows have begun to set the value of exchange rates independent of trade, which in turn have now begun to determine the level of trade. The interactions between global and domestic financial flows have severely limited the influence of governments. To regain influence, some governments have tried to restrict world trade by erecting barriers, charging tariffs, and implementing import regulations.

35. International Institutions The intense links among nations and the new economic environment resulting from new market entrants and the encounter of different economic systems are weakening the WTO. The International Monetary Fund does not have the funds available to satisfy the needs of all struggling nations. The World Bank has been unsuccessful in furthering the economic goals of the developing world and newly emerging market economies. Some claim that its bank policies have created more poverty.

36. Free Trade Countries can buy and sell without any trade barriers or restricitions eg. customs duties being imposed. The 27 countries of the EU enjoy free trade. Note Norway & Sweden members of.....

37. Topic Example Video The following video provides an example of the differences between free trade and protectionism. Take note of the key points. http://www.youtube.com/watch?v=7njIlZ2xYq0

38. Conflict Between Nations In the past, it was hoped that the gap between industrialized and developing nations would gradually be closed. Although several less-developed nations have emerged as newly industrialized countries, even more nations are facing grim economic futures. An increase in environmental awareness has led to a further sharpening of the conflict.

39. Protectionism Countries try to stop foreign imports. Countries try to help their own businesses export. They do this by using trade barriers. Eg. Tariff, quota, embargo, subsidy.

40. Topic Example Video The following video international trade barriers and their effects on Australian businesses. Take note of the key points. http://www.youtube.com/watch?v=4B29axJbnG8

41. Protectionism and Trade Barriers Protectionism and Tariff Barriers Cost of protectionism: arguments for and against Nontariff Barriers: Quota and Import Licenses Domestic Subsidy and Economic Stimuli Standards and documentation requirements Boycotts and Embargoes Monetary barriers Antidumping Penalties

42. Trade Barriers 1. Tariff Is a tax that a coutry adds on to imports. Eg. customs duty/import duty. This makes imports dearer & less attractive to consumers.

43. 2. Quota Countries put a limit on the amount of a good that can be imported. Consumers then must by from indigenous businesses. The EU has a quota on the no. of Chinese garments it will allow into the EU.

44. 3. Embargo Countries puts a complete ban on goods being imported from a certain country. Consumers have no choice but to buy home produce. The USA has a trade embargo with Cuba. During apartheid Ireland had a trade embargo with South Africa.

45. 4. Subsidy Is a direct payment to a producer. It reduces the cost of production. It makes exports cheaper. It boosts employment. It improves the balance of trade. Eg. Irish farmers obtain direct farm payment from the EU.

46. Restrictions of Imports Many countries including the United States have passed antidumping laws which help domestic industries by restricting foreign products being sold below the cost of production, or at prices lower than those in the home market. Imports are also restricted by nontariff barriers, such as buy-domestic campaigns. It is difficult to remove these barriers. Imports can also be reduced by tightening market access and entry of foreign products through involved procedures and inspections.

47. Protectionism: Logic and Illogic Countries use protectionist measures to shield a country’s markets from intrusion by foreign competition and imports. Arguments for Protectionism include: 1.Maintain employment and reduce unemployment 2.Increase of business size 3.Retaliation and bargaining 4.Protection of the home market 5.Need to keep money at home 6.Encouragement of capital accumulation Arguments for Protectionism include: 1.Maintain employment and reduce unemployment 2.Increase of business size 3.Retaliation and bargaining 4.Protection of the home market 5.Need to keep money at home 6.Encouragement of capital accumulation

48. Protectionism: Logic and Illogic Arguments for Protectionism include: 7.Maintenance of the standard of living and real wages 8.Conservation of natural resources 9.Protection of an infant industry 10.Industrialization of a low-wage nation 11.National defense Arguments for Protectionism include: 7.Maintenance of the standard of living and real wages 8.Conservation of natural resources 9.Protection of an infant industry 10.Industrialization of a low-wage nation 11.National defense

49. Protectionism: Logic and Illogic 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

50. The Impact of Tariff (Tax) Barriers Tariff Barriers tend to Increase: 1. Inflationary pressures 2. Special interests’ privileges 3. Government control and political considerations in economic matters 4. The number of tariffs they beget via reciprocity

51. The Impact of Tariff (Tax) Barriers Tariff Barriers tend to Weaken: 1.Balance-of-payments positions 2.Supply-and-demand patterns 3.International relations (they can start trade wars)

52. The Impact of Tariff (Tax) Barriers Tariff Barriers tend to Restrict: 1.Manufacturer’ supply sources 2.Choices available to consumers 3.Competition

53. Six Types of Non-Tariff Barriers (2) Customs and Administrative Entry Procedures: 1.Valuation systems 2.Antidumping practices 3.Tariff classifications 4.Documentation requirements 5.Fees (2) Customs and Administrative Entry Procedures: 1.Valuation systems 2.Antidumping practices 3.Tariff classifications 4.Documentation requirements 5.Fees (1) Specific Limitations on Trade: 1.Quotas 2.Import Licensing requirements 3.Proportion restrictions of foreign to domestic goods (local content requirements) 4.Minimum import price limits 5.Embargoes (1) Specific Limitations on Trade: 1.Quotas 2.Import Licensing requirements 3.Proportion restrictions of foreign to domestic goods (local content requirements) 4.Minimum import price limits 5.Embargoes

54. Six Types of Non-Tariff Barriers (3) Standards: 1.Standard disparities 2.Intergovernmental acceptances of testing methods and standards 3.Packaging, labeling, and marking (3) Standards: 1.Standard disparities 2.Intergovernmental acceptances of testing methods and standards 3.Packaging, labeling, and marking (4) Government Participation in Trade: 1.Government procurement policies 2.Export subsidies 3.Countervailing duties 4.Domestic assistance programs (4) Government Participation in Trade: 1.Government procurement policies 2.Export subsidies 3.Countervailing duties 4.Domestic assistance programs

55. Six Types of Non-Tariff Barriers (5) Charges on imports: 1.Prior import deposit subsidies 2.Administrative fees 3.Special supplementary duties 4.Import credit discriminations 5.Variable levies 6.Border taxes (5) Charges on imports: 1.Prior import deposit subsidies 2.Administrative fees 3.Special supplementary duties 4.Import credit discriminations 5.Variable levies 6.Border taxes (6) Others: 1.Voluntary export restraints 2.Orderly marketing agreements (6) Others: 1.Voluntary export restraints 2.Orderly marketing agreements

56. Monetary Barriers In addition to the Six Types of Non-Tariff Barriers, monetary barriers are also used by countries Three types of monetary barriers include: 1.Blocked currency 2.Differential exchange rates 3.Government approval Three types of monetary barriers include: 1.Blocked currency 2.Differential exchange rates 3.Government approval

57. Effects of Import Restriction Import control may mean that the most efficient sources of supply are not available, resulting in second-best products or higher costs for restricted supplies. Import control may result in the downstream change in the composition of imports. Due to inefficiency, import controls may cause a lag in technological advancements.

58. Restrictions of Exports Nations control their exports for reasons of short supply, national security and foreign policy purposes, or the desire to retain capital. National security controls are placed on weapons and high-technology exports. Although restriction of exports is a valuable international relations tool, it may give a country’s firms the reputation of being unreliable suppliers and may divert orders to firms of other nations.

59. Export Promotion Export promotion is designed to help firms enter and maintain their position in international markets and to match or counteract similar efforts by other nations. Various approaches toward export promotion include: knowledge transfer direct or indirect subsidization of export activities reducing governmental red tape for exporters export financing and mixed aid credits to exporters altered tax legislation for nationals living abroad

60. Import Promotion Countries that maintain large balance-of-trade surpluses use import promotion measures. The Japan External Trade Organization (JETRO) has begun to focus on the promotion of imports to Japan.

61. FDI Impacts on Host Countries Positive Impact capital information technology and management skills transfer regional and sectoral development internal competition and entrepreneurship favorable effect on balance of payments increased employment Negative Impact industrial dominance technological dependence disturbance of economic plans cultural change interference by home government of multinational corporation

62. Restrictions on Investment Many nations that lack necessary foreign exchange reserves restrict exports of capital, because capital flight can be a major problem. Once governments impose restrictions on the export of funds, the desire to transfer capital abroad increases. This creates problems for gaining new outside investors.

63. Investment Promotion Fiscal Incentives Financial Incentives Nonfinancial Incentives

64. Topic Example Video The following video highlights how investment promotion can have a major benefit on a country. Take note of the key points. http://www.youtube.com/watch?v=ELEBmsNHu9g

65. Investment Promotion (cont.) Fiscal incentives are specific tax measures designed to attract the foreign investor, including special depreciation allowances, tax credits or rebates, special deductions for capital expenditures, tax holidays, and reduction of tax burdens. Financial incentives offer special funding for the investor by providing land or building, loans, and loan guarantees. Nonfinancial incentives can consist of guaranteed government purchases, special protection from competition, and investments in infrastructure facilities.

66. MNC & Host Country Bargaining Power Time Policy Provided/Demanded Incentives for Investment Continued Privileged Treatment Discriminating Requirements End of Relationship/ Divestment MNC

67. Trade and Investment Policies The U.S. seeks a positive trade policy rather than reactive, ad hoc responses to specific situations. Protectionist legislation can be helpful, provided it is not enacted into law. Trade promotion authority gives Congress the right to accept or reject treaties and agreements, but reduces the amendment procedures

68. From an international perspective, trade and investment negotiations must continue. In doing so, trade and investment policy can take either a multilateral or bilateral approach: bilateral negotiations are carried out mainly between two nations. multilateral negotiations are carried out among a number of nations. Trade and Investment Policies

69. Next Session Weekly Activity: The World Factbook What foreign market(s) will the company enter? Analysis of local demand, availability of resources Existing and potential competition, tariff rates, currency stability, investment barriers What expenditures are required to enter a new market? What is the best way to organize overseas operations? Good starting point for research: CIA’s World FactbookCIA’s World Factbook