International Trade: The Dynamic Environment. Chapter 2

Chapter 2 The Dynamic Environm ent of Internationa l Trade Copyright © 2016 McGraw-Hill...

Chapter 2 The Dynamic Environm ent of Internationa l Trade Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objectives (1 of 2) 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. 2 No reproduction Learning Objectives (2 of 2) LO6 The importance of GATT and the World Trade Organization LO7 The emergence of the International Monetary Fund and the World Bank Group Copyright © 2016 McGraw-Hill Education. All rights reserved. No 3 reproduction or Trade Barriers  Barriers to trade are one of the major issues confronting international marketers  They can be tariff or nontariff barriers  Countries continue to use nontariff barriers for a variety of reasons  Tariff barriers have reduced considerably in recent years Copyright © 2016 McGraw-Hill Education. All rights reserved. 4 No reproduction Balance of Trade (1  of 2) 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 $160 billion in 1987  Trade deficit peaked in 2007, with the continued weakness in the U.S. dollar  A positive consequence of the global financial crisis in 2008 in the United States was the halving of the U.S. trade Copyright deficit © 2016 during McGraw-Hill 2009 Education. No reproduction from its high in 2007 5 All rights reserved. or distribution without the prior written consent of McGraw-Hill Balance of Trade (2 of 2)  The continuing integration of the countries of the European Union, the creation of NAFTA and the American Free Trade Area (AFTA), and the rapid evolution of the Asia-Pacific Economic Cooperation Conference (APEC) are the beginnings of global trading blocks that many experts expect to dominate trade patterns in the future.  Smaller companies are using novel approaches to marketing and seeking ways to apply their technological expertise to exporting goods and services not previously Copyright © 2016 McGraw-Hill Education. All rights reserved. 6 sold abroad. or distribution No reproduction without the prior written consent of McGraw-Hill Balance of Payments (1 of 5)  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  TheCopyright © 2016 McGraw-Hill Education. All rights reserved. BP is maintained No reproduction on a double-entry 7 or distribution without the prior written consent of McGraw-Hill Balance of Payments (2 of 5)  The assets and liabilities or the credits and debits must offset each other  When they balance, it does not mean a nation is in particularly good or poor financial condition  A balance of payments is a record of condition, not a determinant of condition  Each of the nation’s financial transactions with other countries is reflected in its balance of payments Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction 8 or distribution without the prior written consent of McGraw-Hill Balance of Payments The BP is the difference between receipts and payments (3 of 5) 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. economic aid No reproduction 9 or distribution without the prior written consent of McGraw-Hill Balance of Payments (4 of 5)  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 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. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction 10 or distribution without the prior written consent of McGraw-Hill Balance of Payments (5 of 5)  When the wealth of a country whose expenditures exceed its income has been exhausted, that country, like an individual, must reduce its standard of living.  If its residents do not do so voluntarily, the rates of exchange of its money for foreign monies decline, and through the medium of the foreign exchange market, the purchasing power of foreign goods is transferred from that country to another. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction 11 or distribution without the prior written consent of McGraw-Hill Protectio nism  The reality of trade is that this is a world of tariffs, quotas, 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 Copyright © 2016 McGraw-Hill Education. All rights reserved. 12 No reproduction or distribution without the prior written consent of McGraw-Hill Arguments for Protectionism (1 of 2)  Protection of an infant industry  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  Industrialization of a low-wage nation Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction 13 or distribution without the prior written consent of McGraw-Hill Arguments for Protectionism (2 of 2)  Maintenance of employment and reduction of unemployment  National defense  Enhancement of business size  Retaliation and bargaining Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction 14 or distribution without the prior written consent of McGraw-Hill Trade Barriers  Governments establish tariffs and a variety of nontariff barriers To encourage development of domestic industry To protect existing industry Include quotas, boycotts, monetary barriers, and market barriers Against imports and against foreign businesses Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction 15 or distribution without the prior written consent of McGraw-Hill The Impact of Tariff (Tax) Barriers (1 of 2)  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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction 16 or distribution without the prior written consent of McGraw-Hill The Impact of Tariff (Tax) Barriers (2 of 2)  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: Manufacturers’ supply sources Choices available to consumers Competition Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction 17 or distribution without the prior written consent of McGraw-Hill Six Types of Nontariff Barriers  (1 of 3) (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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction 18 or distribution without the prior written consent of McGraw-Hill Six Types of Nontariff Barriers (2 of 3)  (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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction 19 or distribution without the prior written consent of McGraw-Hill Six Types of Nontariff Barriers  (3 of 3) (5) Charges on Imports: Prior import deposit subsidies Administrative fees Special supplementary duties Import credit discriminations Variable levies Border taxes  (6) Others: Voluntary export Copyright © 2016 McGraw-Hill Education. All rights reserved. restraints No reproduction or distribution without the prior written consent of McGraw-Hill 20 Quotas and Import Licenses  A quota is a specific unit or dollar limit applied to a particular type of good.  As a means of regulating the flow of exchange and the quantity of a particular imported commodity, countries often require import licenses.  The fundamental difference between quotas and import licenses as a means of controlling imports is the greater flexibility of import licenses over quotas. Quotas permit importing until the quota is filled; licensing limits Copyright © 2016 quantities McGraw-Hill Education. on a case-by-case All rights reserved. 21 No reproduction or distribution without the prior written consent of McGraw-Hill Voluntary Export Restraints  Similar to quotas are the voluntary export restraints (VERs) or orderly market agreements (OMAs).  A VER is called voluntary because the exporting country sets the limits; however, it is generally imposed under the threat of stiffer quotas and tariffs being set by the importing country if a VER is not established. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction 22 or distribution without the prior written consent of McGraw-Hill Boycotts and Embargoes  A government boycott is an absolute restriction against the purchase and importation of certain goods and/or services from other countries.  An embargo is a refusal to sell to a specific country.  A public boycott can be either formal or informal and may be government sponsored or sponsored by an industry. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction 23 or distribution without the prior written consent of McGraw-Hill Monetary Barriers  A government can effectively regulate its international trade position by various forms of exchange-control restrictions may enact such restrictions to preserve its balance-of- payments position specifically for the advantage or encouragement of particular industries Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction 24 or distribution without the prior written consent of McGraw-Hill Two Types of Monetary Barriers  Blocked currency: Blockage is accomplished by refusing to allow importers to exchange its national currency for the sellers’ currency  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. This encourages the importation of goods the government deems desirable Copyright © 2016 and McGraw-Hill Education. No reproduction discourages All rights reserved. 25 or distribution without the prior written consent of McGraw-Hill Standa rds  Nontariff barriers of this category include standards to protect health, safety, and product quality.  The standards are sometimes used in an unduly stringent or discriminating way to restrict trade, but the sheer volume of regulations in this category is a problem in itself. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction 26 or distribution without the prior written consent of McGraw-Hill Antidumping Penalties  Historically, tariffs and nontariff trade barriers have impeded free trade, but over the years, they have been eliminated or lowered through the efforts of the GATT and WTO.  Antidumping laws were designed to prevent foreign producers from “predatory pricing,” a practice whereby a foreign producer intentionally sells its products in another country for less than the cost of production to undermine the competition and take control ofCopyright the ©market. 2016 McGraw-HillThis barrier Education. No reproduction was intended as a27 All rights reserved. or distribution without the prior written consent of McGraw-Hill  The Omnibus Trade and Competitiveness Act (OTCA) ofMany 1988 (1 ofare countries 2)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 injustices in trade practices.  It dealt with trade deficits, protectionism, and the overall fairness of our trading partners. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction 28 or distribution without the prior written consent of McGraw-Hill  The Omnibus Trade and Competitiveness Act (OTCA) ofCovers 1988 (2 areas three of 2)for improving U.S. trade: market access export expansion import relief Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction 29 or distribution without the prior written consent of McGraw-Hill 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 Consultation shall be the primary method used to solve global trade problems Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction 30 or distribution without the prior written consent of McGraw-Hill General Agreement on Trade in Services (GATS)  GATS was the first multilateral, legally enforceable agreement covering trade and investment in the services sector.  It provides a legal basis for future negotiations aimed at eliminating barriers that discriminate against foreign services and deny them market access.  Specific market-opening concessions from a wide range of individual countries were achieved, and provision was made for continued negotiations to liberalize telecommunications Copyright © 2016 McGraw-Hill Education.and All rightsfinancial reserved. services 31 No reproduction or distribution without the prior written consent of McGraw-Hill Trade-Related Investment Measures (TRIMs)  It established the basic principle that investment restrictions can be major trade barriers and therefore are included, for the first time, under GATT procedures. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction 32 or distribution without the prior written consent of McGraw-Hill  Trade-Related Aspects of Intellectual Property Rights (TRIPs) The TRIPs agreement establishes substantially higher standards of protection for a full range of intellectual property rights (patents, copyrights, trademarks, trade secrets, industrial designs, and semiconductor chip mask works) than are embodied in current international agreements, and it provides for the effective enforcement of those standards both internally and at the border. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction 33 or distribution without the prior written consent of McGraw-Hill World Trade Organization (WTO) Unlike GATT, WTO is an institution, not an agreement  It sets many rules governing trade between its 160 members  WTO provides a panel of experts to hear and rule on trade disputes between members, and, unlike GATT, issues binding decisions Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction 34 or distribution without the prior written consent of McGraw-Hill WTO (1 of 2)  The Internet exposed protected industries to global competition  WTO was established January 1, 1995 through the Uruguay round of GATT (1986–1993)  Statutory powers to adjudicate trade disputes Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction 35 or distribution without the prior written consent of McGraw-Hill WTO (2 of 2)  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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction 36 or distribution without the prior written consent of McGraw-Hill 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 assisting countries that are seeking economic Copyright © 2016 McGraw-Hill Education. All rights reserved. development and restructuring No reproduction 37 or distribution without the prior written consent of McGraw-Hill The World Bank (1 of 2)  The World Bank Group has five institutions, each of which performs the following services: lending money to the governments of developing countries to finance development projects in education, health, and infrastructure providing assistance to governments of the poorest developing countries (per capita incomes of $925 or less) for developmental projects lending directly to help strengthen the Copyright © 2016 McGraw-Hill Education. All rights reserved. private sector in developing countries with No reproduction or distribution without the prior written consent of McGraw-Hill 38 The World Bank (2 of 2) providing investors with investment guarantees against “noncommercial risk,” such as expropriation and war, to create an environment in developing countries that will attract foreign investment promoting increased flows of international investment by providing facilities for the conciliation and arbitration of disputes between governments and foreign investors; it also provides advice, carries out research, and produces publications in the area of foreign investment law Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction 39 or distribution without the prior written consent of McGraw-Hill Summ ary  Heightened competition around the world has created increased pressure for protectionism from every region at a time when open markets are needed if world resources are to be developed and utilized in the most beneficial manner.  Free international markets help underdeveloped countries become self-sufficient.  The changing economic and political realities are producing unique business structures that continue to protect certain major industries.  The future of open global markets lies with the controlled and equitable reduction of trade barriers. Copyright © 2016 McGraw-Hill Education. All rights reserved. 40 No reproduction or distribution without the prior written consent of McGraw-Hill