3. The Dynamic Environment of International Trade.pdf

The Dynamic Environment of International Trade PREPARED BY: PROF. JAM A. MAGALANG, LPT, MBE Global Perspective – Trade Barriers Japan has had so many trade barriers and high tariffs that U.S. manufacturers are unable to sell in Japan as much as Japanese companies sell in the United St...

The Dynamic Environment of International Trade PREPARED BY: PROF. JAM A. MAGALANG, LPT, MBE Global Perspective – Trade Barriers Japan has had so many trade barriers and high tariffs that U.S. manufacturers are unable to sell in Japan as much as Japanese companies sell in the United States. Every country seems to take advantage of the open U.S. market while putting barriers in the way of U.S. exports. The French not only do these barriers and high tariffs limit how much U.S. companies can sell, they also raise prices on the imported products so that the products cost much more in France than they do in the United States. Global Perspective Great Britain – most foods are exempt from the value-added tax (VAT), but Pringles from P&G, potato chips (known there as crisps) and "similar products made from the potato, or from potato flour." are taxable. Chinese government began restricting sales of rare earth metals to the United States, Japan, and the European Union. Global Perspective Barriers to trade, whatever form they take, both tariff and nontariff, are one of the major issues confronting international marketers. Nations continue to use trade barriers for a variety of reasons: some rational, some not so rational. In recent years tariffs and nontariff barriers generally have been reduced to record lows. However, the election of nationalistic leaders around the world is beginning to slow this effort, threatening to reduce the prosperity and peace achieved through free international trade. Global Perspective Countries continue to emerge in markets internationally. More of the world's people, from the richest to the poorest, will participate in the world’s growing prosperity through global trade. The emerging global economy brings us into worldwide competition, with significant advantages for both marketers and consumers. Marketers benefit from new markets opening and smaller markets growing large enough to become viable business opportunities. Global Perspective Bound together by burgeoning international communications media and global companies consumers in every corner of the world are demanding an ever-expanding variety of goods and services. Eg. iPhone Shipped from China to US (components and labor) World trade is an important economic activity. Global Perspective Because of this importance, the inclination is for countries to attempt to control international trade to their own advantage. As competition intensifies, the tendency toward protectionism gains momentum. If the benefits of the social, political, and economic changes now taking place are to be fully realized, free trade must prevail throughout the global marketplace. The creation of the World Trade Organization (WTO) is one of the biggest victories for free trade in history. Global Perspective It is quite clear that China is the United States's biggest trade problem; the imbalance of trade U.S. imports from China include a majority of parts actually made in other countries. A prominent example is Apple's products, assembled in and imported from China. The iPhone includes parts made in several other countries. Trade balance statistics are greatly distorted, particularly with respect to China. Apple iPads (2017) shipped to the United States from China alone amounted to approximately $8 billion of America's reported trade deficit. The Twentieth to the Twenty-First Century More economically interdependent, have greater opportunities for international trade, and have greater potential for increased demand than at any time in modern economic history. The first half of the 20th century was marred by a major worldwide depression. The last half, free of war, struggles on democratic capitalists to economic development. Traditional trade patterns were disrupted. The Twentieth to the Twenty-First Century After WW2, United States set out to infuse the ideal of capitalism throughout as much of the world as possible. Rebuilding Europe, financial and industrial development assistance to rebuild Japan, and funds channeled through the Agency for International Development and other groups designed to foster economic growth in the underdeveloped world were used to help create a strong world economy. The Twentieth to the Twenty-First Century The benefits of the foreign economic assistance given by the United States flowed both ways for every dollar the United States invested in the economic development and rebuilding of other countries after World War II, hundreds of dollars more returned in the form of purchases of Us agricultural products, manufactured goods, and services. **Marshall Plan to assist rebuilding, financial and industrial development channel through Agency for International Development The Twentieth to the Twenty-First Century The major economic boom and increased standard of living the United States experienced after World War Il were fueled by fulfilling pent up demand in the United States and the demand created by the rebuilding of war-torn countries of Europe and Asia. In short, the United States helped make the world's economies stronger, which enabled them to buy more from us. The Twentieth to the Twenty-First Century World leaders created GATT (General Agreement on Tariffs and Trade) , a forum for member countries to negotiate a reduction of tariffs and other barriers to trade. The forum proved successful in reaching those objectives. With the tariffcation of the Uruguay Round agreements, the GATT became part of the World Trade Organization (WTO) in 1995, and its 117 original members moved into a new era of free trade. **The General Agreement on Tariffs and Trade (GATT), signed in 1947 by 23 countries, is a treaty minimizing barriers to international trade.** World Trade and US Multinationals The rapid growth of war-torn economies and previously underdeveloped countries, coupled with large-scale economic cooperation and assistance, led to new global marketing opportunities. Rising standards of living and broad-based consumer and industrial markets abroad created opportunities for American companies to expand exports and investment worldwide. World Trade and US Multinationals Multinational corporations (MNCs) were facing maior challenges on two fronts: (1) resistance to direct investment (2) increasing competition in export markets. **A multinational corporation (MNC) is a company that has business operations in at least one country other than its home country and generates revenue beyond its borders. World Trade and US Multinationals Multinational corporations (MNCs) were facing major challenges on two fronts: (1) resistance to direct investment (2) increasing competition in export markets. **A multinational corporation (MNC) is a company that has business operations in at least one country other than its home country and generates revenue beyond its borders. World Trade and US Multinationals Competition arose on all fronts; Japan, Germany, most of the industrialized world, and many developing countries were competing for demand in their own countries and looking for world markets as well. Countries once classified as less developed were reclassified as newly industrialized countries (NICs). Eg. Various NICs such as Brazil, Mexico, South Korea, Taiwan, Singapore, and Hong Kong experienced rapid industrialization in select industries and became aggressive world competitors in steel, shipbuilding, consumer electronics, automobiles, light aircraft, shoes, textiles, apparel, and so forth. World Trade and US Multinationals In addition to the NICs, developing countries such as Venezuela, Chile, and Bangladesh established state-owned enterprises (SOEs) that operated in other countries. Economic power and potential have become more evenly distributed among countries **Economic power is the ability of a country to influence the global or regional economy. Economic power is usually a result of its economic size. It is also the basis of economic growth. Economic power is related to the country's purchasing power. World Trade and US Multinationals In addition to the NICs, developing countries such as Venezuela, Chile, and Bangladesh established state-owned enterprises (SOEs) that operated in other countries. Economic power and potential have become more evenly distributed among countries **Economic power is the ability of a country to influence the global or regional economy. Economic power is usually a result of its economic size. It is also the basis of economic growth. Economic power is related to the country's purchasing power. World Trade and US Multinationals Japan's restrictive trade practices. The United States, a strong advocate of free trade, was confronted with the dilemma of how to encourage trading partners to reciprocate with open access to their markets without provoking increased protectionism. In addition to successfully pressuring Japan to open its markets for some types of trade and investment, the United States was a driving force behind the establishment of the WTO. World Trade and US Multinationals By the last decade of the 20th century, profound changes in the way the world would trade were already under way. NAFTA (North American Free Trade Agreement) was an agreement that created a free trade area between the three major countries in North America: the United States, Canada, and Mexico. American Free Trade Area (AFTA), Asia-Pacific Economic Cooperation Conference (APEC) - all of Asia is now controlled and managed by Asians for the first time in 400 years. Beyond the First Decade of the Twenty-First Century 1990s the growth in US slowed dramatically The Organization for Economic Cooperation and Development (OECD) estimates that the economies of member countries will expand an average of 3 percent annually for the next 25 years As a consequence, economic power and influence will move away from industrialized countries-Japan, the United States, and the European Union-to countries in Latin America, eastern Europe, Asia, and Africa. Beyond the First Decade of the Twenty-First Century For one thing, the level and intensity of competition will change as companies focus on gaining entry into or maintaining their position in emerging markets, regional trade areas, and the established markets in Europe, Japan, and the United States. Global companies are not the only ones aggressively seeking new market opportunities. Smaller companies are using novel approaches to marketing and seeking ways to apply their technological expertise to exporting goods and services not previously sold abroad. Balance of Payments When countries trade, financial transactions among businesses or consumers of different nations occur. Products and services are exported and imported, monetary gifts are exchanged, investments are made, cash payments are made and cash receipts received, and vacation and foreign travel occur. In short, over a period of time, there is a constant flow of money into and out of a country. Balance of Payments The system of accounts that records a nation's international financial transactions is called its balance of payments. Statement of records all financial transactions between its residents and those of the rest of the world during a given period of time It is maintained by double-entry bookkeeping system, it always must be balanced Each of the nation's financial transactions with other countries is reflected in its balance of payments. Balance of Payments It presents an overall view of its international economic position and its important measure used by treasuries, central banks, and other government agencies whose responsibility is to maintain external and internal economic stability. Balance of Payments A balance of payments included three accounts: 1. The 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. Protectionism International business executives understand the reality that this is a world of tariffs, quotas, and nontariff barriers designed to protect a country's markets from intrusion by foreign companies. Although the World Trade Organization has been effective in reducing tariffs, countries still resort to measures of protectionism. **Protectionism refers to government policies that restrict international trade to help domestic industries. Protectionist policies are usually implemented with the goal of improving economic activity within a domestic economy but can also be implemented for safety or quality concerns.  Protection Logic and Illogic Countless reasons to maintain government restrictions on trade are espoused by protectionists, but essentially all arguments can be classified as follows: (1) protection of an infant industry, (2) protection of the home market, (3) need to keep money at home, (4) encouragement of capital accumulation, (5) maintenance of the standard of living and real wages, Protection Logic and Illogic (6) conservation of natural resources, (7) industrialization of a low-wage nation, (8) maintenance of employment and reduction of unemployment, (9) national defense. (10) enhancement of business size, and (11) retaliation and bargaining. Economists in general recognize as valid only the arguments regarding infant industry, national defense, and industrialization of underdeveloped countries.  Protectionism The two big breakthroughs in free trade in those years for the United States were (1) the North American Free Trade Agree:nent (NAFTA) in 1994 and (2) the granting of Permanent Normalized Trade Relationship (PINTR) for China in 2000. China's entry into the World Trade Organization (WTO) in 2001 followed the next year. Protectionism Example: - US considering cutting tariffs on imported running shoes. However they go opposite, they cut imports of solar panels from China, 2012. - New Balance US - $10/hour Vietnam – 45c/hour US wants to import more of its US design shoes from Vietnam so consumers could pay lower prices. Trade Barriers To encourage development of domestic industry and protect existing industry, governments may establish such barriers to trade as U.S. tariffs and a variety of nontariff barriers. Barriers are imposed against imports and against foreign businesses. Tariffs and a variety of nontariff barriers including quotas, boycotts, monetary barriers, and market barriers Tariffs A tariff, simply defined, is a tax imposed by a government on goods entering at its borders. Tariffs may be used as revenue-generating taxes or to discourage the importation of goods, or for both reasons. Types of customs duties 1) ad valorem duties, which are based on a percentage of the determined value of the imported goods; 2) specific duties, a stipulated amount per unit weight or some other measure of quantity; and 3) a compound duty, which combines both specific and ad valorem taxes on a particular item-that Tariffs Tariffs are a type of trade barrier imposed by countries in order to raise the relative price of imported products compared to domestic ones. Tariffs typically come in the form of taxes or duties levied on importers and eventually passed on to end consumers. They're commonly used in international trade as a protectionist measure, with the aim of advantaging domestic producers and raising revenue. International trade increases the number of goods that domestic consumers can choose from, decreases the cost of those goods through increased competition, and allows domestic industries to ship their products abroad. While all of these effects seem beneficial, it has been argued that free trade isn't beneficial to all parties. Quotas and Import Licenses A quota is a specific unit or dollar limit applied to a particular type of good. Quotas put an absolute restriction on the quantity of a specific item that can be imported. The main 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 quantities on a case-by-case basis. Voluntary Export Restraints Similar to quotas are the voluntary export restraints (VERs) or orderly market agreements (OMAs). VER is an agreement between the importing country and the exporting country for a restriction on the volume of exports. 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. Boycotts and Embargoes A boycott is an absolute restriction against the purchase and importation of certain goods and/or services from other countries. This restriction even can include travel bans. An embargo is a refusal to sell to a specific country. Eg. Boycott - Nestlé products were boycotted by a citizens' group that considered the way Nestlé promoted baby formula in less developed countries misleading to mothers and harmful to their babies. Embargo - US continue to impose trade sanctions on Russia, North Korea, and Iran Monetary Barriers Two such barriers are blocked currency and government approval requirements for securing foreign exchange. (1) Blocked currency - Blockage is accomplished by refusing to allow an importer to exchange its national currency for the sellers' currency. (2) Government approval - all foreign exchange transactions to be approved by a central minister. **Such policies cause major cash flow problems for the importer and greatly increase the price of imports. Clearly, these currency-exchange barriers constitute a major deterrent to trade. Standards Nontariff barriers of this category include standards to protect health safety, and product quality. The standards sometimes are 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. Antidumping Penalties Antidumping laws were designed to prevent foreign producers from "predatory pricing." a practice whereby a foreign producer intentionally sells its products in the United States for less than the cost of production to undermine the competition and take control of the market. Violators are assessed "antidumping" duties for selling below cost and/or "countervailing duties" to prevent the use of foreign government subsidies. Domestic Subsidies and Economic Stimuli Stimuli. Agricultural subsidies in the United States" and Europe have long been the subject of trade complaints in developing countries. Example, Malaysia limited the number of ports that could accept inbound goods, Easing Trade Restrictions The Omnibus Trade and Competitiveness Act of 1988 is many faceted, focusing on assist and Competitiveness Acting businesses to be more competitive in world markets as well as on correcting perceived injustice in trade practices.