International Trade PDF

INTERNATIONAL TRADE UNIT 1:THEORIES OF INTERNATIONAL TRADE INTERNATIONAL TRADE MEANING International trade is the exchange of goods and services as well as resources between Countries. - BENEFITS OF INTERNATIONAL TRADE International trade provides powerful stimulus to econ...

INTERNATIONAL TRADE UNIT 1:THEORIES OF INTERNATIONAL TRADE INTERNATIONAL TRADE MEANING International trade is the exchange of goods and services as well as resources between Countries. - BENEFITS OF INTERNATIONAL TRADE International trade provides powerful stimulus to economic growth, reduced monopolies, ettficient deployment of productive resources, wider choice of products, increasing competition, greater stimulus to innovative services, export diversification, greater bonds among countries, human resource development, increased use of automation, supports technological change, stimulates innovation. r DEMERITS OF INTERNATIONAL TRADE International trade is not egually beneficial to all nations. Economic exploitation, substantial environnmental damage and exhaustion of natural resources, Contagious trade cycles affect international trade, complex due to too much rules and regulations and high risks. IMPORTANT THEORIES OF INTERNATIONAL TRADE THE MERCANTILISTS' VIEW OF INTERNATIONAL TRADE Mercantilism policy advocates that national wealth and power can be increased by increasing exports in exchange of precious metals (like Gold, silver) and reducing imports by imposing heavy import tariffs. - THEORY OF ABSOLUTE COST ADVANTAGE BY ADAM SMITH Trade between two countries would be mutually beneficial if one country could produce one commodity at absolute advantage over the other country and the other country could, in turn, produce another commodity at an absolute advantage over the first. THE THEORY OF COMPARATIVE ADVANTAGE BY DAVID RICARDO Acountry would can benefit from trading according to its comparative advantage-exporting goods in which its absolute advantage was greatest and importing goods in which its absolute advantage was comparatively less. THEHECKSCHER-OHLIN THEORY/ MODERN THEORY OF TRADE/ FACTOR ENDOWMENT THEORY Countries well-endowed with capital such as factories and machinery should export capital intensive products and vice-versa. GLOBALISATION AND NEW INTERNATIONAL TRADE THEORY BY PAUL KRUGMAN World trade between the developed and bigger developing economies such as Brazil, Russia, India, China and South Africa (BRICS), which trade in similar products take place to enjoy economies of scale and network effects. UNIT 2: THE INSTRUMENTS OF TRADE POLICY TRADE POLICY º Itincludes all instruments that governments may use to promote or restrict imports and exports. º Tvpes of Instruments of Trade Policy are price-related measures (Tariffs) and non-price/non tariff measures (NTMS). TARIFFS MEANING Tax imposed at the border on goods going from one customs territory to another.  AIMS OFTARIFES Tarittsaimed at altering the relative prices of goods and services imported, leaving the world tarketpriceofthe good unaflected, while raisingthe price in domestic market, to raise revenue torthe,government and to protect the domestic import-competingindustries. FORMSOFIMPORT TARIFFS }. SpeciticTariis (tixed duty as per physical unit or weight or measurement of the commodity). valorem Taritt (duty levied as a fixed percentage of the value of the traded commodity). Other Variations of these tariffs are: " Mixed Tariffs (duty levied on the basis of value or aunit of measure of the imported goods- whichever is higher or lower), Compound Tariffs (hybridl of ad valorenm and specific tariff). Torhnical Tariffs (tariff on the components of imported goods). Tariff Rate Quotas (TRQS): Imports entering below the quantitative threshold are subject to lower (sometimes zero) tariff rate and a higher-tariffs rates for imports above the quantitative threshold.. Most-Favoured Nation (MEN) Tariffs: Import tariffs imposed on imports from other members of the World Trade Organisation (WTO), unless the country is part of apreferential trade agreement. Preferential Tariff: Countries levy lower tariffs than their MFN rate. Bound Tariff: AWTO member binds itself with alegal commitment not to raise tariff rate above a certain level. Applied Tariffs: It is the duty that is actually charged on imports on a MFN basis. Escalated Tariff: System wherein the nominal tariff rates on imports of manufactured goods are higher than the nominal tariff rates on intermediate inputs and raw materials. " Prohibitive Tariff: Aprohibitive tariff is one that is set so high that no imports can enter. " Import subsidies: An import subsidy is simply a payment per unit or as a percentage of value for the importation of a good (i.e., a negative import tariff). Tariffs as response to Trade Distortions/ Trigger-price mechanisms: Quick responses ofaffected importing countries upon confirmation of trade distortion to off-set the distortion. For example, Anti-dumping duties. Anti-dumping duties: Protectionist tariff that a domestic government imposes on foreign imports that it believes are priced below fair market value. Countervailing Duties: Tariffs to offset the artificially low prices charged by exporters who enjoy export subsidies and tax concessions offered by the governments in their home country. r EFFECTS OF TARIFFS lariff creates obstacles totrade, reduces imports, reduces consumer surplus, protects domestic industries, increases producer surplus, increases employment, income of people and the revenue of the government. NON-TARIFF MEASURES (NTMs) rMEANING Policy measures, other than ordinary customs tariffs, that can potentialy have an economic effect on international trade in goods,changing quantities traded, or prices or both. NTMS ARE CATEGORIZED AS: Technical measures (product specific properties) hon-iechnical measures (trade requirements)  FURTHER CLASSIFICATION control measures). Hard measures(for examples price and quality Threat measures (anti-dumping & Safeguard). investment neasures). finance & Oher measures (trade-related Import-related nneasures. Export-related measures. transportation, testing). " Procedural Obstacles (PO) broblensrelated to administration, e TECHNICAL MEASURES INCLUDES human, animal, plant &bi0-diversity). *Sanitary and Phytosanitarv (SPS) Measures (protect standardsand technical regulations). Techical Barriers to Trade (TBT)mandatory NON-TECHNICAL MEASURES º Import Quotas (Quantitativerestrictions on imported good). * Price Control Measures (Non-tariffs measures that increase the cost of imports by a fixed percentage or by a fixed amount). Non-Automatic Licensing and Prohibitions (Textiles may be allowed only on a discretionary license by the importing country). Financial Measures (regulotions related to payments, terms of payment, foreign exchange). Measures affecting competition (granting exclusive privileges to economic operators). Government Procurement Policies (rules on localcontent requirements-25% of components of automobiles to be sourced domestically). r Distribution Restrictions (limitations imposed on the distribution of goods in the importing country). º Restrictions on Post-sales services (restrictions for providing after-sales services for exported goods in the importing country). Administrative Procedures (Costly and time-consuming administrative procedures for imports). Rules of origin (criteria needed by governments of importing national source ofa product). countries to determine the Safeguard Measures (Initiatives taken by the country to domestic country is injured). restrict imports temporarily if Embargos (total ban imposed by the government on import & zFORMS OF IMPORT QUOTA exports of certain commodities). Binding Quota (quotas are typically set below the Non-Binding Quota (quota set at or above the freefreelevel trade level of imports by issuing of imports). licenses). Absolute Quotas (Quotas of permanent level during a specified period nature that limit the quantity of condition is attached to the country of the imports can take place at anyimports of time and to a specified time of the year. No origin). Seasonal/ Tariff-rate Quotas (temporary 8 EXPORT-RELATED MEASURES quotas with the mentioned > Ban on country allocation). Exports (complete prohibition of exports of certain Export taxes (Taxes on exported º Export Subsidies and goods). commodities). promote exp ts). Incentives (Special benefits like tax rebates on exported goods to  y Export Restraints (VERS) (informal quota restraining the quantity of goods that can be administered by an exporting time). exported out of that country countrya during UNIT 3:TRADE NEGOTIATIONS RDENEGOTLATIONS whee eresentatives trom difterent countries (national hbying groups, pressure groups and NGOs) engage in governments, money interest beneticial terms discussions and agreements to egarding the exchange of goods and services across borders. RAGONAL TRADE AGREEMENTS (RTAs) MEANING ngs of Countries (not necessarily belonging to same geographical region), which are barriers to trade between member countries. RTA is atreaty between two or NgOvements detine the rules of trade for all signatories. NPES OFRTAS Inilateral Trade Agreements: Importing count1y offers trade incentives to exporting ountr.Bilateral Trade Agreements: Agreements that set rules of trade between two countries. wo blocs or a bloc. BesionalPreferential Trade Agreements: Agreements between countries or regions that itate trade by reducing or eliminating certain barriers within the specified geographic area. themselves and Trading Bloc: Group of countries having a free trade agreement between countries. may appy a common external tarift to other between themselves and.Free-Trade Area: Group of countries have a free trade agreement independently decide distinct external tariff for non-members. " Customs Union: Group of countries having a free trade agreement between themselves and countries. maintain acommon external tariff to other eliminating internal tariffs on goods, maintaining a " Common Markets: Group of countries institutional arrangements. common set of external tariffs and common members share a common currency. " Economic & monetary Union: The TARIFFSAND TRADE (GATT) e THE GENERAL AGREEMENT ON reduction agreement signed in 1947 regulating trade among 153 countries for Multilateral trade covering international trade in goods. for Trade in Goods of tariffs and other trade barriers Council agreement is the responsibility of the The working of the GATT committees consisting of member countries dealing with specitic (Goods Council) having 10 Goods Council and Information Technology Agreement (ITA) Subjects. GATT reports to the Committee. the 1980s because: The GATT lost its relevance byfast-evolving scenario contemporary complex world trade It was obsolete to the characterized by emerging globalization, at liberalizing agricultural trade were not successful,exploited, Efforts " ambiguities in the multilateral system could be heavily System. " The structure and dispute settlement Inadequacies in institutional THE ESTABLISHMENT OF WTO THE URUGUAY ROUND AND foundation of WTO, Roundlaidthe luly 1. 1995. of º In December 1993, the eighth roundcountries Uruguay April 15, 1994 andtook effect on on º The agreement was signed by most replacing GATT: WTO was established on 1 Ian, 1995 rules of trade e WTO(WORLD TRADE ORGANIZATION) International Organisatjon dealing withby bulk of the Global neotated & signed 2. MEANING: The WTO is the only the WTO greements, between nations. Atits heart are 405 www.escholars.in  parliaments. The principle objective of WTO is to world's trading nations &ratified intheir freely, fairly &predictably. facilitate the flow of internationalItrade smoothly - KEY OBJECTIVES OF WTO Set and enforce rules for international trade. liberalization. negotiating & monitoringfurther trade To provide aforum for To resolve trade disputes. proCess. " To increase the transparency of decision-making economic institutions involved in glohal international 10 cooperate with other maior economic management. trading system. the global To helpdeveloping countries benefit fully from º THE STRUCTURE OF WTO Secretariat located in Geneva, headed by a Director " The WTOactivities are supported by a General. Ministerial Conference , the General It has a three-tier system of decision making: the Property (TRIPS) Council Council and The Goods Council, Services Council & Intellectual report to the General Council. r THE GUIDING PRINCIPLES OF WTO Most-Favoured Nation (MFN): Same treatment (same policies) for all trading partners. National Treatment: Once a product or service has entered a market, foreign and domestic entities should be treated equally without discrimination. º OVERVIEW OF THE WTOAGREEMENTS Freer Trade Gradually, through negotiation: Reduction or elimination of barriers that restrict the free flow of goods &services between countries. Predictability through binding & transparency: Many WTO agreements require governments to disclose their policies &practices publicly within the country or by notifying the WTO. The regular surveillance of national trade policies through the Trade policy Review Mechanism provides a further means of encouraging transparency. Promoting fair competition: WTO involves system of rules dedicated to open, fair & undistorted competition. Encourages development &economic reform: Promoting fair && open trade, providing mechanisms for dispute resolution &assisting developing Countries in building their Capacity to participate in global economy. WTOAGREEMENTS WTO agreements covers goods, services and intellectual property and the permitted exceptions. These agreements are often called as WTO trade rules. Agreement on Agriculture: Improving agricultural trade in terms of market access, domestic support and export subsidies. Agreement on the Application of Sanitary &Phyto-Sanitary Measures: Rules related to planning, adoption &implementation of SPS measures. Agreement on Textiles &Clothing replaced the Multi-Fibre Arrangement (MFA) aimed to phase out the use of all barriers on the trade of textiles & Agreement on Technical barriers to Trade (TBT): clothing among WTO members. Aims to prevent standards and conformity assessment systems from becoming unnecessary trade transparency &harmonization with international standards. barriers by securing thelr Agreement on Trade-Related Investment Measures (TRIMS): border investments. Rules related to cross Anti-dumping Agreement: Rules and procedures to prevent anti-dumping Customs valuation agreement: Rules for customs valuation and activities. valuation systems on an intermational basis by aims to harmonize custonts Agreement on Pre-Shipment eliminating arbitrary valuation Systems. shipment inspection,including Inspection (PS): Intends to secure transparency of pre a mechanism for the agencies &exporters. solution of disputes between  Agreement on Rules of Origin: It rules of origin committee. includes dispute settlement " Agreement on Import licensing Procedures: procedures &creates the for imports. Agreement on Subsidies & simplification of administrative procedures Countervailing Meásures: It regulates the use of theactions that can be taken to counteract their Agreements on safeguards: rules ad1verse effects on foreign trade.subsidies and " General Agreement on Trade in regarding safeguard measures. most favoured nation treatment &Services (GATS): Rules regarding trade in as Agreement on Trade-Related aspects transparency. services such of Intellectual favoured nation treatment & national treatment dispute Property Rights (TRIPS): Most intellectual properties. settlement procedure for Trade Policy Review Mechanism (TPRM): Provides the review nechanism to conduct periodical reviews of the procedures for the trade policy Plurilateral Trade Agreements: Multilateral member's trade policies &practices. Negotiations are those the entire WTO contracting parties. It involves several Countries with anegotiations involving do not involve all WTO Countries. common interest but THE DOHAROUND The Doha Round, formally the Doha Development Agenda which is the ninth round since the second world war was officially launched at the WTO's fourth Ministerial Conference in Doha, Oatar in November 2001 for major modifications of the international trade system through lower trade barriers and revised trade rules. The negotiations include 20 areas of trade including agriculture, services trade, market access for non-agricultural products, trade in services, trade facilitation, environment geographical indicators &certain intellectual property issues with controversial topic was agriculture trade. G-20ECONOMIES: FACILITATING TRADE Australia. G-20 consists of 19 countries & European Union. The member countries are Argentina, Mexico, Russia, Saudi Arabia, Brazil,Canada, China, France, Germany, India, Indonesia, Italy, Japan,States. South Africa,South Korea, Turkey,the United Kingdom &the United UNIT 4: EXCHANGE RATE & ITS ECONOMICEFFECTS zEXCHANGE RATE one country exchanges for the currency of another Exchange rate is the rate at which the currency of country. EXCHANGE RATE < QUOTATIONS OF FOREIGN local currency CURRENCY QUOTATION/ DIRECT QUOTE: Number of units of a º EUROPEAN exchangeable for one unit of foreign currency. QUOTE: Number of units of a foreign QUOTATION/ INDIRECT AMERICAN CURRENCY local currency. currency exchangeable for one unit of FOREIGN EXCHANGE RATE < METHODS TO DETERMINE FIXED EXCHANGE RATE SYSTEM It includes devaluation set by government policy. currencies is PXCNange rate between two of domesticcurrency in comparison to foreign currency)and (government reduces the value speculation (opposite of devaluation). Investment risks, less revaluation international trade & " It eliminates exchange rate risks, investment. encourages SCope, controls inflation, foreign FREE-FLOATING EXCILANGE RATE SYSTEM foreign exchange &Supply of P forces of demandfor " Exchange rate is fixed through free bank interference). &central eXChang (No government 407  keep foreign exchange reserves, high risk Government need not to is self-regulating, scope of speculation.; unpredictability, MANAGED FLOAT SYSTEM affectsforeign trade determined through free forces of involvseedly. due to adver Foreign exchange rate is demand & Government andcentral bank may interfere Exchange. RATE Supply of foreign TYPES OF EXCHANGE to NOMINAL EXCHANGE RATE: Exchange rate used find the domestic price of foreign goods. Exchange Rate x omestic price index > REAL EXCHANGE RATE: Nominal Foreign price index REAL EFFECTIVE EXCHANGE RATE (REER): Nominal effective exchange rate deflator. divided by a price THEFOREIGN EXCHANGE MARKET It is a network of commercial banks, brokers, foreign exchange dealers etc. which deals &selling of foreign exchange. It includes current as well as future transactions. with buying DETERMINATION OF NOMINAL EXCHANGE RATE The exchange rate is decided at a point where the demand for foreign exchange is onuvnl. supply of it. x IMPACTS OF EXCHANGERATE FLUCTUATIONS ON DOMESTIC ECONOMY Conseguences of depreciation of currency: ncreases the exports and decreases imports, growth E the domesticeconomy, increases the foreign debt burden and vice versa in case of apnreciatiot currency. UNIT 5: INTERNATIONAL CAPITAL MOVEMENTS FOREIGN CAPITAL Any inflow of capital into the home country from abroad. Foreign aid or assistance, borrowing, deposits from NRI, foreign direct investment & foreign portfolio investment are its components. z TYPES OF FOREIGN CAPITAL º FOREIGN DIRECT INVESTMENT (FDI): Purchase and direct control of real assets in home country by foreign investors. It includes - Vertical Investment: Investment in different business activity which existing major business activity in his home country. supplements the Conglomerate Investment: Investment in business operation not related to existing business activity in his home country. Horizontal investment: Investment in same business activity as the activity in hiS note country. FOREIGN PORTFOLIO INVESTMENT (FPD: Purchase and indirect control of domesticcountry by foreign investor. financial assets t & REASONS FOR FDI Profits, high rate of return, possible large-scale economies, risk diversification, retention of trade patents, capture of emerging markets, low host country environmental and labour standards, by passing of non-tariff and tariff barriers, cost effective availability of needed inputs and tax and investment incentives. K HOST COUNTRY DETERMINANTS Economic Determinants OF FDI Market - Seeking FDI: Policy Framework Market size &per capita Economic, political &social stability. Market growth. income. Rules regarding entry &operations.affiliates. Standards of treatment of foreign  regional& global markets. o Antry-specific to ess consumer preferences. Structure of markets, Asset.seeking FDI: Resource Raw or materials. Policieson functioning &structure of markets (e.g, regarding competition, International agreements on mergers). u unskilledlabour: Low-cost Aailability. ofskilledlabour. FDIPrivatization and other policy. pehnological,innovative Created Trade policies &coherence of FDl and trade brandnames). (Cg, Physical ssets infrastructure. policies. Eiciency-seekingFDI: Tax policy. Business Facilitation ofphysical8 human resources &assets Investment promotion (including image Costs adjustment for includingan. productivity). building and investment-generating activities ocherinput costs (e.g., intermediate products, and investment-facilitation services). ransportcosts). Investment incentives. Membership of country in a regional "Hassle costs" (related to corruption and integration agreement, which could be administrative efficiency). conducive to forming regional corporate Social amenities (e.g, bilingual schools, networks. quality of life). After-investment services. COUNTRY DISCOURAGES INFLOW OF FOREIGN INVESTMENTS FACTORSIN THE HOST poor literacy, low labour skills, rigidity wfrastructure lags, high rates of inflation, BOP deficits, unfavourable tax regime, complex legal he labour market, bureaucracy & corruption,prevalence of non-tariff barriers quotas, stringent bormalities & delays, small size of market, investors, general spirit of friendliness towards foreign Pooulations, language barriers, lack of a technical, administrative personnel and employment of foreign lack offacilities for immigration, security of life &property. MODESOF FDI in equity injection, acquiring a controlling interestand associate company, investments Opening of a subsidiary or mergers & acquisitions, Joint Venture, green field existing foreign company, anbrownfield investments. COUNTRY BENEFITS OF FDI TO HOST development, environment, economic growth & competitive reforms, overall º Generates favourable political reforms &structural revenue, weak domestic monopolies, º Promotes FDI ancillary units, source of new tax Promotion of FDI human resources development. FDI/ISSUES/DRAWBACKS RELATED TO WITH PROBLEMS ASSOCIATED POTENTIAL of natural Z TO HOST COUNTRY employment status, exploitation excessive capital-intensive hampers the adverse commodity's terms of trade, advertising DXCeSSive use of possible environmental damage, skillsand ability, aggressive production & Tesources and the demand only lower level of distorted pattern of jobs that distortions, Toutine management practices cause market and anti-competitive Investment and regional disparities. INDIA The INVESTMENTSIN resource for economic development. more