Topic 1-Overview of International Trade and Ownership Structures PDF

TOPIC 1 AN OVERVIEW OF INTERNATIONAL TRADE Growth and Direction of Trade International trade: Exchange of goods and services across national boundaries International Trade requires the least commitment of/ risk to the companies’ resources. A firm can use intermediaries It is an inexpens...

TOPIC 1 AN OVERVIEW OF INTERNATIONAL TRADE Growth and Direction of Trade International trade: Exchange of goods and services across national boundaries International Trade requires the least commitment of/ risk to the companies’ resources. A firm can use intermediaries It is an inexpensive way of testing a product’s acceptance in the market before investing in foreign production facilities.  Growth in Trade The weakness of trade in 2015 was due to a number of factors, including an economic slowdown in China, a severe recession in Brazil, falling prices for oil and other commodities, and exchange rate volatility (WTO, 2015-16). Source: WTO (https://data.wto.org/)  Importance of Trade Trade allows manufacturers and distributors to seek out products and services from other countries Trade helps acquire low cost merchandise (not necessarily low quality) Trade provides consumers with a variety of goods and services Trade increases incomes and employment (see examples) Example 1: The number of US jobs supported by exports ($2.2 trillion) reached 9.8 million in 2012. Example 2: A survey of 3032 small and medium sized manufacturing firms in Canada (during 1994-1997) shows the association of exports to increase in jobs. Example 3: Exporters in the US pay wages that are 6% higher than non- exporters.  Exports Vs Imports Imports are associated with loss of jobs (plant closings, production cutbacks due to competition). Export job generation effect is about 7.5% larger than the import job loss effect. Imports also have a positive effect on wages through their positive effects on productivity.  Determinants of Exports Trade and exchange rate regime Presence of an entrepreneurial class Efficiency-enhancing government policy Secure access to transport and marketing services Determinants of Import Demand High per capita incomes Price of imports Exchange rates Government restrictions Availability of foreign currency (in the case of developing countries) Volume and Direction of Trade Volume of trade: The volume of world exports in 2012 was over four times what it was in 1990 and approached 19 trillion U.S dollars. Some of the major factors for this increase include increased incomes due to the expanding middle class in many countries, trade liberalization and new technologies that assist in the physical integration of world markets. Dependence on Trade Larger countries (in terms of population) tend to depend less on trade than small ones. Larger countries such as the US or Japan tend to have a more diversified economy that enables them to produce many products and services locally. Value and Direction of Trade The Value of World trade: $ 18 trillion (merchandise exports); $4 trillion (export of services) Direction of trade: Industrial countries account for the largest share (52 percent) of world merchandise trade. Their share (value) declined from 69 percent in 1995 to 52 percent in 2011. Trends in Global Exports Steady growth in the role of developing nations, especially emerging economies. Increasing levels of trade among developing nations. B: International & Regional Agreements Affecting Trade The GATT and WTO GATT – provisional agreement (1945) pending the creation of an International Trade Organization (ITO). The ITO draft charter, which was the result of trade negotiations at the Havana Conference of 1948, never came into being due to the failure of the U.S. Congress to approve it. The GATT and the WTO Principal objectives of the GATT / WTO: Nondiscrimination: Members must be treated in the same way with respect to import- export duties and charges. Trade liberalization: Sponsorship of periodic conferences to reduce trade barriers. Settlement of trade disputes Trade in goods and services: The WTO rules were originally intended to govern trade in merchandise (primarily imports). The rules have, however, been extended to include trade in services and trade-related intellectual property. Uruguay Round Major accomplishments of the Uruguay Round Trade Liberalization : Reduction of trade barriers in areas such as agriculture, textiles New trade rules on dumping, subsidies, import safeguards Broadened coverage from merchandise to services, intellectual property etc, Institutional reforms: Permanent trade organization (WTO) established; strengthened dispute settlement system. Regional Integration Agreements (RIAs) WTO members are permitted to enter into RIAs under specific conditions: Requires free trade on most goods & members to refrain from raising their tariffs against countries outside the agreement. Since January, 1995 about 546 RIAs have been notified to the WTO with 354 currently in effect.  Major Drivers of RIAs Consolidation of peace, regional security and free market reforms in many countries Promotion of deeper levels of economic integration than what is available under the WTO ( issues pertaining to competition, investment, labor and the environment) Market access and a means of attracting FDI. Sluggish progress in multilateral trade talks. Regional Trade Agreements (RTAs) Regional trade agreements are increasing in number and changing their nature. Fifty trade agreements were in force in 1990. There were more than 280 in 2017. In many trade agreements today, negotiations go beyond tariffs to cover multiple policy areas that affect trade and investment in goods and services, including behind-the-border regulations such as competition policy, government procurement rules, and intellectual property rights.  Gulf Cooperation Council (GCC) On 21st Rajab 1401 AH corresponding to 25th May 1981, Their Majesties and Highnesses, the leaders of the United Arab Emirates, State of Bahrain, Kingdom of Saudi Arabia, Sultanate of Oman, State of Qatar and State of Kuwait met in Abu Dhabi, United Arab Emirates, where they reached a cooperative framework joining the six states to effect coordination, integration and inter-connection among the Member States in all fields in order to achieve unity. Objectives of GCC-Custom Union Establishing the Customs Union on January 1st 2003 was a quality shift in the joint economic action as the customs union is basically based on a common external tariff, elimination of trade barriers, uniform import/export procedures and treatment of the geographical territory of the six member States as a single customs territory. a) A Common External Tariff b) Unified Customs regulations and procedures ( A Common Customs Law has been effective since 2002) c) Uniform customs procedures d) Single entry point where common duties are levied e) Intra-GCC movement of goods without tariff or non-tariff barriers f) National treatment of GCC goods  Impact of Custom Union on Intra- GCC Trade That growth was beyond all expectations because the volume of Intra-GCC trade has increased from US$ 11.6 billion in 1993 to US$ 20.3 billion in 2002, i.e. an increase by 75.5% over the past ten years or an average annual growth accounting for some 7.5%. After the formation of the customs union in January 2003, the volume of Intra-GCC trade has increased by an annual growth average that exceeded 20%. Source: The Custom Union (GCC Organization) List of Regional Agreements: Some Examples Name of Agreement Member states The North American Free Trade Agreement (NAFTA) Canada; Mexico; United States European Union (EU) 27 member states primarily in Europe Asia-Pacific Economic Cooperation (APEC) 21 member economies in the Pacific Rim European Free Trade Association (EFTA) Iceland, Liechtenstein, Norway, and Switzerland. South Asian Association for Regional Cooperation Afghanistan, Bangladesh, Bhutan, India,Maldives, Nepal, (SAARC) Pakistan and Sri Lanka. Gulf Cooperation Council (GCC) Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. East African Community (EAC) Burundi, Kenya, Rwanda, South Sudan, Tanzania, and Uganda African Union (AU) 55 member states located on the continent of Africa Ownership Structure Forms of business organizations are: Sole proprietorship: Advantages: Easy to organize and simple to control; flexible to manage; subject to minimal government control; owner taxed as an individual at a lower rate than corporate income tax. Disadvantages: risk of unlimited liability; limited access to capital and terminates upon death or disability of the owner.  Ownership Structure Partnership: Advantages: Share of business costs and management; no tax liability ie., profits/losses included in partner’s income tax return. Disadvantages: Personal liability and partner’s action can bind the partnership. Corporation: Advantages: limited liability; free transferability of shares, perpetual existence; ability to raise funds. Disadvantages: double taxation.  Limited Partnerships and S Corporations A limited partnership is a special form of partnership which consists of at least one general (investor and manager) partner and one or more limited (investor) partners. The general partner is given the right to manage the partnership and personally liable for the debts and obligations of the limited partnership. S Corporations offer the benefits of limited liability, but still permits the owner to pay taxes as an individual, thereby, avoiding double taxation. S Corporations: Preconditions 1. Domestic entity: The Corporation must be a domestic entity, that is, it must be incorporated in the United States. 2. No membership in an affiliated group: The Corporation cannot be a member of an affiliated group (not part of another organization). 3. Number of shareholders: The Corporation can have no more than seventy-five shareholders. 4. Shareholders: Shareholders must be individuals or estates. Corporations and partnerships cannot be shareholders. Shareholders must also be citizens or residents of the United States. 5. Classes of stock: The Corporation cannot have more than one class of stock. 6. Corporate income: No more than 20 percent of the corporation’s income can be from passive investment income (dividends, interest, royalties, rents, annuities, etc.). Business or Trade Name Corporations are required to register their trade name with the state Sole proprietorships and partnerships are required to register with appropriate government agency if they operate under a fictitious name Bank Accounts, Permits, and Licenses An import/export business person can: Open an account with an international bank Operate from a home during the early phase of the business; all direct expenses related to the business are tax deductible Use of professional services: source of guidance on liability, taxes, expansion, and related matters Check with the city or county to determine if permits or business licenses are required Organizational Issues Level at which export decisions should be made Need for a separate export department Coordination and control of various activities Organizational structure of the export-import department Organization of an export department of a global company: Functional, product, market and geographical basis. Organizing for Export: Industry Approach Organizational issues involve three related areas: Subdivision of line operations based on certain fundamental competencies Centralization or decentralization of export tasks and functions Coordination and control Taxation of Export Transactions The Law of Profit Tax on Establishments Article 2: The following tax rates shall apply to the [Commercial and Industrial Establishments] establishments that are solely owned Omani natural persons: The first RO 30,000 of the taxable income is exempted from tax. Taxable income exceeding this amount shall be taxed at the rate of 12 percent. Article 5 (B) is: There shall be exempted from tax, the profits realized by the establishment which is owned or utilized by an Omani natural person from the activity carried on in the fields specified in this Article. Taxation of Export Transactions ii) It should be a commercial or industrial establishment which carries or activities in any of the following fields: d) export of locally manufactured /processed products; iii) Tax exemption shall be granted for a period of five years with effect from the date commencement of production or the date or commencement of business, as the case may be. The exemption period may be renewed in the cases of necessity for a period not more than five years. Source: The Law of Profit Tax on Establishments; Sultan Decree No. 77/891 ; Ministry of Finance, Sultanate of Oman