The Dynamic Environment of International Trade

1. Chapter 2 The Dynamic Environment of International Trade

2. Chapter Learning Objectives 1. The basis for the reestablishment of world trade following World War II 2. The importance of balance-of-payment figures to a country’s economy 3. The effects of protectionism on world trade 4. The seven types of trade barriers

3. Chapter Learning Objectives 5. The provisions of the Omnibus Trade and Competitiveness Act 6. The importance of GATT (General Agreement on Tariffs and Trade) and the World Trade Organization 7. The emergence of the International Monetary Fund and the World Bank Group 8. The implementation of AFTA within the ASEAN countries

4. The International Marketing Environment Foreign Environment (Uncontrollables) 7 1. Competition 7. Structure of Distribution Domestic environment (Uncontrollables) Environmental uncontrollables country market A (Controllables) 1. Competition Price Product 2. Technology Target Market 5. Political- Legal Environmental uncontrollables country market B 6. Geography and Infrastructure Place or Distribution 2 .Technology Promotion 4. Culture Environmental uncontrollables country market C 3. Economy 5. Political- Legal 3. ECONOMY 4. Culture

5. Proliferation (creation) of trade and emergence of the global economy Intensification of global competition More emerging markets Developments in technology allow communications with global consumers and movement of goods Introduction

7. Worldwide economic depression Second world war Cold war and divide between communist-socialist-capitalist approach to economic development The Marshall Plan for rebuilding Europe The 20th to the 21st Century First World War

8. Role of Agency for International Development to foster economic growth in the underdeveloped world Greater demand for U.S. goods and services Greater cooperation among trading nations GATT via reduction of tariffs and trade barriers GATT replaced by the World Trade Organization (WTO) and new era of free trade The 20th to the 21st Century Financial and industrial development assistance to rebuild Japan

9. Rapid growth of underdeveloped countries and new global marketing opportunities Rising living standards have created marketing opportunities for U.S. firms World Trade and U.S. Multinationals 3. Resistance over domination of U.S. multinationals 4. Expropriation and domestication of U.S. investments in Latin America 5. In the Europe, U.S. multinationals were controlled tightly by protectionism laws

10. Resurgence of competition from all over the world challenged the supremacy of American industry Newly industrialized countries (NICs) such as Brazil, Mexico, South Korea, Taiwan, Singapore, and Hong Kong experienced rapid industrialization Economic power evenly distributed with growth of MNCs from other countries (see Exhibit 2-2) World Trade and U.S. Multinationals 4. Establishment of the WTO 5. Integration of European Union countries 6. Creation of NAFTA, AFTA, and APEC

12. 21st Century: The First Decade and Beyond With exception of China, slower economic growth in U.S. and other countries is currently evident. Faster growth rates expected in developing countries such as Brazil, China, India, Indonesia, and Russia. More trade expected in emerging markets, regional trade areas, and the established markets in Europe, Japan, and U.S. Companies need to be more efficient, improve productivity, expand global reach, and respond quickly. Greater growth in international sales expected by smaller firms.

13. The balance of payments is a record of a nation's economic transactions with all other nations for a given year. A credit transaction is one that results in a receipt of payments from foreigners, whereas a debit transaction lead to a payment abroad. Owing to double-entry bookkeeping, a nation's balance of payments will always balance. What is balance of payments?

14. It is a statement of a country’s international economic transactions summary It is based on double entry book keeping When foreign exchange goes out of the country it is a debit (outflow) When foreign exchange comes in it is a credit (inflow) It consists of three divisions namelyCurrent a/c, Financial a/c and Official reserves a/c BALANCE OF PAYMENTS

15. FLOATING EXCHANGE RATES Central bank will not interfere in exchange rate determination It will not release foreign exchange to balance BOP; then (Ca+Fa = BOP) A BOP surplus (BOP > 0) should lead to an appreciation of home currency A BOP deficit (BOP < 0) should lead to a depreciation of home currency BOP AND EXCHANGE RATE DETERMINATION (FLOATING ER)

16. BOP = CA+FA+E&O-ΔRFX ACCOUNTING RULE Export of Rubber to US is recorded as (+) credit in Malaysian current account (vice versa) Purchase of Ford’s shares by a Malaysian investor is recorded as (-) debit in Malaysian Financial account (vice versa) Purchase of US $ is recorded as an increase in the official reserves of Malaysia (vice versa) BOP EQUATION AND ACCOUNTING RULE

17. Current a/c consists of 4 items Trade, Service, Interest and Dividends, Gifts Net trade balance (Export - imports) Net service balance Net income (Interest received - paid) Transfer balance (Gifts received - paid) CURRENT ACCOUNT (CA)

18. Debit (outflow) Imports Service acquired Interest paid Dividends paid Gifts made Credit (inflow) Exports Service rendered Interest received Dividends received Gifts received Current a/c entry

19. Capital a/c consists of 2 items Portfolio investments and Direct investments Investment in securities (Portfolio investment) Direct investment (Foreign currency investment) Errors and Omissions (E&O) (items occurred but not entered in BOP) Official international reserves (maintained by central Bank) (Reserve assets like Gold and Foreign Exchange) Financial ACCOUNT (KA)AND OTHERS

20. MANAGED EXCHANGE RATES Central bank will interfere in exchange rate determination It will release foreign exchange to balance BOP; then (Ca+Fa-∆OR = BOP) A BOP surplus (BOP > 0) should lead to an increase in Foreign Exchange reserves. A BOP deficit (BOP < 0) should lead to a decrease in Foreign Exchange reserves. BOP AND EXCHANGE RATE DETERMINATION

21. 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 The BP is maintained on a double-entry bookkeeping system Balance of Payments

22. The BP is the difference between receipts and payments BP Receipts BP Payments • costs of goods imported. • spending by U.S. tourists overseas. • new overseas investments. • cost of foreign military and economic aid. • merchandise export sales. • money spent by foreign tourists. • transportation. • payments of dividends and interest from FDI abroad. • new foreign investments in the U.S. Balance of Payments

23. The BP includes three accounts: Balance of Payments (1) 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;

24. If a country’s expenditures consistently exceed its income, its standard of living falls Its exchange rate vis-à-vis foreign monies declines When foreign currencies can be traded for more dollars, U.S. products are less expensive for foreign customers and exports increase Simultaneously foreign products are more expensive for U.S. buyers and the demand for imported goods is reduced Balance of Payments and Exchange Rate

26. 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: • maintain employment and reduce unemployment. • increase of business size, and • retaliation and bargaining. • 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. • protection of an infant industry • industrialization of a low-wage nation • national defense

27. Arguments 9-11 above are considered valid for protectionism 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 Protectionism: Logic and Illogic

28. 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 • 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: • Manufacturer’ supply sources • Choices available to consumers • Competition The Impact of Tariff (Tax) Barriers

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

30. (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 Six Types of Non-Tariff Barriers

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

32. 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: • Blocked currency: Blockage is accomplished by refusing to allow importers to exchange its national currency for the sellers’ currency. • Differential exchange rates: It encourages the importation of goods the government deems desirable and discourages importation of goods the government does not want by adjusting the exchange rate. The exchange rate for importation of a desirable product is favorable and vice-versa • 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

33. Many countries are 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 injustice in trade practices. It dealt with trade deficits, protectionism, and the overall fairness of our trading partners. • The bill covers three areas for improving • U.S. trade: • market access, • export expansion, and • import relief The Omnibus Trade and Competitiveness Act (OTCA) 1988

34. GATT created as an agency to serve as watchdog over world trade and provide a process to reduce tariffs GATT also provided a mechanism to resolve trade disputes bilaterally • 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; and • consultation shall be the primary method used to solve global trade problems. General Agreement on Tariffs and Trade (GATT) 3. GATT now replaced by the World Trade Organization

35. It sets many rules governing trade between its 132 members 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 Organization (WTO)

36. IMF was created to assist nations in becoming and remaining economically viable It assists countries that seek capital for economic development and restructuring IMF loans come with stipulations that borrowing countries slash spending and impose controls to curb inflation It helps maintain stability in the world financial markets • Objectives of the IMF include: • stabilization of foreign exchange rates • establish convertible currencies to facilitate international trade • lend money to members in financial trouble The International Monetary Fund (IMF)

37. lending money to countries to finance development projects in education, health, and infrastructure; providing assistance for projects to the poorest developing countries; lending directly to the private sector in developing countries with long-term loans, equity investments, and other financial assistance; provide investors with investment guarantees against “noncommercial risk,” so developing countries will attract FDI; and provide conciliation and arbitration of disputes between governments and foreign investors The goal of WBG is to reduce poverty and the improvement of living standards by promoting sustainable growth and investment in people. World Bank Group (WBG) The functions of the WBG include:

38. environmental concerns worker exploitation and domestic job losses cultural extinction higher oil prices, and diminished sovereignty of nations Protests Against Global Institutions In 1999 “anti-capitalist protestors” complained against the WTO, and IMF, over the unintended consequences of globalization that include: