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Global Trade Regulations and Agreements Chapter 4
International Regulation of Trade How the World Regulates Trade between Its Countries
International Trade • Buying and selling of goods and services across national borders • Involves exporting and importing • Export: Selling goods/services to other countries • Import: Buying goods/services from a foreign country • Marketing of such goods and services across between two or more nations is International marketing
Why Engage in International Business 1. Growth: Introducing new products internationally can expand a company's customer base, sales and revenue. For example, after Coca-Cola dominated the U. S. market, it expanded their business globally starting in 1926 to increase sales and profits 2. To find alternative sources of labor: Some companies look to international countries for lower-cost manufacturing, technology assistance and other services in order to maintain a competitive advantage 3. To locate resources that are difficult to obtain in their home markets, or that can be obtained at a better price internationally 4. To broaden their work force and obtain new ideas. A work force comprised of different backgrounds and cultural differences can bring fresh ideas and concepts to help a company grow. 5. To diversify. Selling products and services in multiple countries
6. Market: A company may respond to demand it discovers in another location. It could make this discovery by accident, or by having an affiliated company giving them a tip 7. Competitive Environment: Seeing competitors going to a particular place/country may entice some business to make the same move. 8. Political Environment changes (Trade Barriers): If an exporting company finds that the government in the recipient country starts to build tariff or non-tariff barriers to block the export, then it might be a reason for the exporter to set up a manufacturing operation overseas in order to avoid the tariffs
Advantages of International Trade A country may import things which it cannot produce International trade enables a country to consume things which either cannot be produced within its borders or production may cost very high. Therefore it becomes cost cheaper to import from other countries through foreign trade. Maximum utilization of resources International trade helps a country to utilize its resources to the maximum limit. If a country does not takes up imports and exports then its resources remain unexplorted. Thus it helps to eliminate the wastage of resources. Benefit to consumer Imports and exports of different countries provide opportunities to the consumer to buy and consume those goods which cannot be produced in their own country. They therefore get a diversity in
Reduces trade fluctuations By making the size of the market large with large supplies and extensive demand international trade reduces trade fluctuations. The prices of goods tend to remain more stable. Utilization of Surplus produce International trade enables different countries to sell their surplus products to other countries and earn foreign exchange. Fosters International trade fosters peace, goodwill and mutual understanding among nations. Economic interdependence of countries often leads to close cultural relationship and thus avoid war between them.
Other advantages include • Causes the flow of ideas, services and capital across the world • Permits diversified sources and markets for goods/services • Insulates seasonal domestic sales by finding new foreign markets • Reduces dependence on home markets/production • Facilitates mobility of labor, capital and technology • Provides more business opportunities • Minimize competitive risk • Led to globalization
Disadvantages of International Trade Import of harmful goods Foreign trade may lead to import of harmful goods like cigarettes, drugs etc. Which may run the health of the residents of the country. E. g. the people of China suffered greatly through opium imports. It may exhaust resources International trade leads to intensive cultivation of land. Thus it has the operations of law of diminishing returns in agricultural countries. It also makes a nation poor by giving too much burden over the resources. Over Specialization may be disasterous for a country. A substitute may appear and ruin the economic lives of millions. Danger of Starvation A country might depend for her food mainly on foreign countries.
One country may gain at the expensive of Another One of the serious drawbacks of foreign trade is that one country may gain at the expense of other due to certain accidental advantages. The Industrial revolution is Great Britain ruined Indian handicrafts during the nineteenth century. It may lead to war Foreign trade may lead to war different countries compete with each other in finding out new markets and sources of raw material for their industries and frequently come into clash. This was one of the causes of first and second world war.
Factors that control International trade: 1. Political factors 2. Legal factors 3. Social factors 4. Environment factors
1. Political Factors Stability of Government Policies: The most important idea is that the government is stable and the set of rules or codes of behavior that affect business are predictable and adaptable.
Political Risks: Below is a brief list of the kinds of political risks a company faces when doing business internationally. • Confiscation (to seize private property by the government) and Expropriation (Taking over possession of private property) • Economic risks associated with the political environment (exchange controls, local-content laws, import restrictions, tax controls, price controls, labor problems) • In order to understand how the political environment impacts your business, you must analyze how politically vulnerable your company is. To decrease how vulnerable your business is to political conditions, it is especially important for the marketer to forecast risk and engage in business ventures that may benefit them.
2. Social factors include e. g. Child labor, under payment, over working, In the context of international trade, social factors essentially refers to a legal provision in a trade agreement aimed at removing the most extreme forms of labor exploitation in exporting countries by allowing importing countries to take trade measures against exporting countries which fail to observe a set of internationally agreed minimum labor standards.
3. Environmental factors Involves clauses that emphasizes on environmental protection. Example, • Using production processes that do not harm the environment • Producing products that are environmental friendly. (Eco labeling) • …
a. Global textile and apparel trade �During 17 th and 18 th century: mercantilism (government play a protection role in the economy); Encouraging of Export and discouraging of imports. Capitalism and more liberal political and economical thinking replaced mercantilism; � 19 th and 20 th century: Napoleonic war and WWI (1814 -1914) development of international economy; market forces rather than governments regulated trade. Economic nationalism; protect domestic market (i. e. US impose tariffs). Therefore, international trade become more volatile than it had been before.
Cont… �After World War II: Measures taken to provide greater stability on international trade; IMF and GATT contribution in Expansion of international trade is much in 20 th century and bridged the gaps of countries and continents. �Recession or economic decline in early 1980 s affect the trade of the textile and apparel sector severely where as in 1996, apparel was 10 th largest trade category as a share of all world merchandise trade (exports)
Global Patterns of Trade Early 20 th century: � 70% of world textile trade was dominated by Britain � During 1900 -1937 world Textile production increased by about 90% � Significant Changes in production location starts in this era � Absolute global production increased even though share of individual countries in developed nation decreased. � Contribution of textiles as a proportion of total manufacturing production in developed nations began to decrease by 1900. (But new producer nations like Japan increased their proficiency). � Till it is weakened by WWII, Japan used Textiles for Economic developments from 1920 s -1950 s.
Mid-20 th century: �US and British industries expanded �Other countries rebuilt their production facilities �After the War Japanese used Textile to rebuild their Economy �In 1950 s Japan become a treat for American domestic manufacturers �Following Japan, a number of less developed nations began to export growing amounts to developed countries.
Late 20 th century: �Since 1950 s, the number of nations producing for the international textile and apparel markets has multiplied many times.
b. Factors which affect global textile and apparel trade �Economic concerns: which nations Economy should grow at the expense of another? �Political concerns: how the political relations of one nation towards the other will be affected by restricting the global textile and apparel markets �Social concerns: which nation’s employment should be increased at the expense of the other? E. g. should workers from France or US lose jobs to give employment for Philippines or Nepal?
Cont… �The short term arrangement (1961) a Short Term Agreement Regarding International Trade in Cotton Textiles �The long term arrangement (1962) a Long Term Agreement Regarding International Trade in Cotton Textiles (LTA) was signed under the sponsorship of the GATT (replacing a 1 -year short-term agreement).
GSP (Generalized system of preferences) � A system of tariff preferences designed to encourage the expansion of manufactured and semi manufactured exports from developing countries. � In 1968, GATT accepted a GSP for developing countries as an exception to the nondiscrimination principles. � It allows products to enter developed-country markets duty free and at reduced rates of duty to give less developed countries advantage over other suppliers which are not granted tariff advantages. � GATT was established in January 1948 on a provisional basis after the Second World War. The original GATT member countries were 23.
Objectives of General agreements on trade and tariff (GATT) �liberalize world trade (all goods) �contribute to economic growth and development �trade without discrimination �protection through tariffs versus quotas �stable basis for trade consultation, conciliation, and settlement of differences �Prohibited quantitative restrictions on imports �Allows for regional trading arrangements
Bilateral Trade Agreements �NAFTA (North American free trade agreements) is basically a free trade agreement between 3 countries namely USA, Canada and Mexico linking them in a free trade sphere. It is the world’s largest free trade area in terms of GDP. it was implemented on January 1, 1994. �The North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labour Cooperation (NAALC) are other bilateral agreements between the above countries.
Objectives �To remove tariff barriers between Canada, the United States and Mexico. � The Agreement includes two supplemental agreements on environmental and labor issues that address cooperative efforts to reconcile policies and procedures for dispute resolution between the member countries.
CAFTA (Central American free trade agreements) The Central America-United States Free Trade Agreement (CAFTA) was signed on August 5, 2004. Member countries include: �United States �El Salvador �Guatemala �Costa Rica �Honduras �Nicaragua �Dominican Republic
Trade measures to a country that do not follow the set rules The trade measures may include: 1. Exclusion from arrangements providing preferential trading status (e. g. US or EU General System of Preferences (GSP) or Most Favoured Nation (MFN) trading status); 1. setting up restrictive quotas or other quantitative trade barriers and/or the raising of tariff levels; 2. complete restriction on the importation of products originating from the offending country.