1. LECTURE 4
Chapter 2
The Dynamic Environment
of International Trade

2. Global Perspective
Trade Barriers:
An International Marketer’s
Minefield

3. Introduction
 Japan and US: Skis, baseball, rice
 French protect their film and broadcast
industry from foreign competition e. g.
US: CNN (French version), American TV
shows,
 Neutrogena to Russia. Tariff for
pharmaceuticals: 5% duty, soap
15%, cosmetics 20%.

4. An Overview
 Yesterday’s competitive battles: Western
Europe, Japan and US
 Tomorrow’s competitive battles: Latin (South)
America, Eastern
Europe, China, Russia, India, Asia and Africa.
 Worldwide competition and significant
advantage of product availability
 Satellite communication and global companies
 Tendency of protectionism gains momentum

5. The 20th to 21st Century
 Countries have been more interdependent, have
greater opportunities for international trade
 First half of the 20Th century: Two world wars and
recession
 Second half of the 20th century: World divides into
socialism and capitalism
 US infused capitalism to rest of the world
 Dissolution of colonial powers
 Benefits of the foreign economic assistance by US was
tremendous e. g. agricultural products, manufactured
goods and services.

6. World trade and US multinationals
 Rapid growth of war torn economies and
previously underdeveloped countries led to new
global marketing opportunities
 During 1950s US companies started export
 By 1960s US MNC were facing two major
challenges:
 Resistance to FDI (in foreign countries)
 Increasing competition
 Latin America: Expropriate (seize) USFDI
 Europe: Strong public demand to limit FDI

7. World trade and US MNC Cont .
 US supremacy was challenged
 Competition arose from
Japan, Germany, other industrial world and
many developing countries
 Less developed countries were reclassified as
newly industrialized countries e. g.
Brazil, Mexico, China, S.
Korea, Taiwan, Singapore, Hong Kong

8. World trade and US MNC Cont .
 Developing countries like Venezuela, Chile
and Bangladesh established state owned
enterprises (SOE)that operated in other
countries
 Bangladesh, the sixth largest exporter of
garments to US owns a mattress company in
Georgia.

9. The Twenty First Century
 Growth of US economy slowed down
 Organization for economic cooperation and
development (OECD) estimates that the
economies of member countries will expand
for the next 25 years
 The WB estimates that
Brazil, China, India, Indonesia and Russia will
have a major share in world trade

10. Twenty first century Cont. . .
 Thus economic power will shift from
Japan, US and EU to Latin America, Eastern
Europe, Asia and Africa
 Companies are more efficient to improve
productivity e. g. Matsushita continue to
expand their global reach
 Nestle is consolidating its dominance in
global consumer markets by acquiring and
marketing country’s local brands.

11. Balance of payment
 The system of accounts that records a
nation’s international financial transactions is
called balance of payment
 It is maintained on a double entry book
keeping system as in assets and liabilities or
debit and credit.
 It is a record of condition

12. Balance of payment Cont . . .
 There are three accounts:
 Current Account: Export, import and services
plus unilateral transfer of funds
 Capital account: Direct investment, portfolio
investment, short term capital movements to
and from countries and the official
 Reserve account: Export and import of
gold, increases and decreases of foreign
exchange and increase and decrease in liabilities
to foreign central banks.

13. Protectionism: Logic and illogic
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 standard of living and real
wages
6. Conservation of natural resources
7. Industrialization of a low wage nation

14. Protectionism: Logic . . . Cont. . .
8. Maintenance of employment and reduction
of unemployment
9. National defense
10.Increase of business size
11.Retaliation and bargaining

15. Free Trade vs. Trade Barriers
 Nations can trade freely with each other or
there are trade barriers.
 Free Trade: Nothing hinders or gets in the
way from two nations trading with each
other.
 Trade Barriers: Trade is difficult because
things get in the way.
 There are costs and benefits related to free
trade as well as trade barriers.

16. Free Trade - Benefits
 When nations specialize and trade, total world
output or sales is increased.
 Companies can produce for foreign markets as
well as domestic markets (markets in the home
country).
 This means there is potential for making more
money as there are more markets to sell goods
or services in.
 More variety of goods are available from a
world market than just a domestic market.
 Prices of goods are decreased through
increased competition

17. Free Trade - Costs
 The domestic (home) country can lose money
because the foreign goods allowed into the
market increase competition and make it less
likely people will buy domestic products.
 Example: In the U.S., people might want to
buy a foreign automobile like a Honda or
Toyota instead of an American made car.
 Increased competition means lower prices.
 Less money will go into the domestic market
place and this can cause factories to be closed
and jobs to be eliminated.

18. Trade Barriers – Three Types
 Barriers to trade are things that hinder or
get in the way of trading.
 They can be cultural, physical , or economic.
 Cultural barriers: language, currency, belief
system.
 Physical barriers: mountains, rivers, etc.
 Example: The Alps Mountains in Europe
 Economic barriers: government rules that
restrict, block or discourage international trade
between countries.

19. Trade Barriers - Economic
• The most common: trade barriers are:
 tariffs, which are taxes on imports.
 quotas
 Voluntary export restraints (VERs)
 Boycotts and embargos
 Monetary barriers
 Standards (QA, Health)
 Antidumping penalties: Predatory pricing (Prices
lower that the cost)

20. Tariffs
 A tariff is a tax put on goods imported from
abroad and sometimes referred to as custom
duties.
 It is the most used and most familiar type of
trade restriction.
 The effect of a tariff is to raise the price of the
imported product.
 It makes imported goods more expensive so
that people are more likely to purchase
domestic products.
 The money received from the tariff is collected
by the domestic government.

21. Quotas
 A quota is a limit on the amount of goods that
can be imported.
 Putting a quota on a good creates a shortage,
which causes the price of the good to rise and
makes the imported goods less attractive for
buyers. This encourages people to buy
domestic products.
 A quota on shoes, for example, might limit
foreign-made shoes to 10,000,000 pairs a year.
If Americans buy 200,000,000 pairs of shoes
each year, this would leave most of the market
to American producers.

22. Voluntary Export Restraint – VER or
Orderly Market Agreement (OMA)
This is a self imposed restriction by an exporting
country to export certain commodity. Primarily
this is a preemptive measure in view of the
threat of restriction that the importing country
may impose for import e. g. Japan imposed a
VER on its auto exports into the U.S. as a result
of American pressure in the 1980s. The VER
subsequently gave the U.S. auto industry some
protection against a flood of foreign competition.

23. Voluntary Export Restraint – VER or Orderly
Market Agreement (OMA) Cont.
There are ways in which a company can avoid a
VER. For example, the exporting country's
company can always build a manufacturing
plant in the country to which exports would be
directed. By doing so, the company will no
longer need to export goods, and should not be
bound by its country's VER e. g. Honda built its
manufacturing plant in Detroit during late
eighties based on this policy.

24. Boycotts and Embargoes
 Boycotts and Embargoes are a
government order which completely
prohibits trade with another country.
 If necessary, the military actually sets
up a blockade to prevent movement of
merchant ships into and out of
shipping ports.
 Example: US for Iran, Iraq and Cuba

25. Embargoes (cont . . .)
 The embargo is the harshest type of trade
barrier and is usually enacted for political
purposes to hurt a country economically
and thus undermine the political leaders
in charge.
 Such was the case with the Cuban
embargo which has been in place since
the 1960s.

26. Monetary Barrier
This is imposed through
 Blocked currency
 Differential exchange rates (e. g. for desirable
goods one unit to one unit of currency, for
less desirable 1 unit local currency to 2 unit
of importing currency etc. and
 Government approval requirement for
securing foreign exchange

27. Standards
 It is imposed to protect health and safety.
 The standard varies from country to country
 Imposed for food items as well as items with
technical specifications e. g. Jute rope for
ships etc.
 Shelf life of medicines

28. Trade Barriers - Benefits
 Most barriers to trade are designed to
prevent imports from entering a country.
 Trade barriers provide many benefits:
 protect homeland industries from competition
 protect jobs
 help provide extra income for the government.
 Decreases the costs of these goods
– through increased competition

29. Trade Barriers - Costs
 Tariffs increase the price of imported
goods.
 Less competition from world markets
means there is an increase in the price.
 The tax on imported goods is passed
along to the consumer so the price of
imported goods is higher.

30. International Trade Barriers
Common Arguments
 -Jobs Are Destroyed by Trade
 -Worker Wages Are Hurt by Trade.
 -National Security Is Threatened by Trade.
 -Special Industries with Unique and Substantial
Economic Potential will not mature without
Protection from Trade.
 -Unfair Competition Undermines the Benefits of
Trade.
 Major International Trade Agreements
 EU, NAFTA, ASEAN

31. The Omnibus Trade and
Competitiveness Act
• Formed in 1988
• Designed to deal with trade
deficits, protectionism, and overall fairness to
trading partners.
• To deal the trading partners on ‘how they
operate’ rather than ‘how we want them to
behave’
• More a reciprocative Act

32. North American Free Trade
Agreement (NAFTA)
Began on January 1, 1994
Between Canada, the United
States and Mexico
NAFTA pros and cons

33. Association of Southeast Asian
Nations (ASEAN)
 Established on August 8th, 1967
 10 member countries
 -Brunei
Darussalam, Cambodia, Indonesia, Laos, Mal
aysia, Myanmar, Philippians, Singapore, Thail
and, and Vietnam

34. European Union
 What is the EU?
 27 member states
 The Economic and Monetary Union (EMU):
 16 member states
 -10th Year of the Euro

35. GATT
 The General Agreement on Tariffs and Trade
(GATT) was first signed in 1947. It regulates
trade among 153 countries.
 Was designed
 To provide an international forum
 That encouraged free trade between member states
 By regulating and reducing tariffs on traded goods
 Providing a common mechanism for resolving trade
disputes.

36. GATT Cont . . .
• Conducted eight rounds of talks
• The Uruguay Round, completed on December
15, 1993 after 7 years of negotiations, resulted in an
agreement among 117 countries to reduce trade
barriers and to create more comprehensive and
enforceable world trade rules.
• The Uruguay Round agreement went into effect on
January 1, 1995.

37. GATT Cont. . .
 The GATT's main objective was the
“Reduction of Barriers to International Trade”
 This was achieved by reducing:
 Tariff barriers
 Quantitative Restrictions
 Subsidies on trade through a series of
agreements

38. GATT Cont.
The agreement covers 3 main elements:
1. Trade shall be conducted on a
nondiscriminatory basis
2. Protection shall be afforded domestic
industries through custom tariff
3. Consultation shall be the primary method
to solve trade problems

39. GATT Cont. . .
 Eliminate trade barriers on services through
general Agreement on Trade and Services
(GATS)
 Trade related Investment Measures (TRIMs)
established under GATT mentioning
investment restriction can be a major trade
barrier and can be challenged
 Better integration of agricultural and textile
areas into overall trading system

40. WTO
The World Trade Organization
(WTO) reiterates the objectives
of GATT
i. e. Reduction of Barriers to
International Trade

41. Functions of WTO
 Administering and Implementing the multilateral and
plurilateral trade agreements
 Acting as a forum for multilateral trade negotiations
 Seeking to resolve trade disputes (e. g. genetically
modified food)
 Overseeing national trade policies
 Cooperating with other international institutions
 Maintaining trade related database
 Acting as a watchdog of international trade
 Forum for successful negotiation to open markets in
telecommunication and IT equipments

42. Skirting the spirit of
GATT and WTO
• China was asked to become a WTO member
and to show good faith in reducing tariffs and
other restrictions on trade.
• When companies are found to dumping, the
country places an extra tax on the product to
offset the advantage o flower price.
• Countries are negotiating bilaterally e. g. USA
and Singapore, EU with South American
countries.

43. IMF
IMF member 181 countries.
Objectives:
 Stabilization of foreign exchange
rates
 Establishment of freely convertible
currencies

44. IMF Cont. . .
 To cope up with universally floating exchange
rates IMF has developed Special Drawing
Rights (SDRs)
 SDR is in effect ‘PAPER GOLD’ represents an
average base of value derived from the value
of major currencies

45. WORLD BANK
Goals:
 Reduction in poverty
 Improvements in living standards by
promoting sustainable growth and
investment in people

46. WORLD BANK Cont.
There are five institutions in the world bank Group
each of which performs the following services:
 Provides loan,
 Providing technical assistance,
 Lending directly to the private sector
 Providing investors with investment guarantees
against non commercial risks like war etc
 Promoting increased flow of international
investment by providing facilities

47. Protests against Global Institutions
Basic complaints against WTO, IMF and others
are as follows:
 Environmental concerns
 Workers exploitation
 Domestic job losses
 Cultural extinction
 Higher oil prices
 Diminished sovereignty of nations