2

The Dynamic Environment of

International Trade

McGraw-Hill/IrwinInternational Marketing, 13/e

© 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

Chapter

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Chapter Learning Objectives

• The basis for the reestablishment of world trade following World War II

• The importance of balance-of-payment figures to a country’s economy

• The effects of protectionism on world trade• The seven types of trade barriers• The provisions of the Omnibus Trade and Competitiveness

Act• The importance of GATT and the World Trade Organization• The emergence of the International Monetary Fund and the

World Bank Group

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Global PerspectiveTrade Barriers – An International

Marketer’s Minefield

• Japan snow, baseball and rice• Every country seems to take advantage of the open U.S. market

while putting barriers in the way of U.S. exports.• France TV shows, songs and movies – French CNN• Barriers to trade, both tariff and nontariff, are one of the major

issues confronting international marketers• Barriers limit US sales and increase products prices• Neutrogena exporting soap to Russia classified into 3 categories .• If the benefits of the social, political, and economic changes now

taking place are to be fully realized, free trade must prevail throughout the global marketplace - PROTECTIONISM

- WTO (World Trade Organization)

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Top Ten 2004 U.S. Trading Parnters($ billions, merchandise trade)

• Insert Exhibit 2.1

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The Twentieth to the Twenty-First Century

• First Half of the Twentieth Century- 1914 – 1917 - 1929 – 1930 – 1939 - 1945 - 1947- Great Depression – Hawley-Smoot tariff- Soldiers returning from war and excessive production capacity

• Last Half of the Twentieth Century- Marred by struggles between countries espousing the socialist

Marxist approach and those following a democratic capitalist approach to economic development.

• Marshall Plan to infuse capitalism and rebuild Europe paied-off.• Dissolution of colonial power in Africa and Asia and US support. • Move toward international cooperation among trading nations was

manifest in the negotiation of (GATT).

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World Trade and U.S. Multinationals

• 1950s, many U.S. companies that had never before marketed outside the U.S. began to export, and others made significant investments in marketing and production facilities overseas.

• 1960s, U.S. multinational corporations (MNCs) were facing major challenges on two fronts:

- Resistance to direct investment limiting JV and acquisitions in Europe, Latin America – The American Challenge Book 1968

- Increasing competition in export markets

• American MNCs were confronted by a resurgence of competition from all over the world challenging the supremacy of US industry .

- NIC (Newly Industrialized Countries) Brazil, Mexico & Asia- SOE (State-Owned Enterprises) Venezuela, Chile, Bangladesh

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World Trade and U.S. Multinationals (continued)

• The Balance of Merchandise Trade- From 1983 to 1987 U.S. Trade Deficit 70% in capital goods& cars- 1990s trade surplus in capital goods particularly in high-tech

• U.S. dilemma of how to encourage trading partners to reciprocate with open access to their markets without provoking increased protectionism.

- WTO (World Trade Organization)- AFTA (America Free Trade Area)- APEC (Asia-Pacific Economic Cooperation Conference)- NAFTA

• Return of HK 1997 and Macao in 2000 to China, Asia is controlled by Asians for the first time in 400 years (major force)

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The First Decade of the Twenty-First Century and Beyond

• The Organization for Economic Cooperation and Development (OECD) estimates that the economies of member countries will expand an average of 3% annually for the next 25 years.

• The economies of the developing world will grow at faster rates from 4% in the past quarter to a rate of 6% for the next 25 years, and their share of the world output will rise from 1/6 to 1/3

• Brazil, China, India, Indonesia& Russia world trade is 1/3 of EU to be 50% higher than that of EU – power will move away.

• The level of intensity of competition will change as companies focus on gaining entry or maintaining their position in:

- Emerging markets, Regional Trade Areas, Established markets in Europe, Japan, and the U.S. It’s the time to lay the groundwork.

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Balance of Payments

• It’s a double-entry book keeping so it must always be in balance• A record of condition, not determinant of condition• A Balance of Payments statement includes three accounts:

- Current account: all merchandize exports, imports& services + unilateral transfer of funds

- Capital account : direct investment, portfolio investments, and short term capital movements to and from countries

- Reserves account: exports& imports of gold, increases or decreases in foreign exchanges and increases or decreases in liabilities to CBs

Balance of Payments is the system of accounts that records a nation’s international financial transactions.

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U.S. Current Account by Major Components, 2002 ($ billions)

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United States Current Account Balance (% of GDP)

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What Would One U.S. Dollar Buy?

• Insert Exhibit 2.5

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Protection Logic and Illogic

• Arguments concerning protectionism on trade:- Protection of infant industry- 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- Industrialization of a low-wage nation- Maintenance of employment and reduction of unemployment- National defense- Increase of business size- Retaliation and bargaining

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Trade Barriers

• Tariffs: revenue generation or discouraging importation • Quotas: specific unit or $ limit on a particular type of good.• Voluntary Export Restraints: textile, steel, cars, clothing, agriculture• Boycotts and Embargoes• Monetary Barriers

- Blocked currency: political disputes or improve BOP- Differential exchange: desirable or undesirable goods- Government approval: to secure foreign exchange through central

authorities granting exchange permits• Standards: to protect health, safety and products’ quality• Antidumping Penalties: to prevent foreign producers from predatory

pricing

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The Omnibus Trade and Competitiveness Act

• Designed to deal with trade deficits, protectionism, and the overall fairness of our trading partners.

• The bill covers three areas considered critical in improving U.S. trade:

- Market access- Export expansion- Import relief

• Four ongoing activities to support the growth of international trade:

- GATT- The associated World Trade Organization (WTO)- International Monetary Fund (IMF)- The World Bank Group

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General Agreement on Tariffs and Trade

• Paved the way for the first effective worldwide tariff agreement.• Basic Elements of the GATT:

- 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- Consultation shall be the primary method used to solve global trade

problems.

• Eliminating barriers to international trade (Uruguay Round):- The General Agreement on Trade in Services (GATS)- Trade-Related Investment Measures (TRIMs)- Trade-Related Aspects of Intellectual Property Rights (TRIPs)

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World Trade Organization

• An institution, not an agreement as was GATT• Sets many rules governing trade between its 148 members• Provides a panel exports to hear and rule on trade disputes between

members.• Issues binding decisions• All member countries will have equal representation• For the first time, member countries, will undertake obligations to open

their markets and to be bound by the rules of the multilateral trading system.

• Trouble with U.S. ratification:- Concern for the possible loss of sovereignty over its trade laws to WTO- The lack of veto power- The role the U.S. would assume when a conflict arises over an individual

state’s laws that might be challenged by a WTO member.• Skirting the Spirit of GATT and WTO

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The International Monetary Fund

• Created to assist nations in becoming and remaining economically viable.

• Objectives of the IMF:- Stabilization of foreign exchange rates- Establishment of freely convertible currencies to facilitate the

expansion and balanced growth of international trade

• Special Drawing Rights (SDRs)- “paper gold”

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The World Bank Group

• Institution that has as its goal the reduction of poverty and the improvement of living standards by promoting sustainable growth and investment in people.

• The World Bank has five institutions each of which performs the following services:

- Lending money to the government of developing countries - Providing assistance to governments for developmental projects to

the poorest developing countries.- Lending directly to the private sector - Providing investors with investment guarantees against

“noncommercial risk.”- Promoting increased flows of international investment

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Protests against Global Institutions

• The basic complaint against the WTO, IMF and others is the amalgam of unintended consequences of globalizing:

- Environmental concerns- Worker exploitation and domestic job losses- Cultural extinction- Higher oil prices- Diminished sovereignty of nations

• Terrorism in London (2005)• “Antisweatshop” campaigns

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Summary

• The benefits from absolute or comparative advantage clearly can accrue to any nation.

• Increased pressure for protectionism from every region of the globe.

• The consumer seldom benefits from such protection.• Free international markets help underdeveloped countries become

self-sufficient.• Freer trade will always be partially threatened by various

governmental and market barriers that exist or are created for the protection of local businesses.

• The future of open global markets lies with the controlled and equitable reduction of trade barriers.