FMS Trade Theories PPT 1

8/18/2019 FMS Trade Theories PPT 1

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International Business Theories

Chapter Six

International Trade and FactorMobility Theory

6-1


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Laissez-Faire versus Interventionist Approaches

to Exports & Imports

• Interventionist:

– Mercantilism

– Neo-mercantilism

• Free-trade theories:

– Absolute advantage

– Comparative advantage


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Theories of Trade Patterns

• Explaining trade patterns:

– Country size

– Factor proportions

– Country similarity

• Trade competitiveness:

– Product life cycle theory

– Porter diamond


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What the major trade theories Do and Don’t

discuss


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Theory of Absolute Advantage

• Suggests specialization through free trade

because consumers will be better off if they

can buy foreign-made products that are priced

more cheaply than domestic ones

• A country may produce goods more efficiently

because of a natural advantage or because of

an acquired advantage

6-6


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Theory of Comparative Advantage

• Also proposes specialization through free

trade because it says that total global output

can increase even if one country has an

absolute advantage in the production of allproducts


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Theories of Specialization

• Both absolute and comparative advantage theoriesare based on specialization

• Assumptions policymakers question: – full employment

– economic efficiency – division of gains

– transport costs

– statics and dynamics

– services – production networks

– mobility


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Trade Pattern Theories

• How much a country will depend on trade if it

follows a free trade policy

• What types of products countries will export

and import

• With which partners countries will primarily

trade


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Theory Of Country Size

• Countries with large land areas are apt to havevaried climates and natural resources

• They are generally more self-sufficient than

smaller countries are• Large countries’ production and market

centers are more likely to be located at a

greater distance from other countries, raisingthe transport costs of foreign trade


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Country-similarity Theory

• Most trade today occurs among high-income

countries because they share similar market

segments and because they produce and consume so

much more than emerging economies• Much of the pattern of two-way trading partners

may be explained by cultural similarity between the

countries, political and economic agreements, and by

the distance between them


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Product Life Cycle (PLC) Theory

• Companies will manufacture products first in

the countries in which they were researched

and developed, almost always developed

countries

• Over the product’s life cycle, production will

shift to foreign locations, especially to

developing economies as the product reachesthe stages of maturity and decline


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Life Cycle of the International Product


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The Porter Diamond

• Four conditions as important for competitive

superiority:

– demand conditions

– factor conditions

– related and supporting industries

– firm strategy, structure, and rivalry


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Limitations of the Porter Diamond Theory

• Production factors and finished goods are

only partially mobile internationally

• The cost and feasibility of transferring

production factors rather than exporting

finished goods internationally will determine

which alternative is better


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The Relationship between Trade and Factor

Mobility

• Capital and labor move internationally to gain

more income and flee adverse political

situations

• Although international mobility of production

factors may be a substitute for trade, the

mobility may stimulate trade through sales of

components, equipment, and complementaryproducts


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Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall

Theories & Current Practices of International

Trade:

The Ricardian Model: Labour Productivity &Comparative Advantage


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• Theories of why trade occurs:

– Differences across countries in labor, labor skills,

physical capital, natural resources, and

technology

– Economies of scale (larger scale of production is

more efficient)


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• Sources of differences across countries that

lead to gains from trade:

– The Ricardian model examines differences in the productivity of labor (due to differences in

technology) between countries.

– The Heckscher-Ohlin model examines differences

in labor, labor skills, physical capital, land, or

other factors of production between countries.


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Comparative Advantage and

Opportunity Cost• The Ricardian model uses the concepts of

opportunity cost and comparative advantage.

• The opportunity cost of producing somethingmeasures the cost of not being able to

produce something else with the resources

used.


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• For example, a limited number of workers

could produce either roses or computers.

– The opportunity cost of producing computers is

the amount of roses not produced.

– The opportunity cost of producing roses is the

amount of computers not produced.


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• Suppose that in the U.S. 10 million roses could

be produced with the same resources that

could produce 100,000 computers.

• Suppose that in Colombia 10 million rosescould be produced with the same resources

that could produce 30,000 computers.

• Workers in Columbia would be less productivethan those in the U.S. in manufacturing

computers.


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• Colombia has a lower opportunity cost of

producing roses.

– Colombia can produce 10 million roses, comparedto 30,000 computers that it could otherwise

produce.

– The U.S. can produce 10 million roses, comparedto 100,000 computers that it could otherwise

produce.


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• The U.S. has a lower opportunity cost of producing computers.

– Colombia can produce 30,000 computers, compared to 10 million rosesthat it could otherwise produce.

– The U.S. can produce 100,000 computers, compared to 10 million rosesthat it could otherwise produce.

– The U.S. can produce 30,000 computers, compared to 3.3 million rosesthat it could otherwise produce.


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• A country has a comparative advantage inproducing a good if the opportunity cost of

producing that good is lower in the country

than in other countries.

– The U.S. has a comparative advantage in

computer production.

– Colombia has a comparative advantage in roseproduction.


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• Suppose initially that Colombia produces

computers and the U.S. produces roses, andthat both countries want to consume

computers and roses.

• Can both countries be made better off?


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Comparative Advantage and Trade

• When countries specialize in production in which they have a

comparative advantage, more goods and services can be

produced and consumed.

– Have U.S. stop growing roses and use those resources to make

100,000 computers instead. Have Colombia stop making 30,000computers and grow roses instead.

– If produce goods in which have a comparative advantage (U.S.

produces computers and Colombia roses), they could still consume the

same 10 million roses, but could consume 100,000 – 30,000 = 70,000

more computers.


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One-Factor Ricardian Model

• The simple example with roses and computers

explains the intuition behind the Ricardianmodel.

• Constructing a one-factor Ricardian model

using the following assumptions:


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The assumptions are:

1 Labor is the only factor of production.2. Labor productivity varies across countries

due to differences in technology, but laborproductivity in each country is constant.

3. The supply of labor in each country isconstant.

4. There is no transport cost

5. There is full employment


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6. Two are only two countries & two goods.7. International trade is free from all barriers.

8. Goods are exchanged against one another

according to the relative amounts of laborembodied in them

9. Production is subject to the law of constantreturns


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Therefore, What is the Gains From

Trade?

• Gains from trade come from specializing in

the type of production which uses resources

most efficiently, and using the incomegenerated from that production to buy the

goods and services that countries desire.

– where “using resources most efficiently” means

producing a good in which a country has a

comparative advantage.


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• Without trade, a country has to allocate

resources to produce all of the goods that it

wants to consume.

• With trade, a country can specialize its

production and exchange for the mix of

goods that it wants to consume.


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• Consumption possibilities expand beyond theproduction possibility frontier when trade isallowed.

• With trade, consumption in each country isexpanded because world production isexpanded when each country specializes in

producing the good in which it has acomparative advantage.


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What are Relative Wages?

• Relative wages are the wages of the home country relative tothe wages in the foreign country.

• Productivity (technological) differences determine relativewage differences across countries.

• The home wage relative to the foreign wage will settle inbetween the ratio of how much better Home is at makingcheese and how much better it is at making wine compared toForeign.

• Relative wages cause Home to have a cost advantage in onlycheese and Foreign to have a cost advantage in only wine.


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Do Wages Reflect Productivity?

• Do relative wages reflect relative

productivities of the two countries?

• Evidence shows that low wages are associatedwith low productivity.

– Wage of most countries relative to the U.S. is

similar to their productivity relative to the U.S.


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• Other evidence shows that wages rise asproductivity rises.

– For example in 1975, wages in South Korea wereonly 5% of those of the United States.

– However, as South Korea’s labor productivity rose(to about half of the U.S. level by 2007), so did itswages (which were more than half of U.S. levels

by 2007).


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However, there are certain Miscon-

ceptions about Comparative

Advantage?1. Free trade is beneficial only if a country is more productive

than foreign countries.

– But even an unproductive country benefits from free trade by avoiding

the high costs for goods that it would otherwise have to producedomestically.

– High costs derive from inefficient use of resources.

– The benefits of free trade do not depend on absolute advantage,rather they depend on comparative advantage: specializing inindustries that use resources most efficiently.


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2. Free trade with countries that pay low wages hurts highwage countries.

– While trade may reduce wages for some workers, thereby affectingthe distribution of income within a country, trade benefits

consumers and other workers.

– Consumers benefit because they can purchase goods more cheaply.

– Producers/workers benefit by earning a higher income in theindustries that use resources more efficiently, allowing them to earnhigher prices and wages.


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3. Free trade exploits less productive countries.

– While labor standards in some countries are less than exemplary

compared to Western standards, they are so with or without trade.

– Are high wages and safe labor practices alternatives to trade?

Deeper poverty and exploitation may result without export

production.

– Consumers benefit from free trade by having access to cheaply

(efficiently) produced goods.

– Producers/workers benefit from having higher profits/wages—

higher compared to the alternative.


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Comparative Advantages with many

goods• If each country specializes in goods that use resources

productively and trades the products for those that it wantsto consume, then each benefits. – If a country tries to produce all goods for itself, resources

are “wasted”.

• The home country has high productivity in apples, bananas,and caviar that give it a cost advantage, despite its high wage.

• The foreign country has low wages that give it a costadvantage, despite its low productivity in date production.


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How is the relative wage determined?

• By the relative supply of and relative (derived) demand forlabor services.

• The relative (derived) demand for home labor services fallswhen w/w * rises. As domestic labor services become more

expensive relative to foreign labor services, – goods produced in the home country become more expensive, and

demand for these goods and the labor services to produce them falls.

– fewer goods will be produced in the home country, which will reducefurther the demand for domestic labor services.


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Transportation Costs and Non-traded

Goods

• The Ricardian model predicts that countriesshould completely specialize in production.

• But this rarely happens for three mainreasons:1. More than one factor of production reduces the

tendency of specialization

2. Protectionism.

3. Transportation costs reduce or prevent trade,which may cause each country to produce thesame good or service.


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• Nontraded goods and services (for ex., haircuts

and auto repairs) exist due to high transport

costs.

– Countries tend to spend a large fraction of national

income on nontraded goods and services.

– This fact has implications for the gravity model and

for models that consider how income transfers

across countries affect trade.


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Empirical Evidence

• Do countries export those goods in which their productivity isrelatively high?

• Compare Chinese output and productivity with that of

Germany for various industries using 1995 data.

• Chinese productivity (output per worker) was only 5 percentof Germany’s on average.

– In apparel, Chinese productivity was about 20

percent of Germany’s, creating a strong

comparative advantage in apparel for China.


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• The main implications of the Ricardian model

are well supported by empirical evidence:

– productivity differences play an important role in

international trade

– comparative advantage (not absolute advantage)

matters for trade


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To Sum up

1. Differences in the productivity of labor across

countries generate comparative advantage.

2. A country has a comparative advantage in

producing a good when its opportunity cost

of producing that good is lower than in other

countries.


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3. Countries export goods in which they have a

comparative advantage - high productivity

or low wages give countries a cost

advantage.

4. With trade, the relative price settles in

between what the relative prices were ineach country before trade.


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5. Trade benefits all countries due to the

relative price of the exported good rising:income for workers who produce exportsrises, and imported goods become less

expensive.6. Empirical evidence supports trade based on

comparative advantage, althoughtransportation costs and other factors

prevent complete specialization inproduction.


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Theories of Trade…cond.

Heckscher-Ohlin Model:

(Resources and Trade)


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• The Heckscher-Ohlin theory argues that trade occurs due todifferences in labor skills & its productivity, capital availability& its efficiency, or other factors of production acrosscountries.

– Countries have different relative abundance of factors of production.

– Production processes use factors of production with different relative

intensity.


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Two Factor Heckscher-Ohlin Model

1. Two countries: home and foreign.

2. Two goods: cloth and food.

3. Two factors of production: labor and capital.

4. The mix of labor and capital used varies across goods.

5. The supply of labor and capital in each country is constant andvaries across countries.

6. In the long run, both labor and capital can move acrosssectors, equalizing their returns (wage and rental rate) acrosssectors.


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• Economy must produce subject to bothconstraints – i.e., it must have enough capital

and labor.

• Without factor substitution, the productionpossibilities frontier is the interior of the two

factor constraints.


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Trade in the Heckscher-Ohlin Model

• Like the Ricardian model, the Heckscher-Ohlin

model predicts a convergence of relative prices

with trade.

• With trade, the relative price of cloth rises in

the relatively labor abundant (home) country

and falls in the relatively labor scarce (foreign)

country.


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• Relative prices and the pattern of trade: In

Home, the rise in the relative price of clothleads to a rise in the relative production of

cloth and a fall in relative consumption of cloth.

– Home becomes an exporter of cloth and animporter of food.

• The decline in the relative price of cloth in

Foreign leads it to become an importer of cloth

and an exporter of food.


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• Heckscher-Ohlin Model: An economy has acomparative advantage in producing, and thus

will export, goods that are relatively intensive

in using its relatively abundant factors ofproduction,

– and will import goods that are relatively intensive

in using its relatively scarce factors of production.


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Factor Price Equalization

• Unlike the Ricardian model, the Heckscher-Ohlin modelpredicts that factor prices will be equalized among countries

that trade.

• Free trade equalizes relative output prices.

• Due to the connection between output prices and factorprices, factor prices are also equalized.

• Trade increases the demand of goods produced by relatively

abundant factors, indirectly increasing the demand of these

factors, raising the prices of the relatively abundant factors.


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• In the real world, factor prices are not equal across countries.

• The model assumes that trading countries produce the samegoods, but countries may produce different goods if their

factor ratios radically differ.

• The model also assumes that trading countries have the same

technology, but different technologies could affect the

productivities of factors and therefore the wages/rates paid to

these factors.


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• The model also ignores trade barriers and transportation

costs, which may prevent output prices and thus factor prices

from equalizing.

• The model predicts outcomes for the long run, but after an

economy liberalizes trade, factors of production may not

quickly move to the industries that intensively use abundant

factors.

– In the short run, the productivity of factors will be determined by their

use in their current industry, so that their wage/rental rate may vary

across countries.


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Therefore, the question is:

Does Trade Increase Income Inequality?

• Over the last 40 years, countries like South Korea, Mexico,

and China have exported to the U.S. goods intensive in

unskilled labor (ex., clothing, shoes, toys, assembled goods).

• At the same time, income inequality has increased in the U.S.,as wages of unskilled workers have grown slowly compared

to those of skilled workers.

• Did the former trend cause the latter trend?


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• The Heckscher-Ohlin model predicts that owners of relativelyabundant factors will gain from trade and owners of

relatively scarce factors will lose from trade.

– Little evidence supporting this prediction exists.

1. According to the model, a change in the distribution of

income occurs through changes in output prices, but there is

no evidence of a change in the prices of skill-intensive goods

relative to prices of unskilled-intensive goods.


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2. According to the model, wages of unskilled workers should

increase in unskilled labor abundant countries relative to

wages of skilled labor, but in some cases the reverse has

occurred:

– Wages of skilled labor have increased more rapidly in Mexico than

wages of unskilled labor.

• But compared to the U.S. and Canada, Mexico is supposed to beabundant in unskilled workers.

3. Even if the model were exactly correct, trade is a small

fraction of the U.S. economy, so its effects on U.S. prices and

wages prices should be small.


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Trade and Income Distribution

• Changes in income distribution occur with every economicchange, not only international trade. – Changes in technology, changes in consumer preferences, exhaustion

of resources and discovery of new ones all affect income distribution.

– Economists put most of the blame on technological change and the

resulting premium paid on education as the major cause of increasingincome inequality in the US.

• It would be better to compensate the losers from trade (or anyeconomic change) than prohibit trade. – The economy as a whole does benefit from trade.


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• There is a political bias in trade politics:

potential losers from trade are betterpolitically organized than the winners fromtrade. – Losses are usually concentrated among a few, but

gains are usually dispersed among many. – Each of you pays about $8/year to restrict importsof sugar, and the total cost of this policy is about$2 billion/year.

– The benefits of this program total about $1 billion,but this amount goes to relatively few sugarproducers.


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Empirical Evidence on the

Heckscher-Ohlin Model

• Tests on US data – Leontief found that U.S. exports were less capital-

intensive than U.S. imports, even though the U.S.is the most capital-abundant country in the world:

Leontief paradox.

• Tests on global data

– Bowen, Leamer, and Sveikauskas tested the

Heckscher-Ohlin model on data from 27 countriesand confirmed the Leontief paradox on aninternational level.



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Heckscher-Ohlin Model …cond.

• Because the Heckscher-Ohlin model predicts that factor prices

will be equalized across trading countries, it also predicts that

factors of production will produce and export a certain

quantity goods until factor prices are equalized.

– In other words, a predicted value of services from factors of

production will be embodied in a predicted volume of trade between

countries.

E i i l E id f th


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Empirical Evidence of the

Heckscher-Ohlin Model (cont.)

• But because factor prices are not equalized across countries,the predicted volume of trade is much larger than actuallyoccurs. – A result of “missing trade” discovered by Daniel Trefler.

• The reason for this “missing trade” appears to be theassumption of identical technology among countries. – Technology affects the productivity of workers and therefore the value

of labor services.

– A country with high technology and a high value of labor serviceswould not necessarily import a lot from a country with low technology

and a low value of labor services.

E i i l E id f th


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• Looking at changes in patterns of exportsbetween developed (high income) and

developing (low/middle income) countries

supports the theory.

• US imports from Bangladesh are highest in

low-skill-intensity industries, while US imports

from Germany are highest in high- skill-intensity industries.



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• As Japan and the four Asian “miracle”

countries became more skill-abundant, U.S.

imports from these countries shifted from less

skill-intensive industries toward more skill-intensive industries.


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3. An increase in the relative price of a good causes the real

wage or real rental rate of the factor used intensively in the

production of that good to increase, – while the real wage and real rental rates of other factors of

production decrease.

4. If output prices remain constant as the amount of a factor ofproduction increases, then the supply of the good that uses

this factor intensively increases, and the supply of the other

good decreases.


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5. An economy exports goods that are relatively intensive in its

relatively abundant factors of production and imports goods

that are relatively intensive in its relatively scarce factors of

production.

6. Owners of abundant factors gain, while owners of scarce

factors lose with trade.7. A country as a whole is predicted to be better off with trade,

so winners could in theory compensate the losers within

each country.


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8. The Heckscher-Ohlin model predicts that relative output

prices and factor prices will equalize, neither of whichoccurs in the real world.

9. Empirical support of the Heckscher-Ohlin model is weak

except for cases involving trade between high-income

countries and low/middle- income countries or whentechnology differences are included.


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Tariff & Non-tariff Trade Barriers


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Tariff is a custom duty or a tax on the products that move

across borders. The custom duty is normally imposed upon by

the importing country on the products that enter into their

country

1. Ad valorem Duty: These duties are imposed “according to

value.” When a fixed percent of value of a commodity is

added as a tariff it is known as ad valorem duty. It ignores the

consideration of weight, size or volume of commodity.

The imposition of ad valorem duty is more justified in case of

those goods whose values cannot be determined on the basis

of their physical and chemical characteristics, such as costly

works of art, rare manuscripts, etc. In practice, this type of duty is mostly levied on majority of items.


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2. Countervailing Duty: It is imposed on certain importswhere products are subsidized by exporting governments. As

a result of government subsidy, imports become morecheaper than domestic goods. To nullify the effect of subsidy,

this duty is imposed in addition to normal duties.

3. Revenue Tariff : A tariff which is designed to provide

revenue to the home government is called revenue tariff.Generally, a tariff is imposed with a view of earning revenue

by imposing duty on consumer goods, particularly, on luxury

goods whose demand from the rich is inelastic.


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4. Anti-dumping Duty: At times, exporters attempt to

capture foreign markets by selling goods at rock-bottom

prices, such practice is called dumping. As a result of dumping, domestic industries find it difficult to compete

with imported goods. To offset anti-dumping effects, duties

are levied in addition to normal duties.

5.Protective Tariff: In order to protect domestic industriesfrom stiff competition of imported goods, protective tariff

is levied on imports. Normally, a very high duty is imposed,

so as to either discourage imports or to make the imports

more expensive as that of domestic products.


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NON-TARIFF BARRIERS

A non tariff barrier is any barrier other than a tariff,that raises an obstacle to free flow of goods in

overseas markets. Non-tariff barriers, do not affect

the price of the imported goods, but only the

quantity of imports. Some of the important non-tariff barriers are as follows:

Types of non-tariff barriers


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1. Import quotas:

Quotas are a restriction on the quantity of a good that may beimported in any one period (usually below free-trade levels)

Global quotas restrict the total quantity of an import,

regardless of origin

Selective quotas restrict the quantity of a good coming from aparticular country

ypes o o ta ba e s



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2. Orderly marketing agreements

Market sharing pact signed by trading partners

Intended to protect less efficient domestic producers

Usually involve voluntary export restraints, or export quotas

Recent trade negotiations have restricted the use of these

agreements

Carbaugh, Chap. 6 80



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3. Domestic content requirements

Rules that require a certain percentage of a product’s totalvalue to be produced domestically

Often has the effect of forcing lower-priced imports to include

higher-cost domestic components or be assembled in a

higher-cost domestic market Governments impose domestic content requirements to

boost domestic production. For instance, in the US bailout

package (to bailout General Motors and other organizations),

the US Govt. introduced ‘Buy American Clause’ which meansthe US firms that receive bailout package must purchase

domestic content rather than import from elsewhere.



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4.Product Standards: Most developed countries imposeproduct standards for imported items. If the imported items

do not conform to established standards, the imports are notallowed. For instance, the pharmaceutical products must

conform to pharmacopoeia standards.

5.Product Labeling: Certain nations insist on specific

labeling of the products. For instance, the European Unioninsists on product labeling in major languages spoken in EU.

Such formalities create problems for exporters.


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6.Packaging Requirements: Certain nations insist onparticular type of packaging materials. For instance, EU

insists on recyclable packing materials, otherwise, the

imported goods may be rejected.


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7. Subsidies

Domestic subsidy

Payments made to import-competing producers

to raise the price they receive above the market

price Export subsidy

Payments and incentives offered to export

producers intended to raise the volume of exports



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8. Dumping

The practice of selling a product at a lowerprice in export markets than at home (or

exporting at prices below production cost)

Sporadic dumping - to clear unwantedinventories or cope with excess capacity

Predatory dumping - to undermine foreign

competitors

Persistent dumping - reaping greater profits by

engaging in price discrimination


9 P f i l A


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9. Preferential Arrangements: Some nations formtrading groups for preferential arrangements in respect of

trade amongst themselves. Imports from member

countries are given preferences, whereas, those from other

countries are subject to various tariffs and other

regulations.

10. Foreign Exchange Regulations: The importer hasto ensure that adequate foreign exchange is available for

import of goods by obtaining a clearance from exchange

control authorities prior to the concluding of contract with

the supplier.


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11.Other Non-Tariff Barriers: There are number of

other non – tariff barriers such as:• health and safety regulations,

•technical formalities,

• environmental regulations,

• embargoes, etc.

•Sea transport and freight restrictions

• Government procurement policies


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International Strategic Alliances

St t i Alli


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Strategic Alliances

A strategic alliance is a business arrangementwhereby two or more firms choose to cooperate

for their mutual benefit.


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Joint Venture

A joint venture (JV) is a special type of strategicalliance in which two or more firms join

together to create a new business entity that is

legally separate and distinct from its parents.


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Benefits of Strategic Alliances

Potential Benefitsof Strategic Alliances

Ease of Market

Entry

SharedRisk

SharedKnowledge

andExpertise

Synergyand

Competitive Advantage


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Scope of Strategic Alliances

• Significant variation – Comprehensive alliance

– Narrowly defined alliance

• Degree of collaboration depends upon basicgoals of each partner

Th S f S i Alli


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The Scope of Strategic Alliances


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Types of Functional Alliances

Production alliances

Marketing alliances

Financial alliances

R&D alliances


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Issues in the Implementation of Strategic

Alliances

13-95

Partnerselection

Jointmanagement

Form of ownership


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Factors Affecting Partner Selection

CompatibilityNature of

partner services

Relative safeness Learning potential


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Approaches to

Joint Management

Sharedmanagementagreements

Delegatedarrangements

Assignedarrangements


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Shared Management Agreement

Partner

1

Partner

2

Alliance

Both parties are activeparticipants


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Assigned Arrangement

Partner

1

Partner

2

Alliance

One partner takes primaryresponsibility


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Delegated Arrangement

Partner

1

Partner

2

Joint venture


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Pitfalls of Strategic Alliances

Pitfalls

Access toinformation

Distributionof earnings

Loss of autonomy

Incompatibilityof partners

Changingcircumstances


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Significance of PTAs


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Economic integrations among countries significantly influence

international business. The preferential treatment granted to

member countries affects the competitiveness of goods in

international markets. Elimination of import tariffs by the member

countries of a trade group encourages sourcing of goods from cost-

efficient production locations. However, discriminatory tariff

against non-members do result in trade diversion to member

countries, even at the cost of production efficiency.


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Trade-Diversion Impact


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Trade Diversion Impact

Formation of an FTA results in trade diversion to its members

from non-members since the elimination of import tariffs

among member countries makes sourcing of goods from

member countries more attractive compared to non-

members, even at the cost of production efficiency.


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Forms of International Economic Integration

Preferential Trade Agreement (PTA)


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Preferential Trade Agreement (PTA)

Member countries in a PTA lower tariff barriers to

imports of identified products from one another e. g.

ECOWAS, GSTP, COMESA, etc.

Free Trade Agreement (FTA)


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g ( )

Form of economic integration in which member

countries seek to remove all tariffs and non-tariff

barriers for cross-border trade of goods and services

among themselves e.g. NAFTA, LAFTA., etc.

Customs Union (CU)


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Customs Union (CU)

Countries not only eliminate tariff barriers among

themselves but also apply common external import tariffs for

non-members e. g. CARICOM, CACM, etc.

Common Market (CM)


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Common Market (CM)

In addition to free trade among members anduniform tariff policy for non-members in a common

market, it involves elimination of all restrictions on

cross-border investments, movement of labour,

technology transfer, management, sharing of capital

resources, e.g. COMESA, MERCOSUR, etc.


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Political Union (PU)


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Political Union (PU)

As a culmination of economic integration, the member

countries strive to harmonize their security and foreign

policies. A common parliament is created with

representatives of member countries who work in

synchronization with an individual country’s legislature.


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Major Regional Trade Agreements


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North American Free Trade Area (NAFTA)


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North American Free Trade Area (NAFTA)

Formed on 1 January, 1994, the economic integration

between the US, Canada and Mexico aims at elimination of

trade barriers related to industrial goods and services,

besides separate agreement on agriculture, intellectual

property rights(IPRs), labour adjustment, and environmental

protection.


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Economic Cooperation (APEC) Asia-Pacific


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Established in 1989, APEC aims to enhance economic growth

and prosperity for the region and to strengthen the Asia-

Pacific Community. APEC has no treaty obligations required

of its participants. Decisions are reached by consensus and

commitments and undertaken on a voluntary basis.

Association of South East Asian Nations (ASEAN)


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The ASEAN was established on 8 August 1967 with majorobjectives:

To accelerate economic growth, social progress, and

cultural development in the region through joint

endeavors

To promote regional peace and stability through abiding

respect for justice and the rule of law in the relationship

among countries


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Regional Comprehensive Economic

Partnership(RCEP)RCEP is a FTA negotiation that has been deve-loped

among 16 countries: 10 members of ASEAN and six

countries with which ASEAN has existing FTAs-Australia, China, India, Japan, Korea & New Zealand

covers total population of 3 billion, trade estimated

around 27 % of global trade covering GDP of US$ 21

trillion (2012).

L h d i N b 2012 RCEP ld b


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Launched in November,2012, RCEP would be a

modern, comprehensive, high quality and mutually

beneficial economic partnership

Agreement establishing an open trade and

investment environment in the region to facilitate

the expansion of regional trade and investmentand contribute to global economic growth and

development.

T P ifi P t hi (TPP)


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Trans- Pacific Partnership(TPP)TPP is a proposed regional regulatory and investment

treaty. Though agreement began in 2005, however as of

2014, 12 countries throughout of Asia Pacific region

participated in negotiations on the TPP: Australia,

Brunei, Canada, Chile, Japan, Malaysia, Mexico, New

Zealand, Peru, Singapore, United States and Vietnam.Basic aims is to counter the rising diplomatic and

economic influence of China in Asia.


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India’s Participation in PTAs

SAARC Preferential Trading Agreement (SAPTA)


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SAARC Preferential Trading Agreement (SAPTA)

The SAPTA was signed on 11 April 1993 at the Seventh SAARC

Summit held in Dhaka to provide a framework for the

exchange of tariff concessions with a view to promoting

trade and economic cooperation among the SAARC member

countries.


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Framework Agreement on Comprehensive Economic

Cooperation between the Association of South East Asian


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p f

Nations (ASEAN) and India

The framework agreement between ASEAN and India wassigned on 8 October 2003. It covers several aspects such as:

– gradual tariff reductions leading to formation of FTA

– trade facilitation measures, – Trade and investment promotion measures

– early harvest programmes

– tariff concessions.

Bay of Bengal Initiative for Multi-sectoral Technical


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and Economic Co-operation (BIMSTEC)

BIMSTEC provides a unique link between South Asia and

Southeast Asia aimed to develop into an FTA and focus on

activities that facilitate trade, increase investment, and promote

technical cooperation among member countries.Six areas were identified for cooperation include trade and

investment, technology, transportation and communication,

energy, tourism, and fisheries.

Indo Sri Lanka Free Trade Agreement (ISLFTA)


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Indo-Sri Lanka Free Trade Agreement (ISLFTA)

An FTA between India and Sri Lanka was signed on 28

December 1998. The agreement envisages phasing out of

tariffs on all products except for a limited number of items in

the Negative List and tariff rate quota items over a period of

time.

Asia-Pacific Trade Agreement (APTA)

(Bangkok Agreement)


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(Bangkok Agreement)

The Bangkok agreement was approved by the GATT council

in March 1978 aimed to liberalize and expand trade

progressively in the ESCAP region through mutually agreed

concessions by member countries. From 2 November 2005,

this agreement is renamed the Asia Pacific Trade Agreement

(APTA).

Global System of Trade Preferences (GSTP)


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Global System of Trade Preferences (GSTP)

The GSTP establishes a framework for exchange of trade

concessions among the member developing countries. It also

lays down the rules, principles, and procedures for conduct of

negotiations and implementation of the decisions made.


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Framework Agreement for Establishing FTA between


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Framework Agreement for Establishing FTA between

India and Thailand

Signed on 9 October 2003, the framework agreement covers

FTA in goods, services and investment, and areas of

economic cooperation. It also provides an Early Harvest

Scheme (EHS) under which common items have been agreed

for elimination of tariffs on a fast-track basis.

l l f l d h


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Bilateral Preferential Trading Agreement with

Afghanistan

The Preferential Trade Agreement between India and

Afghanistan, signed on 6 March 2003, aims to provide for

grant or concessions on a range of products of export

interest to Afghanistan, as a part of India’s endeavour to

strengthen bilateral trade and economic relations.

India–MERCOSUR PTA


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India MERCOSUR PTA

Signed on 19 March, 2005, the PTA aims to expand and

strengthen existing trade relations between India and

MERCOSUR by granting reciprocal fixed trade preferences

with the ultimate objective of creating an FTA.


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Long Awaited India- EU FTA

India & EU have been negotiating a trade pact, known as

the Broad-based Trade and Investment Agreement(BTIA)

since 2007, however could not resolve on certain

contentious issues & latest is on drug ban issue on thesale of 700 pharma products. Such ban will affect India’s

exports of $15 billion & this is our flagship sectors and has

developed its reputation through strong research and

safety protocols.

Limitations of Regional Economic Integrations


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It can create an incentive for even further discrimination,

which eventually will hurt all trading partners.

PTAs cannot solve systemic issues, such as rules of origin,

anti-dumping, agricultural, and fisheries subsidies. These

issues simply cannot be handled at the bilateral or

regional level.


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Regional Trade Agreements Vis-à-vis


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Multilateral Trading System Under the WTO

RTAs are an important exception under Article XXIV of the

GATT Agreement to the MFN rule of the WTO

agreements, under which tariff and other technical

barriers to trade can be reduced on preferential basis by

countries under the regional agreement.


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Regionalism Vs Multilateralism


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A RTA i b d t h t i t d di t ti


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Any RTA is bound to have certain trade distortion

effects. This trade distortion arises due to

discriminatory treatment advanced to the non-

members of the RTA vis-à-vis its members on account

of market access granted to the members of the same

regional bloc.

Though under Article XXIV of GATT of 1994 is now anintegral part of WTO agreement effective from 1995

recognizes the conditional right of members to form

RTAs imposes three conditions stipulated for regional

agreements under WTO :

w r t the overall impact of the RTAs with non members there is


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w.r.t. the overall impact of the RTAs with non-members, there is

an obligation not to raise barriers to trade . Though this is

quantifiable in terms of tariffs, however less easy to measure interms of other trade regulations such as Rules of Origin.

For an ‘external requirement’, FTA can not lead to higher import

duties for its members while a custom union must harmonize the

external trade policies of its members and compensate affected

non-members accordingly. on the ‘internal dimension’ of regional agreements, tariffs and

other restrictive regulations of commerce must be phased out

substantially on all trade. (again the tariff component can be

quantified, but it is harder to determine in the case of their

restrictive trade regulations, as there is no agreed definition of theterm.

The WTO authorizes RTAs the operation of which


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The WTO authorizes RTAs, the operation of which

should not lead to the situations where non-party

would ‘pay the price’ for internal preferences. Toensure coherence, RTAs are to be ‘promptly’ notified tothe WTO and reviewed by peers before beingimplemented.

The MFN treatment calls for non-discrimination among

members, while national treatment ensures non-discrimination between domestic produced andimported items.

RTA implies a higher degree if liberalization within the

region as compared to the rest of the world.

RTAs are thus allowed under the multilateral


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trading system as an exception to the MFN principle

of the WTO in the belief that they would facilitatetrade liberalization at the multilateral level. The

idea is that regionalism would gradually expand,

leading to multilateral trade liberalization.

Therefore, it would facilitate the formation of a

liberalized fair global trading regime.

However, because of the discriminatory

environment created by its formation, any RTA is

bound to result in some amount of trade diversion.


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2.Proliferating regional agreements absorb scarcenegotiating resources (especially in poorer WTO


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negotiating resources (especially in poorer WTOmembers) and crowding out policy-makers

attention.3. Competing RTAs (especially different North-South

combinations) may lock in incompatibleregulatory structures and standards and mayresult in inappropriate norms for developingpartners; and

4. By creating alternative legal frameworks anddispute settlement mechanisms, RTAs mayweaken the discipline and efficiency associated

with a broadly recognized multilateral frameworkof rules

Building blocks proponents stress that:


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1. Regional/bilateral agreements can help sensitize domestic

constituencies to liberalization and keep the stakes lowerto allow for incremental progress on trade.

2. Expanding the number and coverage of RTAs can erode

vested opposition to multilateral liberalisation because

each successive RTAs reduces the value of the margin of

preference , thereby reducing the discriminatory impact.

3. RTAs are often more about building strategic and /or

political alliances or locking in domestic reforms than

about actual trade liberalization and so are not necessarily

competitive with multilateral efforts.

4 Regional arrangement can provide an incubator for


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4. Regional arrangement can provide an incubator for

developing country firms/producers to learn to trade

with RTAs partners without facing full globalcompetition;

5. For some issues, such as regulatory cooperation,

RTAs may be a viable and more manageable

alternative to the WTO where ‘lowest commondenominator’ outcome trends to prevail.

Therefore, RTAs can be complement tomultilateral reform, but they are not

substitutes.

RTAs can be stumbling blocks to multilateralarrangements by creating incentives to resist the


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arrangements by creating incentives to resist thepreference erosion that can occur through new

multilateral liberalization.However, because the gains are often substantially largerin multilateral agreements, concerns over preferenceserosion may be limited to a few small countries that couldconceivably block a multilateral agreement.

Large developed countries may gain more from signingindividual bilateral agreements than they would from amultilateral accord, because they can use the carrot of preferential access to extract concessions in nontradeareas from developing country partners that would be

resisted in the WTO negotiating framework.

From development perspective WTO remains the best-il bl f t di i li th f t d di t ti


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available forum to discipline the use of trade-distortingpolicies. RTAs can complement the WTO efforts bycooperating on behind-the-border policies, especiallyon regulation-intensive issues such as services, tradefacilitation and the investment climate. Governmentspursuing this agenda through RTAs must adopt rulesthat are appropriate to their own level of development.The potential for inappropriate outcomes is higher inNorth-South RTAs because the asymmetry innegotiating power can overtake real developmentpriorities.

All countries could take step to promote openregionalism – the developing countries, high income


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eg o a s t e de e op g cou t es, g co ecountries and the international community working

together through WTO. Developing countries arelikely to have the greatest success in harnessingtrade for growth and poverty alleviation if they adopta three-pronged strategy that involves autonomousliberalization, active multilateralism and open

regionalism.High income countries could promote openregionalism by including agriculture in RTA s. Theycould adopt more common and non-restrictive ‘rulesof origin’ across agreements.


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International community working through the WTOh


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can reduce discrimination in the system. WTO

members should establish stronger multilateralsurveillance mechanisms to document , analyze andmonitor the effects of RTAs on non-members.Expanding the information on the impact of RTAs tostackholders- firms, consumers, taxpayers- would also

help to ensure that the potential benefits of liberalization are both realiz

ed and distributed more equitably. Medium-termefforts should focus on implementing WTO disciplineson regional agreements.


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Tariff & Non-tariff Trade Barriers

Tariff is a custom duty or a tax on the products that move

across borders. The custom duty is normally imposed upon by


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the importing country on the products that enter into their

country1. Ad valorem Duty: These duties are imposed “according to

value.” When a fixed percent of value of a commodity is

added as a tariff it is known as ad valorem duty. It ignores the

consideration of weight, size or volume of commodity.The imposition of ad valorem duty is more justified in case of

those goods whose values cannot be determined on the basis

of their physical and chemical characteristics, such as costly

works of art, rare manuscripts, etc. In practice, this type of duty is mostly levied on majority of items.

2. Countervailing Duty: It is imposed on certain importswhere products are subsidized by exporting governments As


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where products are subsidized by exporting governments. As

a result of government subsidy, imports become more

cheaper than domestic goods. To nullify the effect of subsidy,

this duty is imposed in addition to normal duties.

3. Revenue Tariff : A tariff which is designed to provide

revenue to the home government is called revenue tariff.

Generally, a tariff is imposed with a view of earning revenueby imposing duty on consumer goods, particularly, on luxury

goods whose demand from the rich is inelastic.

4. Anti-dumping Duty: At times, exporters attempt to

capture foreign markets by selling goods at rock bottom


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capture foreign markets by selling goods at rock-bottom

prices, such practice is called dumping. As a result of

dumping, domestic industries find it difficult to compete

with imported goods. To offset anti-dumping effects, duties

are levied in addition to normal duties.

5.Protective Tariff: In order to protect domestic industries

from stiff competition of imported goods, protective tariff

is levied on imports. Normally, a very high duty is imposed,

so as to either discourage imports or to make the imports

more expensive as that of domestic products.

NON-TARIFF BARRIERS


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A non tariff barrier is any barrier other than a tariff,

that raises an obstacle to free flow of goods inoverseas markets. Non-tariff barriers, do not affect

the price of the imported goods, but only the

quantity of imports. Some of the important non-

tariff barriers are as follows:

1. Import quotas:



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Quotas are a restriction on the quantity of a good that may beimported in any one period (usually below free-trade levels)

Global quotas restrict the total quantity of an import,

regardless of origin

Selective quotas restrict the quantity of a good coming from aparticular country

2. Orderly marketing agreements



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Market sharing pact signed by trading partners

Intended to protect less efficient domestic producers

Usually involve voluntary export restraints, or export quotas

Recent trade negotiations have restricted the use of these

agreements



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6.Packaging Requirements: Certain nations insist onf


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particular type of packaging materials. For instance, EU

insists on recyclable packing materials, otherwise, theimported goods may be rejected.

7. Subsidies


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Domestic subsidy Payments made to import-competing producers

to raise the price they receive above the market

price

Export subsidy

Payments and incentives offered to export

producers intended to raise the volume of

exports


8. Dumping


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The practice of selling a product at a lowerprice in export markets than at home (or

exporting at prices below production cost)

Sporadic dumping - to clear unwantedinventories or cope with excess capacity

Predatory dumping - to undermine foreign

competitors

Persistent dumping - reaping greater profits by

engaging in price discrimination


9. Preferential Arrangements: Some nations formtrading groups for preferential arrangements in respect of


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trade amongst themselves. Imports from member

countries are given preferences, whereas, those from othercountries are subject to various tariffs and other

regulations.

10. Foreign Exchange Regulations: The importer has

to ensure that adequate foreign exchange is available forimport of goods by obtaining a clearance from exchange

control authorities prior to the concluding of contract with

the supplier.


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INDIA’S FOREIGN TRADE POLICY (FTP) 2015 –

2020


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• INDIA’S FOREIGN TRADE POLICY (FTP) 2015 – 2020

• ALSO SOMETIMES CALLED COMMERCIAL POLICY ANDFORMULATED ; INTERPRETED AND ADMINISTERED BY DIRECTORATEGENERAL OF FOREIGN TRADE (DGFT), A SUBORDINATE OFFICE OFDEPARTMENT OF COMMERCE, MINISTRY OF COMMERCE ANDINDUSTRY, GOVERNMENT OF INDIA.

• FTP 2015 – 2020 IS THE MICRO TRADE POLICY AND THE MACROTRADE POLICY – INTERFACE WITH WORLD TRADE ORGANISATION(WTO); PTAs AND FTAs WITH VARIOUS COUNTRIES AND TRADEBLOCKS IS THE DOMAIN OF DEPARTMENT OF COMMERCE.

INDIA’S FTP 2015 - 2020


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• India’s new five year FTP 2015 – 2020 provides a stableand sustainable policy environment ; overarchingframework and architecture to catalyse exports andfacilitate nay rationalise imports; generateemployment and increase value addition in the

country.• India’s FTP – Domestic Trade Policy is anchored in theDomestic Policy framework (symbiotic relationship andsynergy) Export Promotion Mission to be created thatwould be synergised with the National Missions of

‘Make in India’; ‘Digital India’ – e Governance -Improve the ‘ease of doing business’ index; ‘Skill India’.


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INDIA’S FTP 2015 – 2020 – SUPER ORDINATE

GOAL (bHAG)


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• India’s FTP Statement explains the Vision ,Mission. Objectives andGoals ; Market and Product strategy; Structure and Architecture toachieve the goals.

• VISION - Super Ordinate Goal – big Hairy Audacious Goal (b HAG )of doubling India’s exports of merchandise and services from aboutUSD 450 Billion in FY 2013 -14 to USD 900 Billion in FY 2019 – 2020

and to raise India’s share in world exports from 2% to 3.5%.• Every thing hangs together in International Trade – so ‘Whole ofGovernment’ approach - State Governments ; Other CentralGovernment Ministries to be also involved rather than just the roleof Department of Commerce in the export value chain (both upstream and down stream activities in terms of Michael Porter’s

value chain)

INDIA’S FTP 2015 - 2020


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• State Governments and Central Government have toact in tandem to remove the inefficiencies andbottlenecks in India’s export value chains ; enhanceIndia’s export competitiveness ; address constraintsand in house challenges like infrastructural bottlenecks;

high transaction costs ; complex procedures.• Analyses India’s position on WTO (Multilateral TradingSystem) – ensures that India’s FTP is aligned with bothIndia’s national interests as well as it’s obligations andcommitments under various WTO Agreements.


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MARKET STRATEGY


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• Market Strategy – Market Penetration and MarketDevelopment (Diversification). India has signed 5limited PTAs ; 11 FTAs and is negotiating 17 FTAs. Someof the issues being addressed are Rules of Origin;Inversion in Duty Structure; Capturing preferential

export data; FTA outreach and informationdissemination and setting up a Trade Portal. UnderMEIS (Chapter – 3 – Export Reward Scrips), countrieshave been grouped into three categories – A –

Traditional Markets ; B – Emerging & Focus Markets; C – Other Markets.

MARKET STRATEGY


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• NAFTA Countries – USA , Canada and Mexico – negotiating a FTAwith Canada.

• European Union (EU) – negotiating a BTIA.

• Australia and New Zealand – negotiating a CECA/CEPA

• South Asia – Sri Lanka FTA and discussions with Pakistan.

• Focus on Iran.

• SE Asia under the Look/ Act East Policy – ASEAN – India Trade inGoods/Services/ Investment Agreement.

• Future Focus on CLMV (Cambodia; Lao PDR; Myanmar; Vietnam)and India – Myanmar – Thailand Trilateral Highway.


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PRODUCT STRATEGY


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• PRODUCT STRATEGY – Focus on moving up the value chain – Value added products (more domestic value in sync withMake in India) – Engineering Products ; Electronics andDrugs and Pharmaceuticals.

• Focus on labour intensive products (create employmentopportunities so that our demographic dividend does notbecome a demographic disaster) – handicrafts , leather,textiles, gems and jewellery; agro and plantation products;marine products.

• Focus on new , innovative and high tech products andProject Exports.


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PRODUCT STRATEGY


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• Facilitating and encouraging export of defenceitems – normal export obligation period under

Advance Authorisation is 18 months which has

been extended to 24 months. A list of military

stores requiring NOC of Department of

Defence Production has been notified by

DGFT recently. A committee has been formed

to create ITC (HS) codes for defence andsecurity items for which industrial licenses are

issued by DIPP.

PRODUCT STRATEGY


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• E – COMMERCE EXPORTS• Goods falling in the category of handloom

products, books/periodicals, leather footwear,

toys and customised fashion garments, havingFOB value up to Rs 25,000 per consignment

(finalised using e – commerce platform) shall

be eligible for benefits under FTP. Such goods

can be exported in manual mode through

Foreign Post Offices at New Delhi, Mumbai

and Chennai.

PRODUCT STRATEGY – BOOST TO MAKE IN INDIA


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• Reduced Export Obligation (EO) for domestic procurementunder EPCG scheme – specific EO under EPCG scheme incase capital goods are procured from indigenousmanufacturers which is currently 90% of the normal EO (6times the duty saved amount) has been reduced to 75% inorder to boost ‘Make in India’.

• Higher level of reward DCSs under MEIS for export itemswith high domestic content and value addition.

• In order to encourage manufacturing of indigenous capitalgoods, imports under EPCG authorisation shall not beeligible for exemption from payment of Anti Dumping Duty,Safeguard Duty and Transitional Product Specific SafeguardDuty.

STRUCTURE /ARCHITECTURE


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• Already Board of Trade (BOT) exists as a forum fordiscussion and consultation.

• Other Institutional Mechanisms to be set up – Councilfor Trade Development and Promotion (CTDP) –community of Central Government and various Statesand UT Governments; National Committee on TradeFacilitation (NCTF) for domestic coordination andimplementation of the Trade Facilitation Agreement(TFA); Export Promotion Mission (EPM) to work with

State Governments to boost India’s exports.


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SYSTEMS


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• In sync with Digitise India andrecommendations of the two Task Forces on

reducing transaction time and cost in

International Trade headed by DGFT , e –

governance initiatives and ease of doing

measures have been taken in the new FTP

and HBP. Simple, transparent , user friendly

and Electronic Data Interchange (EDI)compatible procedures have been put in place

in HBP 2015 -2020 to implement the FT(D&R)

SYSTEMS


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• Online filing of documents/applications and paperlesstrade in 24 x 7 environment -:

• 70% of applications filed in DGFT relate to Chapter 3and Chapter 4. Henceforth hard copies of applicationsand specified documents under these chapters would

not be required to be submitted to the RegionalAuthorities (RAs) under DGFT. Applications underChapter – 5 would be taken in the next phase.

•

Documents

FMS Trade Theories PPT 1