International Business II Unit Notes

2ND CHAPTER NOTES

INTERNATIONAL BUSINESS

Referred by Subba Rao

GOVERNMENT INTERVENTION IN FORMULATING TRADE POLICIES

Traditionally, it had been viewed that government is the custodian of the nation including Industry and business.

Consequently, business has become inefficient due to heavy protection provided by the government. The Other thought is that the business can run efficiently when it is free from government intervention & protection.

POLITICAL ARGUMENTS FOR GOVERNMENT INTERVENTION

1. NATIONAL SECURITY:

From the point of view of National Security Strategic Industries should be run by the government. These industries include

Defence, Electronics, Semiconductors, Posts, Railways and the like.

Even after LPG in India government reserved 8 strategic industries for public sector operation.


2. PROTECTING INDUSTRIES:

One of the major objectives of the Government is to protect the Domestic Industry from the foreign competitors.

This can be done only if the government runs the industry as the foreign competitors easily kill the private industry or business.

This is more after the entry of cheap products from China & East Asian Countries like ( Thailand, South Korea & Malaysia) into the Indian Market.

Therefore, Politicians argue that government should interfere in the business.


3. PROTECTING JOBS:

The Economic liberalization in India led to the closure of many small industries, Downsizing of the large industries, outsourcing of employees, privatization of public sector units etc.

This in turn, reduced the number of jobs in the country. This is true with all other countries which liberalized their economies.

Hence, politicians argue that the government should interfere in business in order to protect the basic right of the people, i.e., Right for Job.


4. RETALIATION:The Foreign businesses need to be threatened and should be dealt with a

tough approach . Only governments can deal with a “tough approach & attitude” with the foreign

businesses. Due to the authority it possess & machinery to implement. As such , the politicians argue for the government in business.

ECONOMIC ARGUMENTS FOR GOVERNMENT INTERVENTION1.INFANT INDUSTRIES: When the Industry is in the early stages of development. It need protection from

Foreign competitors. In fact, Indian Government protected our industry during 1947- 1990. Private industries cannot invest heavily during the Initial stage (INFANT).Therefore government should interfere in the business to provide Capital &

Infrastructural facilities.


ECONOMIC ARGUMENTS FOR GOVERNMENT INTERVENTION

2. STRATEGIC TRADE POLICY:

According to the strategic trade policy, the government intervention is essential in the form of subsidies. The government should provide subsidies to certain domestic firms which have competitive advantage.

FORMS OF TRADE REGULATIONS AT NATIONAL LEVEL

Government announce their trade policies with regard to the following time to time. These are also called the instruments of trade policy. They are:

1. Tariffs

2. Subsidies

3. Import Quotas

4. Voluntary Export Restraints

5. Local Context Requirements

6. Administrative policies.

TARIFF BARRIERS

(1) PRICE BASED BARRIERS:

Price based barriers are also known as Tariffs. Tariffs are the taxes imposed on imports. Tariffs are of two types they are (A) Specific Tariffs and (B) Ad Valorem tariffs.

(2) QUANTITY LIMITS / IMPORT QUOTAS:

Quantity limits are also known as Quotas. An import quota is a direct restriction on the quantity of some goods that may be imported into a country.

(3) CARTELS :

Cartels are agreements between producers located in different countries or between governments of different countries to restrict competition. They normally control prices and they are often accompnied by output & Investment quotas for making price control effective.

TARIFF BARRIERS

4. FINANCIAL LIMITS & FOREIGN INVENSTMENT CONTROLS:

Financial limits are restrictive monetary policies designed to control capital flow .Countries possess restrictions on what foreigners may own in their country.

NON – TARIFF BARRIERSNon- tariff barriers are more non transparent. They are of different

types. They are as follows.

(1)CUSTOMS & ENTRY PROCEDURES:

(A) LICENCE PERMIT: Not all products can be freely imported, importing goods from other countries require Import license. And it is not easy to obtain an import license.

NON – TARIFF BARRIERS

(B) DOCUMENTATION:

Documentation can present another problem at entry because many documents and forms are often necessary and the documents required can be complicated. They vary from country to country.

Usually the following documents are required Proforma Invoice, Certificate of Origin, Bill of Loading, Packaging list, Insurance certificate, Import license and shippers export declarations.

Without proper documentation, goods may not be cleared through customs.

(C) INSPECTION:

Inspection reveals whether imported items are consistent with those specified in the documents & whether such items require any licenses. It prevents Prohibited articles.


(D) CLASSIFICATION & VALUATION:

Customs authorities will classify the products on the basis of quality and quantity and values the products for tariff purposes.

(2) PRODUCT REQUIREMENTS For goods to enter a country, product requirements set by the country must

be met. They are as follows:

(A)PRODUCT STANDARDS: Each country determines its own product standards to protect the health & safety of its customers. Such standards may also be erected as barriers to slow down importation of foreign goods.

Standards make it necessary to get the approval for a slight product modification also occurs.


(B) PRODUCT TESTING:

Many products must be tested to determine their safety and suitability before they can be marked.

The various means by which manufacturers can certify product conformance include Third party testing, Quality assurance audit / Approval by a body authorized recognized and manufacturer’s self declaration.

(C) QUOTAS: Quotas are a quantity control on imported goods. They are of different kinds they are

(i) ABSOLUTE QUOTAS: The amount imported during a quota period once filled, further entries are prohibited.


(ii) TARIFF QUOTAS: A Tariff quota permits the entry of limited quantity of the quota product at a reduced rate of duty. Quantities in excess of the quota can be imported but are subjected to higher duty rate.

(iii) VOLUNTARY QUOTAS: It is a formal agreement between nation and an industry. It usually specified the limit of supply by product, country and volume.

(3) FINANCIAL CONTROL: Financial regulations can also function to restrict international trade.

(A) EXCHANGE CONTROL: An Exchange control is a technique that limits the amount of the currency that can be taken abroad. Thus it limits the amount of money an exporter can hold for the goods.

REGIONAL ECONOMIC INTEGRATION

After the II world war, many countries decided to assist their neighboring countries and get assistance from them in the form of Commodity arrangements and Regional Economic Integration.


It is the agreement among the member countries politically and economically to cooperate with one another and to eliminate restrictions on the flow of goods & services, labour and capital between their regions.

Some countries create business opportunities for themselves by integrating their economies in order to avoid unnecessary competition among themselves and also from the other countries.


Economic Integration varies in levels. They are

(1) FREE TRADE AREA:

If a group of countries agree to abolish all trade restrictions and barriers among the members countries ,it is known as Free Trade Area.

(2) CUSTOMS UNION:

The members countries adopt a uniform commercial policy of barriers and restrictions jointly with regard to the trade with the Non member countries.

(3) COMMON MARKET:

All member countries allow free movement of human resources and capital among the countries.

(4) ECONOMIC UNION: All members countries adopt uniform fiscal policy among themselves for allowing free movement of goods & regarding low rate of tariffs.


BENEFITS OF ECONOMIC INTEGRATIONThe following benefits are achieved with the economic integration they

are:

(1) Increase the size of market

(2)Aggregate demand for products and services

(3)High quantity of productionThe resources of the different regions are pooled, the factors of production are

combined. The pooling increases efficiency of output or productivity due to large scale economies. further, it enables division of labour & specialization.

(4) Employment opportunities

(5) Rapid Technological innovations and development is possible due to pooling financial resources for heavy investment.

(6) The elimination or reduction of tariffs & barriers reduces the import duties and thereby reduces the prices of the products / services. consumer gets the advantage of lesser price.

MAJOR TRADING BLOCKS

Having discussed the different types of economic integration, regional approach and advantages of economic integration, now we shall discuss the different economic integration or trade blocks.

The most important trade blocks include :

1. European Union (EU)

2. North American Free Trade Agreement (NAFTA)

3. The Association of South East Asian Nations (ASEAN)

4. Asian Free Trade Area (AFTA)

5. European Free Trade Association (EFTA)

NORTH AMBERICAN FREE TRADE AGREEMENT (NAFTA)

The North American Free Trade Agreement (NAFTA) came into being on January 1, 1994 when the United States, Canada & Mexico agreed to form a trade block.

A free trade agreement was signed by USA & Canada in 1989. This was extended to Mexico in 1994.

NAFTA is expected to eliminate all tariffs and trade barriers among these countries by 2009. However internal tariffs on a large no. of product categories were removed already.

NAFTA has a population of 363 million & hence it is one of the significant trading areas in the globe.


OBJECTIVES: The objectives of the NAFTA include:

(1)To create new business opportunities particularly in Mexico.

(2)To reduce the prices of the products & services by enhancing the competition.

(3)To develop industries in Mexico in order to create employment and to reduce migration from Mexico to the USA.

(4)To assist Mexico in earning additional foreign exchange to meet its foreign debt burden.

(5)To improve political relationship among member countries.

(6)To provide stable political environment for the investors.


MEASURES : The measures as per the agreement of NAFTA include:

(1)Opening up of Government procurement markets in each member country of NAFTA.

(2)Residents of NAFTA countries can invest in any other NAFTA countries freely.

(3)Protection of Intellectual property rights of the NAFTA members.

(4)Free flow of employees & business people from one member country to another.

(5)Prevention of non- Mexican firms assembling goods in Mexico.

(6)Avoidance of re-export of the products imported by any member country from the third party subjected to certain products.

(7)Pollution control along the USA – Mexico border.


CRITICAL APPRAISAL:

(1) It was felt that the emergence of NAFTA enables further development of USA & Canada & for the significant development of MEXICO.

(2) Further free flow of capital and human resources enables achieving equilibrium in the regional development.

(3) From the US & Canadian government point of view NAFTA was an opportunity to respond to the growing threat of the large European Union Trading Block.

(4) From the Mexican government point of view the agreement was a way to secure future foreign investment.

EUROPEAN FREE TRADE ASSOCIATION (EFTA)

The European Free Trade Association (EFTA) was formed in 1959. The member countries of EFTA include: Austria, Norway, Portugal, Sweden & Switzerland.

OBJECTIVES:

(1)To eliminate almost all tariffs among member countries.

(2)To abolish the trade restrictions regarding imports & exports of goods among member countries.

(3)To Enhance Economic development, employment, incomes & living standards of the people of the member countries.

(4)To enable free trade in Western Europe.

The Efta achieved most of its objectives during its 40 yrs of existence. EFTA does not regulate the agriculture.

The EFTA is managed by a Council. Each member country is represented by its representative to the EFTA council. The council makes the policy decisions.

THE ASSOCIATION OF SOUTH EAST ASIAN NATIONS (ASEAN)

A group of 6 countries , viz., Singapore, Brunei, Malaysia, Philippines, Thailand & Indonesia, agreed in January 1992 to establish a Common Effective Preferential Tariffs (CEPT) plan.

This plan helped to create an Association of South East Asian Nations (ASEAN) free trade area in 15yrs with effect from January 1993.

The ASEAN member countries have developed economically at a fast rate in the globe. Their strength lies is Well Educated & skilled human resources. This strength enabled them to achieve faster Industrialization.

Further the ASEAN member countries are rich in oil, mineral resources, agricultural goods & modern industrial products.

These countries invite and allow the free flow of foreign capital.

ASEAN FREE TRADE AREA (AFTA)

The ASEAN countries are vigilant of the developments in the

international environment like the formation NAFTA, SAARC & EURO.

In view of these developments, the ASEAN countries formed the Asean Free Trade Area (AFTA) in September 1994.

THE OBJECTIVES OF THE AFTA ARE:

(1)To encourage Inflow of foreign investment into this region.

(2)To establish free trade area in the member countries.

(3)To reduce tariff of the products produced in ASEAN countries.

SOUTH ASIAN ASSOCIATION FOR REGIONAL CO-OPERATION (SAARC)

The successful performance of NAFTA, EU, and other trade blocks in the economic development of the member countries and in improving the employment opportunities, incomes and living standards of the people of the region gave impetus for the formation of SAARC.

India, Bangladesh, Bhutan, Pakistan, the Maldives, Nepal, Sri lanka and Afghanistan are members of SAARC.

The SAARC was established on December 8, 1985 later on Afghanistan joined SAARC in April 2007.

SOUTH ASIAN ASSOCIATION FOR REGIONAL CO-OPERATION (SAARC)

OBJECTIVES OF SAARC:

(1)To improve quality of life & welfare of the people of the SAARC member countries.

(2)To enhance mutual trust & understanding among the member countries.

(3)To develop the region economically, Socially and culturally.

(4)To enhance the self reliance of the member countries jointly.

(5)To extend co-operation to other trade blocks.

GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT)

The prolonged recession before the World War II in the west was due to the decades of protectionism followed by the Industrialized countries. This led to conduct of negotiations in 1947 among 23 countries in order to prevent the protectionist policies & to revive the economies from the recession.

These negotiations of the conference resulted in the General Agreement on Tariffs and Trade(GATT) among the participating countries. Thus, GATT has its origin in 1947at a conference in Geneva.

GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT)

THE OBJECTIVES OF GATT ARE:

(1)To ensure full employment and a large steadily growing volume of real income.

(2)To raise standard of living.

(3)To develop full use of the resources of the world &

(4)To expand production & International trade.

Several rounds of negotiations were held since the inception of GATT.

The nature of the negotiations in the rounds during 1947 to 1960 was tariffs.

The negotiations in other rounds included anti-dumping measures etc. The significant round is the Uruguay round of 1986.

The nature of the issues in this round included bringing agricultural & protection of Intellectual property rights under GATT.

URUGUAY ROUND & DUNKEL PROPOSALS

Uruguay round of multilateral trade negotiations was initiated in September 1986 & concluded on the 15th Sept, 1993.

Mr. Arthur Dunkel, the then Director General of GATT submitted a proposal on the 20th December, 1991 popularly known as Dunkel Proposals

which envisages trade liberalization in many areas like

trade related investment measures (TRIMS),

trade related intellectual property rights (TRIPS),

other services, Textiles, clothing & agricultural subsidies. (P.T.O.)

These proposals were discussed in the final round of GATT.

Trade Related Investment Measures(TRIMS)

Dunkel proposal is also concerned with the removal of various controls imposed on the inflow of foreign capital into the third world countries.

This proposal helps the MNCs as they will be treated as national companies.

The TRIMs text provides that the foreign capital would not be discriminated by the member Governments.

This Foreign capital gets equal treatment at par with domestic capital.

The significant features of TRIMs include.

Trade Related Investment Measures(TRIMS)

The significant features of TRIMs include:

(1)Abolition of restrictions imposed on foreign capital.

(2)Offering equal rights to the foreign investor equal to those of the domestic investor.

(3)No limitation or ceiling on the quantum of foreign investment. In other words participation of foreign equity should be allowed up to 100%.

(4)Granting of permission without restrictions to import raw materials and other components.

(5)Restriction on repatriation of dividend, interest & royalty will be removed.

TRADE RELATED INTELLECTUAL PROPERTY RIGHTS (TRIP’s)

Dunkel Proposal regarding trade related intellectual property rights (TRIPs) In respect of Business & Commerce it include:

(1)Protection of patents.

(2)Design

(3)Trade Marks

(4)Trade Secrets etc.

TRADE IN SERVICES:

Trade in services like, Insurance, Travel, Tourism, Hotel, Banking, Transportation, mobility of human resources etc., has been for the first time, brought within the purview of GATT.

URUGUAY ROUND & DUNKEL PROPOSALS

This round of negotiation covers a wide range of subjects

like subsidies, safeguards,

Trade related intellectual property rights (TRIPS),

Trade related investment measures (TRIMS) and

Trade services.

An agreement regarding multilateral trading system was finally signed in the MARRAKESH, MOROCCO, on 15th April, 1994.

World Trade Organization (WTO)

The World Trade Organization was established on 1st January 1995. It was the result of the Uruguay round discussions.

The WTO has replaced the old GATT. It has larger membership than GATT the present number of members stands at 151.

India is one of the founder members of WTO.

The WTO is a permanent organization created by International treaty and ratified by the governments and legislatures of the member states.

World Trade Organization (WTO)FUNCTIONS OF WTO:

1. WTO administers the 28 agreements contained in the final act & examine the regularly the trade regimes of individual member countries.

2. WTO provide technical assistance & training for developing countries.

3. WTO oversees the implementation of the significant tariff cut (averaging 40%) & non tariff measures in the trade negotiations.

4. WTO provides for disputes settlement court between member countries.

5. WTO co-operates with other International institutions like IMF, WORLD BANK, involved in global economic policy making.

6. WTO act as a watch dog of international trade.

7. Member countries can use the WTO as a forum for continuous negotiation of exchange of trade barriers in the entire world.

Organization Structure of the World Trade Organization

The organization structure of the WTO is designed based on four hierarchical levels.

The hierarchies from the top to bottom are as follows:

(1)Ministerial Conference

(2)General Council

(3)Councils

(4)Committees & Management Bodies.


(I) MINISTERIAL CONFERENCE

Ministerial Conference is the highest hierarchical level in the Organization structure.

All the member countries of WTO are the representatives of the ministerial conference.

It has the authority to make decisions on all matters relating to multilateral trade agreements.

The ministerial Conference meets at least once in two years.

Thus the Ministerial Conference is the policy & strategy making body.

It gets the policies & strategies implemented & executed by the next level, i.e. General Council.


(II) GENERAL COUNCIL:

General Council is the executive body of the WTO.

General Council reports its decisions & activities to the Ministerial Conference.

All the members of the WTO are also the representatives in the General Council.

The General Council has other forms like

(A)Dispute Settlement Body

Dispute settlement body supervises dispute settlement procedures.

(B)Trade Policy Review body.

It reviews trade policies of individual WTO members regularly.


(A) Dispute Settlement Body

It is assisted by the appellate body.

(I) COUNCIL FOR TRADE IN GOODS:

This Council supervises the implementation & functioning of all agreements relating to trade in goods.

(II) COUNCIL FOR TRADE IN SERVICES:

This Council overseas the implementation of all the agreements relating to trade in services.

(III) COUNCIL FOR TRADE RELATED ASPECTS OF INTELLECTUAL PROPERTY RIGHTS:

This council overseas the implementation & functioning of all the agreements relating to this area.


(B)Trade Policy Review body.

It consists of the following 3 Committees.

(I) Committee on Trade & Development:This committee is concerned with the issues concerning developing countries &

particularly least developed countries.

(II) Committee on Balance of Payments:Some WTO member countries resort to trade restrictive measures with a view to

cope with their balance of payments problems. Consultations among such countries are arranged by the committee on Balance of Payments.

(III) Committee on Budget, Finance & administration:This committee deals with the issues relating to the budget, finance and

administration of WTO.

INDIA & THE WTOThere was much heated discussion & arguments for & against

regarding India becoming a member of the WTO.

INDIA was one of the 76 Governments that became members of the WTO on the first day of the formation of the WTO.

BENEFITS TO INDIA

(1)The GATT secretariat estimated that the largest increase in the level of merchandise trade in goods (in general, it would be US $ 745 billion by the end of 2005) will be in the areas of clothing (60%), Agriculture, Forestry & Fishery products ( 20%) & processed Food & beverages (19 %).

India’s Competitive advantage lies in these fields. Hence, it is logical to believe that India will obtain large gains in these sectors.

INDIA & THE WTOBENEFITS TO INDIA OF THE WTO AGREEMENT:

(2) The reduction in agricultural subsidies & barriers to export of agricultural products, agricultural exports from India will increase.

(3) The Multilateral rules & disciplines relating to anti- dumping, disputes settlement machinery will ensure greater security of International Trade.

(4) India along with other developing countries has the market access to a number of advanced countries due to the imposition of the clauses concerning to trade without discrimination.

INDIA & THE WTODISADVANTAGES TO INDIA:

(1) Introduction of product patents in India will lead to hike in drug prices by the MNCs who have the product patent. This will hit the poor people.

(2) The extension of Intellectual property right to agriculture has negative effects on India.

Presently, plant breeding & seed production which is in the hands of National & State seed corporation. With the help of this Govt. is providing at a very low prices.

But in future Govt. & research institutions will be unable to compete financially with MNCs for protecting the Patent rights.

(3) Service Sector: Service sector like Insurance, Banking, Telecommunications, Transportation is still in a developing stage in India compared to that of developed countries. Liberalization of service sector would under tremendous pressure.

UNITED NATIONS CONFERENCE ON TRADE & DEVELOPMENT (UNCTAD)

INTRODUCTION :

Developing countries in order to find a suitable place for them in the global trade called for a Full – Fledged Conference, especially devoted to tackle their problems and to identify appropriate actions.

Consequently, the first conference of the United Nations Conference on Trade and Development (UNCTAD) was held in Geneva in 1964.

The conference was institutionalized to meet once in every 4 years.

The membership of UNCTAD as on 31 January 2008 is 192.


After setting up the UNCTAD, the developing countries have got a platform from where they could press the developed economies to grant them relief in matters of trade & development finance.

OBJECTIVES:

1. To promote International trade with a view to accelerate economic development.

2. To formulate principles and policies on International trade & related problems of economic development.

3. Focusing on central problems on acute poverty & growing inequality within and among nations.

4. Generating adequate financial flows for development.


FUNCTIONS:

1. It aims at the friendly integration of developing countries into the world economy.

2. It provides technical assistance tailored to the needs of the developing countries in cooperation with other organizations and donor countries.

3. It acts as a local point within the United Nations for the Interrelated issues in the areas of Finance, Technology & Investment.

4. It undertakes research, policy analysis & data collection for the debates of government representatives and experts.


MAIN ACTIVITIES OF UNCTAD:

are in the areas of

(1)Trade & Commodities

(2) Investment, Technology & Enterprise Development

(3)Macro-economic policies, Debt & Development Financing

(4)Transport, Customs & Information Technology

(5)Special programme for least developed, landlocked developing and small island developing countries.


(I) TRADE & COMMODITIES

UNCTAD helps the member governments in

(1) Formulating policies for diversifying production of various commodities.

(2) Provide analysis and advise for capacity building to meet competition.

(3) Assists developing countries in all aspects of their trade negotiations.

(4) Provides information regarding the impact of environment on the trade.


(2) INVESTMENT, TECHNOLOGY & ENTERPRISE DEVELOPMENT

UNCTAD helps the member governments.

(1)To familiarize Governments & the private sector with the investment environment & policies of a given country.

(2) In Investment analysis capacity building.

(3) In developing Science & Technology reviews & up gradations.

(4) To participate more actively in international investment rule making at the regional & multilateral levels.

UNITED NATIONS CONFERENCE ON TRADE & DEVELOPMENT (UNCTAD

(3) MACROECONOMIC POLICIES, DEBT & DEVELOPMENT FINANCING:


(1) In providing Technical & advisory support.

(2)Providing computer based debt management & financial analysis system specially designed to help countries manage their external debt.

UNITED NATIONS CONFERENCE ON TRADE & DEVELOPMENT (UNCTAD

(4) TRANSPORT, CUSTOMS & INFORMATION TECHNOLOGY:


(1)Computerized cargo tracking system installed in 20 developing countries of Africa & Asia.

(2) Integrating customs system that speeds up customs clearance procedures and helps Governments to modernize their customs procedures & management.

(3)Building training networks & organizes training in all areas of International trade to develop & increase their competitiveness.


(5) SPECIAL PROGRAMME FOR LEAST DEVELOPED, LANDLOCKED DEVELOPING & SMALL ISLAND DEVELOPING COUNTRIES:


(1) Identifying the specific needs of these particularly countries & tailors technical assistance to these needs.

(2)Examining the links between development strategies & poverty reduction.


ORGANIZATION STRUCTURE:

The Organization structure of UNCTAD consists of

(1) Conference,

(2) Trade & development Board

(3) The Commissions

Documents

International Business II Unit Notes