Import Quotas

Import quotas are limitations on the quantity of goods that can be imported into the
country during a specified period of time. An import quota is typically set below the free
trade level of imports. In this case it is called a binding quota. If a quota is set at or above
the free trade level of imports then it is referred to as a non-binding quota. Goods that are
illegal within a country effectively have a quota set equal to zero. Thus many countries
have a zero quota on narcotics and other illicit drugs.

There are two basic types of quotas: absolute quotas and tariff-rate quotas. Absolute
quotas limit the quantity of imports to a specified level during a specified period of time.
Sometimes these quotas are set globally and thus affect all imports while sometimes they
are set only against specified countries. Absolute quotas are generally administered on a
first-come first-served basis. For this reason, many quotas are filled shortly after the
opening of the quota period. Tariff-rate quotas allow a specified quantity of goods to be
imported at a reduced tariff rate during the specified quota period.

In the US in 1996, milk, cream, brooms, ethyl alcohol, anchovies, tuna, olives and durum
wheat were subject to tariff-rate quotas. Other quotas exist on peanuts, cotton, sugar and
syrup.

In the US most quotas are administered the US Customs Service. The exceptions include
dairy products, administered by the Department of Agriculture, and watches and watch
movements, administered by the Departments of the Interior and the Commerce
Department.

Voluntary Export Restraints (VERs)

A voluntary export restraint is a restriction set by a government on the quantity of goods
that can be exported out of a country during a specified period of time. Often the word
voluntary is placed in quotes because these restraints are typically implemented upon the
insistence of the importing nations.

Typically VERs arise when the import-competing industries seek protection from a surge
of imports from particular exporting countries. VERs are then offered by the exporter to
appease the importing country and to avoid the effects of possible trade restraints on the
part of the importer. Thus VERs are rarely completely voluntary.

Also, VERs are typically implemented on a bilateral basis, that is, on exports from one
exporter to one importing country. VERs have been used since the 1930s at least, and
have been applied to products ranging from textiles and footwear to steel, machine tools
and automobiles. They became a popular form of protection during the 1980s, perhaps in
part because they did not violate countries' agreements under the GATT. As a result of
the Uruguay round of the GATT, completed in 1994, WTO members agreed not to
implement any new VERs and to phase out any existing VERs over a four year period.
Exceptions can be granted for one sector in each importing country.

Some interesting examples of VERs occured with auto exports from Japan in the early
1980s and with textile exports in the 1950s and 60s.

Textile VERs
Another interesting effect of VERs occurred in the textile industry beginning in the
1950s. In the mid 50s, US cotton textile producers faced increases in Japanese exports of
cotton textiles which negatively affected their profitability. The US government
subsequently negotiated a VER on cotton textiles with Japan. Afterwards, textiles began
to flood the US market from other sources like Taiwan and South Korea. The US
government responded by negotiating VERs on cotton textiles with those countries. By
the early 1960s, other textile producers in the US, who were producing clothing using the
new synthetic fibers like polyester, began to experience the same problem with Japanese
exports that cotton producers faced a few years earlier. So VERs were negotiated on
exports of synthetic fibers from Japan to the US. During this period European textile
producers were facing the same pressures as US producers and the EEC negotiated
similar VERs on exports from many southeast Asian nations into the EEC.

This process continued until its complexity led to a multilateral negotiation between the
exporters and importers of textile products around the world. These negotiations resulted
in the Multi-Fiber Agreement (MFA) in the early 1970s. The MFA specified quotas on
exports from all major exporting countries to all major importing countries. Essentially it
represented a complex arrangement of multilateral VERs. The MFA provided an assured
upper limit (ceiling) to the extent of competition that import-competing firms could
expect in the US and the EEC. This type of arrangement has sometimes been called an
orderly market arrangement. It is also a reasonable example of what has been referred to
as managed trade.

The MFA was renewed periodically throughout the 70s, 80s and 90s. However, the
Uruguay round of the GATT, completed in 1994, renamed the MFA to the Agreement on
Textiles and Clothing (ATC) and specified a ten year transition period during which the
ATC will be eliminated.

Foreign direct investment

Foreign direct investment (FDI) or foreign investment refers to the net inflows of
investment to acquire a lasting management interest (10 percent or more of voting stock)
in an enterprise operating in an economy other than that of the investor.[1] It is the sum of
equity capital, reinvestment of earnings, other long-term capital, and short-term capital as
shown in the balance of payments. It usually involves participation in management, joint-
venture, transfer of technology and expertise. There are two types of FDI: inward foreign
direct investment and outward foreign direct investment, resulting in a net FDI inflow
(positive or negative) and "stock of foreign direct investment", which is the cumulative
number for a given period. Direct investment excludes investment through purchase of
shares.[2] FDI is one example of international factor movements.

FDI is a measure of foreign ownership of productive assets, such as factories, mines and
land. Increasing foreign investment can be used as one measure of growing economic
globalization. The figure below shows net inflows of foreign direct investment in the
United States. The largest flows of foreign investment occur between the industrialized
countries (North America, Western Europe and Japan). But flows to non-industrialized
countries are increasing sharply.

US International Direct Investment Flows:[3]

Period FDI Outflow FDI Inflows Net

1960-69 $ 42.18 bn $ 5.13 bn + $ 37.04 bn
1970-79 $ 122.72 bn $ 40.79 bn + $ 81.93 bn
1980-89 $ 206.27 bn $ 329.23 bn - $ 122.96 bn
1990-99 $ 950.47 bn $ 907.34 bn + $ 43.13 bn
2000-07 $ 1,629.05 bn $ 1,421.31 bn + $ 207.74 bn
Total $ 2,950.69 bn $ 2,703.81 bn + $ 246.88 bn

Types

A foreign direct investor may be classified in any sector of the economy and could be any
one of the following:[citation needed]

• an individual;
• a group of related individuals;
• an incorporated or unincorporated entity;
• a public company or private company;
• a group of related enterprises;
• a government body;
• an estate (law), trust or other social institution; or
• any combination of the above.

[edit] Methods

The foreign direct investor may acquire voting power of an enterprise in an economy
through any of the following methods:
 • by incorporating a wholly owned subsidiary or company
• by acquiring shares in an associated enterprise
• through a merger or an acquisition of an unrelated enterprise
• participating in an equity joint venture with another investor or enterprise

Foreign direct investment incentives may take the following forms:[citation needed]

• low corporate tax and income tax rates

• tax holidays
• other types of tax concessions
• preferential tariffs
• special economic zones
• EPZ - Export Processing Zones
• Bonded Warehouses
• Maquiladoras
• investment financial subsidies
• soft loan or loan guarantees
• free land or land subsidies
• relocation & expatriation subsidies
• job training & employment subsidies
• infrastructure subsidies
• R&D support
• derogation from regulations (usually for very large projects)

[edit] Global Foreign Direct Investment

UNCTAD said that there was no significant growth of Global FDI in 2010. In 2010 was
$1,122 billion and in 2009 was $1.114 billion. The figures was 25 percent below the pre-
crisis average between 2005 to 2007.[4]

[edit] Foreign direct investment in the United States

The United States is the world’s largest recipient of FDI. More than $325.3 billion in FDI
flowed into the United States in 2008, which is a 37 percent increase from 2007. The $2.1
trillion stock of FDI in the United States at the end of 2008 is the equivalent of
approximately 16 percent of U.S. gross domestic product (GDP).55

Benefits of FDI in America: In the last 6 years, over 4000 new projects and 630,000 new
jobs have been created by foreign companies, resulting in close to $314 billion in
investment.[citation needed] Unarguably, US affiliates of foreign companies have a history of
paying higher wages than US corporations.[citation needed] Foreign companies have in the past
supported an annual US payroll of $364 billion with an average annual compensation of
$68,000 per employee.[citation needed]
Increased US exports through the use of multinational distribution networks. FDI has
resulted in 30% of jobs for Americans in the manufacturing sector, which accounts for
12% of all manufacturing jobs in the US.[5]

Affiliates of foreign corporations spent more than $34 billion on research and
development in 2006 and continue to support many national projects. Inward FDI has led
to higher productivity through increased capital, which in turn has led to high living
standards.[6]

[edit] Foreign direct investment in China

Starting from a baseline of less than $19 billion just 20 years ago, FDI in China has
grown to over $300 billion in the first 10 years. China has continued its massive growth
and is the leader among all developing nations in terms of FDI.[citation needed] Even though
there was a slight dip in FDI in 2009 as a result of the global slowdown, 2010 has again
seen investments increase.[citation needed]

[edit] Foreign direct investment in India

Starting from a baseline of less than USD 1 billion in 1990, a recent UNCTAD survey
projected India as the second most important FDI destination (after China) for
transnational corporations during 2010-2012. As per the data, the sectors which attracted
higher inflows were services, telecommunication, construction activities and computer
software and hardware. Mauritius, Singapore, the US and the UK were among the leading
sources of FDI. FDI for 2009-10 at USD 25.88 billion was lower by five per cent from
USD 27.33 billion in the previous fiscal. Foreign direct investment in August dipped by
about 60 per cent to aprox. USD 34 billion, the lowest in 2010 fiscal, industry department
data released showed. [7]

[edit] Foreign direct investment and the developing world

Foreign investment can be a significant driver of development in poor nations.[citation needed]

It provides an inflow of foreign capital and funds, in addition to an increase in the
transfer of skills, technology, and job opportunities.[citation needed] Many of the East Asian
tigers such as China, South Korea, Malaysia, and Singapore benefited from investment
abroad.[citation needed] The Commitment to Development Index ranks the "development-
friendliness" of rich country investment policies.

Export Reasons
Increasing sales
Exporting is one way of increasing your sales potential; it expands the "pie" that you earn
money from, otherwise you are stuck trying to make money only out of the local market.
In the case of South Africa, market is relatively small in comparison to the markets of
North America, Europe and Asia. While the local market may represent enough sales
potential for smaller firms, for medium and larger companies the local market is just too
small and the only way to expand sales is to export.

It should be said, however, if you are not yet selling regionally and nationally, then you
should first aiming at expanding your market share within the local market. Once you
have saturated the national market, only then should you look beyond the bordersIt has
been said that there are no sales barrier that automatically begins where your border ends.
Increased sales also impact upon your profitability (although not always positively), your
productivity by lowering unit costs, and may increase your firm's perceived size and
stature, thereby affecting its competitive position compared with other similar-sized
organisations. What is more, research and development (R&D) and other costs can also
be offset against a larger sales base, or the move into exports may contribute to the
company's general expansion. For others, exports may be a way of testing the
opportunities for overseas licensing, franchising or production.

Increasing profits

Clearly, you are not likely to enter the export market in order to make a loss. Companies
generally strive to make profits and the bigger the profits the better. In many instances,
exports can contribute to increased profits because the average orders from international
customers are often larger than they are from domestic buyers, as importers generally
order by the container instead of by the pallet (thereby affecting both total sales and total
profits). Some products - especially those that are unique or very innovative in nature
may also command greater profit margins abroad than in the local market. Having said
this, it is also not uncommon - indeed, it is highly likely - that you may receive smaller
profit margins from your export sales compared with the local market. The reason for this
is the highly competitive nature of global markets that forces exporters to lower prices,
squeeze profits and reduce costs. You may also find that in some markets you generate
higher profit margins, while in other markets your profit margins are considerably lower.

Reducing risk and balancing growth

It is risky being bound to the domestic market alone. Export sales to a variety of diverse
foreign markets can help reduce the risk that the company may be exposed to because of
fluctuations in local (and foreign) business cycles. At any one time, the UK, Australia
and Germany will be enjoying different growth rates. By selling in all of these countries,
the risk of low growth in one or more of these countries will be offset by increased
growth in the others, thus resulting in a balanced portfolio of growth overall. In addition,
with the challenging labour conditions that many firms in South Africa face today,
exports may help to create and/or maintain jobs thus reducing the risk of a labour dispute
that could otherwise cripple the company.
Lower unit costs

Exports help to put idle production capacity to work. This is generally achieved the more
efficient utilisation of the existing factory, machines and staff. What is more, because you
are now selling more products without increasing total costs to the same extent, this has
the effect of lowering your unit costs which represents a more productive overall
operation. Lower unit costs make a product more competitive in the local marketplace as
well as in foreign markets, and/or can contribute to the firm's overall profitability.

Economies of scale

Exporting is an excellent way to enjoy pure economies of scale with products that are
more "global" in scope and have a wider range of acceptance around the world (in other
words, they can be used in other parts of the world without much adaptation). This is in
contrast to products that must be adapted for each market, which is expensive and time
consuming and requires more of an investment. The newer the product, the wider range
of acceptance in the world, especially to younger "customers," often referred to as the
"global consumer".

With increased export production and sales, you can achieve economies of scale and
spread costs over a larger volume of revenue. You reduce average unit costs and increase
overall profitability and competitiveness. Long-term exports may enable a company to
expand its production facilities in order to achieve an economic level of production. (This
should not be confused with increased throughput on existing capacity, as discussed
above.)

Minimising the effect of seasonal fluctuations in sales

Being in the Southern Hemisphere, South Africa has seasons that are opposite to those in
the Northern Hemisphere. For companies that sell seasonal goods such as fruit growers,
and swimwear or suntan lotion manufacturers, being able to sell these goods in the
Northern Hemisphere when our season ends, helps achieve a longer and more stable sales
pattern. This increases the sales potential for these goods and also helps reduce risk.

Small and/or saturated domestic markets

One good reason to begin exporting is when the local market is too small to support a
firm's output or when the market becomes saturated. For companies that produce heavy
industrial machinery or that have invested in large factories, they need to be able to sell
enough of their manufactured goods to justify the investment and to insure that the unit
price of goods are kept acceptably low. With relatively small markets such as South
Africa, it is usually not long before the local market becomes saturated and offers limited
additional opportunities for sales. Many of South Africa's larger manufacturers have had
to turn to foreign markets to justify their existence. Examples include most of the motor
vehicle manufacturers such as Opel, VW and BMW; the paper producers such as Mondi
and Sappi; and mining houses such as Anglo-American and De Beers. The same is true of
international firms such as Volvo, Philips and Roche. They only way firms such as these
can justify their investment is to sell abroad because their respective local markets are
just too small.

Overcoming low growth in the home market

It is not uncommon for a recession in the local market to act as a spur for companies to
enter export markets that may offer greater opportunities for sales. While this may have
the benefit of offering ongoing sales potential for the firm in question, the danger with
this approach is that when the local market improves, these companies abandon their
export markets to focus on the now buoyant local market. Overseas importers become
disillusioned with this type of exporter and often see all firms from South African being
the same and will want nothing more to do with South African exporters, even if they are
serious.

Extending the product life-cycle

All products go through a product life-cycle. In the beginning they are novel and sales
increase quite dramatically, then sales level off and they become what is referred to as
mature products and eventually sales start to decrease and the product goes into decline.
Now, a product that has entered its decline stage may have a life elsewhere in the world
and by finding a market where this product could be sold anew, you are essentially
extending the life-cycle of the product. Alternatively, even if it is a fairly common
product, it may also be nearing the end of its life cycle in other overseas markets
(particularly in bigger markets such as Germany, the UK and the US) and they may
decide to discontinue the product. Although the market may have declined to a point that
makes it uneconomical for these companies to continue manufacturing the product in
question, the market may still be big enough for you to supply the declining market. This
has the effect of making more efficient use of the existing factory infrastructure and other
investment spent on producing the product. This extends sales, lowers the unit costs even
further and may allow for higher margins to be generated. When you have a product that
is nearing its life cycle, you should always strive to see if you can find a market for the
product abroad.

Improving efficiency and product quality

The global market is a highly competitive place and by participating in this marketplace,
you need to become equally efficient and quality conscious. It is generally the case that
successful exporters are also very successful in their home markets because of their
heightened efficiency and focus on product quality.

Untapped markets

A company may have a very unique product that is not yet available elsewhere in the
world. In this instance, these untapped markets are likely to drive the firm's export
activities. Other firms may want to take advantage of high-volume purchases in large
markets overseas, such as in the US, Europe and Asia.

Addressing customer, competitor and cost factors

The more formal theory of internationalisation discusses customer, competitor and cost
factors that drive the internationalisation process. The theory argues that in some cases
companies may go global in response to their customers moving abroad. Alternatively,
they may follow their competitors abroad, or may decide to enter a particular foreign
market in order to attack an overseas competitor that has entered the firm's domestic
market, in the competitor's own home market. Finally, companies may go international to
take advantage of lower labour costs, skilled workers or other cost factors (such as lower
telecommunication or energy costs) that are much better in a particular foreign market.
For example, expanding into India to take advantage of programming skills and lower
salaries could translate into a major advantage for a local software development firm. It
should be said, however, that these factors are more likely to be relevant to larger firms,
instead of small scale export operations.

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