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UNIT II - INTERNATIONAL TRADE AND INVESTMENT

Promotion of global business – the role of GATT/WTO – multilateral trade negotiation and
agreements – VIII & IX, round discussions and agreements – Challenges for global business –
global trade and investment – theories of international trade and theories of international
investment – Need for global competitiveness – Regional trade block – Types – Advantages
and disadvantages – RTBs across the globe – brief history.

1) Promotion of global business and global trade/International trade

Global trade/International trade: Global trade, also known as international trade, is simply
the import and export of goods and services across international borders or territories of
the world.
Import: Buying goods and services from abroad or other countries
Export: Selling goods and services to abroad or other countries
“International trade is exchange of capital, goods, and services across international borders
or territories”
India’s major exports
Risks in International trade
Textiles, Spices, engineering and textile products,
 Buyer insolvency: Importer not able precious stones, petroleum products, jewelry,
to pay sugar, steel chemicals, zinc and leather products.
 Non-acceptance: Buyer may reject Most of the exported goods are exempt from
goods and services based on some export duties.
specifications
 Credit risk: Allowing buyer to possess India also exports services to several countries,
goods without prior payment primarily to the US. In fact, India is among the
 Regulatory risk world’s largest exporters of services related to
 Exchange rate risk information and communication technology
 Government intervention (ICT). It is also the key destination for business
 Political risk process outsourcing (BPO).
 War and other uncontrollable events (Remaining assignment) Role of EXIM for
International trade

India’s major imports

Need for global trade
 Large scale production
 Degree of self sufficiency
 Geographic factors
 Occupational distribution
 Means of transportation
 Compensating the production
Components of International trade and
investment
 Trade in Goods & Services
 Foreign Direct Investment
 Portfolio Investments
 Investment income
 Other Investments
Crude oil machinery, military products, fertilizers,
chemicals, gems, antiques and artworks.
(Remaining assignment).
Terminologies
Freely importable items: For these items, no
import license is required. They can be freely
imported by an individual or a firm.
Canalized items: These items can only be
imported by public sector firms. For example
petroleum products fall under this category.
Prohibited items: Items such as unprocessed
ivory, animal rennet and tallow fat cannot be
exported to India.
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Promotion of global business Promotion tools and Mix for global business

“Promotion includes advertising, personal

selling, sales promotion and other selling
tools.”- Stanton

Promotional tools

 International Advertising
 International Sales Promotion
 Publicity
 Public relations
 Personal Selling
 Direct marketing
 Sponsorship Promotion
 Brand Specific Promotion
 Generic promotions

Figure: An overview of international trade

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2) The role of GATT/WTO – multilateral trade negotiation and

agreements – VIII & IX, round discussions and agreements
General Introduction about GATT

There were many barrier for free trade were laid down to support the government
expenditure After II world war several international measures were undertaken to liberalize
trade and payment between nations International monetary fund’s and international bank
for reconstruction and development were set up International trade organization to deal
with international trade was sough to be set up GATT (general agreement for trade and
tariff)was set to liberalize the trade and reduce the tariff amount The General Agreement on
Tariffs and Trade (GATT) was originally created by the Bretton Woods Conference as part of a
larger plan for economic recovery after World War II. The GATT’s main purpose was to
reduce barriers to international trade. This was achieved through the reduction of tariff
barriers, quantitative restrictions and subsidies on trade through a series of different
agreements. The GATT was an agreement, not an organization. Originally, the GATT was
supposed to become a full international organization like the World Bank or IMF called the
International Trade Organization The agreement was not ratified, so the GATT remained
simply an agreement. The functions of the GATT have been replaced by the World Trade
Organization.

GATT: General Agreement on Tariffs and Trade (GATT) and it was a multilateral agreement
regulating international trade.

"Substantial reduction of tariffs and other trade barriers and the elimination of preferences,
on a reciprocal and mutually advantageous basis."

The basic principles of GATT Objectives of GATT

 1. Most-Favored-Nation (MFN) The General Agreement on Tariff and Trade was a

Treatment
 2. Reciprocity
 3. Transparency
 4. Tariff Binding and Reduction
Defects of GATT
 No enforcement authority
 Problems in formulation of general
rules
 Less benefits for the LDCs
 Quantitative Trade Restrictions
multilateral treaty that laid down rules for conducting
international trade. The preamble to the GATT can be
linked to its objectives.
 To raise the standard of living of the people,
 To ensure full employment and a large and
steadily growing volume of real income and
effective demand
 To tap the use of the resources of the world
fully.
 To expand overall production capacity and
international trade.
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WTO and GATT Trade rounds

Name Start Duration Countries Subjects Achievements

covered
Geneva April 1947 7 23 Tarriffs Signing of GATT
Months
Annecy April 1949 5 34 Tarriffs Countries exchanges
Months some5000 Tarriff
concessions
Torquay September 8 34 Tarriffs Countries exchanged
1950 Months some 8700 tariff
concessions, cutting the
1948 tarriff levels by 25 %
Geneva January 1956 5 22 Tarriffs, $2.5 billion in tariff
II Months admission of reductions
Japan
Dillion Septmeber 11 45 Tariffs Tariff concessions worth
1960 Months $4.9 billion of world trade
Kennedy May 1964 37 48 Tarriffs, Anti- Tariff concessions worth
Months dumping $40 billion of world trade
Tokyo September 74 102 Tariifs, Tarriff reduction worth
1973 Months Nontarriff more than $300 billion
measures achieved
and
Framework
agreements
Uruguay September 87 123 Tariffs, Non The round led to the
1986 Months Tarrif creation of WTO, and
measures, extended the range of
rules, trade negotiations,
services, IP, leading to major
dispute reductions in tariffs about
settlement, 40% and agriculture
textiles, subsidies, an agreement
agriculture to allow full access for
creation of textiles and clothing form
WTO etc developing countries and
an extension of IPR
Doha November2001 ? 159 Tarriffs, non The round has not yet
tariff concluded Bali package
measures, signed on the 7 th
agriculture, December 2013
labour
standards,
environment,
completion,
investment,
transparency,
patent etc
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Activities of GATT

 Tariff bargaining
 Bargaining on non- tariff trade barriers
 Elimination of quantum restriction
 Settlement of disputes between
contracting parties

World Trade Organization (WTO)

WTO was established on January 1, 1995

WTO is the embodiment of the Uruguay Round results and the successor to GATT

Government became member of the WTO on its first day

As of 29 July 2016 there are 164members of the WTO.

Doha Discussions and Agreements Main areas of Negotiation

Commenced on Nov. 2001  Agriculture

Called as DDR or DDA  Non-agricultural market access
Nearly 10Rounds were finished  Services Intellectual property
 Doha, 2001  Trade and development
 Cancún, 2003  Trade and environment
 Geneva, 2004  Trade facilitation
 Paris, 2005  WTO rules
 Hong Kong, 2005  Dispute Settlement
 Geneva, 2006 Understanding
 Potsdam, 2007  TRIMS
 Geneva, 2008  TRIPS
 Nairobi, 2015

Figure: Basic Principles of WTO/GATT and Multilateral Trade Negotiation and Agreement
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Differences between GATT and WTO

GATT WTO
It is a set of rules and multilateral It is a permanent institution
agreement

It was designed with an attempt to It is established to serve its own purpose

establish International Trade Organization
It was applied on a provisional basis Its activities are full and permanent

Its rules are applicable to trade in Its rules are applicable to trade in merchandise
merchandise goods and trade in services and trade in related
aspects of intellectual property
GATT was originally a multilateral Its agreements are almost multilateral
instrument, but plurilateral agreement
were added at a later stage

Its disputes settlement system was not Its disputes settlement systems is fast and
faster and automatic automatic

Challenges for Global business

 Marketing
 Finance
 Supply chain
 Economics
 Foreign politics
 Natural calamity, environment & war or terrorism
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3)Theories of International trade and Investment

Non- FDI Based Explanation: 1) International Collaborative venture 2) Network and

Relational Asset

Foundation concepts of International trade

Comparative advantage: Superior features of a country that provide it with unique

benefits in global competition – derived from either national endowments or
deliberate national policies.

It is the concept that helps answer the question of all nations can gain and
sustain national economic superiority.

Competitive advantage: Distinctive assets or competencies of a firm – derived from

cost, size, or innovation strengths that are difficult for competitors to replicate or
imitate.

It is the concept that helps explain how individual firms can gain and sustain
distinctive competence vis-à-vis competitors.
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Examples of National comparative Examples of Firm’s Competitive advantage

advantage
 China is a low labor cost
production base.
 India’s Bangalore region offers a
critical mass of IT workers.
 Ireland’s repositioning enabled a
sophisticated service economy.
 Dubai, a previously doubtful
Emirate, has been transformed
into a knowledge-based
economy.
 Dell’s prowess in global supply chain
management
 Apple’s design and technology
leadership in telecommunications
 Samsung’s leadership in Curved-
panel TV
 Herman Miller’s design leadership in
office furniture (e.g., Aeron chairs)
 Google innovation in Internet usage
and purpose

1) Mercantilism: The first theory of international trade emerged in England in the mid 16th
century. The belief that national prosperity is the result of a positive balance of trade –
Maximize exports and minimize imports.

2) Absolute advantage principle: The principle of absolute advantage refers to the ability of a
party (an individual, or firm, or country) to produce more number of a good product or
service than competitors, using the same amount of resources.

For instance –Absolute advantage in case of two countries and two goods

Country/Goods Bangladesh China

Clothing 20 10
Food 30 40

For absolute advantage from the above table we can understood that

Bangladesh is superior when compare to China for clothes

China is superior when compare to Bangladesh for Food

3) Comparative advantage theory or Ricardion theory: British economist David Ricardo

(1772- 1823) explained in his Ricardian theory that comparative advantage occurs due to
technological difference. Ricardo’s theory implies that comparative advantage rather than
absolute advantage is responsible for much of international trade

Though, two countries may have same opportunity in a specific factor of production, the
country enjoys comparative advantage which has greater productivity that means
technological difference.

Country/Goods Cloth Wine

England 100 120
Portugal 90 80
For comparative advantage from the above table we can understood that

England achieved Wine production when compare to Portugal

Portugal achieved cloth production when compare to England

4) Factors proportion theory or Hecksher – Ohlin (H –O theory)

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Some countries have large populations and large labour resources. Thus, a country with a
large labour force will be able to produce the goods at a lower cost using a labour intensive
mode of production. Similarly, countries with a large supply of capital will specialize in goods
that involve a capital intensive mode of production.

US-Japan trade, Japan exported labour intensive goods to the USA and imported capital
intensive goods in 1959.

Indo-US trade, India mainly imported capital intensive goods from the USA and exported
labour intensive goods to the latter in 1951.

5) International product life cycle theory by Raymond Vernon

After the product becomes adopted and used in the world markets, production gradually
moves away from the point of origin. In some situations, the product becomes an item that is
imported by its original country of invention.] A commonly used example of this is the
invention, growth and production of the personal computer with respect to the United
States.

In the new product stage, the product is produced and consumed in the US; no export
trade occurs. In the maturing product stage, mass-production techniques are developed and
foreign demand (in developed countries) expands; the US now exports the product to other
developed countries. In the standardized product stage, production moves to developing
countries, which then export the product to developed countries.

6) Michael’s Porter diamond model theory of international trade

Michael Porter’s Diamond Model (also known as the Theory of National Competitive
Advantage of Industries) is a diamond-shaped framework that focuses on explaining why
certain industries within a particular nation are competitive internationally, whereas
others might not.
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Firm Strategy, Structure and Rivalry; Factor Conditions; Demand Conditions; and Related
and Supporting Industries. If these conditions are favourable, it forces domestic
companies to continuously innovate and upgrade.
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7) Dunning’s electric paradigm or OLI framework

Source: https://www.business-to-you.com/porter-diamond-model/ (Very good source to

understand each and everything about business)

8) New trade theory

It was proposed by Paul Krugman in 1970. New trade theory focuses on increasing returns
to scale and network effects through economies of scale.
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4) Need for Global competitiveness

Global competitiveness: Ability of nation and its firms able to provide quality products and
services at competitive prices thereby getting adequate returns
The World Economic Forum defines global competitiveness as "the ability of a country
to achieve sustained high rates of growth in gross domestic product (GDP) per capita."

Factors.affecting global competitiveness

GLOBAL COMPETITIVENESS
 Physical infrastructure plays a critical role in improving the global INDEX
competitiveness of a country. This will lead to the smoother The Global Competitiveness
movement of people, products, and services, facilitating faster Reports asses the
delivery of goods and services. competitiveness landscape of
 The business environment should be as such that it 144 economies of the world. It
improves coordination among public-sector agencies. The best provides information about the
methods include providing support and incentives for R&D drivers of their productivity and
activities, HRD and education, encouraging innovativeness and prosperity. The Report is the
creativity, facilitating the improvement of industrial blocks, and most comprehensive
productivity enhancements of SMEs. assessment of national
competitiveness worldwide.
 High total factor productivity (TFP) is a boon for economic
growth. It shows the synergy and efficiency of both capital and HR
utilization and promotes national competitiveness.
 Productivity campaigns are important because they promote
public-awareness and provide mechanisms to use the
productivity tools and techniques.
 Intensifying R&D activities that contribute to creativity,
innovation, and indigenous technological development is also an
important factor.
 Improving the capacities of SMEs to become increasingly
productive suppliers and exporters makes strategic sense.
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GLOBAL INDEX 2019 AND INDIA’S RANKING
India slipped sharply by 10 notches to 68th position in the Global Competitiveness
Index, 2019.

“India, in 68th position, loses ground in the rankings despite a relatively

stable score, mostly due to faster improvements of several countries previously
ranked lower," the World Economic Forum (WEF) said.
Countries like Colombia (57), Azerbaijan (58), South Africa (60) and Turkey (61)
surpassed India in this year’s survey.

In the overall competitiveness ranking, Singapore replaced the US to take the

first position. In South Asia, India is followed by Sri Lanka (84), Bangladesh (105),
Nepal (108) and Pakistan (110).

5) Regional Trade Blocks (RTBs)

A regional trading bloc (RTB) is a co-operative union or group of countries within a specific
geographical boundary. RTB protects its member nations within that region from imports
from the non-members. Trading blocs are a special type of economic integration. There
are four types of trading blocs they are preferential trade area, Free trade area, Customs
union, and common market.

A group of countries → which are geographically close to each other → have similar trade
policies → with their mutual co-operation allow free flow of goods

Trade blocs have liberal rules for the member countries and separate set of rules for the
non-member countries. RTB facilitate trade to member countries of the group but create
barriers and block the trade of member countries

Types of RTBs

 Preferential Trade Area − Preferential Trade Areas (PTAs), the first step towards
making a full-fledged RTB, exist when countries of a particular geographical region
agree to decrease or eliminate tariffs on selected goods and services imported from
other members of the area.
 Free Trade Area − Free Trade Areas (FTAs) are like PTAs but in FTAs, the participating
countries agree to remove or reduce barriers to trade on all goods coming from the
participating members.
 Customs Union − A customs union has no tariff barriers between members, plus
they agree to a common (unified) external tariff against non-members. Effectively,
the members are allowed to negotiate as a single bloc with third parties, including
other trading blocs, or with the WTO.
 Common Market − A ‘common market’ is an exclusive economic integration. The
member countries trade freely all types of economic resources – not just tangible
goods. All barriers to trade in goods, services, capital, and labor are removed in
common markets. In addition to tariffs, non-tariff barriers are also diminished or
removed in common markets.
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Major Trade Blocks

NAFTA  North American Free Trade Agreement

NAFTA stands for North American Free Trade Agreement .An agreement signed by
Canada, Mexico, and the United States. It came into force on January 1, 1994.

NAFTA has two supplements: North American Agreement on Environmental Cooperation

(NAAEC) North American Agreement on Labour Cooperation (NAALC).

It is the most powerful trade bloc of the world Intra-regional trade between the member
countries is US $ 767 Billion

SAARC SAARC stands for South Asian Association for Regional Cooperation

Headquartered in Kathmandu, Nepal It was established on 8 th December 1985.

Members: 1. Afghanistan 2. Bangladesh 3. Bhutan 4. India 5. Maldives 6. Nepal 7. Pakistan 8.
Sri Lanka.

The SAARC policies aim to promote: Welfare economic, Collective self-reliance among the
countries of South Asia, Accelerate socio-cultural development in the region, Develop good
external relations

CACM CACM stands for Central American Common Market.

Type: Customs Union It was established on 15th December 1960.

Headquartered in Guatemala City.

It consists of 5 Central American member countries: 1. Guatemala 2. Honduras 3. El Salvador

4. Nicaragua 5. Costa Rica

OPEC OPEC stands for Organization of the Petroleum Exporting Countries. It was
established on 14th September, 190

An oil cartel whose mission is to coordinate the policies of the oil-producing countries.

It is headquartered in Vienna, Austria

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Member Countries: 1. Iraq 2. Kuwait 3. Iran 4. Saudi Arabia 5. Venezuela 6. Libya 7. United
Arab Emirates 8. Qatar 9. Indonesia 10.Algeria 11.Nigeria 12.Ecuador 13.Angola 14.Gabon. It
was established on 14th September, 1960

EU EU stands for European Union. Came into existence on 1st January 1958. It is
headquartered at Brussels, Belgium It has 28 member countries: 1. United Kingdom 2. Belgium
3. Finland 4. France 5. Germany 6. Netherlands 7. Norway 8. Poland 9. Portugal 10. Greece
and 18 more.

In January 1999, a common currency € (Euro) was introduced Type: Economic Union EU
offers financial aid to the developing countries It is a strong trade bloc politically, industrially
and economically

ALADI is a Spanish abbreviation for Latin American Integration Association. It replaced Latin
American Free Trade Agreement (LAFTA).

It has 13 member countries: 1. Argentina 2. Bolivia 3. Brazil 4. Chile 5. Colombia 6. Cuba 7.

Panama 8. Mexico 9. Paraguay 10.Ecuador 11.Peru 12.Uruguay 13.Venezuela.
Feature of RTBs
 Voluntary in Character Negative Effects of Trade Blocs
 Mutual Negotiations
Negative effects are for the non-member
 Regional in Character
countries
 Divisions based on political
considerations  → Common External Barriers
 Existence based on usefulness  → Absence of Collective Bargaining
 → Affects Competition
Objectives of trade blocks  → Affects global and international
→ Reduction of trade barriers among the trade
member countries  → High Tariffs
→ Maintaining better relations  → Import Restrictions
→ Imposing barriers on non member  → Loss of Political Sovereignty
countries Trade Blocs & Intra-regional trade
→ Promoting free transfer of labour, capital
and other factors Intra-regional trade means trade carried on
→ Creating common currency and Central within one trading blocs Trade Blocs have
Bank contributed the following favourable factors
→ Collective Bargaining for the growth of Intraregional Trade
→ Assisting member countries
 Removal of trade barriers
→ Enhancing welfare of consumers
 Transfer of labour and capital
→ Generating competition
 Uniformity in political and economic
→ Promoting Higher Employment
policies
Positive Effects of Trade Blocs  Close relations between members
→ Economic Integration  Transport and other infrastructural
→ Co-operative Spirit facilities
→ Expansion of Markets  Common external barriers on non
→ Growth and Development of the region members Common economic
→ Uniform policies policy
→ Increase in trade
→ Product and Market Development
→ Benefits to consumers of member
countries
→ Free transfer of resources / factors
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Advantages of RTBs

The advantages of having a Regional Trading Bloc are as follows −

 Foreign Direct Investment − Foreign direct investment (FDI) surges in TRBs and it
benefits the economies of participating nations.
 Economies of Scale − the larger markets created results in lower costs due to mass
manufacturing of products locally. These markets form economies of scale.
 Competition − Trade blocs bring manufacturers from various economies, resulting in
greater competition. The competition promotes efficiency within firms.
 Trade Effects − as tariffs are removed, the cost of imports goes down. Demand
changes and consumers become the king.
 Market Efficiency − the increased consumption, the changes in demand, and a
greater amount of products result in an efficient market.

Disadvantages of RTBs

The disadvantages of having a Regional Trading Bloc are as follows −

 Regionalism − Trading blocs have bias in favour of their member countries. These
economies establish tariffs and quotas that protect intra-regional trade from outside
forces. Rather than following the World Trade Organization, regional trade bloc
countries participate in regionalism.
 Loss of Sovereignty − A trading bloc, particularly when it becomes a political union,
leads to partial loss of sovereignty of the member nations.
 Concessions − The RTB countries want to let non-member firms gain domestic market
access only after levying taxes. Countries that join a trading bloc needs to make some
concessions.
 Interdependence − The countries of a bloc become interdependent on each other. A
natural disaster, conflict, or revolution in one country may have adverse effect on the
economies of all participants.
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Some other important RTBs

 SAFTA South Asia free trade area based around the Indian sub-continent. Includes
Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.
 Mercosur – a southern American trading block formed in 1991. Includes full members
of Argentina, Brazil, Paraguay and Uruguay. With associate members including Bolivia,
Chile, Colombia, Ecuador. Developed from free trade area to become customs union.
 African Union 55 countries of the continent of Africa. Created to forge closer political
and economic ties. It has aspirations to become a free trade area.

**************All the best**************