Chapter 2, Chapter 10

The Dynamic Environment of International Trade

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Learning Objectives

1.
1. The
The basis
basis for
for the
the reestablishment
reestablishment of
of world
world trade
trade
following
following World
World WarWar IIII
2.
2. The
The importance
importance of
of balance-of-payment
balance-of-payment figures
figures
to
to aa country’s
country’s economy
economy

3.
3. The
The effects
effects of
of protectionism
protectionism on
on world
world trade
trade

4.
4. The
The seven
seven types
types of
of trade
trade barriers
barriers
Chapter Learning Objectives

5.
5. The
The importance
importance of
of GATT
GATT and
and the
the World
World Trade
Trade
Organization
Organization

6.
6. Introduction
Introduction to
to EU
EU

7.
7. The
The emergence
emergence ofof the
the International
International Monetary
Monetary
Fund
Fund and
and the
the World
World Bank
Bank Group
Group
 Introduction

Proliferation
Proliferation of
of trade
trade and
and emergence
emergence of
of the
the global
global economy
economy

Intensification
Intensification of
of global
global competition
competition

More
More emerging
emerging markets
markets

Developments
Developments in
in technology
technology allow
allow communications
communications with
with
global
global consumers
consumers and
and movement
movement ofof goods
goods
World Trade and U.S. Multinationals

1. Rapid growth of underdeveloped countries

and new global marketing opportunities
2. Rising living standards have created
marketing opportunities for U.S. firms
3. Resistance over domination of U.S.
multinationals
4. Expropriation and domestication of U.S.
investments in Latin America
5. In the Europe, U.S. multinationals were
controlled tightly by protectionism laws
World Trade and U.S. Multinationals
1. Resurgence of competition from all over the
world challenged the supremacy of American
industry
2. Newly industrialized countries (NICs) such as
Brazil, Mexico, South Korea, Taiwan, Singapore,
and Hong Kong experienced rapid
industrialization
3. Economic power evenly distributed with growth
of MNCs from other countries (see Exhibit 2-2)
4. Establishment of the WTO
5. Integration of European Union countries
6. Creation of NAFTA, AFTA, and APEC
21st Century: The First Decade and Beyond

With
With exception
exception of
of China,
China, slower
slower economic
economic growth
growth
in
in U.S.
U.S. and
and other
other countries
countries isis currently
currently evident.
evident.

Faster
Faster growth
growth rates
rates expected
expected in
in developing
developing
countries
countries such
such as
as Brazil,
Brazil, China,
China, India,
India, Indonesia,
Indonesia,
and
and Russia.
Russia.
More
More trade
trade expected
expected in
in emerging
emerging markets,
markets,
regional
regional trade
trade areas,
areas, and
and the
the established
established markets
markets
in
in Europe,
Europe, Japan,
Japan, and
and U.S.
U.S.

Companies
Companies need
need to
to be
be more
more efficient,
efficient, improve
improve
productivity,
productivity, expand
expand global
global reach,
reach, and
and respond
respond
quickly.
quickly.

Greater
Greater growth
growth in
in international
international sales
sales expected
expected by
by
smaller
smaller firms.
firms.
 Balance of Payments
1. When countries trade there are financial transactions among
businesses or consumers of different nations
2. Money constantly flows into and out of a country
3. The system of accounts that records a nation’s international
financial transactions is called its balance of payments (BP)
4. It records all financial transactions between a country’s firms,
and residents, and the rest of the world usually over a year
5. The BP is maintained on a double-entry bookkeeping system
 Balance of Payments
The BP is the difference between receipts and payments

BP Receipts
BP Payments
•merchandise export sales.
•costs of goods imported.
•money spent by foreign tourists.
•spending by U.S. tourists
•transportation.
overseas.
•payments of dividends and
•new overseas investments.
interest from FDI abroad.
•cost of foreign military and
•new foreign investments in the
economic aid.
U.S.
 Balance of Payments
The BP includes three accounts:

(1)
(1) current
current account—a
account—a record
record of
of (2)
(2) the
the capital
capital account—a
account—a record
record of
of
all
all merchandise
merchandise exports,
exports, imports,
imports, direct
direct investment,
investment, portfolio
portfolio
and
and services
services plus
plus unilateral
unilateral investment,
investment, and
and short-term
short-term capital
capital
transfers
transfers of
of funds;
funds; movements
movements to to and
and from
from countries;
countries;

(3)
(3) the
the official
official reserves
reserves account—a
account—a record
record of
of exports
exports and
and imports
imports of
of gold,
gold,
increases
increases or or decreases
decreases in
in foreign
foreign exchange,
exchange, and
and increases
increases or
or decreases
decreases in
in
liabilities
liabilities to
to foreign
foreign central
central banks;
banks;
 Balance of Payments and Exchange Rate
1. If a country’s expenditures consistently exceed its income, its
standard of living falls
2. Its exchange rate vis-à-vis foreign monies declines
3. When foreign currencies can be traded for more dollars, U.S.
products are less expensive for foreign customers and exports
increase
4. Simultaneously foreign products are more expensive for U.S.
buyers and the demand for imported goods is reduced
 Protectionism: Logic and Illogic
Countries
Countries use
use protectionist
protectionist measures
measures to
to shield
shield aa country’s
country’s markets
markets from
from
intrusion
intrusion by
by foreign
foreign competition
competition and
and imports.
imports.

Arguments
Arguments for
for Protectionism
Protectionism include:
include:

1.
1. maintain
maintain employment
employment and and reduce
reduce unemployment.
unemployment.
2.
2. increase
increase ofof business
business size,size, and
and
3.
3. retaliation
retaliation and
and bargaining.
bargaining.
4.
4. protection
protection ofof the
the home
home market.
market.
5.
5. need
need to
to keep
keep money
money at at home.
home.
6.
6. encouragement
encouragement of of capital
capital accumulation.
accumulation.
7.
7. maintenance
maintenance of of the
the standard
standard ofof living
living and
and real
real wages.
wages.
8.
8. conservation
conservation of of natural
natural resources.
resources.
9.
9. protection
protection ofof an
an infant
infant industry
industry
10.
10.industrialization
industrialization of of aa low-wage
low-wage nation
nation
11.
11.national
national defense
defense
Protectionism: Logic and Illogic

Arguments
Arguments 9-11
9-11 above
above are
are considered
considered valid
valid for
for
protectionism
protectionism

In
In general,
general, protectionism
protectionism contributes
contributes to
to industrial
industrial
inefficiency
inefficiency and
and makes
makes aa nation
nation uncompetitive
uncompetitive

Protectionism
Protectionism isis implemented
implemented through
through the
the
imposition
imposition of
of trade
trade barriers,
barriers, which
which include
include tariff
tariff
barriers
barriers and
and non-tariff
non-tariff barriers
barriers
 Six Types of Non-Tariff Barriers

(1)
(1) Specific
Specific Limitations
Limitations on on Trade:
Trade:
1.
1. Quotas
Quotas
2.
2. Import
Import Licensing
Licensing requirements
requirements
3.
3. Proportion
Proportion restrictions
restrictions of
of foreign
foreign to
to
domestic
domestic goods
goods (local
(local content
content requirements)
requirements)
4.
4. Minimum
Minimum import
import price
price limits
limits
5.
5. Embargoes
Embargoes

(2)
(2) Customs
Customs andand Administrative
Administrative Entry
Entry Procedures:
Procedures:
1.
1. Valuation
Valuation systems
systems
2.
2. Antidumping
Antidumping practices
practices
3.
3. Tariff
Tariff classifications
classifications
4.
4. Documentation
Documentation requirements
requirements
5.
5. Fees
Fees
 Six Types of Non-Tariff Barriers

(3)
(3) Standards:
Standards:
1.
1. Standard
Standard disparities
disparities
2.
2. Intergovernmental
Intergovernmental acceptances
acceptances of
of testing
testing
methods
methods and
and standards
standards
3.
3. Packaging,
Packaging, labeling,
labeling, and
and marking
marking

(4)
(4) Government
Government Participation
Participation in
in Trade:
Trade:
1.
1. Government
Government procurement
procurement policies
policies
2.
2. Export
Export subsidies
subsidies
3.
3. Countervailing
Countervailing duties
duties
4.
4. Domestic
Domestic assistance
assistance programs
programs
 Six Types of Non-Tariff Barriers
(5)
(5) Charges
Charges on on imports:
imports:
1.
1. Prior
Prior import
import deposit
deposit subsidies
subsidies
2.
2. Administrative
Administrative feesfees
3.
3. Special
Special supplementary
supplementary duties
duties
4.
4. Import
Import credit
credit discriminations
discriminations
5.
5. Variable
Variable levies
levies
6.
6. Border
Border taxes
taxes

(6)
(6) Others:
Others:
1.
1. Voluntary
Voluntary export
export restraints
restraints
2.
2. Orderly
Orderly marketing
marketing agreements
agreements
 Monetary Barriers
In
In addition
addition to
to the
the Six
Six Types
Types of
of Non-Tariff
Non-Tariff Barriers,
Barriers, monetary
monetary barriers
barriers are
are
also
also used
used by
by countries
countries

Three
Three types
types of
of monetary
monetary barriers
barriers include:
include:

1.
1. Blocked
Blocked currency:
currency: Blockage
Blockage isis accomplished
accomplished by by refusing
refusing
to
to allow
allow importers
importers to
to exchange
exchange itsits national
national currency
currency for
for the
the
sellers’
sellers’ currency.
currency.
2.
2. Differential
Differential exchange
exchange rates:
rates: It
It encourages
encourages the the
importation
importation ofof goods
goods thethe government
government deems
deems desirable
desirable andand
discourages
discourages importation
importation of of goods
goods the
the government
government does does notnot
want
want byby adjusting
adjusting the
the exchange
exchange rate.
rate. The
The exchange
exchange rate
rate
for
for importation
importation of
of aa desirable
desirable product
product isis favorable
favorable and
and vice-
vice-
versa
versa
3.
3. Government
Government approval:
approval: In In countries
countries where
where there
there is
is aa
severe
severe shortage
shortage of
of foreign
foreign exchange,
exchange, an an exchange
exchange permit
permit
to
to import
import foreign
foreign goods
goods is is required
required from
from thethe government
government
 General Agreement on Tariffs
and Trade (GATT)

1. GATT created as an agency to serve as watchdog over world

trade and provide a process to reduce tariffs
2. GATT also provided a mechanism to resolve trade disputes
bilaterally

GATT
GATT covers
covers three
three basic
basic areas:
areas:
1.
1. trade
trade shall
shall be
be conducted
conducted on on aa nondiscriminatory
nondiscriminatory basis;
basis;
2.
2. protection
protection shall
shall be
be afforded
afforded domestic
domestic industries
industries
through
through customs
customs tariffs,
tariffs, not
not through
through such
such commercial
commercial
measures
measures as as import
import quotas;
quotas; andand
3.
3. consultation
consultation shall
shall be
be the
the primary
primary method
method used
used to
to solve
solve
global
global trade
trade problems.
problems.

3. GATT now replaced by the World Trade Organization

 World Trade Organization (WTO)

Unlike
Unlike GATT,
GATT, isis an
an institution,
institution, not
not an
an agreement
agreement

1. It sets many rules governing trade between its 132

members

2. WTO provides a panel of experts to hear and rule on

trade disputes between members, and, unlike GATT,
issues binding decisions
European Union (EU) – Economic
& Political Integration
• expansion – deepening and broadening
integration
– European Coal and Steel Community, 1951
• six countries (Belgium, France, Germany, Italy,
Luxembourg, the Netherlands)
– European Economic Community (EEC),
1957
• negative integration – absence of restrictions on
movement of workers, goods, services
• Denmark, Ireland and UK admitted, 1972
– European Union, 1993
• positive integration – actively fostering integration
– Maastricht Treaty, 1992
– Amsterdam Treaty, 1997
• 15 members currently
– Greece (1986), Spain (1986), Portugal (1986),
Austria (1995), Finland (1995), Sweden (1995)
– 10 candidate countries (Bulgaria, Czech Republic,
Estonia, Cyprus, Latvia, Lithuania, Hungary,
Malta, Poland, Romania, Slovenia, Slovakia,
Turkey)
European Union (EU) –
Institutions
• legislative – shared legislative
powers
• Council of the European Union
– ministers and heads of state of member
countries
• European Parliament
– direct election

• executive – European Commission

– President and commissioners
appointed by member states
– confirmed by European Parliament
• judiciary – Court of Justice
 European Union (EU) –
Economic Integration
• single market
– free movement of people, capital (investment), goods
and services
• monetary union
• the Euro
– comes into existence January, 1999
– banknotes and coins in circulation, January 2002
– national banknotes and coins withdrawn from use (February
2002)

• common labor market

• Schengen Agreement, 1985
 European Union (EU) –
Political Integration
• political integration
– common political institutions
• e.g. European Parliament
– common European citizenship
• freedom of movements
• fundamental rights
• civil and political rights
– common social citizenship (limited)
• access to social programs in other countries
– common currency
• money traditionally symbol of sovereignty
• requires integrated monetary policy
 Association of Southeast Asian Nations
(ASEAN)

Brunei
Brunei Singapore
Singapore

Indonesia
Indonesia Thailand
Thailand

Laos
Laos Vietnam
Vietnam

Malaysia
Malaysia

Myanmar
Myanmar

Philippines
Philippines
 Association of Southeast Asian Nations
(ASEAN) + 3

Brunei
Brunei Singapore
Singapore

Indonesia
Indonesia Thailand
Thailand

Laos
Laos Vietnam
Vietnam

Malaysia
Malaysia Japan
Japan

Myanmar
Myanmar S.
S.Korea
Korea

Philippines
Philippines China
China
 Asia-Pacific Economic Cooperation (APEC)

Australia
Australia Japan
Japan Philippines
Philippines

Brunei
Brunei South
SouthKorea
Korea Russia
Russia

Canada
Canada Malaysia
Malaysia Singapore
Singapore

Chile
Chile Mexico
Mexico Taiwan
Taiwan

China
China New
NewZealand
Zealand Thailand
Thailand

Hong
HongKong
Kong Papua
PapuaNew
NewGuinea
Guinea U.S.A.
U.S.A.

Indonesia
Indonesia Peru
Peru Vietnam
Vietnam
North American Free-Trade Area (NAFTA)

Canada
Canada

United
UnitedStates
States

Mexico
Mexico
 The International Monetary Fund (IMF)

1. IMF was created to assist nations in becoming and remaining

economically viable
2. It assists countries that seek capital for economic development
and restructuring
3. IMF loans come with stipulations that borrowing countries slash
spending and impose controls to curb inflation
4. It helps maintain stability in the world financial markets

Objectives
Objectives ofof the
the IMF
IMF include:
include:
1.
1. stabilization
stabilization ofof foreign
foreign exchange
exchange rates
rates
2.
2. establish
establish convertible
convertible currencies
currencies to
to
facilitate
facilitate international
international trade
trade
3.
3. lend
lend money
money to to members
members inin financial
financial
trouble
trouble
 World Bank Group (WBG)
The
The goal
goal of
of WBG
WBG isis to
to reduce
reduce poverty
poverty and
and the
the improvement
improvement ofof
living
living standards
standards by
by promoting
promoting sustainable
sustainable growth
growth and
and investment
investment
in
in people.
people.

The
The functions
functions of
of the
the WBG
WBG include:
include:
1. lending money to countries to finance development projects in
education, health, and infrastructure;
2. providing assistance for projects to the poorest developing countries;
3. lending directly to the private sector in developing countries with
long-term loans, equity investments, and other financial assistance;
4. provide investors with investment guarantees against
“noncommercial risk,” so developing countries will attract FDI; and
5. provide conciliation and arbitration of disputes between governments
and foreign investors
 Protests Against Global Institutions

In
In 1999
1999 “anti-capitalist
“anti-capitalist protestors”
protestors” complained
complained against
against the
the WTO,
WTO, and
and IMF,
IMF,
over
over the
the unintended
unintended consequences
consequences of of globalization
globalization that
that include:
include:

1. environmental concerns
2. worker exploitation and domestic job losses
3. cultural extinction
4. higher oil prices, and
5. diminished sovereignty of nations