Protectionism

By specializing in production instead of producing

everything, each nation would profit from free trade. In
international economics, it is the direct counterpart to the
proposition that people within a national economy will all
be better off if they specialize at what they do best instead of
trying to be self-sufficient
Government actions and policies that restrict or restrain
international trade, often done with the intent of protecting
local businesses and jobs from foreign competition. Typical
methods of protectionism are import tariffs, quotas,
subsidies or tax cuts to local businesses and direct state
intervention.
 Protectionism

Any time a government undertakes any of these

actions, they are engaging in protectionism. There is
significant debate surrounding the merits of
protectionism. Critics argue that, over the long term,
protectionism often ends up hurting the people it is
intended to protect and often promotes free trade as
a superior alternative to protectionism.
 Economic rationales for governmental
intervention
Fighting unemployment:
The main reason for governmental intervention in international
business is to create employment in country because of social,
political and national reason.
 Pressure group formed by unemployed people can bring bug
turmoil in country.
In developed country, government has to give unemployed
incentives to unemployed which is big burden for national
economy.( example united states)
Trade restrictions designed to support domestic industry usually
force other countries to put restriction on products from that
country. ( when United States put restriction on steel imports from
Japan, EU, and Brazil)
 Protecting “infant industries”

The infant industry argument for regulation is typically invoked

in cases where a nation sees the existence of potentially large
external benefits from the growth of an industry, or the
potential for other important non-economic benefits
Subsidization, entry (entry barriers) or regulations mandating
the supply of a specific quantity of a good are tools for any
government to promote infant industries.
What if infant industries never try to be competitive and want
to enjoy benefits from government all their life.
Good example of industries that became competitive because of
government protectionism is automobile industry of Brazil and
South Korea.
 Developing an industrial base

United States and Japan developed their industrial

base by imposing trade restrictions during early days
of their industrial development.
Usually countries with large manufacturing base
have higher per capita income than those that do
not.
Manufacturing industry is more beneficial,
manufacturing industry attracts more FDI, markets
of manufacturing products grow faster, increases
export.
 Non-economic rationales for government intervention:

Maintaining essential industries:

Governments of almost all country put restrictions to
protect essential domestic industries so that they do not
need to be dependent on foreign countries during war.
It is very difficult to remove protection, once given
because the protected companies and their employees
supported politician cant dare to lose their vote bank.
For example U.S. government subsidizes the domestic
production of silicon so domestic computer chip
producers will not depend on foreign suppliers.
 Preventing shipments to unfriendly
countries:

Government always prevent export of strategic goods

that might fall in to the hands of potential customer
U.S. Prevented exports of data encryption
technology until U.S. high- tech companies allied
themselves with privacy advocacy groups to convince
the U.S. government to relax the exports curbs.
Trade controls on nondefense goods also may be
used as weapon of foreign policy try to prevent
another country from meeting its political objective.(
any companies doing business with Iran)
 Multilateral regulation of trade and
investment
GATT: General Agreement on Tariffs and Trade
In 1947 23 countries formed the GATT under the auspices of the
united nations to abolish quotas and reduce tariffs. By 1995, 25
nations were members of GATT before WTO replaced it.
The main idea behind GATT was to open market of any nation to
another country without any probation and restriction.
GATT started facing problems with issue like nontariff barriers in
terms of industrial standards, government procurement, subsidies
and countervailing duties, licensing and customs valuation.
Because of protectionism, extension of trade, institutional
structure and dispute settlement system GATT started coming
short to its promise. In 1995 it was replaced by WTO.
The World Trade Organization (WTO)

WTO, the successor of GATT provides platform to different

countries to come together and to settle disputes regarding
trade.
Currently, the WTO has more than 150 countries, including
china, that collectively account for more than 97 percent of
world trade.
The World Trade Organization (WTO) deals with the global
rules of trade between nations. Its main function is to ensure
that trade flows as smoothly, predictably and freely as possible.
 Doha Development Round was launched in 2001 with an
explicit focus on addressing the needs of developing countries.
 WTO

The conflict between free trade on industrial goods and services

but retention of protectionism on farm subsidies to domestic
agricultural sector (requested by developed countries) and the
substantiation of the international liberalization of fair trade on
agricultural products (requested by developing countries)
remain the major obstacles.
Numbers of countries including India are not satisfied with all
the rules of WTO. WTO doesn’t allowed countries like India to
subsidize its farmers in the name of fair trade
WTO members have agreed that, if they believe fellow-
members are violating trade rules, they will use the multilateral
system of settling disputes instead of taking action unilaterally.
 Regional Economic Integration

RTA is an association or agreement between neighboring countries

which have a common history and interest, are closer
geographically and easy to establish distribution channel.
Out of 380 registered RTAs 205 are currently in operation.
There are concerns that the trend towards regionalism could have
damaging long-run effects on external trade liberalization and on
the multilateral trading system because of the discrimination and
the potential for trade diversion. Trade diversion is the shift of
production from efficient external suppliers to inefficient
members.
Regionalism appears to be a useful tool to dismantle trade
barriers, to be employed with care when unilateral and
multilateral efforts fail
RTAs can turn producers against a multilateral agreement
that they would otherwise support, because free trade would
destroy the rents created by the RTAs.
FTA: A free-trade area is a trade bloc whose member
countries have signed a free-trade agreement (FTA), which
eliminates tariffs, import quotas, and preferences on most (if
not all) goods and services traded between them.
Custom Union: A customs union is a type of trade bloc which
is composed of a free trade area with a common external
tariff. The participant countries set up common external
trade policy, but in some cases they use different import
quotas.
 Major regional trading groups

European Union:
The European Union (EU) is an economic and political union of 28
member states that are located primarily in Europe. The EU operates
through a system of supranational independent institutions and
intergovernmental negotiated decisions by the member states.
The EU has developed a single market through a standardized system
of laws that apply in all member states. Within the Schengen Area
(which includes 22 EU and 4 non-EU states) passport controls have
been abolished.EU policies aim to ensure the free movement of people,
goods, services, and capital
With a combined population of over 500 million populations, or 7.3%
of the world population, the EU in 2012 generated a nominal gross
domestic product (GDP) of 16.584 trillion US dollars, constituting
approximately 23% of global nominal GDP.
 NAFTA

The North American Free Trade Agreement is an

agreement signed by Canada, Mexico, and the
United States, creating a trilateral rules-based trade
bloc in North America.
 The agreement came into force on January 1, 1994.
It superseded the Canada–United States Free Trade
Agreement between the U.S. and Canada. In terms of
combined purchasing power parity GDP of its
members, as of 2007 the trade bloc is the largest in
the world.
 CARICOM: The Caribbean community

The Caribbean Community was established in 4th July 1973,

in order to establish free-trade area between commonwealth
countries of Caribbean.
 The major objectives of CARICOM are to create the full
employment, sustained economic development and
convergence; expansion of trade and economic relations with
third States; enhanced levels of international competitiveness;
organization for increased production and productivity.
Member countries: Antigua and Barbuda, The Bahamas,
Barbados, Belize, Dominica, Grenada, Guyana, Haiti,
Jamaica, Montserrat, Saint Lucia, St. Kitts and Nevis, St.
Vincent and the Grenadines, Suriname, Trinidad and Tobago.
 Major regional trading groups

South American community of nations(CSN)

 Association of southeast Asian
nations(ASEAN)
Asia pacific economic cooperation(APEC)
The African union
 South Asian association for regional
cooperation(SAARC).
 The Political / Legal Environment

The laws and policies of the government and society can

affect international business. Political situations can be
stable or unstable and can create opportunities and threats.
Business needs to consider the surrounding political and
legal environmental forces. The economic interests of the
country that an international marketer does business in
might not necessarily coincide with their own.
Political factors will impact on government policies and
they will affect the costs and certainty of doing business in
the host/foreign country, Stability of the government and
continuity affects business confidence
 The Political / Legal Environment

The kinds of legal systems: comparisons between home and

host countries; differences create more complications.
Equity and justice versus corruption, The costs of setting up
a business (registration and administration), Costs and
efficacy of judicial system when settling disputes
Selecting and operating in foreign markets requires close
attention to political factors. Evaluate stability of
government; this will impact on the stability of conducting
business in that country. Understand Government Policies
Understand relations between Host Government and Home
Government. Evaluate Political Risk. Assess Bribery and
Corruption. Assess Country Government Transparency
 The Political / Legal Environment

Political Environment Individual Governments. The

government at home and abroad will affect the way in which
business operates and several issues need to be considered.
Home country versus host country, Structure of
government , Government policies and regulation.
Political environment individual governments Structure of
government. ideology: Communism or capitalism, system
with strict regulation of private ownership
Stability of Government Policies, Issues that can affect the
stability of a government, Radical shifts in government
philosophy when an opposing political party ascends to
power, Pressure from nationalist and self- interest groups
 The Political / Legal Environment

Nationalism: Nationalism is an intense feeling of national pride

and unity The more a country feels threatened by some outside
force or as the domestic economy declines, the more nationalistic it
becomes in protecting itself against intrusions
 Government policies and regulation: Incentives and government
programs, Tax incentives for hi-tech industries in certain parts of
China, Agricultural subsidies in Europe.
Political Risks of Global Business, Confiscation – the seizing of a
company’s assets without payment.• Expropriation – where the
government seizes an investment but some reimbursement for the
assets is made
Terrorism and the World Economy, Terrorism: A world post-
September 11, Cyber terrorism, hacking. Intellectual Property.
 Economic environment

A country’s economic policies are a leading indicator of government’s

goals and its planned use of economic tools and market reforms.
Economic development directly impacts citizens, managers,
companies, policymakers, and institutions.
International Economic Analysis: Difficulty in stipulating a definitive
set of indicators to estimate the performance and potential of a
country’s economy.
Elements of the Economic Environment Gross domestic product
(GDP): the total value of all final goods and services produced in a
country in a given year equal to total consumer, investment, and
government spending, plus the value of exports, minus the value of
imports.
 Other Features of an Economy Inflation Unemployment Debt Income
distribution Poverty Labor costs Productivity Balance of payments.
 Economic environment

Debt Internal Debt: Portion of the government debt that is

denominated in the country’s own currency and held by domestic
residents External Debt: Debt owed to foreign creditors and
denominated in foreign currency.
Labor Costs Labor and Total Costs For many goods and services,
the cost of labor is a key element of total costs. Consequently,
companies scan the world, looking for markets that offer lower-
cost labor.
Means of Economic Transition Liberalizing economic activity
reforming business activity establishing legal and institutional
frameworks Success is linked to how well the government deals
with: Privatization Regulation Property right protection Fiscal
and monetary reform .
 Socio-cultural environment

 “Culture of civilization is that complex whole which includes

belief, art, morals, law, custom knowledge and other capabilities
and habits acquired by man as a member of the society
Cultural Adaptation –While introducing new products, techniques,
ideas, segmentation one should consider the extent to which the
different categories of consumers adapt to the new things or
environment.
 Cultural Transmission – The elements of culture are transmitted
among the members of the culture from one generation to the next
and to the new members admitted in the society. As the time goes
culture accumulates more techniques, ideas, product and skills.
Literature, Film, T.V, Social institutions, advertising, marketing
techniques, etc. play an important role in cultural transmission.
 Socio-cultural environment

Cultural Traits: - 1. Masculine & Feminine Culture,

Universalism vs. Particularism, Individualism vs.
Communitarianism, Neutral vs. Emotional
Religion – The cost of ignoring certain religious aspects
could be very high, sometimes fatal in international business.
E.g.. 1 – When an American fast food chain was planning to
enter India, one political party stated that it would oppose
the marketing of beef product in the country.
The Islamic holy book Koran prohibits payment &
acceptance of interest. Islamic banks do not pay interest to
the depositors nor do they charge interest to borrower’s
.Rather the banks share the profit with depositors.
 Socio-cultural environment

Ethno domination – In many countries one or other industry

or trade is dominated by certain ethnic groups. The
automobile spare parts business in India is dominated by
Sikhs.
Language – Differences in language is a very important
problem area in business. Ford’s third word truck brand
name Fiera meant “Ugly old woman” in Spanish.
Consumer Preferences: Even when a product serves the same
purpose, the relative importance of various product
attributes may differ b/w markets. Goodyear tires for
example stress tires safety in Britain, durability and mileage
in U.S and agile performance in Germany
 Ethical environment

Ethics is standards of moral conduct that individuals

and groups set for themselves. Ethics defines what’s
“right” or “wrong” and is closely linked to personal
values (beliefs and attitudes).
What do you deem as “right” or “wrong”? Cheating
on an exam or assignment if you don’t get caught?
Using your neighbor’s wireless internet or cable
without paying? Pirating music/movies/games from
the Internet
 Ethical environment

Business Ethics• Business Ethics: -collection of

principles & rules for an organization• Codes of
Ethics address issues such as… – Accepting business
gifts – Employee privacy – Using company property
for personal use – Maintaining confidentiality
An ethical issue is an identifiable problem, situation,
or opportunity that requires a person to choose from
among several actions that may be evaluated as right
or wrong, ethical or unethical
 Exchange rate

Foreign exchange: is money denominated in the currency

of another nation or group of nations. The market in which
these transactions take place is the foreign-exchange market.
An exchange rate is the price of a currency or number of units
of one currency that buys one unit of another currency.
It is a price of a currency. It is the number of units’ one
currency that buys one unit of another currency. For example
exchange rate of NRS 1 is 0.01 U.S. dollar.
The bank for international settlement (BIS), a central banking
institution in Basel, Switzerland owned and controlled by 55
member nations. It makes rules and regulation for foreign
exchange market.
 Exchange rate

Dealers (Deutsche bank, UBS, Citi, RBS, Barclays capital

and HSBC) are money center bank. Other than money
center bank locals and regional bank are also engaged in
foreign exchange market, pension funds, money market
funds, currency funds, mutual funds.
These dealers, at whatever level provide foreign-exchange
services to financial and nonfinancial customers
(governments, MNEs) and make money on commission
basis.
Now foreign-exchange market provides service to its
customers electronically too through Reuters, EBS and
Bloomberg.
 Foreign exchange

is money denominated in the currency of another

nation or group of nation.
The market in which these transactions take place is
the foreign-exchange market.
Foreign exchange can be in the form of cash, funds
available on credit and debit cards, traveler’s checks,
bank deposits, or other short terms claims.
 Major Foreign-Exchange Markets

Spot market
The spot market or cash market is a public financial market, in
which financial instruments or commodities are traded for
immediate delivery.
 It contrasts with a futures market in which delivery is due at a
later date. In spot market settlement happens in t+2 working days
i.e. delivery of cash and commodity must be done after the two
working day of the trade date.
The rate at which transactions takes place is known as spot rate.
The dealer always quotes a bid (buy) and offer (sell) rate. The bid
is the price at which dealer is willing to buy foreign currency; offer
is the price at which the dealer is willing to sell foreign currency.
 Major Foreign-Exchange Markets

Forward market
A forward foreign exchange (FX) transaction involves
the purchase of one currency against the sale of
another for delivery on an agreed date in the future.
 It is similar to a spot FX deal, only for settlement at a
later date, for example 7 days, one month, one year or
a specific date
Forward transactions involve the forward transactions
will be settled at the forward rate no matter what the
actual spot rate is at the time of settlement.
 Forward market

Example, an Indian company agreed to borrowed

electronic goods from South Korea with immediate
delivery but payment due in 3 months. Now Indian
company makes an agreement with currency dealer
to deliver the south Korean currency or dollar at a
forward rate.
If forward rate of foreign currency is less than spot
rate, then the foreign currency is selling at a forward
discount else forward premium.
 Options

An option is the right, but not obligation, to buy or

sell a foreign currency within a certain time period or
on a specific date at a specific exchange rate.
For example, a Nepalese company sets to buy
$500,000 at 100 RS per dollar. If strike price is more
than spot price then a company may simply walkout
without doing any transaction.
 Futures

A contractual agreement, generally made on the

trading floor of a futures exchange, to buy or sell a
particular commodity or financial instrument at a
pre-determined price in the future.
Futures contracts detail the quality and quantity of
the underlying asset; they are standardized to
facilitate trading on a futures exchange. Some
futures contracts may call for physical delivery of the
asset, while others are settled in cash.
 Determining Exchange Rates

Currency exchange rates can be floating, in which case they change

continually based on a multitude of factors, or they can be pegged (or
fixed) to another currency, in which case they still float, but they move
in tandem with the currency to which they are pegged.
 A U.S. investor, knowing the dollar to euro exchange rate is valuable
when selecting European investments. A declining U.S. dollar could
increase the value of foreign investments, just as an increasing U.S.
dollar value could hurt the value of your foreign investments.
 Floating rates are determined by the market forces of supply and
demand. How much demand there is in relation to supply of a currency
will determine that currency's value in relation to another currency.
For example, if the demand for U.S. dollars by Europeans increases, the
supply-demand relationship will cause an increase in price of the U.S.
dollar in relation to the euro.
 Determining Exchange Rates

There are countless geopolitical and economic announcements that affect

the exchange rates between two countries, but a few of the most popular
include: interest rate decisions, unemployment rates, inflation reports,
gross domestic product numbers and manufacturing information.
 Some countries may decide to use a pegged exchange rate that is set and
maintained artificially by the government. This rate will not fluctuate
intraday, and may be reset on particular dates known as revaluation
dates.
A country's exchange rate regime under which the government or central
bank ties the official exchange rate to another country's currency (or the
price of gold) is known as fixed exchange rate.
The purpose of a fixed exchange rate system is to maintain a country's
currency value within a very narrow band. Also known as pegged
exchange rate.
 Determining Exchange Rates

Nonintervention: currency in a floating-rate

world:
Intervention: currency in a fixed rate world:
Assignment:
Write your opinion about government intervention
on economical and non-economical intervention on
international trade.
How do we determine exchange rates? Describe with
an example.