Ìnternational business Ìnternational business

management management
Module Module - -11
Ìnternational business Ìnternational business
management management
Introduction Introduction
Meaning and definition Meaning and definition
Features of globalization Features of globalization
Stages of globalization Stages of globalization
Process of globalization Process of globalization
Modes of international business Modes of international business
Globalization of market Globalization of market
Globalization of production, investment Globalization of production, investment
&technology &technology
Advantages & disadvantages of globalization Advantages & disadvantages of globalization
Essential conditions of globalization Essential conditions of globalization
Major challenging for managers in global market Major challenging for managers in global market
Ìntroduction Ìntroduction
Merchant has no nation .it means Merchant has no nation .it means
that a businessman can view the that a businessman can view the
entire world as one country for his entire world as one country for his
operation. the entire globe is just like operation. the entire globe is just like
one country for a business. so one country for a business. so
erasing national and political erasing national and political
boundaries for the purpose of boundaries for the purpose of
business in may be termed as business in may be termed as
globalization. globalization.
Globalization implies integration of the economy Globalization implies integration of the economy
and opening up of economy for FDI by liberalizing and opening up of economy for FDI by liberalizing
the rules and regulations and by creating the rules and regulations and by creating
favorable socio economic and political climate for favorable socio economic and political climate for
global business global business
IMF defines globalization as growing economy, IMF defines globalization as growing economy,
economic independence of countries worldwide economic independence of countries worldwide
through increasing volume and variety of cross through increasing volume and variety of cross
border transactions of goods & services and of border transactions of goods & services and of
international capital flow and also through the international capital flow and also through the
more rapid & widespread diffusion of technology. more rapid & widespread diffusion of technology.
Charles W .L. Hill defines globalization as a shift Charles W .L. Hill defines globalization as a shift
towards a more integrated and interdependent towards a more integrated and interdependent
world economy . world economy .
eatures of Globalization. eatures of Globalization.
Globalization encompasses the following features. Globalization encompasses the following features.
Operating and planning to expand business through out the Operating and planning to expand business through out the
world world
Erasing the difference between domestic market & foreign Erasing the difference between domestic market & foreign
market. market.
Buying & selling goods & services from any country in the Buying & selling goods & services from any country in the
world world
Establishing manufacturing & distribution facilities in any Establishing manufacturing & distribution facilities in any
part of the world based on feasibility and viability rather part of the world based on feasibility and viability rather
than national considerations. than national considerations.
Product planning and development are based on market Product planning and development are based on market
considerations of entire world. considerations of entire world.
Global orientation in strategies ,organizational culture and Global orientation in strategies ,organizational culture and
managerial expertise . managerial expertise .
Setting the mind and attitude to view the entire globe as a Setting the mind and attitude to view the entire globe as a
single market. single market.
stud Ìnternational business stud Ìnternational business
management management
International business encompasses International business encompasses
a large & growing portion of worlds a large & growing portion of worlds
total business. total business.
It uses different modes of business It uses different modes of business
(exporting & importing) compared to (exporting & importing) compared to
domestic business and even the domestic business and even the
environment is also different. environment is also different.
Learning IBM will help us to make Learning IBM will help us to make
informed decisions informed decisions
companies engage in companies engage in
Ìnternational Business. Ìnternational Business.
%o fulfill it %o fulfill it' 's mission & following s mission & following
objectives. objectives.
Acquire resources . Acquire resources .
Diversify sources of sales and Diversify sources of sales and
supplies. supplies.
Expand sales and profit. Expand sales and profit.
Minimize competitive risks. Minimize competitive risks.
recent increased growt in recent increased growt in
Ìnternational business Ìnternational business
Factors favoring growth in Factors favoring growth in
international business are : international business are :
Expansion of technology. Expansion of technology.
Liberalization of cross border Liberalization of cross border
movements. movements.
Development of infrastructure. Development of infrastructure.
Increase in global competition Increase in global competition
Modes of international business Modes of international business
EXPOR%S/IMPOR%S
Merchandise (Visible) Services (Invisible)
%ourism %ransportation Performance of
services
Use of
assets
(Royalties
for the use
of
trademark,
patents,
copyright,
licensing,
franchise)
Fees (Banking,
insurance,
brokerage)
%urnkey operations;
Management
contracts; Contract
mfg.
Modes of international business Modes of international business
Part Share
J.V.
(pvt.)
M. V.
(Wiith Govt)
INVES%MEN%S
Direct (FDI)
(with control of co.)
100% Share
(Subsidiary)
Portfolio
(without control)
(J.V. - Joint Venture)
(M. V.- Mixed Venture)
Components of Globalization Components of Globalization
Components of Globalization Components of Globalization
Globalization of
Markets
Globalization of
Production
Globalization of
Investment
Globalization of
%echnology
Advantages of Globalization Advantages of Globalization
Free flow of capital and increase in the total capital Free flow of capital and increase in the total capital
employed. employed.
Free flow of technology. Free flow of technology.
Increase in industrialization . Increase in industrialization .
Spread of production facilities throughout the globe. Spread of production facilities throughout the globe.
Balanced development of world economies. Balanced development of world economies.
Increase in production and consumption. Increase in production and consumption.
Commodities at lower prices with high quality. Commodities at lower prices with high quality.
Cultural exchange and demand for a variety of products. Cultural exchange and demand for a variety of products.
Increases in Jobs and Income. Increases in Jobs and Income.
Higher standards of living. Higher standards of living.
Balanced Human Development. Balanced Human Development.
Increase in Welfare and Prosperity. Increase in Welfare and Prosperity.
Disadvantages of Globalization Disadvantages of Globalization
Globalization kills domestic business. Globalization kills domestic business.
Exploits Human Resource. Exploits Human Resource.
Leads to unemployment and underemployment. Leads to unemployment and underemployment.
Decline in demand for domestic products. Decline in demand for domestic products.
Decline in income. Decline in income.
Widening gap between rich and poor. Widening gap between rich and poor.
%ransfer of Natural Resources. %ransfer of Natural Resources.
National sovereignty at stake. National sovereignty at stake.
Leads to commercial and political colonialism. Leads to commercial and political colonialism.
Stages of internationalization Stages of internationalization

Fully Owned
subsidiary
J. V. / M.V.
Franchising
Licensing
Export/import
Domestic
FDI
Essential conditions of globalization Essential conditions of globalization
Govt. of various countries provide the following Govt. of various countries provide the following
conditions for smoothening the process of conditions for smoothening the process of
globalization. globalization.
Liberalizing the rules & regulations of control Liberalizing the rules & regulations of control
Providing freedom for business and industry Providing freedom for business and industry
Providing infrastructural facility Providing infrastructural facility
Removal of tariffs and quotas Removal of tariffs and quotas
Removal of bureaucratic hurdles Removal of bureaucratic hurdles
Encouraging R&D Encouraging R&D
Development of money and capital markets Development of money and capital markets
Providing govt. and administrative support. Providing govt. and administrative support.
Metods of globalization Metods of globalization
Exporting directly Exporting directly
Exporting indirectly Exporting indirectly
Licensing and franchising Licensing and franchising
Contract manufacturing Contract manufacturing
Establishing full marketing facilities Establishing full marketing facilities
Establishing manufacturing facility Establishing manufacturing facility
Joint venture Joint venture
Strategic alliance Strategic alliance
Merger Merger
Globalization process Globalization process
Domestic company exports to foreign countries Domestic company exports to foreign countries
through the dealers or distributors of the home through the dealers or distributors of the home
country country
In the second stage ,the domestic company exports to In the second stage ,the domestic company exports to
the foreign country directly on its own the foreign country directly on its own
In third stage ,the domestic company becomes an In third stage ,the domestic company becomes an
international company by establishing the production international company by establishing the production
and marketing operation sin various key foreign and marketing operation sin various key foreign
countries. countries.
In the fourth stage ,the company replicates a foreign In the fourth stage ,the company replicates a foreign
company by having all the facilities including R&D full company by having all the facilities including R&D full
fledged human resources etc . fledged human resources etc .
In the fifth stage the company becomes a true foreign In the fifth stage the company becomes a true foreign
company by serving the needs of foreign customers company by serving the needs of foreign customers
just like the host company serves. %hus the just like the host company serves. %hus the
globalization means the marketing, production, globalization means the marketing, production,
investment, technology & other activities. investment, technology & other activities.
at are te callenges for at are te callenges for
managers in global market place ? managers in global market place ?
managing an international business is different managing an international business is different
from managing a domestic business for at least from managing a domestic business for at least
four reasons. four reasons.
1.Countries are different 1.Countries are different
2.%he range of problems confronted by a manager 2.%he range of problems confronted by a manager
in an international business in wider and the in an international business in wider and the
problems themselves more complex than these problems themselves more complex than these
confronted by a managers in domestic business confronted by a managers in domestic business
3.Managers must find the ways within the limits 3.Managers must find the ways within the limits
imposed by govt. intervention in the international imposed by govt. intervention in the international
trade & investment system trade & investment system
4. International transactions involve converting 4. International transactions involve converting
money into different currencies. money into different currencies.
Ìnternational business Ìnternational business
management management
Module Module - -33
Ìnternational trade teories Ìnternational trade teories
%rade theory is useful because it helps to %rade theory is useful because it helps to
explain what might be produced in a given explain what might be produced in a given
locale ,where the company might go to locale ,where the company might go to
produce a given product efficiently /and produce a given product efficiently /and
whether governmental practices might whether governmental practices might
interface with the free flow of trade among interface with the free flow of trade among
countries. Basically all theories look in to countries. Basically all theories look in to
the following factors : the following factors :
How much to be traded ? How much to be traded ?
What products to be traded ? What products to be traded ?
With whom to be traded ? With whom to be traded ?
Should the govt. intervene in trade ? Should the govt. intervene in trade ?
Ìnternational trade teories Ìnternational trade teories
Mercantilism Mercantilism
Absolute advantage Absolute advantage
Comparative advantage Comparative advantage
Hecks Hecks- -her her- -ohlin theory ohlin theory
%he new product life cycle theory %he new product life cycle theory
porter porter' 's diamond theory s diamond theory
Implications for international Implications for international
business business
Mercantilism Mercantilism
%he first theory of international trade emerged in England %he first theory of international trade emerged in England
in the mid 16 in the mid 16
th th
century. its principle assertion was that century. its principle assertion was that
gold and silver were the mainstays of national wealth and gold and silver were the mainstays of national wealth and
essential to vigorous commerce. essential to vigorous commerce.
At that time silver and gold were the currency of trade At that time silver and gold were the currency of trade
between countries .the country can earn gold and silver by between countries .the country can earn gold and silver by
exporting goods. exporting goods.
In ordinary means therefore to increases our wealth and In ordinary means therefore to increases our wealth and
treasure is by foreign trade where in we must ever observe treasure is by foreign trade where in we must ever observe
this rule ; to sell more to stranger yearly than we consume this rule ; to sell more to stranger yearly than we consume
of their values of their values
%he main tenet of mercantilism was that it was in a %he main tenet of mercantilism was that it was in a
country country' 's best interests to maintain a trade surplus, to s best interests to maintain a trade surplus, to
expand. expand.
Hence according to Hume ,in the long run no country can Hence according to Hume ,in the long run no country can
sustain a surplus on the balance of trade and so sustain a surplus on the balance of trade and so
accumulated gold and silvers the mercantilists had accumulated gold and silvers the mercantilists had
envisaged. envisaged.
Te teor of absolute advantage Te teor of absolute advantage
Resources required to produced 1 to of cocoa and rice Resources required to produced 1 to of cocoa and rice
COCOA RICE COCOA RICE
Ghana 10 20 Ghana 10 20
south Korea 40 10 south Korea 40 10
production and consumption without trade production and consumption without trade
COCOA RICE COCOA RICE
Ghana 10.0 5.0 Ghana 10.0 5.0
south korea 2.5 10.0 south korea 2.5 10.0
%otal production 12.5 15.0 %otal production 12.5 15.0
Teor of absolute advantage Teor of absolute advantage
K
A
B
G'
K'
G
20
15
10
5
2.5
0 5 10 15 20
C
o
c
o
a
Rice
Production with specialization Production with specialization
COCOA RICE COCOA RICE
Ghana 20.0 0.0 Ghana 20.0 0.0
South korea 0.0 20.0 South korea 0.0 20.0
%otal production 20.0 20.0 %otal production 20.0 20.0
Consumption after Ghana trades 6 tons of cocoa for 6 tons of south korean rice Consumption after Ghana trades 6 tons of cocoa for 6 tons of south korean rice
cocoa rice cocoa rice
Ghana 14.0 6.0 Ghana 14.0 6.0
south korea 6.o 14.0 south korea 6.o 14.0
Increase in consumption as a result of specialisation and trade Increase in consumption as a result of specialisation and trade
COCOA RICE COCOA RICE
GHAN 4.0 1.0 GHAN 4.0 1.0
SOU%H KOREA 3.5 4.0 SOU%H KOREA 3.5 4.0
Comparative Advantage Teor Comparative Advantage Teor
In 1817 principles of political In 1817 principles of political
economy . economy .
David Recardo took Adam Smith David Recardo took Adam Smith' 's s
theory one step further by exploring theory one step further by exploring
what might happen when one what might happen when one
country has an absolute advantage country has an absolute advantage
in production of all goods. in production of all goods.
Assume that Ghana is more efficient Assume that Ghana is more efficient
in the production of both Cocoa and in the production of both Cocoa and
Rice i.e absolute advantage from it Rice i.e absolute advantage from it' 's s
200 units it can produce 20 tons 200 units it can produce 20 tons
Cocoa and no Rice or 15 tons of Rice Cocoa and no Rice or 15 tons of Rice
and no Cocoa or any combinations and no Cocoa or any combinations
between these two that is between these two that is
PPP(Purchasing Power Parity) PPP(Purchasing Power Parity)
Qualifications and Assumptions Qualifications and Assumptions
Only two countries and two goods. Only two countries and two goods.
%ransportation cost is nil. %ransportation cost is nil.
No difference in price of resources. No difference in price of resources.
Resourceas can move freely with in the Resourceas can move freely with in the
country. country.
Constant return on sales. Constant return on sales.
Fixed stock of resources. Fixed stock of resources.
Assume away the effect of trade and Assume away the effect of trade and
income distribution within the country. income distribution within the country.
Heckscer Heckscer- -Olin Teor (H Olin Teor (H- -O O
Teor Teor
%he H %he H- -O theory predicts that countries will O theory predicts that countries will
export those goods that makes extensive export those goods that makes extensive
use of factors that are locally abundant, use of factors that are locally abundant,
while importing goods that make while importing goods that make
extensive use of factors that are locally extensive use of factors that are locally
scarce. scarce.
H H- -o theory argues that the pattern of o theory argues that the pattern of
international trade is determined by international trade is determined by
differences in factor endowment rather differences in factor endowment rather
than productivity. than productivity.
Eg. China excels the export of labour Eg. China excels the export of labour
intensive manufacturing industry intensive manufacturing industry
products such as textiles & footwear products such as textiles & footwear
due to low cost of labour and USA due to low cost of labour and USA
exports agricultural products due to exports agricultural products due to
abundance of land. abundance of land.
Te Leontief Paradox Te Leontief Paradox
In 1953 Wassilly Leontief (Winner of noble In 1953 Wassilly Leontief (Winner of noble
prize in economics in 1975) conducted prize in economics in 1975) conducted
various empirical tests which raised the various empirical tests which raised the
question about the validity of H question about the validity of H- -O theory. O theory.
Using this theory Leontief postulated that Using this theory Leontief postulated that
since USA would be exporter of capital since USA would be exporter of capital
intensive goods & importer of labour intensive goods & importer of labour
intensive goods to his surprise he found intensive goods to his surprise he found
that, USA exports less capital intensive that, USA exports less capital intensive
goods than labour intensive goods than it goods than labour intensive goods than it
imports. %his result has been known as imports. %his result has been known as
Leontief Paradox. Leontief Paradox.
NO one knows that why Leontief NO one knows that why Leontief
Paradox occurs .One possible Paradox occurs .One possible
explanation is that the USA has explanation is that the USA has
special advantage of producing new special advantage of producing new
products made with innovative products made with innovative
technology. technology.
Product Life Ccle Teor Product Life Ccle Teor
Raymond Verman Raymond Verman- - 1960 1960' 's s
He observed that the most of the He observed that the most of the
20 20
th th
century, a large portion of the century, a large portion of the
world world' 's new products had been s new products had been
developed by USA firms and sold developed by USA firms and sold
first in USA market eg. Instant first in USA market eg. Instant
cameras, photo cameras, photo- -copiers ,personal copiers ,personal
computers etc. computers etc.
USA market gave USA firms a strong USA market gave USA firms a strong
intensive to develop new consumer goods intensive to develop new consumer goods
and first sold in USA market with high and first sold in USA market with high
price. So demand in USA market price. So demand in USA market
increased. increased.
%han demand for new products starts to %han demand for new products starts to
grow in other advanced countries like grow in other advanced countries like
Great Britain, France, Germany, Japan. Great Britain, France, Germany, Japan.
%hen USA firms setup production facilities %hen USA firms setup production facilities
in these advanced countries. in these advanced countries.
As the market matures in USA and other As the market matures in USA and other
advanced countries it produce most advanced countries it produce most
standardized and price becomes standardized and price becomes
competitive weapon. competitive weapon.
%he consequence of these trends for the %he consequence of these trends for the
pattern of world trade is that the USA pattern of world trade is that the USA
firms Switches from being an exporter of firms Switches from being an exporter of
the products to an importer in lower costs the products to an importer in lower costs
from the foreign countries. from the foreign countries.
Te New Trade Teor Te New Trade Teor
It emerged in 1970 It emerged in 1970' 's when a number of s when a number of
economists were questioning the economists were questioning the
assumptions of diminishing returns to assumptions of diminishing returns to
specialization used in the trade theory. specialization used in the trade theory.
Economies of scale is the basic component Economies of scale is the basic component
as per this theory. as per this theory.
%his theory argues that if output required %his theory argues that if output required
to release significant scale of economies to release significant scale of economies
represents as substantial preposition of represents as substantial preposition of
total world total world' 's demand for that product. s demand for that product.
Eg. %he aerospace industry currently Eg. %he aerospace industry currently
dominated by two firms Boeing and dominated by two firms Boeing and
Air Bus . Air Bus .
Learning Effect Learning Effect
Learning effect at the cost of saving Learning effect at the cost of saving
that come from learning by doing. that come from learning by doing.
Eg. Labour productivity Eg. Labour productivity
improvement. improvement.
Implications:New trade theory has Implications:New trade theory has
important implications that a country important implications that a country
may predominate in the export of may predominate in the export of
goods which it is first to produce i.e goods which it is first to produce i.e
first mover advantage. first mover advantage.
Te National Competitive Te National Competitive
advantage: Porter Diamond Teor advantage: Porter Diamond Teor
In 1990 Michael Porter of Harward In 1990 Michael Porter of Harward
business school published result of an business school published result of an
extensive research(100 industries and 10 extensive research(100 industries and 10
countries) that attempted to determine countries) that attempted to determine
why some nations succeed and others why some nations succeed and others
failed in international competition in the failed in international competition in the
book book " "the competitive advantage of the competitive advantage of
nations nations¨ ¨..
Eg. Why do Germans & USA do well in Eg. Why do Germans & USA do well in
chemical industry , Japan in automobile. chemical industry , Japan in automobile.
Firm strategy,
Structure, and
Rivalry
Related and
Supporting
Industries
Factors
Endowments
Demand
Conditions
Porter Porter' 's theory has four broad attributes of nation shape, s theory has four broad attributes of nation shape,
the environment in which the local firms compete.%hose are the environment in which the local firms compete.%hose are
as folows: as folows:
Factor endowments Factor endowments-- a nation a nation' 's position in factors of s position in factors of
production such as skilled labor or the infrastructure production such as skilled labor or the infrastructure
necessary to compete in a given industry. necessary to compete in a given industry.
Demand condition Demand condition-- the nature of home demand for the the nature of home demand for the
industry industry' 's product or services. s product or services.
Related and supporting industry Related and supporting industry --the presence or absence the presence or absence
of supplier industries and related industries that are of supplier industries and related industries that are
internationally competitive. internationally competitive.
Firms strategy ,structure and rivalry Firms strategy ,structure and rivalry-- the condition the condition
governing how companies are created , organized and governing how companies are created , organized and
managed and the nature of domestic rivalry. managed and the nature of domestic rivalry.
Ìmplications for business due to Ìmplications for business due to
trade teor of international trade teor of international
business business
Why does all this matter for Why does all this matter for
business ? business ?
%here are three main implications %here are three main implications
for international business . for international business .
1. 1. Location implications Location implications
2. 2. First mover implications First mover implications
3. 3. Policy implications Policy implications
Module Module - -4 4
Ìntroduction Ìntroduction
Managing any business strategically needs an Managing any business strategically needs an
understanding of the business policies. understanding of the business policies.
Govt. announce their trade policies with regard to the Govt. announce their trade policies with regard to the
following from time to time. %here are called the following from time to time. %here are called the
instruments of trade policy. instruments of trade policy.
%hey are : %hey are :
1. 1. %ariffs %ariffs
2. 2. Subsidies Subsidies
3. 3. Import quotas Import quotas
4. 4. Local content requirement Local content requirement
5. 5. Administrative policies Administrative policies
6. 6. Voluntary export restraints Voluntary export restraints
7. 7. Antidumping policy Antidumping policy
Tariffs Tariffs
%ariffs refers to the tax imposed on imports. %ariffs %ariffs refers to the tax imposed on imports. %ariffs
are two types : are two types :
1.specific tariffs 1.specific tariffs
2.valorem tariffs 2.valorem tariffs
Specific tariffs are levied as a fixed charge for each Specific tariffs are levied as a fixed charge for each
unit of product imported. extra tariff of Rs. 1,000 on unit of product imported. extra tariff of Rs. 1,000 on
each %V imported each %V imported
%ariff levied as a proportion of the values of imported %ariff levied as a proportion of the values of imported
goods is called goods is called ad valorem ad valorem' ' tariff. For ex imposition tariff. For ex imposition
of 30 % tax on the value of computers imported of 30 % tax on the value of computers imported
the purpose of tariff is to protect the domestic the purpose of tariff is to protect the domestic
industry by increasing the cost of imported goods. industry by increasing the cost of imported goods.
Govt. of India imposed tariffs to protect domestic Govt. of India imposed tariffs to protect domestic
automobile industry sugar industry, cement industry automobile industry sugar industry, cement industry
and steel industry. and steel industry.
%he following parties gain from the tariff : %he following parties gain from the tariff :
Govt. of importing country : Govt. of the Govt. of importing country : Govt. of the
importing country gets the revenue in the importing country gets the revenue in the
form import duties. form import duties.
Industry of importing country : the Industry of importing country : the
product of importing country would find product of importing country would find
market as the cost of importing goods market as the cost of importing goods
higher than that of domestic goods. higher than that of domestic goods.
Jobs in the domestic country are saved Jobs in the domestic country are saved
Business for the ancillary industry, Business for the ancillary industry,
servicing ,market intermediation etc. is servicing ,market intermediation etc. is
also protected. also protected.
Te following parties are adversel Te following parties are adversel
affected b te tariffs : affected b te tariffs :
Consumers of domestic country lose the demand Consumers of domestic country lose the demand
for its product .thus the consumers pay for the for its product .thus the consumers pay for the
inefficiency of the domestic industry. inefficiency of the domestic industry.
%he industry of the exporting country lose the %he industry of the exporting country lose the
demand for its product ,sale and profit demand for its product ,sale and profit
ultimately ,tariffs enhances the efficiency of ultimately ,tariffs enhances the efficiency of
some countries and the growth of the most some countries and the growth of the most
efficient countries .thus tariffs reduce the efficient countries .thus tariffs reduce the
efficiency of the world economies. this process efficiency of the world economies. this process
results in inefficient utilization of all kinds of results in inefficient utilization of all kinds of
resources. resources.
Subsidies Subsidies
In ordered to encourage domestic production or In ordered to encourage domestic production or
to protect the domestic producer from the to protect the domestic producer from the
foreign competitors, Govt. pays to a domestic foreign competitors, Govt. pays to a domestic
producer by reducing operations cost. Such producer by reducing operations cost. Such
payment called subsidies. payment called subsidies.
Subsidies are in the following forms .they are : Subsidies are in the following forms .they are :
1. 1. Cash grant Cash grant
2. 2. Loans Loans
3. 3. Advances at low rate of interest Advances at low rate of interest
4. 4. %ax holidays %ax holidays
5. 5. Govt. procurement of output at a higher rate Govt. procurement of output at a higher rate
6. 6. Equity participation Equity participation
7. 7. Supply of inputs at lower price Supply of inputs at lower price
Subsidies elp te domestic Subsidies elp te domestic
producers in te following was : producers in te following was :
Acquires the character of a low cost Acquires the character of a low cost
producer and have all the advantage producer and have all the advantage
of low cost producer like high profit of low cost producer like high profit
margin or fixing the price at the margin or fixing the price at the
lower level. lower level.
Compete with a foreign producer in Compete with a foreign producer in
the domestic market. the domestic market.
Enter the foreign markets. Enter the foreign markets.
Advantages and disadvantages of Advantages and disadvantages of
subsidies subsidies
Advantages Advantages
Subsidies enhance the international competitiveness of the domestic industry. Subsidies enhance the international competitiveness of the domestic industry.
therefore the domestic business ,industry and advocates of strategic international therefore the domestic business ,industry and advocates of strategic international
trade favor subsidies. trade favor subsidies.
Subsidies in turn ,help the firms to have the large scale economies and advantages of Subsidies in turn ,help the firms to have the large scale economies and advantages of
low cost producer. low cost producer.
In addition to these advantage firm can enter into the foreign markets before the In addition to these advantage firm can enter into the foreign markets before the
firms of other country can also have the first mover advantage in ASIA and AFRICAN firms of other country can also have the first mover advantage in ASIA and AFRICAN
countries countries
%he first turn advantage brings the advantage of employment and tax gain to the %he first turn advantage brings the advantage of employment and tax gain to the
domestic country. domestic country.
Disadvantages Disadvantages
Subsidies are paid by the got by taxing the individuals .thus subsidies are a national Subsidies are paid by the got by taxing the individuals .thus subsidies are a national
cost . %herefore ,subsidies should produce national benefit more than the national cost . %herefore ,subsidies should produce national benefit more than the national
cost otherwise subsidies are the national waste . cost otherwise subsidies are the national waste .
Infect ,subsidies are not enhancing international competitiveness of domestic Infect ,subsidies are not enhancing international competitiveness of domestic
companies companies
In such case ,subsidies protect the inefficiency of the domestic firms In such case ,subsidies protect the inefficiency of the domestic firms
Hence W%O proposed for the phased withdrawal of subsidies. Hence W%O proposed for the phased withdrawal of subsidies.
Ìmport quotas Ìmport quotas
Import quota is direct restriction on the Import quota is direct restriction on the
quantity of goods which are imported into quantity of goods which are imported into
a country . a country .
%hese restrictions are imposed by the %hese restrictions are imposed by the
issued licenses to certain firms and issued licenses to certain firms and
individuals to import certain quantity of individuals to import certain quantity of
the goods the goods
India had quotas of import of various India had quotas of import of various
goods like cars .motor cycles, milk etc. up goods like cars .motor cycles, milk etc. up
to 31 to 31
st st
march 2001 import quotas provide march 2001 import quotas provide
the protection to the domestic firms from the protection to the domestic firms from
the foreign country competitors. the foreign country competitors.
'oluntar export restraints ('ER 'oluntar export restraints ('ER
A VER is the opposite form of import quotas. A A VER is the opposite form of import quotas. A
VER is a quota on exports of domestic firms VER is a quota on exports of domestic firms
imposed by the exporting country. imposed by the exporting country.
Exporting countries imposed such restrictions Exporting countries imposed such restrictions
mostly at the request of importing country mostly at the request of importing country
Import quotas and VER help the domestic firms Import quotas and VER help the domestic firms
by providing protection from the foreign by providing protection from the foreign
competitors. thus enhance the prices of import competitors. thus enhance the prices of import
goods and make the domestic goods cheep. goods and make the domestic goods cheep.
For ex : Japanese automobile exporters have For ex : Japanese automobile exporters have
certain restraint in 1981 due to the request of US certain restraint in 1981 due to the request of US
govt.foreign exporters mostly accept for the VER govt.foreign exporters mostly accept for the VER
as its violation leads to imposition of import as its violation leads to imposition of import
tariffs, import quotas. tariffs, import quotas.
Local content requirement (LCR Local content requirement (LCR
LCR is a condition that requires some specific fraction of a LCR is a condition that requires some specific fraction of a
product imported be produced domestically. product imported be produced domestically.
%he requirement may be in physical terms (50% of the %he requirement may be in physical terms (50% of the
components should be from the domestic country.) or in components should be from the domestic country.) or in
the value terms ( 50% of the value of the products should the value terms ( 50% of the value of the products should
be produced domestically. be produced domestically.
Most of the developing countries insist on the local content Most of the developing countries insist on the local content
requirements in order to shift at least certain part of requirements in order to shift at least certain part of
manufacturing base in there country manufacturing base in there country
%his helps the country to enhance the employment %his helps the country to enhance the employment
opportunities, utilization of local resources and economic opportunities, utilization of local resources and economic
activities. activities.
%his factor protects the domestic producer as in case of %his factor protects the domestic producer as in case of
quotas. quotas.
Administrative polices Administrative polices
Govt. in addition to the quotas and other Govt. in addition to the quotas and other
restrictions ,use formal and informal restrictions ,use formal and informal
policies to restrict imports and boost policies to restrict imports and boost
exports. exports.
Administrative policies are bureaucratic Administrative policies are bureaucratic
rules and procedures which are formulated rules and procedures which are formulated
to make it difficult to imports enter the to make it difficult to imports enter the
country . Formal trade barrier Most of the country . Formal trade barrier Most of the
developing countries insist on the local developing countries insist on the local
content requirements era like tariffs and content requirements era like tariffs and
quotas are lowest in Japan mostly uses quotas are lowest in Japan mostly uses
the administrative policies the administrative policies
Govt intervention in formulating Govt intervention in formulating
trade policies trade policies
Govt is the custodian of the nation Govt is the custodian of the nation
including industry and business including industry and business
.consequently ,business has become .consequently ,business has become
inefficient due to heavy protection inefficient due to heavy protection
provided by the govt .the other provided by the govt .the other
school of thought is that the business school of thought is that the business
can run efficiently and creating in can run efficiently and creating in
order to give more value to the order to give more value to the
customer customer' 's money, when it is free s money, when it is free
from govt intervention & protection. from govt intervention & protection.
Political arguments for government Political arguments for government
intervention. intervention.
politicians argue for govt intervention politicians argue for govt intervention
from the point of view from the point of view
National security National security
Protecting industries Protecting industries
Protecting jobs Protecting jobs
retaliation retaliation
National securit National securit
Strategic industry from the point of view Strategic industry from the point of view
of national security should be run by the of national security should be run by the
govt. these industries include : defence govt. these industries include : defence
,aerospace, electronics , semiconductors ,aerospace, electronics , semiconductors
,posts, railways & like the same.govt runs ,posts, railways & like the same.govt runs
these industries even in earlier market these industries even in earlier market
economies like USA & Japan. even after economies like USA & Japan. even after
liberalization and globalization of Indian liberalization and globalization of Indian
economy , govt in India reserved eight economy , govt in India reserved eight
strategic industry for exclusive public strategic industry for exclusive public
sector operation . sector operation .
Protecting industries Protecting industries
Major objectives of govt is to protect the Major objectives of govt is to protect the
domestic industry from the foreign competitors. domestic industry from the foreign competitors.
%his can be done only if the govt runs the %his can be done only if the govt runs the
industry as the foreign competitors easily kill the industry as the foreign competitors easily kill the
private industry or business. %his is clearly private industry or business. %his is clearly
evident from the Indian experience .most of the evident from the Indian experience .most of the
sick small scale industrial units have become sick small scale industrial units have become
mortal and the healthy small & medium mortal and the healthy small & medium
industries have become sick after the entry of industries have become sick after the entry of
foreign industries. %his is more so after the entry foreign industries. %his is more so after the entry
of cheap products from china & east Asian of cheap products from china & east Asian
countries ( like %hailand ,south Korea & Malaysia countries ( like %hailand ,south Korea & Malaysia
into Indian market .therefore , politicians argued into Indian market .therefore , politicians argued
that govt should interfere in the business. that govt should interfere in the business.
Protecting jobs Protecting jobs
%he economic liberalization in India led to %he economic liberalization in India led to
the closure of many small industries the closure of many small industries
,downsizing of the large industries, ,downsizing of the large industries,
outsourcing of employees, privatization of outsourcing of employees, privatization of
public sector units .this in turn reduced public sector units .this in turn reduced
the number of jobs in the country. %his the number of jobs in the country. %his
case in true with all other countries which case in true with all other countries which
liberalised and globalize their economies liberalised and globalize their economies
.hence politicians argue that govt should .hence politicians argue that govt should
interfere in business in order to protect interfere in business in order to protect
the basic right of the people, i.e. right for the basic right of the people, i.e. right for
job. job.
Retaliation Retaliation
%he foreign businesses need to be %he foreign businesses need to be
threatened and should be dealt with a threatened and should be dealt with a
tough approach. Only governments can do tough approach. Only governments can do
this with tough approach and attitude with this with tough approach and attitude with
the foreign businesses. %he governments the foreign businesses. %he governments
can do this due to the power to take tough can do this due to the power to take tough
decisions and availability of machinery to decisions and availability of machinery to
implement the decisions otherwise foreign implement the decisions otherwise foreign
businesses control the domestic businesses control the domestic
businesses. businesses.

Economic arguments for Economic arguments for
government intervention government intervention
Economic arguments include : Economic arguments include :
Infant industry arguments Infant industry arguments
Strategic trade policy Strategic trade policy
INFAN% INDUS%RY ARGUMEN%: INFAN% INDUS%RY ARGUMEN%:
When the indusrty is in the infant stage of it When the indusrty is in the infant stage of it' 's life s life
cycle it needs protection from the foreign cycle it needs protection from the foreign
competitors. Infact the Indian government competitors. Infact the Indian government
protected during 1947 to 1990. %he private protected during 1947 to 1990. %he private
industrialists can not invest heavily during infant industrialists can not invest heavily during infant
stage therefore government should interfere in stage therefore government should interfere in
the business to provide capital and infrastructural the business to provide capital and infrastructural
facilities . facilities .
S%RA%EGIC %RADE POLICY S%RA%EGIC %RADE POLICY
%he government intervention is essential in the %he government intervention is essential in the
form of subsidies. %he government should form of subsidies. %he government should
provide subsidies to certain domestic firms which provide subsidies to certain domestic firms which
have competitive advantage. %hese firms with have competitive advantage. %hese firms with
low cost advantage will move to the foreign low cost advantage will move to the foreign
market and get the first mover advantage. market and get the first mover advantage.
Foreign competing firms may create entry Foreign competing firms may create entry
barriers to domestic firms even in the home barriers to domestic firms even in the home
country so it is necessary to provide the entry to country so it is necessary to provide the entry to
the domestic firms to the domestic market. the domestic firms to the domestic market.
Eg: USA Government played this role to provide Eg: USA Government played this role to provide
the entry to domestic firms when Japanese the entry to domestic firms when Japanese
automobiles firms created entry barriers. automobiles firms created entry barriers.
%hus this argument suggests rational for %hus this argument suggests rational for
government intervention in international government intervention in international
business. Government role is essential when business. Government role is essential when
foreign firms create entry barriers by having the foreign firms create entry barriers by having the
first mover advantage (market provided to airbus first mover advantage (market provided to airbus
when Boeing created entry barriers). when Boeing created entry barriers).
However it is criticized that the strategic trade However it is criticized that the strategic trade
policy looks nice in theory but it may be policy looks nice in theory but it may be
unworkable in practice so they suggest for global unworkable in practice so they suggest for global
trading system. trading system.
Global Trading Sstem Global Trading Sstem
Despite the arguments for Despite the arguments for
protectionalism, , there are strong protectionalism, , there are strong
arguments for free global trade. arguments for free global trade.
Practically it lead to the inefficiency Practically it lead to the inefficiency
of both public and private sector of both public and private sector
industry. %he customers in the industry. %he customers in the
protected economies hard to pay protected economies hard to pay
high price for low quality products. high price for low quality products.
Adam Smith & David Ricardo long Adam Smith & David Ricardo long
back suggested for free trade: back suggested for free trade:
Smith to the great depressions: Smith to the great depressions:
David Ricardo as a member of David Ricardo as a member of
parliament could influence the British parliament could influence the British
government to go for free trade in government to go for free trade in
1846. But he great depression of 1846. But he great depression of
1929 1929- -33 reversed the position. %he 33 reversed the position. %he
US & UK Government followed this US & UK Government followed this
inorder to protect the domestic inorder to protect the domestic
industry and jobs. industry and jobs.
Ìnternational Monetar und Ìnternational Monetar und
%he IMF is postwar international monetary %he IMF is postwar international monetary
institution. %he breakdown of gold institution. %he breakdown of gold
standard resulted in vacuum in the field of standard resulted in vacuum in the field of
international trade then the world nations international trade then the world nations
felt that the need for international felt that the need for international
cooperation in economic, trade and cooperation in economic, trade and
balance of payment affairs. US in 1943 balance of payment affairs. US in 1943
published a proposal for establishment of published a proposal for establishment of
an international establising fund. %he USA an international establising fund. %he USA
proposal is known as white plan and UK proposal is known as white plan and UK
proposal is known as keynes plan. proposal is known as keynes plan.
A joint plan is prepared in 1944 in A joint plan is prepared in 1944 in
the form of joint statement by the form of joint statement by
exports for the establishment of exports for the establishment of
international monetary fund. %his international monetary fund. %his
became the basis for international became the basis for international
monetary and financial conference at monetary and financial conference at
Bretton Woods new Hampshire in Bretton Woods new Hampshire in
1944. An agreements was reached to 1944. An agreements was reached to
establish international monetary fund establish international monetary fund
by 44 nations in this conference. by 44 nations in this conference.
%hus the IMF came into being to %hus the IMF came into being to
promote economic and financial promote economic and financial
cooperation among the member cooperation among the member
countries with a view to facilitate the countries with a view to facilitate the
expansion and balanced growth of expansion and balanced growth of
world trade with affect from March world trade with affect from March
1st 1947. %he members of IMF 1st 1947. %he members of IMF
increased from 44 in 1947 to 181 in increased from 44 in 1947 to 181 in
June 1996. June 1996.
Objectives of ÌM Objectives of ÌM
Avoid the competitive devaluation and Avoid the competitive devaluation and
exchange control. exchange control.
Establish & maintain currency Establish & maintain currency
convertibility with stable exchange rates. convertibility with stable exchange rates.
Develop multilateral trade And payments. Develop multilateral trade And payments.
%o promote the international monetary %o promote the international monetary
cooperation through a permanent institute cooperation through a permanent institute
which provides machinery for consultation which provides machinery for consultation
and collaboratiop on international and collaboratiop on international
monetary problems. monetary problems.
%o facilitate the expansion of balanced %o facilitate the expansion of balanced
growth of international trade and to growth of international trade and to
contribute thereby to the promotion and contribute thereby to the promotion and
maintenance of high levels of employment maintenance of high levels of employment
and real income. and real income.
%o the development of all members as the %o the development of all members as the
primary objectives of economic policy. primary objectives of economic policy.
%o provide exchange stability, to maintain %o provide exchange stability, to maintain
orderly exchange arrangements among orderly exchange arrangements among
members to avoid competitive exchange members to avoid competitive exchange
depreciation. depreciation.
%o assist the establishment of multilateral system %o assist the establishment of multilateral system
of payments in respect of current transactions of payments in respect of current transactions
between members as the primary objectives of between members as the primary objectives of
economic policy. economic policy.
%o lend confidence to members to making funds %o lend confidence to members to making funds
resources available to them under adequate safe resources available to them under adequate safe
guard with opportunity to correct small guard with opportunity to correct small
adjustments in their balance of payments with adjustments in their balance of payments with
out resorting to major destructive of national or out resorting to major destructive of national or
international prosperity. international prosperity.
%o certain duration and lessen the degree of %o certain duration and lessen the degree of
disequilibrium in the international balance of disequilibrium in the international balance of
payment of members. payment of members.
unctions of ÌM unctions of ÌM
%he fund is regarded as %he fund is regarded as " "the the
guardian of good conduct guardian of good conduct¨ ¨ in the in the
area of balance of payments. area of balance of payments.
IMF aims at reducing tariffs and IMF aims at reducing tariffs and
other trade restrictions by the other trade restrictions by the
member countries. member countries.
IMF provides technical advice to its IMF provides technical advice to its
members regarding monetary nad members regarding monetary nad
fiscal policies. fiscal policies.
IMF provides short term financial IMF provides short term financial
assistance to its members to get rid of the assistance to its members to get rid of the
balance of payments problems/prices. balance of payments problems/prices.
IMF provides machinery for the orderly IMF provides machinery for the orderly
adjustment of exchange rates. adjustment of exchange rates.
It functions as a reservoir of currencies of It functions as a reservoir of currencies of
member countries and enables the member countries and enables the
members to borrow the other currencies. members to borrow the other currencies.
It functions as a lending institution of It functions as a lending institution of
foreign currencies. foreign currencies.
It provides a machinery for international It provides a machinery for international
consultancy. consultancy.
It conducts short term training courses on It conducts short term training courses on
fiscal, monetary and balance of payments fiscal, monetary and balance of payments
for employees of member countries for employees of member countries
through its Central Banking Services through its Central Banking Services
Department, the Fiscal Affairs Department, the Fiscal Affairs
Department, Bureau of Statistics and the Department, Bureau of Statistics and the
IMF institute. IMF institute.
Organization Structure Organization Structure
%he IMF is an autonomous organization %he IMF is an autonomous organization
affiliated to the UNO. %he organization affiliated to the UNO. %he organization
structure of the IMF consists of: structure of the IMF consists of:
Board of Governors Board of Governors
Executive Board Executive Board
A Managing Director A Managing Director
IMF Secretariat helps managing director in IMF Secretariat helps managing director in
carrying out the activities carrying out the activities
Interim committee Interim committee
Development committee Development committee
Organizational structure Organizational structure
Board of Governors
:Interim Committee
:Development Committee
ecutive Board of Directors
Managing Director
IMF Secretariat
Development of te world trading Development of te world trading
sstem sstem
%here are strong arguments for supporting %here are strong arguments for supporting
unrestricted free trade. unrestricted free trade.
Free trade was developed from 18 Free trade was developed from 18
th th
century and the work of Adam Smith and century and the work of Adam Smith and
David Recardo . David Recardo .
First official embracement of the free First official embracement of the free
trade done by Great Britain 1846 .at that trade done by Great Britain 1846 .at that
line it was the worlds large exporting line it was the worlds large exporting
nation. nation.
By 1950 By 1950 s the free trade was buried under s the free trade was buried under
great depression after WW1 . great depression after WW1 .
GENERAL AGREEMENT OR GENERAL AGREEMENT OR
TARÌ & TRADE TARÌ & TRADE
GA%% GA%%- - Established 1947 ( 19 members) Established 1947 ( 19 members)
120 after the great depression under US 120 after the great depression under US
leadership GA%% was formed. leadership GA%% was formed.
%he GA%% was a multilateral agreement %he GA%% was a multilateral agreement
whose objectives was to liberalize trade by whose objectives was to liberalize trade by
eliminating tariffs , subsidies ,import eliminating tariffs , subsidies ,import
quotas & like. it is a continuous process . quotas & like. it is a continuous process .
GA%% regulations were en forced by a GA%% regulations were en forced by a
mutual monitoring mechanisms through mutual monitoring mechanisms through
GENEVA based bureaucracy . GENEVA based bureaucracy .
If the member found guilty , they If the member found guilty , they
will be forced to changed policies , will be forced to changed policies ,
compensate ..expelled from compensate ..expelled from
membership. membership.
Benefits of GATT Benefits of GATT
Avg tariff declined by 92 % in US Avg tariff declined by 92 % in US
firm 1947 firm 1947 - -73 73
1953 1953- -63 63 --world trade grew by 6.1 world trade grew by 6.1
% annually & income at 4.5 % . % annually & income at 4.5 % .
Decline of GA%% : during 1980 Decline of GA%% : during 1980' 's and s and
early 1990 early 1990' 's due to greater s due to greater
protectionism around the world. protectionism around the world.
%hree reasons for this %hree reasons for this
1. 1. Economic success of japan 1980 Economic success of japan 1980' 's s
second largest economies second largest economies
2. 2. %rade deficit in US 1987 %rade deficit in US 1987
3. 3. Voluntary export restraint Voluntary export restraint --to get to get
around GA%% without complaint. around GA%% without complaint.
Te urugua round ( domical Te urugua round ( domical
proposal 1986 sep proposal 1986 sep - -1993 sep 1993 sep
Dunket director general & GA%% Dunket director general & GA%%
%he draft proposal includes : %he draft proposal includes :
MARKE% : abolition of public MARKE% : abolition of public
distribution system . ( govt control ) distribution system . ( govt control )
AGRICUL%URE : reduced subsidy on AGRICUL%URE : reduced subsidy on
fertilizers and seeds &other inputs fertilizers and seeds &other inputs
.abolish of price variation in domestic .abolish of price variation in domestic
market & international market . market & international market .
%RADE RELA%ED IN%ELLEC%UAL PROPER%Y %RADE RELA%ED IN%ELLEC%UAL PROPER%Y
RIG%HS (%RIPS ): i.e. patents ,copy right , RIG%HS (%RIPS ): i.e. patents ,copy right ,
and trade marks ( 7 & 10 years ) . and trade marks ( 7 & 10 years ) .
%RADE RELA%ED IN%ELLEC%UL INVES%MEN% %RADE RELA%ED IN%ELLEC%UL INVES%MEN%
MEASURES ( %RIMS ): for the removal of MEASURES ( %RIMS ): for the removal of
various controls imposed an inflow of foreign various controls imposed an inflow of foreign
capital which includes capital which includes
1. 1. Abolish of restriction on foreign capital Abolish of restriction on foreign capital
2. 2. Equal rights to the foreign investors. Equal rights to the foreign investors.
3. 3. no restrictions on any area of investment no restrictions on any area of investment
4. 4. No restrictions on the volume of investment 0 No restrictions on the volume of investment 0- -
100 % . 100 % .
5. 5. Free import of inputs. Free import of inputs.
ORLD TRADE ORGANÌSATÌON ORLD TRADE ORGANÌSATÌON
(TO (TO
W%O was established on 1995 . W%O was established on 1995 .
January ( 104 members countries ) January ( 104 members countries )
by signing final act in Marrakech by signing final act in Marrakech
Maraca 15 apr 1994 . %he result of Maraca 15 apr 1994 . %he result of
Uruguay round would strengthen Uruguay round would strengthen
the world economy and lead to more the world economy and lead to more
trade , investment , employment and trade , investment , employment and
income growth through out the world income growth through out the world
..
unctions of TO unctions of TO
W%O designed to play role of watch dog W%O designed to play role of watch dog
in the sphere of trade is goods, services in the sphere of trade is goods, services
,%RIPS , foreign investment etc. ,%RIPS , foreign investment etc.
Multinational trade agreements Multinational trade agreements --
consultant consultant
Provides forum for negotiation Provides forum for negotiation -- technical technical
co co --op and training . op and training .
Administer the understanding of rules & Administer the understanding of rules &
procedures governing the settlement & procedures governing the settlement &
agreements. agreements.
Administer the undrestanding of Administer the undrestanding of
rules & procedures governing the rules & procedures governing the
settlement & agreement . settlement & agreement .
Adminster the trade policy review Adminster the trade policy review
mechanism. mechanism.
Co Co- -operates IMF & IBRD ( world operates IMF & IBRD ( world
bank ) bank )
Difference between GATT & TO Difference between GATT & TO
GA%% GA%%
Set of rules & Set of rules &
agreements agreements
Designed to establish Designed to establish
international trade international trade
organization . organization .
Rules applicable to trade Rules applicable to trade
in goods . in goods .
Plulateral agreements Plulateral agreements
were added at later stage were added at later stage
Dispute settlement is not Dispute settlement is not
faster & automatic faster & automatic
W%O W%O
1.Permanent institution. 1.Permanent institution.
2.%o serve its own purpose . 2.%o serve its own purpose .
3 .Both goods (merchandise ) 3 .Both goods (merchandise )
and services . and services .
4. its agreements are 4. its agreements are
multilateral . multilateral .
5. Fast and automatic. 5. Fast and automatic.
TO & antidumping duties TO & antidumping duties
%ypes of dumping : %ypes of dumping :- -
1. 1. Intermittent dumping :when production Intermittent dumping :when production
of the product is more than the demand of the product is more than the demand
procedure sell the remaining stock at low procedure sell the remaining stock at low
price . price .
2. 2. Persistent dumping : monopolist sells the Persistent dumping : monopolist sells the
balance stock at low price . balance stock at low price .
3. 3. Predatory dumping : sells at low price to Predatory dumping : sells at low price to
drive away competitors leave the drive away competitors leave the
market market
Antidumping measures Antidumping measures
%ariff duties %ariff duties
Import quotas Import quotas
Import embargo (ban on imports ) Import embargo (ban on imports )
VER VER
W%O provides clear information about W%O provides clear information about
product dumped & injury caused to product dumped & injury caused to
domestic industry . domestic industry .
W%O provides procedures to be followed in W%O provides procedures to be followed in
initiating and conducting antidumping initiating and conducting antidumping
investigation . investigation .
Rules ADM . Rules ADM .
Duration ADM . Duration ADM .
Roles of dispute settlement panels . Roles of dispute settlement panels .
Effects of dumping Effects of dumping
on importing countr on importing countr
1. 1. Home country will experience decline in Home country will experience decline in
sales and profits . sales and profits .
2. 2. Home industry structure changes due to Home industry structure changes due to
persistent / predatory dumping and persistent / predatory dumping and
when the foreign company raises prices when the foreign company raises prices
later ,there is little alternative to paying later ,there is little alternative to paying
the higher price . the higher price .
3. 3. Balance of payment may become Balance of payment may become
unfavorable . unfavorable .
4. 4. Change in customer preference may Change in customer preference may
occur. occur.
1. 1. Consumers at exporting country Consumers at exporting country
pay higher price compared to pay higher price compared to
importing country . importing country .
2. 2. Exporting country finds market for Exporting country finds market for
excess production excess production
3. 3. Balance of payment may become Balance of payment may become
favorable for the exporting country. favorable for the exporting country.
Effects of dumping on exporting Effects of dumping on exporting
countr countr
Economic co Economic co- -operation and operation and
integration integration
Economic integration abolishes cross Economic integration abolishes cross
--nation economic discrimination. nation economic discrimination.
Geographical proximity is an Geographical proximity is an
important reasons for economic important reasons for economic
integration. it also generally results integration. it also generally results
in similar tastes of consumers ,a in similar tastes of consumers ,a
shared history and at times similar shared history and at times similar
ideologies. ideologies.
Development of te TO Development of te TO
%here are strong economic arguments for %here are strong economic arguments for
supporting unrestricted free trade while supporting unrestricted free trade while
many govt have recognized the value of many govt have recognized the value of
these arguments, they have been these arguments, they have been
unwilling to unilaterally lower their trade unwilling to unilaterally lower their trade
barriers for fear that other nations might barriers for fear that other nations might
not follow suit. the essence of this is lack not follow suit. the essence of this is lack
of trust. both the govt recognize that their of trust. both the govt recognize that their
respective nations will benefit from lower respective nations will benefit from lower
trade barriers between them, but neither trade barriers between them, but neither
govt is willing to lower trade barrier for govt is willing to lower trade barrier for
fear that the other might not follow. fear that the other might not follow.
Such a deadlock can be resolved if both countries Such a deadlock can be resolved if both countries
negotiate a set of rules to govern cross negotiate a set of rules to govern cross- -border border
trade and lower trade barriers. but who is to trade and lower trade barriers. but who is to
monitor the govt to make sure that they are monitor the govt to make sure that they are
playing by the trade rules ?and who is to impose playing by the trade rules ?and who is to impose
sanctions on a govt that cheats ? sanctions on a govt that cheats ?
both govts could set up an independent both govts could set up an independent
body whose function is to act as a referee. this body whose function is to act as a referee. this
referee could monitor trade between the referee could monitor trade between the
countries ,make sure that no side cheats & countries ,make sure that no side cheats &
impose sanctions on a country if it does cheat in impose sanctions on a country if it does cheat in
the trade game . the trade game .
While it might sound unlikely that any While it might sound unlikely that any
govt would compromise its national govt would compromise its national
sovereignty by submitting to such an sovereignty by submitting to such an
arrangement ,since world war 2 an arrangement ,since world war 2 an
international trading framework has international trading framework has
evolved that has exactly these features. evolved that has exactly these features.
for its first 50 years ,this framework for its first 50 years ,this framework
was known as the GENERAL AGREEMEN% was known as the GENERAL AGREEMEN%
ON %ARIFFS AND %RADE (GA%% ) ON %ARIFFS AND %RADE (GA%% )
Since 1995 ,it has been known as the Since 1995 ,it has been known as the
WORLD %RADE ORGANIZA%ION (W%O ). WORLD %RADE ORGANIZA%ION (W%O ).
rom smit to great depression rom smit to great depression
%he theoretical case for free trade dates to the %he theoretical case for free trade dates to the
late 18 late 18
th th
century and the work of Adam Smith & century and the work of Adam Smith &
David Ricardo, free trade as a govt policy was David Ricardo, free trade as a govt policy was
first officially embraced by great Britain in 1846. first officially embraced by great Britain in 1846.
during next 80 years or so ,great Britain during next 80 years or so ,great Britain
,as one of the world ,as one of the world s dominant trading s dominant trading
powers ,pushed the case for trade powers ,pushed the case for trade
liberalization ,but the b4ritish govt was a voice in liberalization ,but the b4ritish govt was a voice in
the wildness .its major trading partners did not the wildness .its major trading partners did not
reciprocate the British policy of unilateral free reciprocate the British policy of unilateral free
trade .the only reason British kept this policy for trade .the only reason British kept this policy for
so long was that the world so long was that the world s largest exporting s largest exporting
nation ,it had far more to lose from a trade war nation ,it had far more to lose from a trade war
than did any other country . than did any other country .
By 1930s however ,the British By 1930s however ,the British
attempt to stimulate free trade was attempt to stimulate free trade was
buried under the economic rubble of buried under the economic rubble of
the Great depression .the Great the Great depression .the Great
depression had roots in the failure of depression had roots in the failure of
the world economy to mount a the world economy to mount a
sustained economic recovery after sustained economic recovery after
the end of world war in 1918. the end of world war in 1918.
Te Urugua round and te TO Te Urugua round and te TO
Against the background of rising Against the background of rising
background of rising pressures for background of rising pressures for
protectionism ,in 1986 the GA%% members protectionism ,in 1986 the GA%% members
embarked on their eighth round of embarked on their eighth round of
negotiations to reduced tariffs ,the negotiations to reduced tariffs ,the
Uruguay round (so named because it Uruguay round (so named because it
occurred in Uruguay ) occurred in Uruguay )
GA%% rules had applied only to GA%% rules had applied only to
trade in manufactured goods and trade in manufactured goods and
commodities .in the Uruguay round commodities .in the Uruguay round
,member countries sought to extend GA%% ,member countries sought to extend GA%%
rules to cover trade in services . rules to cover trade in services .
Uruguay round contained the following Uruguay round contained the following
provisions : provisions :
1. 1. %ariffs on industrial goods were to be %ariffs on industrial goods were to be
reduced by more than one reduced by more than one- -third ,and third ,and
tariffs were to be scrapped on over 40 % tariffs were to be scrapped on over 40 %
of manufacturing goods . of manufacturing goods .
2. 2. Avg tariff rates imposed by developed Avg tariff rates imposed by developed
nations on manufactured goods were nations on manufactured goods were
reduced to less than 4 % of value ,the reduced to less than 4 % of value ,the
lowest level in modern history lowest level in modern history
3. 3. %here was to be substantial reduction in %here was to be substantial reduction in
agricultural subsidies. agricultural subsidies.
4.For the first time GA%% fair trade and 4.For the first time GA%% fair trade and
market access rules were to be extended market access rules were to be extended
to cover a wide range of services. to cover a wide range of services.
5.GA%% rules were also to be extended to 5.GA%% rules were also to be extended to
provide enhanced protection for patents, provide enhanced protection for patents,
copyrights, and trademarks ( intellectual copyrights, and trademarks ( intellectual
property ) property )
6.barriers on trade in textiles were to be 6.barriers on trade in textiles were to be
significantly reduced over 10 years. significantly reduced over 10 years.
7.A W%O was to be created to implement 7.A W%O was to be created to implement
the GA%% agreement . the GA%% agreement .
TO as a global policeman TO as a global policeman
%he first few years in the life of the W%O %he first few years in the life of the W%O
suggest that its policing and enforcement suggest that its policing and enforcement
mechanisms are having a positive effect mechanisms are having a positive effect
.between 1995 and late 2000, 213 trade .between 1995 and late 2000, 213 trade
disputes between member countries were disputes between member countries were
brought to the W%O . brought to the W%O .
%his record compares with a total of 196 %his record compares with a total of 196
cases handled by the GA%% over almost cases handled by the GA%% over almost
half a century . half a century .
Of the cases brought to W%O three Of the cases brought to W%O three --
fourths had been resolved by late 2000 fourths had been resolved by late 2000
following informal consultations between following informal consultations between
the disputing countries. the disputing countries.
Resolving the reminder has involved more Resolving the reminder has involved more
formal procedures ,but they have been formal procedures ,but they have been
largely successful.. largely successful..
In general ,the countries more involved In general ,the countries more involved
adapted the W%O recommendations. adapted the W%O recommendations.
Levels of economic integration Levels of economic integration
Several levels of economic integration Several levels of economic integration
are possible in theory .from least are possible in theory .from least
integrated to most integrated there are integrated to most integrated there are
economic integration : economic integration :
1. 1. Free trade area Free trade area
2. 2. A customs union A customs union
3. 3. A common market A common market
4. 4. An economic union An economic union
5. 5. Finally political union Finally political union
Political union
Economic union
Common market
Customs union
Free
trade
area
1. 1. Free trade area : (F%A ) tariffs are Free trade area : (F%A ) tariffs are
abolished among F%A member abolished among F%A member
maintains its own external tariff maintains its own external tariff
against non F%A countries for ex against non F%A countries for ex --
NAF%A ( members USA, Canada & NAF%A ( members USA, Canada &
Mexico ) is a free trade area . Other Mexico ) is a free trade area . Other
are : the European free trade are : the European free trade
association , the central European association , the central European
free trade agreement , APEC,ASEAN free trade agreement , APEC,ASEAN
and the ASEAN free trade area. and the ASEAN free trade area.
2 .Customs union : levying a common 2 .Customs union : levying a common
external tariff is combined with the external tariff is combined with the
abolition of all internal tariffs .an ex abolition of all internal tariffs .an ex
of it is MERCOSUR ( UNION OF of it is MERCOSUR ( UNION OF
ARGEN%INA , BRAZIL , URUGUAY ARGEN%INA , BRAZIL , URUGUAY
AND PARAGUAY ).When MERCOSUR AND PARAGUAY ).When MERCOSUR
negotiates at W%O they do it as a negotiates at W%O they do it as a
regional block .where as USA, regional block .where as USA,
Canada & Mexico (members of Canada & Mexico (members of
NAF%A )negotiate separately at W%O. NAF%A )negotiate separately at W%O.
3. Common market : all the 3. Common market : all the
characteristics of a customs union characteristics of a customs union
are combined with abolition of are combined with abolition of
restriction on mobility of production restriction on mobility of production
factors ,such as labor and capital . factors ,such as labor and capital .
For ex :the Caribbean community For ex :the Caribbean community
and common market .the central and common market .the central
American common market American common market
4.Economic union : economies of all 4.Economic union : economies of all
the members countries are joined the members countries are joined
together , a part from having together , a part from having
features of common market . features of common market .
economic union is advanced form economic union is advanced form
of economic integration it achieved of economic integration it achieved
some degree of economic policies some degree of economic policies
such as monetary & fiscal policy . such as monetary & fiscal policy .
5. Political union : European union or 5. Political union : European union or
European community (EEC ) , further European community (EEC ) , further
European govt with common European govt with common
citizenship with a EU parliament & a citizenship with a EU parliament & a
united states of Europe to emerge . united states of Europe to emerge .
Complete economic integration Complete economic integration --
fiscal and monetary policies are fiscal and monetary policies are
unified to create even greater unified to create even greater
economic harmonization. %his level economic harmonization. %his level
also implies a degree of political also implies a degree of political
integration . %his is the direction in integration . %his is the direction in
which EU is moving , even its which EU is moving , even its
currency is same ( euro ) currency is same ( euro )
Europe has two trade blocks Europe has two trade blocks --
1. 1. the European union the European union
2. 2. European free trade association European free trade association
of this two the EU is by far of this two the EU is by far
more significant ,not just in terms more significant ,not just in terms
of membership (the EU has 15 of membership (the EU has 15
members ,and EF%A has 4 ) members ,and EF%A has 4 )
Regional economic integration in Regional economic integration in
Europe Europe
Evolution of European union Evolution of European union
%he EU is the product of two %he EU is the product of two
political factors . political factors .
1. 1. %he devastation of two world wars %he devastation of two world wars
of western Europe and the desire of western Europe and the desire
for a lasting peace . for a lasting peace .
2. 2. %he European nations desire to hold %he European nations desire to hold
their own on the world their own on the world' 's political s political
and economic stage . and economic stage .
%he original forerunner of the EU ,the %he original forerunner of the EU ,the
European coal steel community ,was European coal steel community ,was
formed in 1951 by Belgium ,France formed in 1951 by Belgium ,France
,West Germany ,Italy ,Luxembourg ,West Germany ,Italy ,Luxembourg
and Netherlands . and Netherlands .
Its objective was to remove barriers Its objective was to remove barriers
to intragroup shipment of coal ,iron to intragroup shipment of coal ,iron
,steel and scrap metal . ,steel and scrap metal .
Political structure of te European Political structure of te European
union union
%he economic policies of the EU are %he economic policies of the EU are
formulated and implemented by a formulated and implemented by a
complex and still evolving political complex and still evolving political
structure .the five main institutions in structure .the five main institutions in
this structure are : this structure are :
1. 1. European council European council
2. 2. Council of ministers Council of ministers
3. 3. European commission European commission
4. 4. European parliament European parliament
5. 5. Court of justice Court of justice
European council European council
%he European council is composed of the %he European council is composed of the
heads of state of EU heads of state of EU' 's member nations s member nations
and president of the European commission. and president of the European commission.
each head of state is normally each head of state is normally
accompanied by a foreign minister to accompanied by a foreign minister to
those meeting . those meeting .
%he European council meets at least twice %he European council meets at least twice
a year and often resolves major policy a year and often resolves major policy
issues and sets policy directions. issues and sets policy directions.
European commission European commission
%he European commission is responsible %he European commission is responsible
for proposing EU legislation ,implementing for proposing EU legislation ,implementing
it and monitoring compliance with EU laws it and monitoring compliance with EU laws
by member states . by member states .
Headquartered in Brussels ,Belgium ,the Headquartered in Brussels ,Belgium ,the
commission has more than 10000 commission has more than 10000
employees . employees .
It is run by a group of 20 commissioners It is run by a group of 20 commissioners
appointed by each member country for appointed by each member country for
four years renewable terms. four years renewable terms.
Most countries appoint only one Most countries appoint only one
commissioner ,although the populated commissioner ,although the populated
states states --Great Britain ,Germany ,Italy ,and Great Britain ,Germany ,Italy ,and
Spain Spain- -appoint two each. appoint two each.
A president and six vice presidents are A president and six vice presidents are
chosen from these among these chosen from these among these
commissioners for two year renewable commissioners for two year renewable
terms. terms.
%he commission has a monopoly in %he commission has a monopoly in
proposing European union legislation . proposing European union legislation .
%he commission has a monopoly in proposing %he commission has a monopoly in proposing
European union legislation. the commission starts European union legislation. the commission starts
the legislative ball rolling by making a proposal the legislative ball rolling by making a proposal
,which goes to the council of ministers and then ,which goes to the council of ministers and then
to the European parliament . to the European parliament .
%he council of ministers cannot legislate with out %he council of ministers cannot legislate with out
a commission proposal in front of it. a commission proposal in front of it.
%he commission is also responsible for %he commission is also responsible for
implementing aspects of EU law ,although in implementing aspects of EU law ,although in
practice much of this must be delegated to practice much of this must be delegated to
member states. member states.
Another responsibility of the Another responsibility of the
commission is to monitor member commission is to monitor member
states to make sure they are states to make sure they are
complying with EU laws. if this complying with EU laws. if this
persuasion is not sufficient ,the persuasion is not sufficient ,the
commission can refer a case to the commission can refer a case to the
court of justice. court of justice.
Te council of ministers Te council of ministers
%he council of ministers represents %he council of ministers represents
the interests of member states . the interests of member states .
It is clear that the ultimate It is clear that the ultimate
controlling authority within the EU controlling authority within the EU
since draft legislation from the since draft legislation from the
commission can become commission can become EU law only EU law only
if the council agrees. %he council if the council agrees. %he council
composed of one representative composed of one representative
from the govt of each member state. from the govt of each member state.
Te European parliament Te European parliament
%he European parliament ,which now %he European parliament ,which now
has about 630 members, is directly has about 630 members, is directly
elected by the populations of the elected by the populations of the
members states. members states.
%he power over the parliament %he power over the parliament
recently has been increasing recently has been increasing
,although not the right to vote on the ,although not the right to vote on the
appointment of commissioners as appointment of commissioners as
well as veto power over some laws. well as veto power over some laws.
Court of justice Court of justice
%he court of justice ,which is comprised of one %he court of justice ,which is comprised of one
judge from each country ,is the supreme appeals judge from each country ,is the supreme appeals
court for EU law . court for EU law .
Like commissioners ,the judges are required to Like commissioners ,the judges are required to
act independent officials ,rather than as act independent officials ,rather than as
representatives of national interest. representatives of national interest.
%he commission or member country can bring %he commission or member country can bring
other members to the court for failing to meet other members to the court for failing to meet
treaty obligatioins.similarly ,member countries treaty obligatioins.similarly ,member countries
,companies or institutions can bring the ,companies or institutions can bring the
commission or council to court for failure to act commission or council to court for failure to act
to an EU treaty. to an EU treaty.
Te European monetar sstem Te European monetar sstem
%he exchange rate mechanism (ERM ) %he exchange rate mechanism (ERM )
that was a central part of the EMS of that was a central part of the EMS of
the European union between1979 the European union between1979- -1999 . 1999 .
EMS is created in march 1979, with there EMS is created in march 1979, with there
main objectives . main objectives .
1. 1. %o create a zone of monetary stability in %o create a zone of monetary stability in
Europe by reducing exchange rate Europe by reducing exchange rate
volatility & converging national interest volatility & converging national interest
rate. rate.
2.%o control inflation through the 2.%o control inflation through the
imposition of monetary discipline. imposition of monetary discipline.
3.%o co 3.%o co- -ordinate ER policy Vs non EU ordinate ER policy Vs non EU
currencies such as the US $ and yen. currencies such as the US $ and yen.
two instruments are used to two instruments are used to
achieve these objectives the achieve these objectives the
EUROPEAN CURRENCY UNI% (ECU) . EUROPEAN CURRENCY UNI% (ECU) .
THE EXCHANGE RATE THE EXCHANGE RATE
MECHANÌSM (ERM MECHANÌSM (ERM
%he ecu was a basket of the EU %he ecu was a basket of the EU
currency that served as the unit of currency that served as the unit of
account for the EMS .one ECU account for the EMS .one ECU
comprised a defined % of national comprised a defined % of national
currencies. Which depends upon currencies. Which depends upon
countries economic weight in EC. countries economic weight in EC.
Until 1992 then ERM nov 1989 Until 1992 then ERM nov 1989
one EUE dm 2.05853 one EUE dm 2.05853
Te establisment of EURO Te establisment of EURO
Dec 1999 EC members meet at Dec 1999 EC members meet at
MAAS%RI%CH% regarding issues of MAAS%RI%CH% regarding issues of
common currency UK opposed. common currency UK opposed.
12 members signed a treaty the 12 members signed a treaty the
committed then to adopting a common committed then to adopting a common
currency by jan 1999 for closed political currency by jan 1999 for closed political
union .the treaty laid down a main union .the treaty laid down a main
element a future European govt with element a future European govt with
common currency (the Euro ) common common currency (the Euro ) common
foreign defense ,a common citizenship foreign defense ,a common citizenship
with a EU parliament and a United states with a EU parliament and a United states
of Europe .to change. of Europe .to change.
11 countries Euro zone that made 11 countries Euro zone that made
the grade 9qualified & agreed to the grade 9qualified & agreed to
locked the exchange rate against locked the exchange rate against
each other jan 1999 Euro notes & each other jan 1999 Euro notes &
coins was issued on jan 1 2000 . coins was issued on jan 1 2000 .
Qualification for members countries Qualification for members countries
to join Euro zone to join Euro zone
Has to achieve low inflation rate . Has to achieve low inflation rate .
Low long term interest rate . Low long term interest rate .
A stable exchange rate. A stable exchange rate.
Public debt limited to not more than Public debt limited to not more than
60 % of countries GDP. 60 % of countries GDP.
Current budget deficits of not more Current budget deficits of not more
than 3% of GDP . than 3% of GDP .
Benefits of Euro Benefits of Euro
%o the members countries are : %o the members countries are :
1. 1. Significant saving from having to handle Significant saving from having to handle
one currency e.g. foreign exchange and one currency e.g. foreign exchange and
hedging cost. hedging cost.
2. 2. Make it easier to compare prices across Make it easier to compare prices across
Europe. Europe.
3. 3. Faced with lower price European Faced with lower price European
producers will be forced to look for ways producers will be forced to look for ways
to reduce cost of production . to reduce cost of production .
4. 4. ..
4 .%he development of a pan European 4 .%he development of a pan European
Euro dominated capital market will Euro dominated capital market will
increase the range of investment increase the range of investment
options to individuals and options to individuals and
institutions. institutions.
5.Members countries can complete 5.Members countries can complete
with US $ in international business. with US $ in international business.
Disadvantages Disadvantages
%o members countries : %o members countries :
1. 1. National authority lost control over National authority lost control over
monetary policy Euro is controlled by monetary policy Euro is controlled by
European central banks . European central banks .
2. 2. Eu is not what economists would call on Eu is not what economists would call on
optimal currency area .e.g. Finland Vs optimal currency area .e.g. Finland Vs
Portugal economies are very dissimilar Portugal economies are very dissimilar
wage rate taxes ,salaries ,interest ,GDP wage rate taxes ,salaries ,interest ,GDP
per capital income. per capital income.
Fiscal transfer from prosperous to Fiscal transfer from prosperous to
depressed region . depressed region .
%he Euro put economic part before %he Euro put economic part before
political hors ( political Vs economy ) political hors ( political Vs economy )
Single exchange rate & inflexible Single exchange rate & inflexible
exchange rate . exchange rate .- -shows different impact on shows different impact on
different countries due to economic shacks different countries due to economic shacks
,inflexible wages ,low labor mobility and ,inflexible wages ,low labor mobility and
separate national fiscal system. separate national fiscal system.
Te Nort American ree Trade Te Nort American ree Trade
Agreement (NATA Agreement (NATA
(IN 1993 USA ,Canada & Mexico for (IN 1993 USA ,Canada & Mexico for
NAF%A ). NAF%A ).
%he agreement become law in jan 1 %he agreement become law in jan 1
1994 the obligation of NAF%A are : 1994 the obligation of NAF%A are :
1. 1. Abolition of tariff on 90 % of goods Abolition of tariff on 90 % of goods
with in 10 years . with in 10 years .
2. 2. Removal barriers on the cross Removal barriers on the cross
boarder & flow of services . boarder & flow of services .
3. 3. Protection of IPRS. Protection of IPRS.
4.Removal of restrictions on FDI . 4.Removal of restrictions on FDI .
5.Application of national environment 5.Application of national environment
standards. standards.
6.Establishment of two commissions 6.Establishment of two commissions
with the power . with the power .
7.%o impose fines ,if standards not 7.%o impose fines ,if standards not
followed . followed .
Association Of Sout East Asian Association Of Sout East Asian
Nations (ASÌAN Nations (ASÌAN
Formed in 1967 . Formed in 1967 .
Members : Bruins , Indonesia ,Laos Members : Bruins , Indonesia ,Laos
,Malaysia ,Myanmar ,Philippines ,Malaysia ,Myanmar ,Philippines
,Singapore ,%hailand ,Vietnam ,Singapore ,%hailand ,Vietnam
Objectives : the basic objective as to Objectives : the basic objective as to
achieve co achieve co- -operation in their industrial operation in their industrial
policy . policy .
the financial crisis of 1997 hits the financial crisis of 1997 hits
some of the members countries : some of the members countries :
Indonesia ,Malaysia & %hailand . Indonesia ,Malaysia & %hailand .
Over all development is less progressive. Over all development is less progressive.
Sout Asian Association or Sout Asian Association or
Regional Co Regional Co- -operation. (SAARC operation. (SAARC
MEMBERS :India ,Pakistan MEMBERS :India ,Pakistan
,Nepal,BhutanS,Srilanka & Maldives. ,Nepal,BhutanS,Srilanka & Maldives.
SAP%A : South Asian preferential SAP%A : South Asian preferential
%rading Arrangement . %rading Arrangement .
SAF%A :South Asian Free %rade SAF%A :South Asian Free %rade
Area. Area.
UNC%AD : United nation conference UNC%AD : United nation conference
on trade and development . on trade and development .
UNIDO : United Nation Industrial UNIDO : United Nation Industrial
Development Organization Development Organization
I%C : International trade centre which is I%C : International trade centre which is
jointly operated by W%O & united nations jointly operated by W%O & united nations
.I%C is executive body of UNDP . .I%C is executive body of UNDP .
F%AA :Free trade area of the Americas F%AA :Free trade area of the Americas
proposed in 1994 to established in 2005 . proposed in 1994 to established in 2005 .
APEC : Asia pacific economic cooperation APEC : Asia pacific economic cooperation
which involves . which involves .
LAP%A : Latin America free trade area . LAP%A : Latin America free trade area .
OPEC : Organization of petroleum OPEC : Organization of petroleum
exporting countries . exporting countries .
Module 8 Module 8
oreign Excange Market oreign Excange Market
Ìnternational monetar sstem Ìnternational monetar sstem
IMS refers to the institutional IMS refers to the institutional
arrangements that countries adopt to arrangements that countries adopt to
govern exchange rates. govern exchange rates.
%he foreign exchange market was primary %he foreign exchange market was primary
institution for determining the exchange institution for determining the exchange
rate and impersonal market force of rate and impersonal market force of
demand and supply determined the demand and supply determined the
relative value of any two supply of relative value of any two supply of
currency . I e .floating exchange rate . currency . I e .floating exchange rate .
%he major currencies : US ,dollar ,the %he major currencies : US ,dollar ,the
European unions euro ,the Japanese yen European unions euro ,the Japanese yen
and the British pound . and the British pound .
ÌXED EXCHANGE RATE ÌXED EXCHANGE RATE
SYSTEM SYSTEM
In which the values of the currencies In which the values of the currencies
are fixed against each other at some are fixed against each other at some
mutually agreed on exchange rate. mutually agreed on exchange rate.
EX : before 2000, EU under EX : before 2000, EU under
European monetary system . European monetary system .
LOATÌNG EXCHANGE RATE LOATÌNG EXCHANGE RATE
:When the foreign exchange market :When the foreign exchange market
determined the relative value of a determined the relative value of a
currency determined by market currency determined by market
forces and fluctuate against each forces and fluctuate against each
other on day to day or minute to other on day to day or minute to
minute basis for which other minute basis for which other
institutional arrangement are also institutional arrangement are also
made .e.g four major currencies of made .e.g four major currencies of
the world . US dollar ,EU the world . US dollar ,EU' 'S euro J S euro J
Japanese yen & British pound . Japanese yen & British pound .
Pegged excange rate Pegged excange rate
%he value of the currency is fixed %he value of the currency is fixed
relative to a reference currency ,such relative to a reference currency ,such
as US dollar ,and then the exchange as US dollar ,and then the exchange
rate between that currency and other rate between that currency and other
currency is determined by the currency is determined by the
reference currency ER . reference currency ER .
E.g some of the American countries E.g some of the American countries
pegged against US $. pegged against US $.
DÌRTY LOAT DÌRTY LOAT
Where central banks of a country Where central banks of a country
by intervention ,not by market by intervention ,not by market
force . force .
In IMS 3 main phases : In IMS 3 main phases :
1. 1. Gold standard Gold standard
2. 2. Fixed exchange & bretton wood Fixed exchange & bretton wood
system . system .
3. 3. Floating exchange rate system. Floating exchange rate system.
oreign excange market oreign excange market
Foreign exchange means money Foreign exchange means money
determined in the currency of determined in the currency of
another nation or group of nation . another nation or group of nation .
It is a market for converting the It is a market for converting the
currency of one country in to that of currency of one country in to that of
another county another county s currency. s currency.
Exchange rate is the rate on which Exchange rate is the rate on which
currency is converted in to another . currency is converted in to another .
US $ = RS 44 IN 2005 . US $ = RS 44 IN 2005 .
Short selling : occurs when an Short selling : occurs when an
investor places a speculation that the investor places a speculation that the
value of financial assets will decline value of financial assets will decline
and the profits from that declines . and the profits from that declines .
e.g. short seller borrows 100 shares e.g. short seller borrows 100 shares
@ 10000 & sells in market for 15000 @ 10000 & sells in market for 15000
and repurchase for 10000 & earn RS and repurchase for 10000 & earn RS
15000. 15000.
Ìnsuring against R risk : Ìnsuring against R risk :
Second major function of FEM is to Second major function of FEM is to
protect against the possible adverse protect against the possible adverse
consequence of unpredictable consequence of unpredictable
changes in ER to know the function changes in ER to know the function
we must know instruments of FEM . we must know instruments of FEM .
a) spot exchange rate a) spot exchange rate
b) forward exchange rate b) forward exchange rate
C) currency swap C) currency swap
Spot excange rate Spot excange rate
When two parties agrees to When two parties agrees to
exchange currency and execute the exchange currency and execute the
deal immediately the transaction is deal immediately the transaction is
referred as spot exchange. referred as spot exchange.
%rades based on currency rate & %rades based on currency rate &
exchange rate . exchange rate .
Spot exchange rate reported daily in Spot exchange rate reported daily in
the financial pages of newspapers. the financial pages of newspapers.
orward excange rate orward excange rate
Occurs where two parties agree to Occurs where two parties agree to
exchange currency and execute the deals exchange currency and execute the deals
at some specific date in the future . ER at some specific date in the future . ER
governing such future transaction are governing such future transaction are
referred as to forward exchange rate. referred as to forward exchange rate.
%his is to reduce the risk of imports . %his is to reduce the risk of imports .
E.g. US company imports of laptops from E.g. US company imports of laptops from
Japan ($ vs YEN ) 30 days payment Japan ($ vs YEN ) 30 days payment
Currenc swap Currenc swap
It is the simultaneous purchases & It is the simultaneous purchases &
sale if a given amount of forward sale if a given amount of forward
exchange of two different values exchange of two different values
dates. dates.
Swap are transacted between govt Swap are transacted between govt
when it is durable to more out of one when it is durable to more out of one
currency into another for a invited currency into another for a invited
period without incurring foreign period without incurring foreign
exchange risk . exchange risk .
Economic teor of excange rate Economic teor of excange rate
1.Prices and exchange rate :which can be 1.Prices and exchange rate :which can be
explained by explained by
a) low of one price a) low of one price
b) Purchasing power parity b) Purchasing power parity
c) Money supply and price inflation c) Money supply and price inflation
prices are related to exchange rate prices are related to exchange rate
movement ,we must can economic movement ,we must can economic
proposition known as the law of one price proposition known as the law of one price
& the theory of purchasing power parity & the theory of purchasing power parity
(ppp ) . (ppp ) .
Te law of one price Te law of one price
It states that in competitive market free of It states that in competitive market free of
transportation costs and barriers to trade ( tariff ) transportation costs and barriers to trade ( tariff )
identical products sold in different countries identical products sold in different countries
must sell for the same price when there prices is must sell for the same price when there prices is
expressed in terms of same currency . expressed in terms of same currency .
for ex US $ = Rs 45 for ex US $ = Rs 45
%he retail price of jacket in US mkt is 100 $ and the %he retail price of jacket in US mkt is 100 $ and the
same jacket in india Rs4500 .if the price of the same jacket in india Rs4500 .if the price of the
jacket in india becomes Rs 4050 and 100 $ in US jacket in india becomes Rs 4050 and 100 $ in US
.the company initially makes profit and price .the company initially makes profit and price
might equalise . might equalise .
Purcasing power parit (ppp Purcasing power parit (ppp
By comparing the prices of identical By comparing the prices of identical
products is different currency it would be products is different currency it would be
possible to determine the real or ppp possible to determine the real or ppp
exchange rate that would exist if market exchange rate that would exist if market
were efficient .an efficient market has no were efficient .an efficient market has no
impediments to the free flow . impediments to the free flow .
ppp theory states that the price of ppp theory states that the price of
basket goods should be equivalent in each basket goods should be equivalent in each
country if efficient market . country if efficient market .
Big mac index Big mac index
Money supply and inflation Money supply and inflation
ppp theory predicts that the ppp theory predicts that the
changes in relative price will result in changes in relative price will result in
exchange rates .countries supply exchange rates .countries supply
determine its likely future inflation determine its likely future inflation
rate .money losess value very rapidly rate .money losess value very rapidly
..
empirical tests of ppp theory : empirical tests of ppp theory :
ppp puzzle the failure to find a strong link ppp puzzle the failure to find a strong link
between relative inflation rates and exchange between relative inflation rates and exchange
rate movement has been deferred as ppp. rate movement has been deferred as ppp.
PPP draw backs ( failure ) PPP draw backs ( failure )
assume away transportation costs and trade assume away transportation costs and trade
barriers barriers
price control by few MNC s.. Interference of price control by few MNC s.. Interference of
govt in exchange rate by RBI. govt in exchange rate by RBI.
EXCHANG RATE ORECASTÌNG EXCHANG RATE ORECASTÌNG
%wo schools of thought of this issue : %wo schools of thought of this issue :
1 . Efficient market school ( EMS ) 1 . Efficient market school ( EMS ) --
An efficient market is one in which prices An efficient market is one in which prices
reflect all available public information of reflect all available public information of
the foreign exchange market is efficient the foreign exchange market is efficient
forward exchange rate should be unbiased forward exchange rate should be unbiased
predictions of futures spot rate if forward predictions of futures spot rate if forward
rater reflects all available information rater reflects all available information
about likely future changes in foreign about likely future changes in foreign
exchange there is no way a company can exchange there is no way a company can
break the market by investment in break the market by investment in
forecasting services . forecasting services .
2. the inefficient market school ( 2. the inefficient market school (
IMS) : in which do not reflect all IMS) : in which do not reflect all
available information and in IMS available information and in IMS
forward exchange rate will not be the forward exchange rate will not be the
best possible predictors of future best possible predictors of future
spot ,exchange rates. spot ,exchange rates.
Approaces for forecasting Approaces for forecasting
%here are two school of thought : %here are two school of thought :
1. 1. Fundamental analysis Fundamental analysis : fundamental analysis is : fundamental analysis is
drawn an economic theory to construct sophisticated drawn an economic theory to construct sophisticated
econometric models for predicting exchange rate econometric models for predicting exchange rate
movement ,the variable include relative money supply movement ,the variable include relative money supply
,growth rate ,inflation rate and interest rate . ,growth rate ,inflation rate and interest rate .
running deficit on BOP current account .create running deficit on BOP current account .create
pressure that result in depreciation of currency due to pressure that result in depreciation of currency due to
more supply of currency . more supply of currency .
but argument is that between 1998 but argument is that between 1998 - -2001 US $ 2001 US $
appreciated even though growing BOP deficit . appreciated even though growing BOP deficit .
Tecnical analsis Tecnical analsis
Uses price and volume data to Uses price and volume data to
determine past trends , which are determine past trends , which are
expected to continue into the future . expected to continue into the future .
%echnical analysis is base on the %echnical analysis is base on the
precise that there are analyzable precise that there are analyzable
market trends and waved technical market trends and waved technical
analysis has gained favor in recent analysis has gained favor in recent
years . years .
Currenc convertibilit Currenc convertibilit
Currency of various countries on Currency of various countries on
freely not convertible into other freely not convertible into other
currencies because many countries currencies because many countries
restricts to convert the local currency restricts to convert the local currency
into a foreign currency ,making into a foreign currency ,making
international trade .and investments international trade .and investments
are more difficult. are more difficult.
Convertibilit and government Convertibilit and government
polic polic
A country A country' 's currency is said to be freely s currency is said to be freely
convertible where the country govt allows convertible where the country govt allows
both resident and non residents to both resident and non residents to
purchase unlimited amount of foreign purchase unlimited amount of foreign
currency with it . currency with it .
A currency is not convertible when neither A currency is not convertible when neither
residents nor nonresidents are allowed to residents nor nonresidents are allowed to
convert it into foreign currency restrictions convert it into foreign currency restrictions
can be minor to major ( such restrictions can be minor to major ( such restrictions
to domestic business ability to take to domestic business ability to take
foreign currency out of the country . foreign currency out of the country .
E.g Japanese govt highly controlled E.g Japanese govt highly controlled
the convert the yen to US dollar but the convert the yen to US dollar but
they will assure to there profits of they will assure to there profits of
yen in to US dollar. yen in to US dollar.
counter trade : refers to a range of counter trade : refers to a range of
barter like agreements by which goods barter like agreements by which goods
and services .counter trade can make and services .counter trade can make
sense where a countries currency is non sense where a countries currency is non
convertible . convertible .
Ex : GE agreement in 1984 with roman Ex : GE agreement in 1984 with roman
govt for $ 150 m . Generator project .it govt for $ 150 m . Generator project .it
agreed to take payment in the form of agreed to take payment in the form of
roman ion goods that could be sold for $ roman ion goods that could be sold for $
150 million in international mkt . 150 million in international mkt .

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