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International Marketing The Dynamic Environment of International Trade Module 2

Aug ± Sep 2009 By Murali Murti Professor of Management, PES Institute of Management

4/7/2011 IUP MBA 2009

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Global Perspective
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Trade barriers are a constant threat to the international marketer. Example: Indian IT industry is dependent to a large extent on H1B visas. Example: China imposes many indirect trade barriers, such as quality certification only by approved Chinese companies Tighter coupling of economies increases vulnerability ± example Iceland

4/7/2011

ICSMSE 2009

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Global Perspective
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The US is the world¶s most important trading partner US trade deficit has potentially catastrophic economic implications.
Country Canada China Germany UK Total Trade 446 231 108 82 Exports 190 35 31 36 Imports 256 196 77 46 Balance -66 -132 -46 -10

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ICSMSE 2009

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g the Marshall Plan for rebuilding Europe after 1945 ICSMSE 2009 4 4/7/2011 .The to Century ± World Trade and US MNCs ‡ th 20 st 21 ‡ ‡ Important to remember that inter-country trade is centuries old. But only in 20th century did global trade become significant Significant events in the 20th century: ‡ ‡ ‡ ‡ Two world wars The Great Depression 1929 Two competing ideological systems ± capitalism and communism from 1945 to 199o Foreign aid as an important part of world trade after WWII. e.

The to Century ± World Trade and US MNCs ‡ ‡ ‡ th 20 st 21 ‡ ‡ ‡ ‡ General Agreement on Trade and Tariffs instituted after WW II to avoid situation that developed after WWI In 1930. the prediction was made: ³The world¶s third largest industrial power will be American industry in Europe´ ! 4/7/2011 ICSMSE 2009 5 . US imposed tariffs of 60% on more than 20. In 1968.000 items In retaliation. 60 countries imposed trade barriers and global trade suffered badly This deepened the effect of the Great Depression GATT evolved into the World Trade Organization (WTO) This has had a very beneficial effect on world trade.

the US had a favorable balance of trade with the rest of the world. the US accounted for 50% of the world¶s GDP. etc In 1950. the number of US companies in the global Top 100 fell from 67 to 33 Japan went from 3 to a peak of 29 in 1996.The to Century ± World Trade and US MNCs ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ th 20 st 21 ‡ From 1963 to 2005. in 2000 only 23% Till 1971. 4/7/2011 ICSMSE 2009 6 . then declined to 12 Germany remained static at 13 and 15 China reached 3 in 2003 India is on the verge of entering the top 100 China has become the world¶s manufacturing destination India has become a critical IT destination EU has integrated widely to include Turkey.

Examples: ‡ ‡ ‡ Global reach. unchanged from previous 25 Developing world will grow at 6%.g i-Flex India. five countries (BRIIC) will be 50% larger than EU in world trade Corporations have to adapt. GE 70:30 outsourcing policies ICSMSE 2009 7 4/7/2011 . Indian IT majors Small companies adapt: e. Buztronics ³blinking lapel buttons´. up from 4% in past 25 Share of world output will go to 1/3 from 1/6 World Bank estimates that by 2020. Matsushita . Nestle.2010 ‡ ‡ ‡ ‡ th 20 st 21 ‡ OECD forecast is growth of 3% for next 25 years for member countries. Samsung.The to Century ± Lessons from 2000 .

tourism. ICSMSE 2009 8 4/7/2011 . such as dividends. foreign aid given. ‡ A deficit occurs when the Minus exceeds the Plus. dividend payments. etc. investments made abroad.Balance of Payments ‡ ‡ BOP represents the difference between receipts from foreign countries and payments to them. payments to country companies for services (e. interest payments. return on capital invested abroad. spending by country tourist abroad. Plus side includes: export sales. new foreign investments and payments by foreign governments ‡ Minus side includes: cost of imported goods. interest.g insurance). and financial flows.

Current Account is the most important 4/7/2011 ICSMSE 2009 9 . and short term capital movements to and from countries Reserves account: record of imports and exports of gold. increases / decreases in foreign exchange. portfolio investments. and increases / decreases in liabilities to foreign central banks. plus unilateral transfer of funds Capital account: record of all direct investments.Balance of Payments (contd) ‡ Balance of Payments statement is represented in three accounts: ‡ ‡ ‡ Current Account: record of merchandise exports and imports.

Balance of Payments (contd) ‡ Examples: ‡ US Current Account 2004 Exports: Goods Services Income receipts Imports: Goods Services Income payments Net Unilateral Current Transfers 808 344 380 -1473 -296 -349 Total 1532 Total 2118 -81 Current Account Balance 4/7/2011 .666 ICSMSE 2009 10 .

yet the rupee has continued to weaken.86 in 1985 to 0.3 Swiss franc : from 2.23 to 112.86 in 2005 Although India has a sound economic platform.57 in 2005 Japanese Yen : from 250.25 to 1.01 in 1999 to 0.31 Euro: from 1. Why? 4/7/2011 ICSMSE 2009 11 .Balance of Payments (contd) ‡ ‡ Value of a country¶s currency is affected by the BOP Impact of negative US BOP has been the weakening of the US dollar: ‡ ‡ ‡ ‡ UK Pound : from 0.

10. 11. 6. 3. 4. 5.Balance of Payments Protectionism Reasons for protectionism: 1. 7. 9. 8. Protection of an infant industry Protection of the home market Need to keep money at home Encouragement of capital accumulation Maintenance of wages and standards of living Conservation of natural resources : *** Industrialization of an underdeveloped country Maintenance of employment levels National defence Increase in business size Retaliation and bargaining ICSMSE 2009 12 4/7/2011 . 2.

Balance of Payments ± Trade Barriers ‡ ‡ ‡ ‡ ‡ ‡ Tariffs Quotas Boycotts Monetary barriers Non-tariff barriers Market barriers 4/7/2011 ICSMSE 2009 13 .

Balance of Payments ± Tariffs ‡ ‡ A tariff is a tax imposed by a government on goods entering at its borders ± used to generate revenue and/or discourage imports Effects: ‡ Increase: ‡ Inflationary pressures. Government control over industry. international relations (can start wars!) Supply sources. Number of tariffs BOP positions. competition ‡ Weaken: ‡ ‡ Restrict: ‡ 4/7/2011 ICSMSE 2009 14 . Special Interest privileges. consumer choice. supply and demand patterns.

proportional foreign/domestic restrictions. acceptance of intergovernmental testing methods. embargoes Valuation systems. domestic assistance. export subsidies. documentation requirements. packaging / labeling / marking standards Government procurement policies. countervailing duties. minimum import price limits.tariff barriers  Specific Limitations on Trade:  Quotas. antidumping practices.  Customs and administrative entry procedures: ‡  Standards: ‡  Government participation in trade: ‡ 4/7/2011 ICSMSE 2009 15 . import licensing requirements.Balance of Payments ± Non. fees Standards disparities. tariff classifications. local content requirements.

tariff barriers (contd. import credit discriminations. variable levies. special supplementary duties. border taxes Voluntary export restraints (VERs) Orderly marketing agreements (OMAs)  Others:   4/7/2011 ICSMSE 2009 16 .Balance of Payments ± Non. administrative fees.)  Charges on imports:  Prior import deposit requirements.

steel.peanuts! US quotas on textiles estimated to add 50% to the price of clothing.g. Italy restricts Japanese motorcycles.. Based on agreement between importing and exporting countries. e.Balance of Payments ± Non. e.g Iran Sometimes driven by citizens groups. Nestle baby milk formula  VERs and OMAs:    Boycotts and embagoes:   4/7/2011 ICSMSE 2009 17 . and automobiles Usually in the form of sanctions against a country. US has quotas for sugar. clothing. e. agriculture.tariff barriers : Examples  Quotas:  UK limits imports of TVs. textiles and«. Japan exports only a fixed number of automobiles annually Common in textiles.g.

Balance of Payments ± Non. Aim is to to protect health. 4/7/2011 ICSMSE 2009 18 .  Standards:     Antidumping penalties::     Designed to prevent ³predatory pricing´ Allowed under WTO rules Violators to pay countervailing duties Huge recent increase in number of antidumping cases filed. (exchange permit). Government approvals to secure foreign exchange.tariff barriers : Examples  Monetary barriers:    Blocked currency ± refusal to allow exchange of currency beyond a certain point Differential exchange rates: applicable for different products / industries. safety and product quality Problem is huge number of different standards Stipulations on ³Local content´.

Export Expansion. especially in high-technology items Computer-based procedures for US companies to file for export licenses. Import Relief Act gives US president authority to impose restrictions on sales in US from a country if unfair restrictions have been placed on US products Authority to ban US government procurement if similar measure in place in the other country US companies are at a disadvantage due to FCPA. National Trade Data Bank (NTDB) for transparent information Temporary import relief based on appeals by companies made very flrxible. etc. export controls.Reduction in Trade Restrictions ‡ US Omnibus Trade and Competitiveness Act: ‡ ‡ ‡ ‡ ‡ ‡ Three areas covered: Market Access. 4/7/2011 ICSMSE 2009 19 .

4/7/2011 ICSMSE 2009 20 . services. eighty GATT nations had accepted the agreements.Reduction in Trade Restrictions ± General Agreement on Tariffs and Trade ‡ ‡ ‡ ‡ Signed by 23 countries immediately after WW II Provided a process to reduce tariffs and establish a watchdog agency GATT offered nations a forum for negotiating trade issues in case bilateral talks broke down Basic elements: ‡ ‡ ‡ Trade shall be conducted on a nondiscriminatory basis Protection to domestic industry through tariffs and not quotas Consultation to be the primary method to resolve trade disputes ‡ ‡ ‡ Eight ³rounds´ of negotiations held. IPRs. and investment and capital flows By 1995. Other issues addressed: agriculture. last Uruguay Round in 1994.

Reduction in Trade Restrictions ± General Agreement on Tariffs and Trade ‡ ‡ ‡ ‡ ‡ ‡ In Uruguay Round. virtually all tariffs in 10 vital industrial sectors were eliminated Resulted in cuts of 50-100% in tariffs on electronic items General Agreement on Trade in Services (GATS) is first. multilateral. Most notable achievement of the Uruguay Round was the creation of the World Trade Organization 4/7/2011 ICSMSE 2009 21 . legally enforceable agreement on services trade Trade Related Investment Measures (TRIMs) aims to remove investment barriers that restrict trade Trade-Related Aspects of Intellectual Property Rights(TRIPs) established high standards for protection of IPRs.

Reduction in Trade Restrictions ± World Trade Organization ‡ WTO is an institution. and issues rulings in case of disputes Winning side authorized to impose trade restrictions if losing side does not comply with rulings. to appoint a D-G. 4/7/2011 ICSMSE 2009 22 . comprehensive framework to address 21st century trade issues All member countries have equal representation in two-year WTO ministerial conferences. not an agreement like GATT ‡ ‡ ‡ Sets rules governing trade between 148 member countries Provides a panel of experts to hear and rule on trade disputes Issues binding decisions ‡ ‡ ‡ ‡ Provides a permanent. etc Panel of experts selected from lists provided by member countries.

including developing countries have agreed to obligations Resistance to WTO: ‡ ‡ In EU. concern about possible loss of sovereignty and lack of veto power ‡ ‡ In spite of detractors. not clear if EU was authorized to negotiate on behalf of all member countries In US. member countries. WTO appears to be gaining acceptance in the international trading community Telecommunications is a significant victory for WTO 4/7/2011 ICSMSE 2009 23 .Reduction in Trade Restrictions ± World Trade Organization ‡ ‡ For the first time.

China was required to reduce tariffs ‡ ‡ ‡ China reduced tariffs on 5000 items and elimnated some nontariff barriers such as quotas. ‡ ‡ Increase in antidumping duties as a way to increase tariffs Because of slow WTO processes. to be paid for by foreign company. e. 4/7/2011 ICSMSE 2009 24 .Reduction in Trade Restrictions ± WTO operational issues ‡ ‡ How to handle countries that want the benefits of WTO membership but also want to protect their markets Example: To show good faith and gain membership. jigsaw puzzles! Certification processes require on-site visits by Chinese inspection officials. etc But simultaneously started to slowly apply restrictions based on technical standards and inspection requirements. licenses.g. may member countries are negotiating separate bilateral agreements.

expected to cross 2% in 2009: ‡ ‡ ‡ In merchandise.5% In services.2 % to 1.5% in 2006. increase from 1. $143 billion in services Market access ± almost no commitments Domestic support ± price support only Export subsidies ± only tax relief under 80-HHC ‡ Trade in goods ± agriculture: India¶s commitments: ‡ ‡ ‡ 4/7/2011 ICSMSE 2009 25 .Reduction in Trade Restrictions ± India and the WTO ‡ Share in total world trade was 1. increase from 2% to 3% Total $294 billion in 2006.

upto 10% of owned funds or 30% of invested capital.Reduction in Trade Restrictions ± India and the WTO ‡ Trade in financial services: ‡ Subject to RBI and SEBI regulations ‡ ‡ ‡ ‡ Insurance and Insurance-related services Reinsurance Insurance intermediation through rep offices Banking and other financial services. except insurance Market access restrictions to continue ‡ RBI regulations on appointment of Indian national as Chairman ‡ CEO can be a foreigner ‡ Local Advisory Board to consist only of Indians Trading for own account Limitations on market access. for investment purposes ‡ 4/7/2011 ICSMSE 2009 26 . whichever is lower.

Reduction in Trade Restrictions ± India and the WTO Participation in issue of securities of all kinds Stock Broking ± upto 49% share in a JV Financial Consultancy Services Financial leasing ± upto 49% share in a JV Venture Capital: upto 49% in a JV. and funding has to be entirely out of equity 4/7/2011 ICSMSE 2009 27 .

South Korea alone received $60 billion in loans ‡ Achievements: ‡ ‡ 4/7/2011 ICSMSE 2009 28 . equivalent to ³paper gold´ Stabilization of global financial markets during 1997 crisis in SE Asia.Reduction in Trade Restrictions ± The IMF and World Bank group ‡ International Monetary Fund: Objectives: ‡ ‡ ‡ ‡ Lending money to countries in crisis situations Stabilization of foreign exchange rates Establishment of freely convertible currencies 184 member countries Special Drawing Rights (SDRs) .

and policy guidance Five institutions to: ‡ ‡ ‡ ‡ ‡ Lending money to governments Providing assistance for developmental projects Lending directly to private sector Providing investors with guarantees against ³non-commercial risks´ such as war Promoting increased flow of investment through conciliation services in case of disputes ICSMSE 2009 29 4/7/2011 .Reduction in Trade Restrictions ± The IMF and World Bank group ‡ ‡ World Bank Group: Objectives: ‡ ‡ ‡ Reduction in poverty Improvement in living standards Promotion of sustainable growth and investment in people ‡ ‡ Provides loans. technical assistance.

4/7/2011 ICSMSE 2009 30 .Reduction in Trade Restrictions ± Protest against global institutions ‡ ‡ Anti globalization protests have taken place regularly Remains to be seen what the outcome will be.