International Marketing 16 th edition Philip R. Cateora, Mary C. Gilly, and John L. Graham

Overview Transition of the world trade from the 20 th to the 21 st century Balance of payments Protectionism – Logic and illogic Trade barriers Easing trade restrictions – GATT, WTO, IMF, and the World Bank Group Anti-globalization protests Roy Philip 2

Global Perspective Trade Barriers: An International Marketer’s Minefield Many countries take advantage of U.S. open markets while putting barriers in the way of U.S. exports – Japan (snow skis, rice, baseballs, and beef) – France (American movies and songs) – Britain (taxing of P&G’s Pringle potato chips) Trade barriers not only limit how much U.S. companies can sell, they also raise prices for imported products much higher than they sell for in the U. S. Since the birth of the WTO (World Trade Organization), efforts have been made by many countries to reduce trade barriers, benefiting the world socially, politically, and economic ally Roy Philip 3

Introduction History of world trade: – Stock market crash of 1929; U.S. gave up on free trade – Other countries retaliated and world trade collapsed into a global depression – After World War II, the U.S. and the industrialized nations wanted free trade – World trade increased 22-fold since 1950 – General Agreement on Tariffs and Trade (GATT) was formed in 1944 to help reduce tariffs Roy Philip 4

The International Trade Environment Yesterday’s competitive market battles were fought in western Europe, Japan, and the United states; now these battles have expanded to Latin America, eastern Europe, Russia, China, India, Asia, and Africa. This emerging global economy brings significant advantages to both marketers and consumers: – Marketers benefit from new markets that give them viable business opportunities – Consumers benefit from a wide array of goods at the lowest prices. Roy Philip 5

Top Ten 2011 U.S. Trading Partners ($ billions, merchandise trade) Roy Philip 6 Exhibit 2.1

2-7

Twentieth to the Twenty-First Century (1 of 2) First Half of the Twentieth Century – The Depression era (1930s) between two world wars - WW I ( ) and WW II ( ) Capitalism was promoted by the U.S. through the Marshall Plan: – Economically rebuilding Europe and Japan – Fostering economic growth in the underdeveloped world In short, the United States helped make the world’s economies stronger, which enable them to buy more from us. Roy Philip 8

Twentieth to the Twenty-First Century (2 of 2) GATT (General Agreement on Tariffs and Trade) was created in 1986 by world leaders to help negotiate reductions in tariffs and other trade barriers. WTO (World Trade Organization) was created in 1995 to reinforce GATT rules and legislate trade disputes. Last half of the 20 th century marred by competing approaches to economic development between the Socialist Marxist and Democratic capitalist. Roy Philip 9

World Trade and U.S. Multinationals (1 of 2) 21 st century ushered in the era of new global marketing opportunities 1950s – U.S. companies began to export and make significant investments in overseas marketing and production facilities 1960s – U.S. multinational corporations (MNCs) faced major challenges on two fronts – Resistance to direct investment – Increasing competition in export markets Roy Philip 10

World Trade and U.S. Multinationals (2 of 2) American MNCs were confronted by a resurgence of competition from all over the world – Japan, Germany, NIC (Newly Industrialized Countries – Brazil, Mexico, India, South Korea, Taiwan, Singapore, Hong Kong), developing countries such as Venezuela, Chile, Bangladesh established SOE (State-Owned Enterprises) The U.S. role as an economic powerhouse was challenged on two fronts: – U.S. position in world trade (see chart on the next slide) – U.S. trade deficit (as high as $700 billion in 2007) Last decade of the 20 th century saw profound changes in the way world trade would be done – Free trade zones developed such as NAFTA, AFTA, and APEC Roy Philip 11

World’s 100 Largest Industrial Corporations (Annual Revenues) Roy Philip 12 Exhibit 2.2

Beyond the First Decade of the 21 st Century (1 of 2) Growth of the U.S. economy slowed dramatically in the last few years especially in 2009 Economies of the developed world expected on average to grow annually at 3% for the next 25 years (OECD) Economies of the developing world expected on average to grow annually at 6% for the next 25 years (OECD) As a result, economic power and influence will move away from industrialized nations to developing nations (Latin America, Asia, Eastern Europe, and Africa) Roy Philip 13

Beyond the First Decade of the 21 st Century (2 of 2) Companies are looking for ways to become more efficient, improve productivity, and expand their global reach while maintaining an ability to respond quickly and deliver products that the markets demand. – Nestle, Samsung, Whirlpool Smaller companies also using novel approaches to target global markets – Nochar Inc. (fire retardant) – Buztronics Inc. (promotional lapel buttons) Roy Philip 14

International Marketing 16 th edition Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

Balance of Payments (1 of 2) Balance of payments is defined as the system of accounts that records a nation’s international finance transactions. – Transactions recorded annually – Must always be in balance – A record of condition, not determinant of condition Roy Philip 16

Balance of Payments (2 of 2) Roy Philip 17 Receipts (+) Receipts (+) Payments (-) Payments (-) Export salesExport sales Money spent by foreign touristsMoney spent by foreign tourists TransportationTransportation Insurance to the U.S. governmentInsurance to the U.S. government Dividend and interest on investments abroadDividend and interest on investments abroad Foreign government payments to the U.S.Foreign government payments to the U.S. Cost of goods importedCost of goods imported Spending by American tourists overseasSpending by American tourists overseas New overseas investmentsNew overseas investments Cost of foreign militaryCost of foreign military Economic aidEconomic aid

U.S. Current Account by Major Components, 2009 ($ billions) Roy Philip 18 Exhibit 2.3

U.S. Current Account by Major Components, 2011 ($ billions) Roy Philip 19 Exhibit 2.3

U.S. Current Account Balance (% of GDP) Exhibit Roy Philip

International Marketing 16 th edition Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

Balance of Payments Balance of payments include three accounts: – Current account (exports, imports, services, funds) – Capital account (investments and short-term capital) – Reserves account (gold, foreign exchange, and liabilities) Roy Philip 22

International Marketing 16 th edition Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

Protectionism The reality of world trade is that countries protect its markets from foreign companies by setting up tariffs, quotas, and nontariff barriers. Barriers to trade can take any of the following forms: – Legal (tariffs and quotas) – Exchange – Psychological (nontariffs) – Private market Roy Philip 24

Protection Logic and Illogic Arguments for protectionism: – Protection of infant industry – Protection of the home market – Need to keep money at home – Encouragement of capital accumulation – Maintenance of the standard of living and real wages – Conservation of natural resources – Industrialization of a low-wage nation – Maintenance of employment and reduction of unemployment – National defense – Increase of business size – Retaliation and bargaining Roy Philip 25

Does Protectionism Help? A recent study on 21 protected industries showed that while jobs are protected, consumers pay much higher prices because of protectionism: – U.S. consumers pay about $70 billion per year in higher prices because of tariffs and other protective restrictions. – At the same time, the average cost to consumers for saving one job in these protected industries was $170,000 per year. Protectionism is politically popular, particularly during times of declining wages, and/or high employment, but it rarely leads to renewed growth in a declining industry. Roy Philip 26

International Marketing 16 th edition Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

Trade Barriers Tariffs Quotas and Import Licenses Voluntary Export Restraints (VER) Boycotts and embargoes Monetary barriers – Blocked currency – Government approval – Differential Exchange rates Standards Antidumping penalties Domestic subsidies and economic stimuli Roy Philip 28

Trade Barriers Tariffs are taxes imposed by a government on goods entering its borders. Roy Philip 29IncreaseIncreaseWeakenWeaken Restrict Inflationary pressures, special interests’ privileges, government control and political considerations in economic matters, and the number of tariffs Balance-of-payment positions, supply and demand patterns, and international relations by starting trade wars Manufacturer’s supply sources, choices available to consumers, and competition

Trade Barriers Quotas and Import Licenses – Quota is a specific unit or dollar limit applied to a particular type of good (increases price of good) – Import licenses limits quantities on a case-by-case basis – Japan and foreign rice; Banana wars between the United States and the EU Voluntary Export Restraints (VER) – Often used in the 1980s is an agreement between the importing country and the exporting country for a restriction on the volume of exports. – Japan’s VER on U.S. automobiles Roy Philip 30

International Marketing 16 th edition Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

The Omnibus Trade and Competitiveness Act (OTCA) 1988 Many countries are allowed to trade freely with the United States but do not grant equal access to U.S. products in their countries. To ease trade restrictions, the OTCA focused on correcting perceived injustice in trade practices. It dealt with trade deficits, protectionism, and the overall fairness of our trading partners.

The General Agreement on Tariffs and Trade (GATT) Shortly after World War II, the U.S. and 22 other countries signed GATT (1947) which paved the way for the first effective worldwide tariff agreement Basic elements of the GATT – Trade shall be conducted on a nondiscriminatory basis – Protection shall be afforded domestic industries through customs tariffs, not through such commercial measures as import quotas – Consultation shall be the primary method used to solve global trade problems Eliminating international trade barriers – Uruguay Round – The General Agreement on Trade in Services (GATS) – Trade-Related Investment Measures (TRIMs) – Trade-Related aspects of Intellectual Property Rights (TRIPs) Roy Philip 33

The World Trade Organization (WTO) WTO which is an institution, not an agreement, was founded in – Sets many rules governing trade between its 148 members – Provides a panel exports to hear and rule on trade disputes between members – Issues binding decisions – All member countries will have equal representation – Member countries have open their markets and to be bound by the rules of the multilateral trading system U.S. ratification concerns – Possible loss of sovereignty over its trade laws to WTO – Lack of veto power – Role U.S. would assume when a conflict arises over an individual state’s laws that might be challenged by a WTO member China became member of the WTO (2001); Vietnam (2007) Roy Philip 34

Skirting the spirit of GATT and WTO Loopholes – China reduced tariffs while at the same time increased number and scope of technical standards and inspection requirements Imposing antidumping duties Negotiating bilateral trade agreements – May lead to multinational concessions – Not necessarily consistent with WTO goals and aspirations Roy Philip 35

International Monetary Fund (IMF) Because of inadequate money reserves and unstable currencies, the IMF was created to assist nations in becoming and remaining economically viable Objectives of the IMF – Stabilization of foreign exchange rates – Establishment of freely convertible currencies to facilitate the expansion and balanced growth of international trade Roy Philip 36

World Bank Group By promoting sustainable growth and investment in people, the World Bank Group is an institution created in 1944 to reduce poverty and improve standard of living The World Bank has five institutions which perform the following services: – Lending money to the governments of developing countries – Providing assistance to governments for developmental projects to the poorest developing countries (per capital incomes of $925 or less) – Lending directly to the private sector – Providing investors with guarantees against “noncommercial risk” – Promoting increased flows of international investment Roy Philip 37

Anti-globalization Protests The unintended consequences of globalizing – Environmental concerns – Worker exploitation and domestic job losses – Cultural extinction – Higher oil prices – Diminished sovereignty of nations Protests – WTO meeting in Seattle (November 2009) – World Bank and IMF meetings in Washington D.C. (April 2010) – World Economic Forun meeting in Australia (September 2010) – IMF meeting in Prague (September 2010) – Terrorism in London (2005) “Antisweatshop” campaigns Roy Philip 38

Summary (1 of 2) Heightened worldwide competition has increased pressure for protectionism from every region of the globe when open markets are needed Although there are arguments in favor of protectionism, the consumer seldom benefits from such protection Free trade in international markets help underdeveloped countries become self-sufficient Roy Philip 39

Summary (2 of 2) Free trade will always be partially threatened by various governmental and market barriers that exist or are created for the protection of local businesses The future of open global markets lies with the controlled and equitable reduction of trade barriers Roy Philip 40