© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 2 Trade Institutions and Trade Policy

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Historical Dimension The rise and fall of the Roman Empire and the emergence of feudalism can be attributed to trade. The Romans placed primary emphasis on encouraging international business activities. The principal approaches used to implement this emphasis was the Pax Romana, or the “Roman Peace,” and the common coinage.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Historical Dimension European feudalism encouraged the development of a closed-state economy that was inwardly focused and ultimately conceived for self-sufficiency and security. Medieval commerce thrived through export trade.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Historical Dimension The Smoot-Hawley Act raised import duties to reduce the volume of imports into the United States to help restore domestic employment. –This resulted in raising of duties and imposition of barriers to imports by other nations. –Led to worldwide depression and the collapse of the world financial system.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Historical Dimension Global division –The world was split into West and East, with Soviet Union as the leader of the Eastern bloc and the United States for the Western world. –The Soviet Union focused on developing strong linkages among the members of the Soviet bloc. –The United States created the Pax Americana driven by the belief that international trade was a key to worldwide prosperity.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Historical Dimension Global division –The charter for an International Trade Organization (ITO), a series of agreements among 53 countries, was signed in –It was designed to cover international commercial policies, domestic business practices, commodity agreements, employment and reconstruction, economic development and international investment, and a constitution for a new United Nations agency to administer the whole.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Historical Dimension Global division –The General Agreement on Tariffs and Trade (GATT) was initiated in –The World Bank and the International Monetary Fund were created.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transnational Institutions Affecting World Trade General Agreement on Tariffs and Trade (GATT) –Set of rules for non discrimination, transparent procedures and settlement of disputes in international trade. –Emphasized on tariff reduction. –Reduced trade barriers and developed provisions for dealing with subsidies, and a more explicit definition of rules for import controls. –Was designed to operate by consensus.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transnational Institutions Affecting World Trade World Trade Organization (WTO) –Created in January –Responsible for General Agreement on Trade in Services (GATS), Agreements on trade related aspects of intellectual property rights (TRIPS), and Trade related investment measures (TRIMS). –Administered international trade and investment accords.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transnational Institutions Affecting World Trade World Trade Organization (WTO) –Developed speedier trade dispute settlement procedures and streamlined the decision making process. –The Doha Round was initiated to expand the role of the WTO to encompass trade activities between developed and developing economies.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transnational Institutions Affecting World Trade International Monetary Fund (IMF) –Developed in –Designed to provide stability for the international monetary framework. –Provided for fixed exchange rates between countries.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transnational Institutions Affecting World Trade World Bank –Also recognized as the International Bank for Reconstruction and Development, was formed in –Key functions: Provides economic assistance for the reconstruction of war-torn countries. Assists fledging economies to participate in modern economic trade. Resolves debt problems of the developing nations. Bring a market economy to the former members of the Eastern bloc.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transnational Institutions Affecting World Trade World Bank –Current areas of focus: Promoting sustainable growth and development. Addressing higher commodity prices. Agricultural assistance for combating inflation in food articles. Liberalization of world trade. Greater participation of rising economic powers and developing nations in the bank’s governance.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transnational Institutions Affecting World Trade Regional institutions –European Coal and Steel Community: Create a common market among six countries in coal, steel and iron. –Customs Unions: Common external tariff. –European Union (EU): Free movement of capital, services, and people across national borders and the joint development of common international policies.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Transnational Institutions Affecting World Trade Regional institutions –North American Free Trade Agreement (NAFTA), Mercosur - Latin America, and Gulf Cooperation Council (GCC): Focus on issues such as forming a customs union, a common market, an economic union, or a political union. –Private sectors have begun to develop international trade institutions of its own; example being Transatlantic Business Dialogue (TBD).

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Trade Positions Compared International trade positions have changed substantially when measured in terms of world market share. The U. S share of total world export has declined precipitously since 1950s. Another important development is the rise of China’s trade position. The impact of international trade and marketing on individuals is highlighted when trade is scrutinized from a per-capita perspective.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 2.1: Merchandise Exports and Imports as a Percentage of World Total, 2008

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Trade Positions Compared Factors behind the decline in U.S. international competitiveness: –Attitude of the American policy makers. –Ignoring domestic firms in an attempt to boost the development of foreign economies. –Perception amongst US manufacturers about international marketing being risky and complicated. –Lack of global interest. –Inadequacy of information. –Unfamiliarity with international market conditions. –Complicated trade regulations.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Impact of Trade and Investment The effect of trade – Exports are important as it: –Creates a trade balance by reducing trade deficits. –Affects the currency values and fiscal and monetary policies of the government. –Shapes public perception about competitiveness. –Determines the affordable levels of imports for a country. –Helps to achieve economies of scale.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Impact of Trade and Investment The effect of trade – Importance of imports: –Firms are exposed to new competition. –Gives rise to new marketing approaches, better processes or better products and services. –Competitive pressures keep quality high and price low.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Impact of Trade and Investment The effect of international investment –Foreign direct investment is extensive in many U.S. industries. –Almost one in seven U.S. manufacturing employees works for a foreign affiliate. –To some extent, foreign direct investments substitute for trade activities. –Even though theory suggests an open investment policy that welcomes foreign corporations, some degree of uneasiness exists about the rapid growth of such investment.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Impact of Trade and Investment Restriction on investments may –Permit more domestic control over industries. –Deny access to foreign capital and often innovation. –Tightening up of credit markets, higher interest rates, and a decrease in willingness to adapt to changing world market conditions.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Policy Responses to Trade Problems Policy responses to trade problems have consisted mainly of political ad hoc reactions, which over the years have changed to protectionism. Voluntary import restrictions - Aid domestic industries to reorganize, restructure, and recapture their trade prominence of years past. Non-tariff barriers - Providing preferential treatment to domestic bidders, using national standards, placing emphasis on design rather than performance, and preventing the market entry of foreign products.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Policy Responses to Trade Problems Export promotion efforts –Earn foreign currency, encourage domestic employment, and increase domestic economic activity. –Offering mixed aid credits that take the form of loans composed partially of commercial interest rates and partially of highly subsidized developmental aid interest rates. –Formation of export consortia to provide the foreign buyer with a one-stop shopping center for a variety of complementary and competitive products.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. A Strategic Outlook for Trade and Investment Policies A strategic outlook for trade and investment policies - U.S. perspective –Improve the quality and amount of information government and business share to facilitate competitiveness. –Encourage collaboration among companies in such areas as goods and process technologies. –Overcome its export reluctance and its short-term financial orientation. –Invest in its people, providing education and training suited to the competitive challenges. –Renewal of trade promotion authority.

© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. A Strategic Outlook for Trade and Investment Policies A strategic outlook for trade and investment policies - An international perspective: –Bilateral or multilateral trade and investment negotiations must continue. –Willingness to trade off short-term achievements for long-term goals. –Design new mechanisms to evaluate restraint measures. –Assess the cost of policy measures which affect trade and investment flow.