The Dynamic Environment of International Trade Chapter 2 McGraw-Hill/Irwin© 2005 The McGraw-Hill Companies, Inc. All rights reserved. PowerPoint presentation prepared by: Professor Rajiv Mehta Associate Professor of Marketing New Jersey Institute of Technology Newark, N.J.

Chapter Learning Objectives 1. The basis for the reestablishment of world trade following World War II 2. The importance of balance-of-payment figures to a country’s economy 3. The effects of protectionism on world trade 4. The seven types of trade barriers

Chapter Learning Objectives 5. The provisions of the Omnibus Trade and Competitiveness Act 6. The importance of GATT and the World Trade Organization 7. The emergence of the International Monetary Fund and the World Bank Group

The International Marketing Environment 7 3. ECONOMY Environmental uncontrollables country market A Environmental uncontrollables country market B Environmental uncontrollables country market C 1. Competition 2. Technology PriceProduct Promotion Place or Distribution 6. Geography and Infrastructure Foreign Environment (Uncontrollables) 7. Structure of Distribution 3. Economy 5. Political- Legal Domestic environment (Uncontrollables) (Controllables) 2.Technology 4. Culture 5. Political- Legal 4. Culture Target Market

Introduction Proliferation of trade and emergence of the global economy Intensification of global competition More emerging markets Developments in technology allow communications with global consumers and movement of goods

The 20 th to the 21 st Century Worldwide economic depression First World War Second world war Cold war and divide between communist- socialist-capitalist approach to economic development The Marshall Plan for rebuilding Europe

The 20 th to the 21 st Century Role of Agency for International Development to foster economic growth in the underdeveloped world Financial and industrial development assistance to rebuild Japan Greater demand for U.S. goods and services Greater cooperation among trading nations GATT via reduction of tariffs and trade barriers GATT replaced by the World Trade Organization (WTO) and new era of free trade

World Trade and U.S. Multinationals 1.Rapid growth of underdeveloped countries and new global marketing opportunities 2.Rising living standards have created marketing opportunities for U.S. firms 3.Resistance over domination of U.S. multinationals 4.Expropriation and domestication of U.S. investments in Latin America 5.In the Europe, U.S. multinationals were controlled tightly by protectionism laws

World Trade and U.S. Multinationals 1.Resurgence of competition from all over the world challenged the supremacy of American industry 2.Newly industrialized countries (NICs) such as Brazil, Mexico, South Korea, Taiwan, Singapore, and Hong Kong experienced rapid industrialization 3.Economic power evenly distributed with growth of MNCs from other countries (see Exhibit 2-2) 4. Establishment of the WTO 5. Integration of European Union countries 6. Creation of NAFTA, AFTA, and APEC

21st Century: The First Decade and Beyond With exception of China, slower economic growth in U.S. and other countries is currently evident. Faster growth rates expected in developing countries such as Brazil, China, India, Indonesia, and Russia. More trade expected in emerging markets, regional trade areas, and the established markets in Europe, Japan, and U.S. Companies need to be more efficient, improve productivity, expand global reach, and respond quickly. Greater growth in international sales expected by smaller firms.

Balance of Payments 1.When countries trade there are financial transactions among businesses or consumers of different nations 2.Money constantly flows into and out of a country 3.The system of accounts that records a nation’s international financial transactions is called its balance of payments (BP) 4.It records all financial transactions between a country’s firms, and residents, and the rest of the world usually over a year 5.The BP is maintained on a double-entry bookkeeping system

Balance of Payments The BP is the difference between receipts and payments merchandise export sales. money spent by foreign tourists. transportation. payments of dividends and interest from FDI abroad. new foreign investments in the U.S. BP Receipts costs of goods imported. spending by U.S. tourists overseas. new overseas investments. cost of foreign military and economic aid. BP Payments

Balance of Payments The BP includes three accounts: (1) current account—a record of all merchandise exports, imports, and services plus unilateral transfers of funds; (2) the capital account—a record of direct investment, portfolio investment, and short-term capital movements to and from countries; (3) the official reserves account—a record of exports and imports of gold, increases or decreases in foreign exchange, and increases or decreases in liabilities to foreign central banks;

United States Current Account Balance Percent +

Balance of Payments and Exchange Rate 1.If a country’s expenditures consistently exceed its income, its standard of living falls 2.Its exchange rate vis-à-vis foreign monies declines 3.When foreign currencies can be traded for more dollars, U.S. products are less expensive for foreign customers and exports increase 4.Simultaneously foreign products are more expensive for U.S. buyers and the demand for imported goods is reduced

Protectionism: Logic and Illogic Countries use protectionist measures to shield a country’s markets from intrusion by foreign competition and imports. Arguments for Protectionism include: 1.maintain employment and reduce unemployment. 2.increase of business size, and 3.retaliation and bargaining. 4.protection of the home market. 5.need to keep money at home. 6.encouragement of capital accumulation. 7.maintenance of the standard of living and real wages. 8.conservation of natural resources. 9.protection of an infant industry 10.industrialization of a low-wage nation 11.national defense Arguments for Protectionism include: 1.maintain employment and reduce unemployment. 2.increase of business size, and 3.retaliation and bargaining. 4.protection of the home market. 5.need to keep money at home. 6.encouragement of capital accumulation. 7.maintenance of the standard of living and real wages. 8.conservation of natural resources. 9.protection of an infant industry 10.industrialization of a low-wage nation 11.national defense

Protectionism: Logic and Illogic In general, protectionism contributes to industrial inefficiency and makes a nation uncompetitive Arguments 9-11 above are considered valid for protectionism Protectionism is implemented through the imposition of trade barriers, which include tariff barriers and non-tariff barriers

The Impact of Tariff (Tax) Barriers Tariff Barriers tend to Increase: 1.Inflationary pressures 2.Special interests’ privileges 3.Government control and political considerations in economic matters 4.The number of tariffs they beget via reciprocity Tariff Barriers tend to Increase: 1.Inflationary pressures 2.Special interests’ privileges 3.Government control and political considerations in economic matters 4.The number of tariffs they beget via reciprocity Tariff Barriers tend to Weaken: 1.Balance-of-payments positions 2.Supply-and-demand patterns 3.International relations (they can start trade wars) Tariff Barriers tend to Weaken: 1.Balance-of-payments positions 2.Supply-and-demand patterns 3.International relations (they can start trade wars) Tariff Barriers tend to Restrict: 1.Manufacturer’ supply sources 2.Choices available to consumers 3.Competition Tariff Barriers tend to Restrict: 1.Manufacturer’ supply sources 2.Choices available to consumers 3.Competition

Six Types of Non-Tariff Barriers (2) Customs and Administrative Entry Procedures: 1.Valuation systems 2.Antidumping practices 3.Tariff classifications 4.Documentation requirements 5.Fees (2) Customs and Administrative Entry Procedures: 1.Valuation systems 2.Antidumping practices 3.Tariff classifications 4.Documentation requirements 5.Fees (1) Specific Limitations on Trade: 1.Quotas 2.Import Licensing requirements 3.Proportion restrictions of foreign to domestic goods (local content requirements) 4.Minimum import price limits 5.Embargoes (1) Specific Limitations on Trade: 1.Quotas 2.Import Licensing requirements 3.Proportion restrictions of foreign to domestic goods (local content requirements) 4.Minimum import price limits 5.Embargoes

Six Types of Non-Tariff Barriers (3) Standards: 1.Standard disparities 2.Intergovernmental acceptances of testing methods and standards 3.Packaging, labeling, and marking (3) Standards: 1.Standard disparities 2.Intergovernmental acceptances of testing methods and standards 3.Packaging, labeling, and marking (4) Government Participation in Trade: 1.Government procurement policies 2.Export subsidies 3.Countervailing duties 4.Domestic assistance programs (4) Government Participation in Trade: 1.Government procurement policies 2.Export subsidies 3.Countervailing duties 4.Domestic assistance programs

Six Types of Non-Tariff Barriers (5) Charges on imports: 1.Prior import deposit subsidies 2.Administrative fees 3.Special supplementary duties 4.Import credit discriminations 5.Variable levies 6.Border taxes (5) Charges on imports: 1.Prior import deposit subsidies 2.Administrative fees 3.Special supplementary duties 4.Import credit discriminations 5.Variable levies 6.Border taxes (6) Others: 1.Voluntary export restraints 2.Orderly marketing agreements (6) Others: 1.Voluntary export restraints 2.Orderly marketing agreements

Monetary Barriers In addition to the Six Types of Non-Tariff Barriers, monetary barriers are also used by countries Three types of monetary barriers include: 1.Blocked currency: Blockage is accomplished by refusing to allow importers to exchange its national currency for the sellers’ currency. 2.Differential exchange rates: It encourages the importation of goods the government deems desirable and discourages importation of goods the government does not want by adjusting the exchange rate. The exchange rate for importation of a desirable product is favorable and vice- versa 3.Government approval: In countries where there is a severe shortage of foreign exchange, an exchange permit to import foreign goods is required from the government Three types of monetary barriers include: 1.Blocked currency: Blockage is accomplished by refusing to allow importers to exchange its national currency for the sellers’ currency. 2.Differential exchange rates: It encourages the importation of goods the government deems desirable and discourages importation of goods the government does not want by adjusting the exchange rate. The exchange rate for importation of a desirable product is favorable and vice- versa 3.Government approval: In countries where there is a severe shortage of foreign exchange, an exchange permit to import foreign goods is required from the government

The Omnibus Trade and Competitiveness Act (OTCA) Many countries are allowed to trade freely with the United States but do not grant equal access to U.S. products in their countries. 2.To ease trade restrictions, the OTCA focused on correcting perceived injustice in trade practices. 3.It dealt with trade deficits, protectionism, and the overall fairness of our trading partners. The bill covers three areas for improving U.S. trade: 1.market access, 2.export expansion, and 3.import relief The bill covers three areas for improving U.S. trade: 1.market access, 2.export expansion, and 3.import relief

General Agreement on Tariffs and Trade (GATT) 1.GATT created as an agency to serve as watchdog over world trade and provide a process to reduce tariffs 2.GATT also provided a mechanism to resolve trade disputes bilaterally GATT covers three basic areas: 1.trade shall be conducted on a nondiscriminatory basis; 2.protection shall be afforded domestic industries through customs tariffs, not through such commercial measures as import quotas; and 3.consultation shall be the primary method used to solve global trade problems. GATT covers three basic areas: 1.trade shall be conducted on a nondiscriminatory basis; 2.protection shall be afforded domestic industries through customs tariffs, not through such commercial measures as import quotas; and 3.consultation shall be the primary method used to solve global trade problems. 3. GATT now replaced by the World Trade Organization

World Trade Organization (WTO) 1.It sets many rules governing trade between its 132 members 2.WTO provides a panel of experts to hear and rule on trade disputes between members, and, unlike GATT, issues binding decisions Unlike GATT, is an institution, not an agreement

The International Monetary Fund (IMF) 1.IMF was created to assist nations in becoming and remaining economically viable 2.It assists countries that seek capital for economic development and restructuring 3.IMF loans come with stipulations that borrowing countries slash spending and impose controls to curb inflation 4.It helps maintain stability in the world financial markets Objectives of the IMF include: 1.stabilization of foreign exchange rates 2.establish convertible currencies to facilitate international trade 3.lend money to members in financial trouble Objectives of the IMF include: 1.stabilization of foreign exchange rates 2.establish convertible currencies to facilitate international trade 3.lend money to members in financial trouble

World Bank Group (WBG) The functions of the WBG include: The goal of WBG is to reduce poverty and the improvement of living standards by promoting sustainable growth and investment in people. 1.lending money to countries to finance development projects in education, health, and infrastructure; 2.providing assistance for projects to the poorest developing countries; 3.lending directly to the private sector in developing countries with long-term loans, equity investments, and other financial assistance; 4.provide investors with investment guarantees against “noncommercial risk,” so developing countries will attract FDI; and 5.provide conciliation and arbitration of disputes between governments and foreign investors

Protests Against Global Institutions In 1999 “anti-capitalist protestors” complained against the WTO, and IMF, over the unintended consequences of globalization that include: 1.environmental concerns 2.worker exploitation and domestic job losses 3.cultural extinction 4.higher oil prices, and 5.diminished sovereignty of nations