Global Business Management (MGT380) Lecture #4: International Trade & Investment Policies

Learning Objectives  To examine how traditional attitudes toward trade and investment policies are changing.  To see the effects of global links in trade and investment on policymakers.  To understand that nations must cooperate closely in the future to maintain a viable global trade and investment environment.

Critical Thinking question of last lecture  Choose two countries where religion has strong influence. Compare the cultures of those countries and indicate how cultural differences influence (a) business practices (b) costs of doing business in each country. (You may take the example of McDonald in US and India)

Quick recap of Last lecture  Values are shared beliefs or group norms within the society and attitudes are evaluations of alternatives based on values.  Material element: It refers to the impact of technology, and as a result how a society organizes its activities (Economic infrastructure, social infrastructure, financial infrastructure). Cultural convergence  Each culture has clear statement for what is acceptable and what is not

 Education plays an important role in passing on and sharing of culture  Two types of knowledge (i) Objective/factual: communication, education, R&D (ii) Experimental: by involving oneself in new culture  Culture life styles can be classified into four dimension: Individualism, Power distance, Uncertainty avoidance, Masculinity

Rationale and Goals of Trade and Investment Policies  Government policies are designed to regulate, direct, and protect national activities. The exercise of these policies is the result of national sovereignty, which provides a government with the right to shape the environment of the country and its citizens.  The domestic policy actions of most governments aim to increase the standard of living of citizens and to improve the quality of life, and to achieve full employment.  These policies goals and international trade relates indirectly.

 In more direct ways, a country may also pursue technology transfer from abroad or the exclusion of foreign industries to the benefit of domestic infant firms. Government officials can also develop regulations on imports to protect citizens.  Each country develops its own domestic policy, which varies, may cause conflict. E.g., Cattle, Cars  Nations institute foreign policy measures designed with domestic concerns in mind but explicitly aimed to exercise influence abroad.  A major foreign policy goal is national security.

Global trade regulations since 1945  ITO  GATT (General Agreement on Tariffs and Trade )  WTO (World Trade Organization)  In 1948, the ITO represented an agreement among 53 countries to:  Aid in international commercial policies, restrictive business practices, commodity agreements, employment and reconstruction, and economic development and international investment.  It developed a constitution for a new United Nations agency.  The ITO was never implemented.

 In GATT started in 1947 as a set of rules to ensure nondiscrimination, transparent procedures, the settlement of disputes, and the participation of the lesser-developed countries in international trade.  GATT used tariff concessions to limit the level of tariffs that would be imposed on other GATT members.  The Most Favored Nation clause calls for each member country to grant every other member country the same treatment that it accords with any other country with respect to imports and exports.

 The WTO was introduced in 1995 and administers international trade and investment accords.  In 2002, the Doha Round ended the first stage of implementation. The aim is to further hasten implementation of liberalization to help development in developing nations.

Changes in global policy environment  It becomes very difficult to isolate the domestic investment policy from the foreign policy.  Three major changes have occurred over time in the global policy environment:  a reduction of domestic policy influence;  a weakening of traditional international institutions;  and a sharpening of the conflict between industrialized and developing nations.

 Reduction of domestic policy influence: Policy makers were unable to take decisive steps even for domestic market.  E.g. US wanted to impose tariff on Japanese imports to retaliate for Japanese no-adherence to an agreement but could not.

 Weakening of traditional international institutions: WTO faced four main challenges  Focus was shifted towards non-tariff barriers which are more complex  Right to establishment within countries without personal presence  Disputes in areas like agriculture or intellectual property rights protection continue to rise.  Inclusion of ‘social causes’ such as labour laws, competition, emigration

 Sharpening of the conflict between industrialized and developing nations:  In the 1960s and 1970s it was hoped that development gap would gradually decreased but could not.  Environmental awareness contributed to a further sharpening. Global obligation vs. matter of choice

Restrictions of Imports  Trade restrictive measures:  Tariffs are taxes on the value of imported goods  Quotas are restrictions on the no of foreign products that can be imported  Non-tariff barriers include testing, certification, or simply bureaucratic hurdles which result in restricting imports.  Many countries including the United States have passed antidumping laws which help domestic industries by restricting foreign products being sold below the cost of production, or at prices lower than those in the home market

 Antidumping laws are designed to help domestic industries that are injured by unfair competition from abroad due to products being ‘dumped’ on them. It is a strategic shelter for domestic industry from foreign competition. i.e., Harley-Davidson vs. Honda and Kawasaki  Nontariff barriers: preference to domestic bidders, incompatibility of international standards, etc. Hard to quantify

 Last way to restricts imports is tightening market access and entry of foreign products through involved procedures and inspection.  Most famous example is inspection by France of video recorders (VR). French government ruled that all foreign VR had to sent to customs station. Within few weeks, imports of VR came to a halt.

Effects of Import Restriction  Import control may mean that the most efficient sources of supply are not available, resulting in second-best products or higher costs for restricted supplies.  Import control may result in the downstream change in the composition of imports. i.e., if copper ore is restricted firm can shift to copper wire.  Firms change the entry mode. i.e. Japanese Automobile industry in US  Due to inefficiency, import controls may cause a lag in technological advancements. domestic firms get ‘dull’.

Mini-case study: Shrimps, Turtle and the WTO  There are seven species of sea turtle in the world, six of them are on the list of engendered species in the US. A major cause of the decline of sea turtle has been poor fishing practices, particularly in shrimp boats. It is estimated that almost 150,000 sea turtles/year are trapped in the nets of sea boats. To limit this, in 1989, US congress passed a law which required shrimp boats to the equipped with a turtle excluder. The law also banned the importation of shrimp from countries that fail to mandate the use of turtle excluders. In 1996, US placed an embargo on importation from India, Pakistan and Malaysia. In response, these countries filed a complaint in WTO against it, Thailand also joined them on principle grounds.  US claimed that WTO rules include provisions for taking restrictive measures if they are related to the conservation of exhaustible resources. Its US obligation and therefore US took reasonable measures.  The four countries argue that US violating WTO rules by applying domestic legislation outside its boundaries and applying it in a discriminatory manner. It is unfair restraint on trade.

 WTO ruled that US was wrong to prohibit shrimp imports from countries that failed to protect sea turtle. WTO state that while environmental protection is important but the primary aim of international agreements on trade is promotion of economic development through unfettered free trade. US would not be allowed to force other nations to adopt policies to protect an engendered species. Questions:  Do you think it is correct for the WTO to decouple trade policy from environmental policy? Why?  Do you think other countries are correct to accuse the US of hypocrisy on the environmental issue?

Summary of the lecture  Rationale of trade policies  The domestic policy actions of most governments aim to increase the standard of living of citizens and to improve the quality of life, and to achieve full employment.  These policies goals and international trade relates indirectly.  Each country develops its own domestic policy, which varies, may cause conflict. E.g., Cattle, Cars  ITO, GAAT (Most Favored Nation clause), WTO

 Three major changes have occurred over time in the global policy environment:  a reduction of domestic policy influence;  a weakening of traditional international institutions Focus was shifted towards non-tariff barriers which are more complex Right to establishment within countries without personal presence Disputes in areas like agriculture or intellectual property rights protection continue to rise. Inclusion of ‘social causes’ such as labour laws, competition, emigration  Sharpening of the conflict between industrialized and developing nations.

 Trade restrictive measures:  Tariffs are taxes on the value of imported goods  Quotas are restrictions on the no of foreign products that can be imported  Non-tariff barriers include testing, certification, simply bureaucratic hurdles which result in restricting imports.  Anti-dumping law, Nontariff barriers (preference to domestic bidders, incompatibility of international standards) and tightening market access  Effects: high cost, shift of product/mode, efficiency loss