The Dynamic Environment

of InternationalTrade

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Learning outcomesLearning outcomes

• The basis for the reestablishment of world trade following world war II

• The importance of balance of payment figures

• The effects of protectionism on world trade

• Several types of trade barriers

• The importance of GATT and the world trade organization

• The emergence of international monetary fund and the world bank

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The 20th to the 21st CenturyThe 20th to the 21st Century

• First Half of the Twentieth Century

– Depression– WW I and WW II

• Move toward international cooperation among trading nations

– General Agreement on Tariffs an Trade, (GATT)

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• Last half of the 20th century marred by competing approaches to economic development

• Rapid growth of war-torn economies and previously underdeveloped countries

• Large-scale economic cooperation and assistance

• Rising standards of living

The 20th to the 21st CenturyThe 20th to the 21st Century

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World Trade and U.S. Multinationals

World Trade and U.S. Multinationals

• 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

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World’s 100 Largest Industrial Corporations (Annual Revenues)

World’s 100 Largest Industrial Corporations (Annual Revenues)

Exhibit 2.2

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Balance of PaymentsBalance of Payments

• Balance of payments – 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

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Balance of PaymentsBalance of Payments

• A balance of payments statement includes three accounts

– Current account– Capital account – Reserves account

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ProtectionismProtectionism

• Tariffs, quotas, and nontariff barriers are designed to protect markets from intrusions by foreign countries

• Nations utilize barriers to restrain entry of unwanted goods

– Legal– Exchange– Psychological– Private market

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Protection Logic and IllogicProtection Logic and Illogic

• Arguments concerning protectionism on trade

– 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

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Trade BarriersTrade Barriers

• Tariffs

• Quotas

• Voluntary Export Restraints (VER)

• Boycotts and embargoes

• Monetary barriers– Blocked currency– Differential exchange– Government approval

• Standards

• Antidumping penalties

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The Omnibus Trade and Competitiveness Act

The Omnibus Trade and Competitiveness Act

• Designed to deal with trade deficits, protectionism, and overall fairness of our trading partners

• Covers three critical areas in improving U.S. trade– Market access– Export expansion– Import relief

• Four ongoing activities to support the growth of international trade– GATT– The associated World Trade Organization (WTO)– International Monetary Fund (IMF)– The World Bank Group

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General Agreement on Tariffs and TradeGeneral Agreement on Tariffs and Trade

• Paved way for 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)

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World Trade OrganizationWorld Trade Organization

• WTO is an institution – not an agreement

– 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

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Skirting the Spirit of GATT and WTOSkirting the Spirit of GATT and WTO

• Loopholes

– Reducing tariffs while at the same time increasing 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

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The International Monetary FundThe International Monetary Fund

• 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

• Special Drawing Rights (SDRs)

– “Paper gold”

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The World Bank GroupThe World Bank Group

• Institution created to reduce poverty and improve standard of living – By promoting sustainable growth and investment in people

• 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– Lending directly to the private sector – Providing investors with guarantees against “noncommercial risk”– Promoting increased flows of international investment