International MarketingChapter 2

The Dynamic Environment of International Trade

A Short History of Trade• Countries now are very interdependent.• There are many opportunities for trade.• We had two world wars and economic depression which

negatively affected trade among countries.• The US developed the Marshall Plan after WWII to rebuild

Europe and was very successful in doing so.• Great overseas demand was created through the Marshall Plan

for our goods and services.• There was also a move toward international cooperation by

trading nations through the development of the General Agreement on Tariffs and Trade (GATT). This agreement helped to lower tariffs and thus encourage trade.

• GATT is now part of the World Trade Organization (WTO). There are 117 members in the WTO.

• As the result of the growth of economies world wide, the 1960s, the US corporation was facing stiff competition from other parts of the world and this competition has continued to grow.

A Short History of Trade Continued

• To overcome the competition, US firms started to invest internationally as direct foreign investment.

• However, economic power is now more evenly distributed among the world economies and the US no longer holds the control it once had.

• In fact, by 1971, the US had started incurring trade deficits where people bought less from us than we did from them. This remains the same today.

• The OECD countries will grow at about 3 % while developing economies will grow must faster.

• US companies must become more productive and efficient in order to continue to compete in the world marketplace.

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

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Exhibit 2.3 The Nationality of the World’s 100 Largest Industrial Corporations (size measured by annual revenues) Source: “2011 Global 500,” Fortune, http://www.fortune.com , 2012.

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The Balance of Payments

• The system of accounts that records a nation’s international financial transactions is called the balance of payments.

• This records a country’s financial transactions between its residents and the rest of the world.

Balance of PaymentsThe BP is the difference between receipts and payments

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Balance of Payments

• A balance-of-payments statement includes three accounts– the current account, a record of all merchandise exports,

imports, and services plus unilateral transfers of funds – the capital account, a record of direct investment,

portfolio investment, and short-term capital movements to and from countries; and

– 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.

• Of the three, the current account is of primary interest to international business.

The Balance of Payments• Exports Goods Services Income Receipts• Imports Goods Services Income Payments• Unilateral Current Transfers, net Current account balance• The Capital Account Capital Account Balance• Reserves

Overall Balance

The Balance of Payments

• As the US balance of payment deficit grows, monetary pressures push the value

of the dollar to lower levels.

• This makes it more expensive for us to buy things from the rest of the world as our dollar is lower in value than the value of the currency in many other parts of the world.

Exhibit 2.6 What Would One U.S. Dollar Buy?Source: The Wall Street Journal, 2012

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The Use of Protectionism to Protect Markets

• Many countries use certain protectionist measures to prevent foreign goods from being sold in their markets.

• There are many logic reasons to protect your home market.

• Trade Barriers: Tariffs, Quotas, Standards, Customs and Administrative Entry Procedures, VERs, Boycotts, Embargoes, Monetary Barriers, Anti-dumping legislation,

Arguments for Protectionism

• maintain employment and reduce unemployment

• increase of business size, and

• retaliation and bargaining

• protection of the home market

• need to keep money at home

• encouragement of capital accumulation

Arguments for Protectionism

• maintenance of the standard of living and real wages

• conservation of natural resources

• protection of an infant industry

• industrialization of a low-wage nation

• national defense

The Impact of Tariff (Tax) Barriers

• Tariff Barriers tend to increase:– Inflationary pressures– Special interests’ privileges– Government control and political

considerations in economic matters– The number of tariffs they beget via

reciprocity

The Impact of Tariff (Tax) Barriers

• Tariff Barriers tend to weaken:– Balance-of-payments positions– Supply-and-demand patterns– International relations (they can start trade

wars)

• Tariff Barriers tend to restrict:– Manufacturer’ supply sources– Choices available to consumers– Competition

Six Types of Non-Tariff Barriers

• (1) Specific Limitations on Trade:– Quotas– Import Licensing requirements– Proportion restrictions of foreign to domestic goods (local

content requirements)– Minimum import price limits– Embargoes

• (2) Customs and Administrative Entry Procedures:– Valuation systems– Antidumping practices– Tariff classifications– Documentation requirements– Fees

Six Types of Non-Tariff Barriers

• (3) Standards:– Standard disparities– Intergovernmental acceptances of testing

methods and standards– Packaging, labeling, and marking

• (4) Government Participation in Trade:– Government procurement policies– Export subsidies– Countervailing duties– Domestic assistance programs

Six Types of Non-Tariff Barriers

• (5) Charges on imports:– Prior import deposit subsidies– Administrative fees– Special supplementary duties– Import credit discriminations– Variable levies– Border taxes

• (6) Others:– Voluntary export restraints– Orderly marketing agreements

Three Types of Monetary Barriers

• Blocked currency: Blockage is accomplished by refusing to allow importers to exchange its national currency for the sellers’ currency.

• 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

• 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

Improving the US Trade Position: The Omnibus Trade and

Competitiveness Act of 1988• Increase US access to foreign markets.• Increase exports.• Import relief.• Foreign markets use the same trade barriers as

we do. We want them to reduce these barriers.• Creation of the National Trade Data Bank

(NTDB) to improve access to trade data.• Made export licenses easier to get.• Companies can be temporarily protected from

import competition.

How to Eliminate Trade Barriers

• The role of GATT

• The role of the WTO

• The role of the IMF

• The role of the World Bank