Chapter 2

Dynamic Environment of International Trade

 General Agreement on Tariffs and Trade (GATT) forum to negotiate reduction of tariffs and other barriers to trade The system of the account that records a nations international financial transaction is called balance of payment BOP records all the financial transactions between its residents and those of the rest of the world during a given period of time-usually one year

 It is maintained in a double entry book keeping system. Balance is the record of condition and not the determinant of condition. An important economic measure used by treasuries, central banks and other govt. agencies.

 On plus side are merchandise export sales, money spent by foreign tourists, payment to Government for insurance, transportation and other similar services, payment on dividends and interests on investment abroad, return on capital invested abroad, new foreign investments in the country and foreign government payments to country

 On the minus side are cost of goods imported, spending by domestic tourists abroad, new overseas investment, cost of foreign military and economic aid.

 BOP consists of three accounts: Current account a record of all merchandise exports, imports and services plus unilateral transfers of funds. Capital account record of direct investment, portfolio investment, and short term capital investments. Reserve account - record of export and import of gold, changes in FE, changes in liabilities to foreign banks.

Current account is of primary interest to international business

 Protectionism
Designed to protect a countrys markets from intrusion by foreign companies Legal barriers, exchange barriers and psychological barriers are used to restrain entry of foreign goods complex distribution system in Japan Section 301, a provision of U.S trade law, enables the US government to take action against countries deemed to have engaged in unreasonable, unjustifiable or discriminatory practices that restrict US commerce.

Classification: Protection of an infant industry Protection of home market Need to keep money at home Encouragement of capital accumulation Maintenance of standard living and real wages Conservation of natural resources Industrialisation of a low wage nation Maintenance of employment and reduce unemployment National defence Increase of business size Retaliation and bargaining

 Customers bear the cost of tariffs etc

Protectionism is politically popular Jobs saved are saved at very high cost

US consumers pay $70 billion /year in higher prices because of tariff. On average, cost to consumers for saving one job in these protected industries is $170,000 per year six times the average pay of worker.

Trade barriers

Saved jobs of 1239 workers at a cost of $835,351 each in steel industry in US

Tariffs- is a tax imposed by a government on goods entering at its border Used either to discourage import of goods or to generate revenue or both Tariffs increase inflationary pressure, special interests privileges, government control and political considerations in economic matter Weaken BOP, supply and demand pattern and international relations Restrict manufacturers supply sources, consumer choices and competition

 Tariffs are arbitrary, discriminatory and require constant administration and supervision In addition to this quality standards, sanitary and health standards, quotas, antidumping penalty etc. are used Quotas- a quota is a specific unit or dollar limit applied to a particular type of good
Quotas put an absolute restriction on the quantity of a specific item that can be imported Quotas tend to increase price

 GB limits imported TV sets, Germany on Jap ball bearings, Italy restricts Jap motorcycles, US on textiles, peanuts and sugar. Japanese on rice and EU and US banana war!

Voluntary Export Restraints (orderly market agreements) Common in textile, clothing, steel agriculture and automobiles
VER is an agreement between importing and exporting country for a restriction on the volume of exports Exporting country sets the limit and imposed under the threat of stiffer quotas and tariffs

 Boycotts and Embargoes A government boycott is an absolute restriction against purchase and importation of certain goods from other countries
An embargo is a refusal to sell to a specific country Pubic boycott could be formal or informal. Government sponsored or sponsored by a specific industry

Monetary barriers- three barriers are blocked currency, differential exchange rate, and government approval requirements for securing FE

 Blocked currency is used as a political weapon or as a response to difficult BOP situation Blockage cuts off all importing or importing beyond certain level Accomplished by refusing to allow importers to exchange its national currency for the sellers currency

 Differential exchange rate is ingenious method of controlling imports Encourages import of goods government deems desirable and discourages others Requires the importer to pay varying amount of domestic currency for FE rate for a with which to purchase products in different category

 Government approval for secure FE is often used by countries experiencing severe shortages of FE. Importer must apply for an exchange permit i.e permission to exchange an amount of local currency to foreign currency Can stipulate rate of exchange Amount may have to be deposited in a specific bank for stipulated period

Standards Standards to protect health, sanity and product quality Sometimes used in discriminating way to restrict trade Jam standards differ from country to country USA demands NAFTA members to sell cars with 62.5 pc of North American components The size of knot holes in plywood shipped to Japan can determine whether shipment to be accepted or not.

Antidumping penalties used to avoid predatory pricing- foreign producer sells the product at less than the cost price to undermine competition and take control of the market anti-trust law for international trade violators are assessed anti dumping duties for selling below cost countervailing duties to prevent foreign government subsidies to undermine nations industry In US, in one year 12 US steel manufacturers launched antidumping cases against 82 foreign steel makers in 30 countries.