I n t e r n a t i o n a l M a r k e t i n g I n t e r n a t i o n a l M a r k e t i n g

The Dynamic Environment

of InternationalTrade

Chapter 2

1 4 t h E d i t i o nP h i l i p R. C a t e o r a

M a r y C. G i l l yJ o h n L . G r a h a m

McGraw-Hill/IrwinInternational Marketing 14/e

Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

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What Should You Learn?What Should You Learn?

• The basis for the reestablishment of world trade following World War II

• The importance of balance-of-payment figures to a country’s economy

• The effects of protectionism on world trade

• The seven types of trade barriers

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What Should You Learn?What Should You Learn?

• The provisions of the Omnibus Trade and Competitiveness Act

• The importance of GATT and the World Trade Organization

• The emergence of the International Monetary Fund and the World Bank Group

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Global Perspective Trade Barriers – An International Marketer’s Minefield

Global Perspective Trade Barriers – An International Marketer’s Minefield

• Countries take advantage of U.S. open markets while putting barriers in the way of U.S. exports

• Tariff and nontariff barriers to trade are major issues confronting international marketers

• To realize the benefits of the social, political, and economic changes, free trade must prevail throughout the global marketplace

– WTO (World Trade Organization)

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Top Ten 2007 U.S. Trading Partners($ billions, merchandise trade)

Top Ten 2007 U.S. Trading Partners($ billions, merchandise trade)

Exhibit 2.1

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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

• Marshall Plan

• 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

– Socialist Marxist– Democratic capitalist

• 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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• American MNCs confronted by a resurgence of competition from all over the world– NIC (Newly Industrialized Countries)– SOE (State-Owned Enterprises)

• The balance of merchandise trade– U.S. trade deficit

• U.S. dilemma of how to encourage trading partners to reciprocate with open access to their markets without provoking increased protectionism– WTO (World Trade Organization)– NAFTA– AFTA (American Free Trade Area)– APEC (Asia-Pacific Economic Cooperation Conference)

World Trade and U.S. Multinationals

World Trade and U.S. Multinationals

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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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Beyond the First Decade of the 21st Century

Beyond the First Decade of the 21st Century

• U.S. economy has slowed dramatically

• World growth (except China) also slowed

– The Organization for Economic Cooperation and Development (OECD) estimates 3% average annual growth for next 25 years

• Developing countries will grow faster

– From an annual rate of 4% in the past quarter to a rate of 6% for the next 25 years

– Share of world output will range from one-sixth to one-third

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Beyond the First Decade of the 21st Century

Beyond the First Decade of the 21st Century

• Level of intensity of competition will change as companies focus on gaining entry or maintaining their position

– Emerging markets– Regional trade areas– Established markets in Europe, Japan, and the U.S.

• Smaller companies also seeking new markets

– Novel approaches– Technological expertise

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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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U.S. Current Account by Major Components, 2007 ($ billions)

U.S. Current Account by Major Components, 2007 ($ billions)

Exhibit 2.3

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U.S. Current Account Balance (% of GDP)

U.S. Current Account Balance (% of GDP)

Exhibit 2.4

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What Would One U.S. Dollar Buy?What Would One U.S. Dollar Buy?

Exhibit 2.5

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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– Retaliation and bargaining

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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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Types of Nontariff BarriersTypes of Nontariff Barriers

Exhibit 2.6

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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

• U.S. ratification concerns– Possible loss of sovereignty over its trade laws to WTO– Lack of veto power– Role U.S. would assume when a conflict arises over an individual state’s

laws that might be challenged by a WTO member

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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

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Protests against Global InstitutionsProtests against Global Institutions

• The basic complaint against the WTO, IMF and others is the amalgam of unintended consequences of globalizing

– Environmental concerns– Worker exploitation and domestic job losses– Cultural extinction– Higher oil prices– Diminished sovereignty of nations

• Terrorism in London (2005)

• “Antisweatshop” campaigns

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SummarySummary

• The benefits from absolute or comparative advantage clearly can accrue to any nation

• Increased pressure for protectionism from every region of the globe

• The consumer seldom benefits from such protection

• Free international markets help underdeveloped countries become self-sufficient

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SummarySummary

• Freer trade will always be partially threatened by various governmental and market barriers that exist or are created for the protection of local businesses

• The future of open global markets lies with the controlled and equitable reduction of trade barriers