International Mark etingP h i l i p R. C a t e o r a John L. Graham

The Dynamic Environment of International TradeChapter 2McGraw-Hill/Irwin International Marketing

Iftekhar Amin Chowdhury (IAC)

Top Ten 2007 U.S. Trading Partners($ billions, merchandise trade)Exhibit 2.1

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The 20th to the 21st Century First Half of the Twentieth Century Depression (A depression is a severe economic downturn that lasts several years) WW I and WW II

Move toward international cooperation among trading nations General Agreement on Tariffs an Trade (GATT) World Trade Organization (WTO)

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The 20th to the 21st Century 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 living2-4

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 Trade and U.S. Multinationals 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)

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Worlds 100 Largest Industrial Corporations (Annual Revenues)Exhibit 2.2

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Beyond the First Decade s t of the 21 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

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Beyond the First Decade s t of the 21 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 Payments Balance of payments the system of accounts that records a nations 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 Payments A balance of payments statement includes three accounts Current account - a record of all merchandise exports, imports, and services plus unilateral transfers of funds; Capital account - a record of direct investment, portfolio investment, and short-term capital movements to and from countries; and 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.2-11

Balance of Payments: Current Account

The current account -A record of all merchandise exports, imports, & services plus unilateral transfers of funds It includes the flows of -Goods: Trade balance -Services: Investment income, tourism etc. -Transfer: Gifts, fixed payments such as pension

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Balance of Payments: Capital Account

The capital account -A record of direct investment, portfolio investment, and short-term capital movements to and from countries Measures the flow of Capital including -Financial securities trading -Borrowing -Lending -Direct investment2-13

Balance of Payments: Reserves Account

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 -Measures currency flows Inflow

of other currencies of domestic currency

Outflow

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by Major Components, 2007 ($ billions)Exhibit 2.3

U.S. Current Account

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What Would One U.S. Dollar Buy?Exhibit 2.5

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How exactly is an international transaction (import or export) conducted? Contd.

Most transactions share some common elements Every transaction is unique; many variations are found A system of international payments has developed to protect both importers and exporters Look at the mechanics of a typical transaction Most important thing is the documents used

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How exactly is an international transaction (import or export) conducted? Contd.First Step - Sales Agreement

Importer in one country and exporter in another agree to buy and sell of goods Importer places a purchase order to exporter

Second Step Letter of Credit (L/C) Application

Importer will apply to his bank for a L/C for the goods he wants to purchase-L/C is guarantee from importers bank to pay for the goods -Bank changes certain fees2-18

How exactly is an international transaction (import or export) conducted? Contd.Third Step Sending L/C to Exporters Bank L/C is sent via importers bank to the exporters bank Once it is drawn up it is really a contract between two banks As part of the L/C agreement, importer must sign promissory note payable to bank of importer upon payment by bank on the L/C Bank of importer only makes payment when documents show correct goods have been shipped2-19

How exactly is an international transaction (import or export) conducted? Contd.Fourth Step L/C Notification

Once the L/C is received, the exporters bank will notify the exporter that L/C is in place and that the exporter can now ship the goods

Fifth Step Shipment of Goods

Exporter will ship goods

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How exactly is an international transaction (import or export) conducted? Contd.Sixth Step Presenting Exporters Bank Shipping Documents and Time Draft

Exporter will present to his bank a time draft (or sight draft) and a bill of lading

-A Time Draft is written order instructing the importers bank to pay the amount on a specified date (usually 30, 60 or 90 days) -A Bill of Lading is document issued by shipping company specifying the goods shipped and it serves as title to goods -A Sight Draft is document where payment is due immediately

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How exactly is an international transaction (import or export) conducted? Contd.Seventh Step Sending Bank Shipping Documents and Time Draft to Importers Bank

These are sent to importers bank Importers bank then accepts the time draft if everything is in order Once accepted, it is called bankers acceptance (B/A), where bank unconditionally guarantees its payment on maturity Bank of importer will charge a fee for accepting a draft

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How exactly is an international transaction (import or export) conducted? Contd.Eighth Step Payment- Discounted Value of B/A

B/A is returned to the exporter who will hold it until it matures and then present it to the importers bank on maturity for payment Or it can be sold at a discount in the money market Or it can be discounted by the importers bank2-23

How exactly is an international transaction (import or export) conducted? Contd.Ninth Step Collecting Promissory Note signed by the importer

Before discounting importers bank gets promissory notes signed by the importer Then it hands over necessary title documents to the importer to have goods

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How exactly is an international transaction (import or export) conducted?Tenth Step Giving Money to Importers Bank

On maturity importer pays money to its bank Money market presets the B/A to importers bank and it then pays money to them Then transaction closes

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Protectionism 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

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Assignment: Protection 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 bargaining2-27

Trade Barriers Tariffs Quotas Voluntary Export Restraints (VER) : Agreed quota system between two nations. Ex. Japan and USA in Car market Boycotts and embargoes Monetary barriers (explanation in next slide) Blocked currency Differential exchange Government approval Standards : To protect health, safety and product quality Antidumping penalties : Using Predatory Pricing2-28

Monetary Barriers (Exchange control restrictions)

Blocked currency: Refusing to allow importers to exchange its national currency for the sellers currency Differential exchange rates: Importers have to pay differential exchange rate for the of purchase products in different categories Government approval: Govt approval needed to purchase foreign exchange2-29

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 Group2-30

General 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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The General Agreement on Trade in Services (GATS)

The GATS was the first multinational, legally enforceable agreement covering trade & investment in the services sector It provides a legal basis for future negotiations aimed at eliminating barriers that discriminate against foreign services & deny them market access2-32

Trade Related Investment Measures (TRIMs)

TRIMs established the basic principle that investment restrictions can be major trade barriers & therefore are included, for the first time, under GATT procedures -For example, as a result of TRIMs, restrictions in Indonesia that prohibit foreign firms from opening their own wholesale or retail distribution channels can be challenged

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Trade-Related Aspects of Intellectual Property Rights (TRIPs)

The TRIPs agreement establishes substantially higher standards of protection for a full range of intellectual property rights It covers patents, copyrights, trademarks, trade secrets, industrial design, semiconductor chip mask works etc.

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World 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 states laws that might be challenged by a WTO member

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Skirting 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 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 : To cope with universally floating exchange rates. Paper gold is used for managing the Clean float (float cleanly without manipulation) & Dirty float (systematically manipulate the value of the currency) activities.2-37

The 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 investment2-38

Protests 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

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