INTERNATIONAL BUSINESS

ASSIGNMENT-2
2/20/2012

SUBMITTED BYNEETIKA KALYANI (11MBA0043) BATCH-A

TRADE OPENNESS
Openness in trade refers to the degrees to which countries or economies permit or have trade with other countries or economies. The trading activities include import and export, foreign direct investment (FDI), borrowing and lending, and repatriation of funds abroad. Open economies generally greater market opportunities, at the same time they also face greater competition from businesses based in other countries. In terms of financial development trade openness enables a form to obtain funds from other countries, and also invest its surplus funds in other countries. Trade openness has been measured in various ways in the hundreds of studies investigating the issue, but most measures share a common feature; they express trade in terms of its share of income for a given country.

Import and Export in INDIA

Imports consist of transactions in goods and services (sales, barter, gifts or grants) from nonresidents to residents. The buyer of such goods and services is referred to an "importer" who is based in the country of import whereas the overseas based seller is referred to as an "exporter". Thus an import is any good (e.g. a commodity) or service brought in from one country to another country in a legitimate fashion, typically for use in trade. It is a good that is brought in from another country for sale. Import goods or services are provided to domestic consumers by foreign producers. An import in the receiving country is an export to the sending country. Export of
commercial quantities of goods normally requires involvement of the customs authorities in both the country of export and the country of import.

Exports jumped 34.42% in April 2011 to $ 23.8 billion continuing the fast paced growth of the previous fiscal. Imports, too, continued to rise although at a lower pace of 14/13% to $32.8 billion. The trade deficit for April 2011 was estimated at $ 8.98 billion which was lower than the deficit of $ 11.02 billion during April 2010. India's exports grew a record 37.6 percent in the 2010-11 fiscal year due to high growth in the engineering sector, gems & jewellery and petroleum products. Oil imports during April, 2011 were valued at $ 10.18 billion which was 7.7% higher than oil imports of $ 9.45 billion in the corresponding period last year. Non-oil imports during April, 2011 were estimated at $ 22.64 billion which was 17.3% higher than non-oil imports of $ 19.31 billion in the previous year.

Foreign Direct Investment (FDI)

There are several reasons why foreign firms choose to invest away from their home country. Market seeking FDI ideally involves foreign firms exporting or opening new markets in host countries in order to boost their sales. This is also another way for firms to go around trade restrictions such as high transport costs and rules of origin. Efficiency seeking firms aim at using a few countries to serve larger market. The key factors in this category of FDI motive are location, resource endowments and government regulation. The last motive, strategic-asset, is more concerned with maintaining the foreign firms international position and competitiveness.

Trade Openness and Growth in INDIA

The concept of trade openness remains the object of debate, in particular over the indicators. It encompasses heterogeneous elements: facts (flows, such as trade of goods and market integration) and policies (reduction of barriers on trade, liberalization). Countries that do not open and exclude themselves from trade liberalization are viewed as losing from it. Most of the economic literature considers that trade liberalization leads to an increase in welfare derived from an improved allocation of domestic resources. Import restrictions of any kind create an anti-export bias by raising the price of importable goods relative to exportable goods. The removal of this bias through trade liberalization will encourage a shift of resources from the production of import substitutes to the production of export-oriented goods. This, in turn, will generate growth in the short to medium term as the country adjusts to a new allocation of resources more in keeping with its comparative advantage. It may be fair to say that openness, by leading to lower prices, better information and newer technologies, has a useful role to play in promoting growth. But it must be accompanied by appropriate complementary policies (most notably, education, infrastructure, financial and macroeconomic policies) to yield strong growth results. Indian economic growth since 1991 has been impressive. There does not seem to be any consensus on whether the trade reforms implemented in the 1990s have been successful, and to what extent, but they cannot be discounted. As to their distributional impact, regional inequality in India has increased since the reforms were introduced. Also, even though the manufacturing sector has perked up, overall it continues to account for only 17 per cent of India s GDP. Employment trends in the manufacturing sector have not been positive. There was an increase in the national unemployment rate from 6 per cent in 1993/94 to 7.3 per cent in 1999/00. Between 1993 and 2000, the organized manufacturing sector created only 350,000 jobs, which can be attributed to rigid labour markets.

Developing Country BRAZIL

Both countries, given their size, have offered numerous incentives for inward-oriented growth over a long period. However, their trade regimes, which started to show signs of obsolescence and slow growth, were liberalized along with moves towards more open economies. But in both cases trade liberalization was more timid. In the case of Brazil, GDP growth rates in the 1960s and 1970s were superior to average world GDP growth rates, but in the 1980s and 1990s performance began to slow down, and failed to offer enough employment opportunities to absorb the economically active population. Trade liberalization went hand in hand with regional trade agreements and with a new economic policy environment committed to stable macroeconomic conditions. These led to a period of overvaluation of the currency. The impact of trade liberalization, along with overvaluation, is best indicated by the import penetration coefficient, which increased from 3.22 per cent in 1990 to 11.88 per cent in 1999. This occurred in all the sectors, leading to a higher percentage of domestic consumption of imported goods. The share of exports fell from 9 per cent to 6.5 per cent, but when the currency was devalued in 1999, it increased to15 per cent by 2003. Brazil s main export markets are its regional partners, especially for manufactures. Overall returns for the period have been

disappointing. Clearly, adverse conditions internationally have influenced these results, but problems also abound in domestic policies relating to the exchange rate, public debt and high interest rates, and there have been difficulties in implementing all the economic reforms. Comment: Most of economic literature considers that trade liberalization leads to an increase in welfare derived from an improved allocation of domestic resources. It may be fair to say that openness, by leading to lower price, better information and newer technologies, has a useful role to play in promoting growth. Trade liberalization helps the poor in the same way it helps other consumer, by lowering prices of imported goods and keeping prices of import substitutes lower, thus increasing real incomes. Given the high incidence of poverty in both countries, it is clear that trade alone cannot address this problem; improvements in income distribution will also be necessary to achieve a faster pace of poverty reduction and for the growth of the economy. In conclusion, there are strong theoretical reasons to believe that trade is a positive tool for development, although extensive overnight liberalisation may be too disruptive and a phased and reciprocal approach is most likely to achieve a balanced outcome. Beyond theory we see that many developing countries have used trade, together with sound domestic policies, as a key motor for their development and have seen significant reductions in poverty and increases in welfare. The hope is that these emerging growth economies can bring a new wave of developing countries into the globalisation process. To achieve this, trade barriers need to be reduced both in developing and in developed markets.

Developed Country SPAIN

In terms of GDP, Spain has an export propensity similar to other European peers. Spain s world market share in goods and services exports has slightly decreased due to surge of export from developing countries, but to a lower extent than other European countries. The maintenance of export share has been general over sectors, despite losses of so-called price competitiveness. As far as trade openness is concerned, Spain compares well with other EU countries of similar size. In 2010, total trade openness, (the ratio of exports plus imports to GDP) was close to 65%, below Germany but in line with France, Italy and the UK. The same figure arises when considering exports as a fraction of GDP. In the last ten years, Spain has increased its exports of goods and services by more than 50% in value and 30% in volume. These figures are slightly lower than growth in goods and services of Germany, but they are much higher than the export performance of some other European countries.

Spain has slightly reduced its world market share in exports, but to a much lower extent than other European countries. In fact, in the case of services, Spain has overtaken Italy and reduced the gap with France and the UK. Coming back to goods exports, Spain s share in world manufacturing trade has been stable at slightly below 2%, compared to a share around 3% for agricultural products. The highest share in world trade is within the automotive/automobile sector, but other industrial products, such as machinery, iron products, clothing and chemical products, also have a world trade share close to 2%. Indeed, the maintenance of the export share has been preserved in most industries during the last decade. However, in spite of this lower apparent price competitiveness; Spain increased its exports at a faster pace than some other EU countries. Several explanations to this apparent puzzle have been: low price elasticity of Spanish exports, important diversification of markets and the very competitive behaviour of Spanish exporting firms. Comment: As Spain is a developed economy, we can clearly see the advantages of trade openness on the economy of Spain. Openness to import increases efficiency and reduces costs for industry, reduces costs for consumers and entails restructuring cost. It seems that trade openness is a necessary, but not a sufficient, requirement for development.

Changes over the last two decades on the Major Economies due to Trade Openness
World trade recorded its largest ever annual increases in 2010 as merchandise exports surged 14.5% buoyed by a 3.6% recovery in global output as measured by gross domestic product. Both trade and output grew faster in developing economies than in developed countries. The difference between trade of developed and developing economies was even greater on the import side, where developed economies imports rose by 11% compared with 18% in the rest of the world. Export in volume terms were upto 13% in developed economies while the increase for developing economies was nearly 17%. The factors that contributed to the unusually large 12% drop in the world trade in 2009 may have also helped boost the size of the rebound in 2010. Although the growth of world export in 2010 was the highest on record in a data series going back to 1950, it might have been even higher if trade had quickly reverted to its pre-crisis trend. This did not happen. The rebound was strong enough for world exports to recover their peak level of 2008, but it was not strong enough to bring about a return to the previous growth path. The record expansion of trade and the revival of economic activity in 2010 were certainly welcome developments, but their importance should not be overstated.

PTAs Principle in contradiction with the fundamentals of WTO

Preferential trade agreements are now a prominent feature of the global trading system. This column introduces the WTO's new World Trade Report that explores why deep regionalism is gaining momentum. It also proposes a number of options for increasing coherence between such agreements and the multilateral trading system. Participation in preferential trade agreements (PTAs) has grown rapidly in recent years. In 1990, there were only about 70 PTAs in force. Thereafter, PTA activity accelerated noticeably; by 2010 the number of PTAs in force was close to 300 (see Figure 1). The average WTO member is party to 13 PTAs. PTA activity has transcended regional boundaries and levels of economic development. One half of the PTAs currently in force are not strictly "regional" with the advent of cross-regional PTAs being particularly pronounced in the last decade. Two thirds of all PTAs in force are between developing countries, about a quarter are between developed and developing countries and the remainder between developed countries only.

Cumulative number of PTAs in force, 1950-2010, notified and non-notified PTAs, by country group

Article XXIV of the General Agreement on Tariffs and Trade (GATT) permits member countries of the World Trade Organization (WTO) to form preferential trade agreements (PTAs) such as free trade agreements (FTAs) and customs unions (CUs) under which PTA members can grant tariff reductions to each other that they do not extend to other WTO members. Empirical evidence indicates that WTO members have made rather liberal use of Article XXIV. The sanctioning of discriminatory trade agreements by GATT Article XXIV and the complicated web of global tariffs that has resulted from their pursuit by WTO member countries raises some uncomfortable questions about the very structure of GATT. Indeed, Article XXIV appears to be in direct conflict with the first and the most fundamental Article of GATT i.e., the most favored nation (MFN) clause that forbids WTO members from pursuing discriminatory trade liberalization. MFN-based liberalisation does not require complex rules of origin. Often, rules of origin are not only difficult and cumbersome to administer, thereby imposing a burden on the business sector, but they also tend to have protectionist effects. Whether intentional or not, they direct exporters towards using inputs that have been produced inside the regional integration area, even if more competitive inputs might have been available in third countries. These rules are therefore not only another source of welfare-decreasing trade diversion, but also a source of discrimination against third countries. From a political perspective, trade liberalisation on the MFN basis provides protection for countries from the abuse of trade policy for political or non-trade purposes by more powerful countries. By contrast, preferential trade agreements may have exclusive, and therefore also exclusionary, character.

Finally, the MFN principle is of particularly high value from the perspective of a small or mediumsized country. On the one hand, small and medium-sized countries often lack the market power necessary to negotiate commitments from larger partners. On the other hand, small and mediumsized countries depend much more on free trade than their larger counterparts because their firms require international markets in order to harvest the gains from specialisation and economies of scale. By contrast, firms in large markets such as the United States may find a sufficiently large customer base already at home. The MFN principle has therefore done small and medium-sized economies a great service: It has secured a certain level of market access on a global scale and it has made sure that the concessions granted by Members in the many trade rounds since the establishment of the GATT have been applied to all trade partners, regardless of their political or economic weight. There are many more points we could mention transparency, global coherence in trade policy making, predictability, fairness considerations and so on. They have one message in common: The MFN principle has lost none of its virtues today; from both an economic and a political point of view, and under both theoretical and practical considerations, it appears to be still the first best approach to trade liberalisation. This is particularly true when we consider the increasing trend towards globalisation. Obviously, the fruits of the increasing entangling of national economies into the world economy can best be reaped by a universally applied rule the MFN principle. The second and third conditions require that duties and other restrictive commercial regulations must be eliminated within a reasonable length of time and that the regional integration area covers "substantially all the trade of member countries. These conditions serve as a litmus test, making sure that the PTA exemption from the MFN principle is only invoked where two or more economies really share a strong and sincere determination towards a quick and broad-based liberalisation of their trade. Fourth, PTAs shall be notified to the WTO and all relevant information made available to enable WTO-Members to evaluate them and make recommendations. This provision has at least two important effects. One is direct: It ensures transparency and enables Members to evaluate the possible effects that a PTA might have on their trade. The second effect, rather indirect but arguably important: In the light of the transparency provision, it is more difficult for the parties to a PTA to agree on rules or commitments that would violate WTO rules or be otherwise detrimental to the interest of third parties.