Chapter 2

The Dynamic Environment of International Trade

PowerPoint presentation prepared by:

Professor Rajiv Mehta
Associate Professor of Marketing
New Jersey Institute of Technology
Newark, N.J.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Learning Objectives

1. The basis for the reestablishment of world trade

following World War II
2. The importance of balance-of-payment figures
to a country’s economy

3. The effects of protectionism on world trade

4. The seven types of trade barriers

Chapter Learning Objectives

5. The provisions of the Omnibus Trade and

Competitiveness Act

6. The importance of GATT and the World Trade

Organization

7. The emergence of the International Monetary

Fund and the World Bank Group
 The International Marketing Environment
Foreign Environment
(Uncontrollables)
7. Structure of 1. Competition
Distribution Domestic environment Environmental
(Uncontrollables) uncontrollables
country market A
(Controllables) 1. Competition
Price Product 2. Technology
5. Political- Target Environmental
7
6. Geography and Legal Market uncontrollables
Infrastructure Promotion Place or 2 .Technology country
Distribution market B
4.
Culture Environmental
3. Economy
uncontrollables
5. Political- 3. ECONOMY country
Legal market C
4. Culture
 Introduction

Proliferation of trade and emergence of the global economy

Intensification of global competition

More emerging markets

Developments in technology allow communications with

global consumers and movement of goods
 The 20th to the 21st Century
First World War

Worldwide economic
depression

Second world war

Cold war and divide between communist-

socialist-capitalist approach to economic
development

The Marshall Plan for rebuilding

Europe
 The 20th to the 21st Century
Financial and industrial development assistance to rebuild
Japan

Role of Agency for International Development to

foster economic growth in the underdeveloped
world

Greater demand for U.S. goods

and services

Greater cooperation among trading nations

GATT via reduction of tariffs and trade
barriers

GATT replaced by the World Trade

Organization (WTO) and new era of
free trade
World Trade and U.S. Multinationals

1. Rapid growth of underdeveloped countries

and new global marketing opportunities
2. Rising living standards have created
marketing opportunities for U.S. firms
3. Resistance over domination of U.S.
multinationals
4. Expropriation and domestication of U.S.
investments in Latin America
5. In the Europe, U.S. multinationals were
controlled tightly by protectionism laws
World Trade and U.S. Multinationals
1. Resurgence of competition from all over the
world challenged the supremacy of American
industry
2. Newly industrialized countries (NICs) such as
Brazil, Mexico, South Korea, Taiwan, Singapore,
and Hong Kong experienced rapid
industrialization
3. Economic power evenly distributed with growth
of MNCs from other countries (see Exhibit 2-2)
4. Establishment of the WTO
5. Integration of European Union countries
6. Creation of NAFTA, AFTA, and APEC
21st Century: The First Decade and Beyond

With exception of China, slower economic growth

in U.S. and other countries is currently evident.

Faster growth rates expected in developing

countries such as Brazil, China, India, Indonesia,
and Russia.

More trade expected in emerging markets, regional

trade areas, and the established markets in Europe,
Japan, and U.S.

Companies need to be more efficient, improve

productivity, expand global reach, and respond
quickly.

Greater growth in international sales expected by

smaller firms.
 Balance of Payments
1. When countries trade there are financial transactions among
businesses or consumers of different nations
2. Money constantly flows into and out of a country
3. The system of accounts that records a nation’s international
financial transactions is called its balance of payments (BP)
4. It records all financial transactions between a country’s firms,
and residents, and the rest of the world usually over a year
5. The BP is maintained on a double-entry bookkeeping system
 Balance of Payments
The BP is the difference between receipts and payments

BP Receipts
BP Payments
•merchandise export sales.
•costs of goods imported.
•money spent by foreign tourists.
•spending by U.S. tourists
•transportation.
overseas.
•payments of dividends and
•new overseas investments.
interest from FDI abroad.
•cost of foreign military and
•new foreign investments in the
economic aid.
U.S.
 Balance of Payments
The BP includes three accounts:

(1) current account—a record of (2) the capital account—a record of

all merchandise exports, imports, direct investment, portfolio
and services plus unilateral investment, and short-term capital
transfers of funds; movements to and from countries;

(3) 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;
 United States Current Account Balance

United States
Current Account Balance
(% of GDP)

Percent
+2
1
0
-1
-2
-3
-4
-5
1971 1981 1991 2001
 Balance of Payments and Exchange Rate
1. If a country’s expenditures consistently exceed its income, its
standard of living falls
2. Its exchange rate vis-à-vis foreign monies declines
3. When foreign currencies can be traded for more dollars, U.S.
products are less expensive for foreign customers and exports
increase
4. Simultaneously foreign products are more expensive for U.S.
buyers and the demand for imported goods is reduced
 Protectionism: Logic and Illogic
Countries use protectionist measures to shield a country’s markets from
intrusion by foreign competition and imports.

Arguments for Protectionism include:

1. maintain employment and reduce unemployment.

2. increase of business size, and
3. retaliation and bargaining.
4. protection of the home market.
5. need to keep money at home.
6. encouragement of capital accumulation.
7. maintenance of the standard of living and real wages.
8. conservation of natural resources.
9. protection of an infant industry
10. industrialization of a low-wage nation
11. national defense
Protectionism: Logic and Illogic

Arguments 9-11 above are considered valid for

protectionism

In general, protectionism contributes to industrial

inefficiency and makes a nation uncompetitive

Protectionism is implemented through the

imposition of trade barriers, which include tariff
barriers and non-tariff barriers
 The Impact of Tariff (Tax) Barriers
Tariff Barriers tend to Increase:
1. Inflationary pressures
2. Special interests’ privileges
3. Government control and political considerations in
economic matters
4. The number of tariffs they beget via reciprocity

Tariff Barriers tend to Weaken:

1. Balance-of-payments positions
2. Supply-and-demand patterns
3. International relations (they can start trade wars)

Tariff Barriers tend to Restrict:

1. Manufacturer’ supply sources
2. Choices available to consumers
3. Competition
 Six Types of Non-Tariff Barriers

(1) Specific Limitations on Trade:

1. Quotas
2. Import Licensing requirements
3. Proportion restrictions of foreign to
domestic goods (local content requirements)
4. Minimum import price limits
5. Embargoes

(2) Customs and Administrative Entry Procedures:

1. Valuation systems
2. Antidumping practices
3. Tariff classifications
4. Documentation requirements
5. Fees
 Six Types of Non-Tariff Barriers

(3) Standards:
1. Standard disparities
2. Intergovernmental acceptances of testing
methods and standards
3. Packaging, labeling, and marking

(4) Government Participation in Trade:

1. Government procurement policies
2. Export subsidies
3. Countervailing duties
4. Domestic assistance programs
 Six Types of Non-Tariff Barriers
(5) Charges on imports:
1. Prior import deposit subsidies
2. Administrative fees
3. Special supplementary duties
4. Import credit discriminations
5. Variable levies
6. Border taxes

(6) Others:
1. Voluntary export restraints
2. Orderly marketing agreements
 Monetary Barriers
In addition to the Six Types of Non-Tariff Barriers, monetary barriers are
also used by countries

Three types of monetary barriers include:

1. Blocked currency: Blockage is accomplished by refusing

to allow importers to exchange its national currency for the
sellers’ currency.
2. 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
3. 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
 The Omnibus Trade and
Competitiveness Act (OTCA) 1988
1. Many countries are allowed to trade freely with the
United States but do not grant equal access to U.S.
products in their countries.
2. To ease trade restrictions, the OTCA focused on
correcting perceived injustice in trade practices.
3. It dealt with trade deficits, protectionism, and the
overall fairness of our trading partners.

The bill covers three areas for improving

U.S. trade:
1. market access,
2. export expansion, and
3. import relief
 General Agreement on Tariffs
and Trade (GATT)

1. GATT created as an agency to serve as watchdog over world

trade and provide a process to reduce tariffs
2. GATT also provided a mechanism to resolve trade disputes
bilaterally

GATT covers three basic areas:

1. trade shall be conducted on a nondiscriminatory basis;
2. protection shall be afforded domestic industries
through customs tariffs, not through such commercial
measures as import quotas; and
3. consultation shall be the primary method used to solve
global trade problems.

3. GATT now replaced by the World Trade Organization

 World Trade Organization (WTO)

Unlike GATT, is an institution, not an agreement

1. It sets many rules governing trade between its 132

members

2. WTO provides a panel of experts to hear and rule on

trade disputes between members, and, unlike GATT,
issues binding decisions
 The International Monetary Fund (IMF)
1. IMF was created to assist nations in becoming and remaining
economically viable
2. It assists countries that seek capital for economic development
and restructuring
3. IMF loans come with stipulations that borrowing countries slash
spending and impose controls to curb inflation
4. It helps maintain stability in the world financial markets

Objectives of the IMF include:

1. stabilization of foreign exchange rates
2. establish convertible currencies to
facilitate international trade
3. lend money to members in financial
trouble
 World Bank Group (WBG)
The goal of WBG is to reduce poverty and the improvement of
living standards by promoting sustainable growth and investment
in people.

The functions of the WBG include:

1. lending money to countries to finance development projects in

education, health, and infrastructure;
2. providing assistance for projects to the poorest developing countries;
3. lending directly to the private sector in developing countries with
long-term loans, equity investments, and other financial assistance;
4. provide investors with investment guarantees against
“noncommercial risk,” so developing countries will attract FDI; and
5. provide conciliation and arbitration of disputes between governments
and foreign investors
 Protests Against Global Institutions

In 1999 “anti-capitalist protestors” complained against the WTO, and IMF,

over the unintended consequences of globalization that include:

1. environmental concerns
2. worker exploitation and domestic job losses
3. cultural extinction
4. higher oil prices, and
5. diminished sovereignty of nations