INTERNATIONAL BUSINESS MANAGEMENT

INTERNATIONAL TRADE - EXPORT, IMPORT & COUNTERTRADE

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Learning objectives
To appreciate the benefits of foreign trade

Understand different trade policies

Explain why it is beneficial for a country to engage in international trade.

Explain the pattern of international trade observed in the world economy.

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Foreign Trade Policies

1.Free trade Outward oriented policies

2.Fair trade / Managed trade Inward oriented policies Import substitution strategy Outward oriented policies / Free Trade - Advantages: 1.Free trade promotes world trade 2.The economic interdependence among countries engage less in conflict - Economic Utilization at global level 3.Even distribution of Resources makes trade inevitable
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Outward oriented policies/Free Trade Advantages (contd..)

4. World trade encourages efficient use of global resources 5. Global competition forces compares to become more efficient and innovative

6. Helps to break domestic monopoly free the consumers from exploitation consumer has variety cheap sources
7. World trade has created awareness 8. Exports create jobs. not much scope for corruption.
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Inward oriented policies (overt protectionism)

Barriers to trade 1) Tariff Export tariff, Import duty, Transit tariff 2) Non- Tariff Barriers (NTB) a) Import Licensing, Import quotas, Foreign exchange regulations & Canalization of imports. b) Voluntary export restraint (VER) c) Quotas Quantitative restrictions d) Subsidies
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Inward oriented policies (overt protectionism)

Barriers to trade (contd.) e) Administered Protection - Product and testing standards (Safeguards, Health guards), Embargoes, Local content requirements, Administrative delays (Customs procedures, consular formalities, govt. Procurement, state trading, monetary controls) Environmental protection laws, foreign exchange regulations f) Commodity Agreements (Quota, Buffer stock, bilateral/ Multilateral )

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Political arguments 1. Protecting Human rights 2. National security 3. Retaliation 4. Protecting jobs Economic arguments 1.Infant industry (by alexander hamilton & fredrick list) 2.Diversified industrial structure is necessary 3.Improving the terms of trade 4.Improving BOP 5.Anti-dumping 6.Bargaining 7.Employment 8.Key industry 9.Strategic trade policy 10.Equalization of costs of production 11.Keeping money at Home 3/31/2013 a.velsamy, sona school of management

Arguments for protectionism

Types of trade /Marketing barriers

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CARTELS 1. opec, iata

2. State trading STC, MNTC, MITCO

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Exporting and Importing

Exporting: selling of products made in ones own country for use or resale in other countries Importing: buying of products made in other countries for use or resale in ones own country

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Visible and Invisible Trade

Trade in Goods
Merchandise exports and imports Visible trade

Trade in Services
Service exports and imports Invisible trade

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Rank (2010 est.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Country

Total International Trade (Billions of USD) 27,567.0 3,764.0 3,225.0 2,908.0 2,402.0 1,404.3 1,107.8 971.9 921.5 914.9 886.7 825.6 793.7 668.8 648.8 606.7 604.5 569.3

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World European Union (ExtraEU27) United States China Germany Japan France United Kingdom Italy Netherlands South Korea Hong Kong Canada Singapore Russia India Mexico Belgium

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Economies are becoming more open (in terms of trade as % of GDP), Exports and imports as % of GDP
Mauritius Zambia

Chile China UK Argentina Bangladesh India Brazil United States

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1990 153 99 64 29 51 15 20 17 14 20
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2003 121 76 68 66 54 40 37 31 30 23
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Source: World Bank World Development Indicators

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Export strategies
1. Novice exporter behind Export Management Company 2. FIDO First in defeats others 3. Make a little sell a little 4. Local people to sell- set up a local sales subsidiary 5. Lots of attention in building strong and enduring relationships

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Countertrade
The word countertrade refers to a variety of international trade arrangements in which goods and services are exported by a manufacturer with compensation linked to that manufacturer accepting imports of other goods and services. In other words, an export sale is tied by contract to an import. The countertrade may take place at the same time as the original export, in which case credit is not an issue; or the countertrade may take place later, in which case financing becomes important.

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Types of countertrade
1. Barter 2. Counter purchase 3. Off set 4. Switch trading 5. Buyback 6. Compensation deal

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The International Balance of Payments

The components of the balance of payments:
Current account

Capital account
Official financing (International reserves account
operated by central bank)

National income determination and foreign trade

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Each transaction is classified according to the payment or receipts that it generates

Transactions that generate a receipt of a payment from foreigners are a credit item in the accounts with a + sign
These represent a supply of foreign exchange ($) and a demand for the local currency ()

Transactions that comprise a payment to foreigners are reported as a debit item with a - sign
=> These represent demand for foreign exchange ($) and a supply of the local currency ()
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a) The balance of payments on Current Account

Records transactions arising from trade in goods and services The visible trade balance
payments and receipts from the import/export of tangible goods (cars, food, textiles,)

The invisibles trade balance

payments and receipts for financial services, shipping and tourism, interest and dividends payments on investments, etc. 3/31/2013 a.velsamy, sona school of management 23

b) The balance of payments on Capital Account

Records transactions related to international movements in the ownership of financial assets The purchase of foreign investments by UK citizens brings assets to the UK (in exchange for money) and are referred to as a capital outflow
to purchase these foreign assets, locals have to buy $
=> debit (negative) entry in the Capital Account
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b) The balance of payments on Capital Account (cont.)

Foreign investment into the UK increases UK liabilities to foreigners, and it is a capital inflow
foreigners have to buy to undertake their investments credit (positive) entry in the Capital Account

The Capital Account is further divided into shortterm and long-term capital flows
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c) The balance for Official Financing

If the exchange rate is fixed, and there is a BoP deficit outflows > inflows supply of s > demand for s
The Central Bank must offset this excess supply of s by buying them with foreign currency ($); i.e. runs down its reserves of foreign exchange
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c) The balance for Official Financing (cont)

The balance for official financing shows the net increase or decrease in a countrys holdings of foreign currency reserves:
A decrease in the official reserves is reported as a credit item (+), since it involves the purchase of s an increase is reported as a debit item (-)

=> If the exchange rate is freely floating, then the balance for official financing is zero
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National Income Identities and the Current Account Balance

Recall the aggregate expenditure equation in our study of macroeconomics: AE (=AD) = C + I + G + X - M Leakages are: S+T+M Injections are:
I+G+X

=> In equilibrium: injections = leakages

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The balance of payments on Current Account could be re-written as:

(X - M) = (T - G) + (S - I)

(M - X ) trade deficit

or = (G - T) + (I - S) = government + private sector balance balance

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 A trade deficit is not necessarily a bad thing (e.g. when growing domestic industries attract foreign investments) - if borrowing is financing investment
(which generates economic growth and income in future) then it is not a problem

Are trade deficits a problem?

However, if a country persistently runs a trade deficit this is something to worry about (e.g. vulnerability to loss of foreign investors confidence) - excessive borrowing on capital account to
finance consumption on current account will incur higher interest payments and eventually lead to reduction consumption 3/31/2013 a.velsamy, sona school of management 30

Stay tuned
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