INTERNATIONAL TRADE AND INVESTMENT
UNIT-II-BA9209
Promotion of global Business-The Role of GATT/WTO-Multilateral Trade Negotiation
and agreements-VIII&IX round Discussions And agreements-Challenges for GlobalBusiness-Global Trade and Investments-Theories of international trade and theories of
International Investment-need for global competitiveness-Regional trade blocks-Typesadvantages and disadvantages-RTBs Across the Globe- Brief History.
Content
Promotion of Global Business………………………………………………………………..4
What is international Business……………………………………………….........................4
WTO/GATT………………………………………………………………………………………5
Structure of the WTO…………………………………………………………………………...6
Status of the WTO………………………………………………………………………........6-7
Decision Making power of WTO……………………………………………………………….8
Globalization……………………………………………………………………………………8
Advantages of Globalization………………………………………………………………..8&9
Disadvantages of Globalization…………………………………………………………….8&9
Multilateral Trading Agreements…………………………………………………………10-12
VIII Round Discussions……………………………………………………………………….12
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A. Kumar Assistant Professor
KV Institute of Management and Information Studies
Coimbatore
Challenges For Global Business…………………………………………………………12-14
Global Trade and Investment ……………………………………………………………...14
1).Scope and Methodology …………………………………………………………………15
2).Foreign Exchange Risk……………………………………………………………………15
3).Fiscal Mobility……………………………………………………………………………….15
4).Policies and institution……………………………………………………………………..15
5).Finance Stability…………………………………………………………………………….15
6.)Migration……………………………………………………………………………………..16
What is International Trade Theories? & Types……………………………………..16
Classical or country based trade theories………………………………………………17
Mercantalism……………………………………………………………………………………………………….17
Absolute advantage Theory……………………………………………………………………………………17
Opportunity cost Theory……………………………………………………………………………………….18
Vent for surplus theory………………………………………………………………………………………….18
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Comparative advantage …………………………………………………………………………………….....19
Competitive advantage theory……………………………………………………………………………….19
Hechscher-Ohlin Theory(Factor Proportions Theory)…………………………………………...20
Leontief paradox…………………………………………………………………………………20
Modern firm based trade Theories……………………………………………….……………..21
Country Similarity Theory……………………………………………………………………….21
Product Life Cycle Theory……………………………………………………………………….21
Porters national firm based advantage theory…………………………………..23
International trade areas……………………………………………………24-25
Need for Global competitiveness………………………………………………...25
Global trade and investments……………………………………………….26&27
Regional Trade agreements………………………………………………....28-30
Trade Blocks……………………………………………………………………..30
MERCOSUR………………………………………………………………………………...31-32
ASEAN………………………………………………………………………………………..…37
EUROPEAN UNION………………………………………………………………………..…38
SAARC…………………………………………………………………………………........35-38
Bretton Wood Agreements……………………………………………………………….......39-40
Advantages of trade blocks…………………………………………………………………-…..40
Disadvantages of trade blocks………………………………………………………………42-44
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What Is International Trade?
International trade theories are simply different theories to explain international trade. Trade is the
concept of exchanging goods and services between two people or entities. International trade is then the
concept of this exchange between people or entities in two different countries.
People or entities trade because they believe that they benefit from the exchange. They may need or want
the goods or services. While at the surface, this many sound very simple, there is a great deal of theory,
policy, and business strategy that constitutes international trade.
In this section, you’ll learn about the different trade theories that have evolved over the past century and
which are most relevant today. Additionally, you’ll explore the factors that impact international trade and
how businesses and governments use these factors to their respective benefits to promote their interests
Globalization is best thought of as a process that results in some significant changes for
markets and businesses to address: for example

An expansion of trade in goods and services between countries (an opportunity for
many businesses; a threat for others)

An increase in transfers of financial capital across national
boundaries including foreign direct investment (FDI) by multi-national companies
and the investments by sovereign wealth funds (e.g. Middle Eastern governments
buying assets in the UK)

The internationalization of products and services and the development of global
brands such as Starbucks, Nike, Sony and Google

Shifts in production and consumption – e.g. the expansion of outsourcing and off
shoring of production and support services, which has traditionally benefitted
countries with lower labour costs & skilled labour markets such as India, at the
expense of jobs in developed economies like the UK

Increased levels of labour migration – which has the effect of lowering wage costs in
many industries, but for others is a problem (e.g. a loss of skilled workers leaving
an economy)

The emergence of countries playing a bigger role in the global trading system
including China, Brazil, India and Russia
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A key result of globalization is the increasing inter-dependence of economies. For
example:

Most of the world’s countries are dependent on each other for their macroeconomic
health

Many of the newly industrializing countries are winning a growing share of world
trade and their economies are growing faster than in richer developed nations
WTO
All countries have been affected by the credit crunch and decline in world trade, but
many emerging market countries have slowed down rather than fall into a full-blown
recessiThe Doha Development Agenda (DDA or Doha Round) is the ninth round of multilateral trade
negotiations to be carried out since the end of World War II.
The Round was launched in Doha, Qatar, in November 2001, at the WTO’s Fourth WTO Ministerial
Conference, where Ministers provided a mandate for negotiations on a range of subjects and work in ongoing WTO Committees. In addition, the mandate gives further direction on the WTO’s existing work
program and implementation of the WTO Agreement.
The goal of the Doha Round is to reduce trade barriers in order to expand global economic growth,
development, and opportunity.
The Doha negotiations offer an opportunity to revive confidence in global trade and to lay the groundwork
for the robust global trading system of tomorrow.
The negotiations focus on the following areas:
agriculture
industrial goods market access
services
trade facilitation
WTO rules (i.e., trade remedies, fish subsidies, and regional trade agreements)
Development
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The Trade Negotiations Committee (TNC) oversees the agenda and negotiations in cooperation with the
WTO General Council. The WTO Director General serves as Chairman of the TNC and worked closely
with the Chairman of the General Council.

The Chairman of the General Council and the WTO Director General play a central role in
steering efforts toward progress on the Doha Round.
At the 8th WTO Ministerial Conference, held in Geneva, Switzerland in December 2011, WTO
Members acknowledged that the Doha Round is at an impasse and that we need new
approaches that will lead to credible results. Since then, discussions on a number of important
issues have begun to move forward. The next WTO Ministerial will take place December 3-6,
2013 in Bali, Indonesian
Structure of the WTO/GATT
1.
There shall be a Ministerial Conference composed of representatives of all the Members, which
shall meet at least once every two years. The Ministerial Conference shall carry out the functions of
the WTO and take actions necessary to this effect. The Ministerial Conference shall have the authority
to take decisions on all matters under any of the Multilateral Trade Agreements, if so requested by a
Member, in accordance with the specific requirements for decision-making in this Agreement and in the
relevant Multilateral Trade Agreement.
2.
There shall be a General Council composed of representatives of all the Members, which shall
meet as appropriate. In the intervals between meetings of the Ministerial Conference, its functions
shall be conducted by the General Council. The General Council shall also carry out the functions
assigned to it by this Agreement. The General Council shall establish its rules of procedure and approve
the rules of procedure for the Committees provided for in paragraph 7.
3.
The General Council shall convene as appropriate to discharge the responsibilities of the Dispute
Settlement Body provided for in the Dispute Settlement Understanding. The Dispute Settlement Body
may have its own chairman and shall establish such rules of procedure as it deems necessary for the
fulfillment of those responsibilities.
4.
The General Council shall convene as appropriate to discharge the responsibilities of the Trade
Policy Review Body provided for in the TPRM. The Trade Policy Review Body may have its own chairman
and shall establish such rules of procedure as it deems necessary for the fulfillment of those
responsibilities.
5.
There shall be a Council for Trade in Goods, a Council for Trade in Services and a Council for
Trade-Related Aspects of Intellectual Property Rights (hereinafter referred to as the “Council for
TRIPS”), which shall operate under the general guidance of the General Council. The Council for Trade
in Goods shall oversee the functioning of the Multilateral Trade Agreements in Annex 1A. The Council
for Trade in Services shall oversee the functioning of the General Agreement on Trade in Services
(hereinafter referred to as “GATS”). The Council for TRIPS shall oversee the functioning of the
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Agreement on Trade-Related Aspects of Intellectual Property Rights (hereinafter referred to as the
“Agreement on TRIPS”). These Councils shall carry out the functions assigned to them by their
respective agreements and by the General Council. They shall establish their respective rules of
procedure subject to the approval of the General Council. Membership in these Councils shall be open
to representatives of all Members. These Councils shall meet as necessary to carry out their functions.
6.
The Council for Trade in Goods, the Council for Trade in Services and the Council for TRIPS shall
establish subsidiary bodies as required. These subsidiary bodies shall establish their respective rules of
procedure subject to the approval of their respective Councils.
7.
The Ministerial Conference shall establish a Committee on Trade and Development, a Committee
on Balance-of-Payments Restrictions and a Committee on Budget, Finance and Administration, which
shall carry out the functions assigned to them by this Agreement and by the Multilateral Trade
Agreements, and any additional functions assigned to them by the General Council, and may establish
such additional Committees with such functions as it may deem appropriate. As part of its functions,
the Committee on Trade and Development shall periodically review the special provisions in the
Multilateral Trade Agreements in favor of the least
Status of the WTO
1.
The WTO shall have legal personality, and shall be accorded by each of its Members such legal
capacity as may be necessary for the exercise of its functions.
2.
The WTO shall be accorded by each of its Members such privileges and immunities as are
necessary for the exercise of its functions.
3.
The officials of the WTO and the representatives of the Members shall similarly be accorded by
each of its Members such privileges and immunities as are necessary for the independent exercise of
their functions in connection with the WTO.
4.
The privileges and immunities to be accorded by a Member to the WTO, its officials, and the
representatives of its Members shall be similar to the privileges and immunities stipulated in the
Convention on the Privileges and Immunities of the Specialized Agencies, approved by the General
Assembly of the United Nations on 21 November 1947.
5.
The WTO may conclude a headquarters agreement.
.
Decision Making
1.
The WTO shall continue the practice of decision-making by consensus followed
under GATT 1947. Except as otherwise provided, where a decision cannot be arrived
at by consensus, the matter at issue shall be decided by voting. At meetings of the
Ministerial Conference and the General Council, each Member of the WTO shall have
one vote. Where the European Communities exercise their right to vote, they shall
have a number of votes equal to the number of their member States ,which are
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Members of the WTO. Decisions of the Ministerial Conference and the General
Council shall be taken by a majority of the votes cast, unless otherwise provided in
this Agreement or in the relevant Multilateral Trade Agreement.
2. The Ministerial Conference and the General Council shall have the exclusive
authority to adopt interpretations of this Agreement and of the Multilateral Trade
Agreements. In the case of an interpretation of a Multilateral Trade Agreement in
Annex 1, they shall exercise their authority on the basis of a recommendation by the
Council overseeing the functioning of that Agreement. The decision to adopt an
interpretation shall be taken by a three-fourths majority of the Members. This
paragraph shall not be used in a manner that would undermine the amendment
provisions in Article X.
3.
In exceptional circumstances, the Ministerial Conference may decide to waive
an obligation imposed on a Member by this Agreement or any of the Multilateral Trade
Agreements, provided that any such decision shall be taken by three fourths () of the
Members unless otherwise provided for in this area.
GLOBALISATION
People around the globe are more connected to each other then ever before.
Information and money flow more quickly than ever. Goods and services produced in
one part of the world are increasingly available in all parts of the world. International
travel is more frequent and international communication is commonplace. Globalization
is an economic tidal wave that is sweeping over the world. It can’t be stopped, and there
will be winners and losers. But before drawing any conclusions on how it affects the
U.S. economy, consider some of the general pros and cons of globalization.
The disadvantages of globalization
1. “The general complaint about globalization is that it has made the rich richer while
making the non-rich poorer. It is wonderful for managers and investors, but hell on
workers and nature.”1
2. Multinational corporations are accused of social injustice, unfair working conditions
(including slave labor wages and poor living and working conditions), as well as a lack
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of concern for the environment, mismanagement of natural resources, and ecological
damage.
3. Multinational corporations which were previously restricted to commercial activities
are increasingly influencing political decisions. Many think there is a threat of
corporations ruling the world because they are gaining power due to globalization.
4. Opponents say globalization makes it easier for rich companies to act with less
accountability. They also claim that countries’ individual cultures are becoming
overpowered by Americanization.
5. Anti-globalists also claim that globalization is not working for the majority of the world.
During the most recent period of rapid growth in global trade and investment, 1960 to
1998, inequality worsened both internationally and within countries. The UN
Development Program reports that the richest 20 percent of the world's population
consume 86 percent of the world's resources, while the poorest 80 percent consume
just 14 percent.
6. Some experts think that globalization is also leading to the incursion of communicable
diseases. Deadly diseases like HIV/AIDS are being spread by travelers to the remotest
corners of the globe.
7. Globalization has led to exploitation of labor. Prisoners and child workers are used to
work in inhumane conditions. Safety standards are ignored to produce cheap goods.
There is also an increase in human trafficking.
8. Social welfare schemes or “safety nets” are under great pressure in developed
countries because of deficits and other economic ramifications of globalization.
The Advantages of globalization
Globalization has a positive side as well. Supporters of globalization argue that it has
the potential to make this world a better place to live in and solve some deep-seated
problems like unemployment and poverty. The marginal are getting a chance to exhibit
in the world market.
Here are some other arguments for globalization:
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1. The proponents of global free trade say that it promotes global economic growth,
creates jobs, makes companies more competitive, and lowers prices for consumers. It
also provides poor countries, through infusions of foreign capital and technology, with
the chance to develop economically and by spreading prosperity creates the conditions
in which democracy and respect for human rights may flourish.
2. According to libertarians, globalization will help us to raise the global economy only
when the involved power blocks have mutual trust and respect for each other’s opinion.
Globalization and democracy should go hand-in-hand. It should be pure business with
no colonialist designs.
3. Now there is a worldwide market for companies and consumers to access products
from different countries.
4. There is a world power that is being created gradually, instead of compartmentalized
power sectors. Politics are merging and decisions that are being made are actually
beneficial for people all over the world.
5 There is more influx of information between two countries.
6. There is cultural intermingling. Each country is learning more about other cultures.
7. Since we share financial interests, corporations and governments are trying to sort
out ecological problems for each other.
8. Socially we have become more open and tolerant towards each other, and people
who live in the other part of the world are not considered aliens.
Multilateral trade agreements and negotiations
Definition: Multilateral trade agreements are between many nations at one
time. For this reason, they are very complicated to negotiate, but are very
powerful once all parties sign the agreement. The primary benefit of
multilateral agreements is that all nations get treated equally, and so it
levels the playing field, especially for poorer nations that are less
competitive by nature.
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Examples:
The Doha round of trade agreements is a multilateral trade agreement
between all 149 members of the World Trade Organization
Introduction and overview Last week we considered unilateral trade policy: What is a
government’s optimal trade policy? Why do governments engage in trade policy in
practice? Today we consider multilateral trade negotiations: What are the basic facts?
Can we make economic sense of trade negotiations? What are the main principles of
the GATT? How does the WTO differ from the GATT? Why did the Doha Round fail? Do
regional trade agreements undermine multilateral trade negotiations? How do
GATT/WTO rules affect national environmental and health
1947 Founding Round 23 GATT established (details below) tariffs reduced by around
20 percent 1949 Annecy Round 13 tariffs reduced by around 2 percent 1951 Torquay
Round 38 tariffs reduced by around 3 percent 1956 Geneva Round 26 tariffs reduced by
around 2.5 percent 1960-61 Dillon Round 26 tariffs reduced by around 4 percent 196467 Kennedy Round 62 tariffs reduced by around 35 percent 1973-79 Tokyo Round 102
tariffs reduced by around 33 percent 1986-94 Uruguay Round 123 WTO established
(details below) tariffs reduced by around 38 percent 2001- Doha Round.
The term multilateral trade negotiations initially applied to negotiations between
general Agreements on tariffs and Trade (GATT) member nations conducted under the
auspices of the GATT and aimed at reducing tariff and nontariff trade barriers. In 1995
the WTO replaced the GATT as the administrative body. A current round of multilateral
trade negotiations was conducted in the Doha Development Agenda round.
Prior to the ongoing Doha Development Agenda, eight GATT sessions took place:


1st Round: Geneva Tariff Conference, 1947
2nd Round: Annecy Tariff Conference, 1949

3rd Round: Torque Tariff Conference, 1950-51

4th Round: Geneva Tariff Conference, 1955-56

5th Round: Dillon Round, 1960-61

6th Round: Kennedy Round, 1963-67

7th Round: Tokyo Round, 1973-79

8th Round :Uruguay round, 1986-94
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VIII ROUND AGREEMENTS
Bretton Woods Agreement Agreement coming out of WWII (1945) to stabilize the
world economy. Created GATT, IMF, and the World Bank GATT General
Agreement on Tariffs and Trade. Revised under the “Uruguay Round” in 1994.IMF
International Monetary Fund - lending and “consulting” organization for member
nations.
World Bank Lending and “consulting” organization for non-member nations
WTO Non-elected administration and dispute resolution agency created by the
Uruguay round of GATTMAI Multilateral Agreement on Investment. Amendments
in 1996 to the IMF charter have essentially covered most of the issues the MAI was to
address. OECD Organization for Economic Cooperation and Development
Agreements
GATT General Agreement on Tariffs and Trade Initiated after WWII and generally
known as the Breton Woods Agreement the most recent rounds of discussion are
known as the “Uruguay Round” ended in 1994 and became GATT as it is known
today. “The Uruguay Round puts into place comprehensive international rules about
which policy objectives so-called independent countries are permitted to pursue and
which means a country might use to obtain even GATT-legal objectives.
Currently more than 110 nations responsible for more than 4/5ths of world trade have
signed the agreement.
1. Established the World Trade Organization [WTO] as the ruling body in
international trade disputes.
2. GATT supersedes all national and regional law.
3. Provides nations and corporations the ability to sue other nations for barriers to
free trade. Examples of such barriers may be government subsidies for industries, or
to promote policy objectives.
4. Corporations must be given “national treatment,” meaning corporations must
receive the same treatment in bidding and contracting regardless of national or local
origin.
5. Includes non-tariff barriers as actionable. For example, environmental and worker
protection legislation. “Any nation, state, or local standard that provides more
protection than does a specified industry-shaped international standard” must past
WTO tests to determine whether such standards are an illegal trade barrier. (Nader
and Wallach)
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Challenges and Risks for Global Businesses
Too often business owners jump when they see opportunities abroad without first taking the
time to conduct research and train their employees for the challenges they may face. Here are
some of the top challenges and risks that small businesses face.
1. Inexperienced management team. The management team of small businesses may not
have experience with international businesses. Having experience with conducting business
globally is critical for businesses to move into the international market with the lowest amount
of surprises, mistakes, and expenses. the management team should be provided with
appropriate training beforehand. Another option is to hire internal or external experts to guide
decision making.
2. No local marketing contacts or partners. Having connections in the foreign country is a
valuable asset to pushing the product out faster and obtaining a quicker ROI. If the business
does not have any contacts or partners, it should start working on networking and possibly
hiring a local marketing firm.
3. Foreign country's laws and regulations. Each country has its own set of laws and
regulations when it comes to importing goods, taxes, and even selling online. Obtain legal advice
from someone experienced in business law for that country and conduct your own research to
see which laws and regulations will affect your business. However, finding information online
does not replace legal advice from a qualified lawyer.
4. Inadequate infrastructure within the foreign country. Some countries do not have
adequate infrastructure for transporting goods. Find out which obstacles exist and what should
be done to overcome them or what adjustments should be made.
5. Cultural and language barriers. Researching the local culture and speaking the same
language is not enough to communicate efficiently. When two people are speaking the same
sentence, the underlying meaning may not be the same. Find out how the locals conduct
business and how their culture affects their decision making and communication.
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6. Corruption amongst foreign officials. Corruption is more prevalent than what most
small business owners are prepared for. Conduct research into the foreign country and find out
how business is truly conducted. If possible, avoid countries where corruption is prevalent to
save on future headaches and possible losses.
7.Company is not flexible. After entering into the foreign market the business may have to
adapt further to the local market. Small businesses that are not flexible or refuse to make
alternations will lose out on customers and potential revenue. The business should be prepared
to make changes after entrance and have the structure in place for quick decision making and
implementations.
8. Tariffs and quotas. Countries add taxes or restrictions to particular products coming into
their country in order to give their own businesses a higher advantage. Unsuspecting small
business owners unaware of these tariffs and quotas can end up at a loss instead of profiting.
9. Pricing is not optimized for the country. Small business owners that price its products
the same in foreign country as in the United States is either overcharging or undercharging
customers. For instance, in countries with a lower GDP, consumers have less money to spend on
purchases so lower price points should be set to attract more buyers.
10. Does not provide after sales services. Customer support should be available in the
language of each country and be conveniently accessible. Customers should not have to pay long
distance charges in order to receive assistance. Small business owners should ensure that they
are providing adequate customer service to all their customers. They can outsource this to a
customer call center within the country.
Global Trade and Investment
Scope and methodology
The economics of international finance do not differ in principle from the economics of international trade
but there are significant differences of emphasis. The practice of international finance tends to involve
greater uncertainties and risks because the assets that are traded are claims to flows of returns that often
extend many years into the future. Markets in financial assets tend to be more volatile than markets in
goods and services because decisions are more often revised and more rapidly put into effect. There is
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the share presumption that a transaction that is freely undertaken will benefit both parties, but there is a
much greater danger that it will be harmful to others.
For example, mismanagement of mortgage lending in the United States led in 2008 to banking failures
and credit shortages in other developed countries, and sudden reversals of international flows of capital
have often led to damaging financial crises in developing countries. And, because of the incidence of
rapid change, the methodology of comparative statics has fewer applications than in the theory of
international trade, and empirical analysis is more widely employed. Also, the consensus among
economists concerning its principal issues is narrower and more open to controversy than is the
consensus about international trade. Given by Mahendr.
Exchange rates and capital mobility
A major change in the organization of international finance occurred in the latter years of the twentieth
century, and economists are still debating its implications. At the end of the second world war the national
signatories to the Bretton Woods Agreement had agreed to maintain their currencies each at a fixed
exchange rate with the United States dollar, and the United States government had undertaken to buy
gold on demand at a fixed rate of $35 per ounce. In support of those commitments, most signatory
nations had maintained strict control over their nationals’ use of foreign exchange and upon their dealings
in international financial assets.
But in 1971 the United States government announced that it was suspending the convertibility of the
dollar, and there followed a progressive transition to the current regime of floating exchange rates in
which most governments no longer attempt to control their exchange rates or to impose controls upon
access to foreign currencies or upon access to international financial markets.
Policies and institutions
Although the majority of developed countries now have "floating exchange rates, some of them –
together with many developing countries – maintain exchange rates that are nominally "fixed", usually
with the US dollar or the euro. The adoption of a fixed rate requires intervention in foreign exchange
market by the country’s central bank, and is usually accompanied by a degree of control over its citizens’
access to international markets.
A controversial case in point is the policy of the Chinese governments who had, until 2005, maintained
the renminbi at a fixed rate to the dollar, but have since "pegged" it to a basket of currencies. It is
frequently alleged that in doing so they are deliberately holding its value lower than if it were allowed to
float (but there is evidence to the contrary
Some governments have abandoned their national currencies in favor of the common currency of
a currency area such as the "euro zone" and some, such as Denmark, have retained their national
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currencies but have pegged them at a fixed rate to an adjacent common currency. On an international
scale, the economic policies promoted by the (IMF) have had a major influence, especially upon the
developing countries.
.
International financial stability
From the time of the great
depression onwards, regulators and their economic advisors have been aware
that economic and financial crises can spread rapidly from country to country, and that financial crises
can have serious economic consequences. For many decades, that awareness led governments to
impose strict controls over the activities and conduct of banks and other credit agencies, but in the 1980s
many governments pursued a policy of deregulation in the belief that the resulting efficiency gains would
outweigh any systemic risks.
Migration
Elementary considerations lead to a presumption that international migration results in a net gain in
economic welfare. Wage differences between developed and developing countries have been found to be
mainly due to productivity differences which may be assumed to arise mostly from differences in the
availability of physical, social and human capital. And economic theory indicates that the move of a skilled
worker from a place where the returns to skill are relatively low to a place where they are relatively high
should produce a net gain (but that it would tend to depress the wages of skilled workers in the recipient
country)..
From the standpoint of a developing country, the emigration of skilled workers represents a loss of human
capital (known as brain drain), leaving the remaining workforce without the benefit of their support. That
effect upon the welfare of the parent country is to some extent offset by the remittances that are sent
home by the emigrants, and by the enhanced technical know-how with which some of them return. One
study introduces a further offsetting factor to suggest that the opportunity to migrate fosters enrolment in
education thus promoting a "brain gain" that can counteract the lost human capital associated with
emigration .
What Are the Different International Trade Theories?
People have engaged in trade for thousands of years. Ancient history provides us with rich examples such
as the Silk Road—the land and water trade routes that covered more than four thousand miles and
connected the Mediterranean with Asia.
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“Around 5,200 years ago, Uruk, in southern Mesopotamia, was probably the first city the world had ever
seen, housing more than 50,000 people within its six miles of wall. Uruk, its agriculture made prosperous
by sophisticated irrigation canals, was home to the first class of middlemen, trade intermediaries…A
cooperative trade network…set the pattern that would endure for the next 6,000 years In more recent
centuries, economists have focused on trying to understand and explain these trade patterns. discussed
how Thomas Friedman’s flat-world approach segments history into three stages: Globalization from 1492
to 1800, 2.0 from 1800 to 2000, and 3.0 from 2000 to the present. In Globalization, nations dominated
global expansion. In Globalization 2.0, multinational companies ascended and pushed global
development. Today, technology drives Globalization To better understand how modern global trade has
evolved, it’s important to understand how countries traded with one another historically. Over time,
economists have developed theories to explain the mechanisms of global trade. The main historical
theories are called classical and are from the perspective of a country, or country-based. By the midtwentieth century, the theories began to shift to explain trade from a firm, rather than a country,
perspective. These theories are referred to as modern and are firm-based or company-based. Both of these
categories, classical and modern, consist of several international theories.
Types International Business or Trade Theories
Classical or Country-Based Trade Theories
Mercantilism
Developed in the sixteenth century, mercantilism was one of the earliest efforts to develop an economic
theory. This theory stated that a country’s wealth was determined by the amount of its gold and silver
holdings. In it’s simplest sense, mercantilists believed that a country should increase its holdings of gold
and silver by promoting exports and discouraging imports. In other words, if people in other countries
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buy more from you (exports) than they sell to you (imports), then they have to pay you the difference in
gold and silver. The objective of each country was to have a trade surplus, or a situation where the value
of exports are greater than the value of imports, and to avoid a trade deficit, or a situation where the value
of imports is greater than the value of exports.
A closer look at world history from the 1500s to the late 1800s helps explain why mercantilism
flourished. The 1500s marked the rise of new nation-states, whose rulers wanted to strengthen their
nations by building larger armies and national institutions. By increasing exports and trade, these rulers
were able to amass more gold and wealth for their countries. One way that many of these new nations
promoted exports was to impose restrictions on imports. This strategy is called protectionism and is still
used today.
Absolute Advantage
In 1776, Adam Smith questioned the leading mercantile theory of the time in The Wealth of Nations.[
Smith offered a new trade theory called absolute advantage, which focused on the ability of a country to
produce a good more efficiently than another nation. Smith reasoned that trade between countries
shouldn’t be regulated or restricted by government policy or intervention. He stated that trade should flow
naturally according to market forces. In a hypothetical two-country world, if Country A could produce a
good cheaper or faster (or both) than Country B, then Country A had the advantage and could focus on
specializing on producing that good. Similarly, if Country B was better at producing another good, it
could focus on specialization as well. By specialization, countries would generate efficiencies, because
their labor force would become more skilled by doing the same tasks. Production would also become
more efficient, because there would be an incentive to create faster and better production methods to
increase the specialization.
Smith’s theory reasoned that with increased efficiencies, people in both countries would benefit and trade
should be encouraged. His theory stated that a nation’s wealth shouldn’t be judged by how much gold and
silver it had but rather by the living standards of its people.
Opportunity Cost Theory
The opportunity cost theory was proposed by Gottfried Haberler in 1959. The opportunity cost is
the value of alternatives which have to be forgone in order to obtain a particular thing. For
example, Rs. 1,000 is invested in the equity of Rama News Limited and earned a dividend of six
per cent in 1999, the opportunity cost of this investment is 10 per cent interest had this amount
been deposited in a commercial bank for one year term.
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Another example is that, India produces textile garments by utilizing its human resources worth
of Rs. 1 billion and exports to the US in 1999. The opportunity cost of this project is, had India
developed software packages by utilizing the same human resources and exported the same to
USA in 1999, the worth of the exports would have been Rs. 10 billion. Opportunity
cost approach specifies the cost in terms of the value of the alternatives which have to be
foregone in order to fulfill a specific art.
Thus, this theory provides the basis for international business in terms of exporting a particular
product rather than other products. The previous example suggests that it would be profitable
for India to develop and export software packages rather than textile garments to the USA.
The vent for surplus theory
International trade absorbs the output of unemployed factors. If the countries produce more than
the domestic requirements, they have to export the surplus to other countries. Otherwise, a part
of the productive labor of the country must cease and the value of its annual produce
diminishes.
Thus, in the absence of foreign trade, they would be surplus productive capacity in the country.
The surplus productive capacity is taken by another country and in turn gives the benefit under
international trade. According to this theory, the factors of production of developing countries
are fully utilized. The unemployed labor of the developing countries is profitably employed when
the surplus is exported
Competitive advantage
The challenge to the absolute advantage theory was that some countries may be better at producing both
goods and, therefore, have an advantage in many areas. In contrast, another country may not
have any useful absolute advantages. To answer this challenge, David Ricardo, an English economist,
introduced the theory of comparative advantage in 1817. Ricardo reasoned that even if Country A had the
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absolute advantage in the production of both products, specialization and trade could still occur between
two countries.
Comparative advantage
It occurs when a country cannot produce a product more efficiently than the other country; however,
itcan produce that product better and more efficiently than it does other goods. The difference between
these two theories is subtle. Comparative advantage focuses on the relative productivity differences,
whereas absolute advantage looks at the absolute productivity.
Let’s look at a simplified hypothetical example to illustrate the subtle difference between these principles.
Miranda is a Wall Street lawyer who charges $500 per hour for her legal services. It turns out that
Miranda can also type faster than the administrative assistants in her office, who are paid $40 per hour.
Even though Miranda clearly has the absolute advantage in both skill sets, should she do both jobs? No.
For every hour Miranda decides to type instead of do legal work, she would be giving up $460 in income.
Her productivity and income will be highest if she specializes in the higher-paid legal services and hires
the most qualified administrative assistant, who can type fast, although a little slower than Miranda. By
having both Miranda and her assistant concentrate on their respective tasks, their overall productivity as a
team is higher. This is comparative advantage. A person or a country will specialize in doing what they
do relatively better. In reality, the world economy is more complex and consists of more than two
countries and products. Barriers to trade may exist, and goods must be transported, stored, and
distributed. However, this simplistic example demonstrates the basis of the comparative advantage theory.
Hechscher-Ohlin Theory(Factor Proportions Theory)
The theories of Smith and Ricardo didn’t help countries determine which products would give a country
an advantage. Both theories assumed that free and open markets would lead countries and producers to
determine which goods they could produce more efficiently. In the early 1900s, two Swedish economists,
Eli Huckster and Bertil Ohlin, focused their attention on how a country could gain comparative advantage
by producing products that utilized factors that were in abundance in the country. Their theory is based on
a country’s production factors—land, labor, and capital, which provide the funds for investment in plants
and equipment. They determined that the cost of any factor or resource was a function of supply and
demand. Factors that were in great supply relative to demand would be cheaper; factors in great demand
relative to supply would be more expensive. Their theory, also called the factor proportions theory,
stated that countries would produce and export goods that required resources or factors that were in great
supply and, therefore, cheaper production factors. In contrast, countries would import goods that required
resources that were in short supply, but higher demand.
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For example, China and India are home to cheap, large pools of labor. Hence these countries have become
the optimal locations for labor-intensive industries like textiles and garments.
Leontief paradox
In the early 1950s, Russian-born American economist Wassily W. Leontief studied the US economy
closely and noted that the United States was abundant in capital and, therefore, should export more
capital-intensive goods. However, his research using actual data showed the opposite: the United States
was importing more capital-intensive goods. According to the factor proportions theory, the United States
should have been importing labor-intensive goods, but instead it was actually exporting them. His
analysis became known as the Leontief Paradox because it was the reverse of what was expected by the
factor proportions theory. In subsequent years, economists have noted historically at that point in time,
labor in the United States was both available in steady supply and more productive than in many other
countries; hence it made sense to export labor-intensive goods. Over the decades, many economists have
used theories and data to explain and minimize the impact of the paradox. However, what remains clear
is that international trade is complex and is impacted by numerous and often-changing factors. Trade
cannot be explained neatly by one single theory, and more importantly, our understanding of
international trade theories continues to evolve.
Modern firm based trade Theories
In contrast to classical, country-based trade theories, the category of modern, firm-based theories emerged
after World War II and was developed in large part by business school professors, not economists. The
firm-based theories evolved with the growth of the multinational company (MNC). The country-based
theories couldn’t adequately address the expansion of either MNCs orintraindustry trade, which refers to
trade between two countries of goods produced in the same industry. For example, Japan exports Toyota
vehicles to Germany and imports Mercedes-Benz automobiles from Germany.
Unlike the country-based theories, firm-based theories incorporate other product and service factors,
including brand and customer loyalty, technology, and quality, into the understanding of trade flows.
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Country Similarity Theory
Swedish economist Stefan Linder developed the country similarity theory in 1961, as he tried to explain
the concept of intraindustry trade. Linder’s theory proposed that consumers in countries that are in the
same or similar stage of development would have similar preferences. In this firm-based theory, Linder
suggested that companies first produce for domestic consumption. When they explore exporting, the
companies often find that markets that look similar to their domestic one, in terms of customer
preferences, offer the most potential for success. Linder’s country similarity theory then states that most
trade in manufactured goods will be between countries with similar per capita incomes, and intraindustry
trade will be common. This theory is often most useful in understanding trade in goods where brand
names and product reputations are important factors in the buyers’ decision-making and purchasing
processes.
Product Life Cycle Theory
Raymond Vernon, a Harvard Business School professor, developed the product life cycle theory in the
1960s. The theory, originating in the field of marketing, stated that a product life cycle has three distinct
stages: (1) new product, (2) maturing product, and (3) standardized product. The theory assumed that
production of the new product will occur completely in the home country of its innovation. In the 1960s
this was a useful theory to explain the manufacturing success of the United States. US manufacturing was
the globally dominant producer in many industries after World War II.
It has also been used to describe how the personal computer (PC) went through its product cycle. The PC
was a new product in the 1970s and developed into a mature product during the 1980s and 1990s. Today,
the PC is in the standardized product stage, and the majority of manufacturing and production process is
done in low-cost countries in Asia and Mexico.
The product life cycle theory has been less able to explain current trade patterns where innovation and
manufacturing occur around the world. For example, global companies even conduct research and
development in developing markets where highly skilled labor and facilities are usually cheaper. Even
though research and development is typically associated with the first or new product stage and therefore
completed in the home country, these developing or emerging-market countries, such as India and China,
offer both highly skilled labor and new research facilities at a substantial cost advantage for global firms.
Global Strategic Rivalry Theory
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Global strategic rivalry theory emerged in the 1980s and was based on the work of economists Paul

Krugman and Kelvin Lancaster. Their theory focused on MNCs and their efforts to gain a competitive
advantage against other global firms in their industry. Firms will encounter global competition in their
industries and in order to prosper, they must develop competitive advantages. The critical ways that firms
can obtain a sustainable competitive advantage are called the barriers to entry for that industry.
The barriers to entry refer to the obstacles a new firm may face when trying to enter into an industry or
new market. The barriers to entry that corporations may seek to optimize include:
research and development,

the ownership of intellectual property rights,

economies of scale,

unique business processes or methods as well as extensive experience in the industry, and

the control of resources or favorable access to raw materials.
Porters National Competitive advantage Theory
In the continuing evolution of international trade theories, Michael Porter of Harvard Business School
developed a new model to explain national competitive advantage in 1990. Porter’s theory stated that a
nation’s competitiveness in an industry depends on the capacity of the industry to innovate and upgrade.
His theory focused on explaining why some nations are more competitive in certain industries. To explain
his theory, Porter identified four determinants that he linked together. The four determinants are (1) local
market resources and capabilities, (2) local market demand conditions, (3) local suppliers and
cmlementary industries, and (4) local firm characteristics.
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1. Local market resources and capabilities (factor conditions). Porter recognized the value of the factor
proportions theory, which considers a nation’s resources (e.g., natural resources and available labor) as
key factors in determining what products a country will import or export. Porter added to these basic
factors a new list of advanced factors, which he defined as skilled labor, investments in education,
technology, and infrastructure. He perceived these advanced factors as providing a country with a
sustainable competitive advantage.
2. Local market demand conditions. Porter believed that a sophisticated home market is critical to
ensuring ongoing innovation, thereby creating a sustainable competitive advantage. Companies whose
domestic markets are sophisticated, trendsetting, and demanding forces continuous innovation and the
development of new products and technologies. Many sources credit the demanding US consumer with
forcing US software companies to continuously innovate, thus creating a sustainable competitive
advantage in software products and services.
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3. Local suppliers and complementary industries. To remain competitive, large global firms benefit from
having strong, efficient supporting and related industries to provide the inputs required by the industry.
Certain industries cluster geographically, which provides efficiencies and productivity.
4. Local firm ch
5.
6.
7. aracteristics. Local firm characteristics include firm strategy, industry structure, and industry rivalry.
Local strategy affects a firm’s competitiveness. A healthy level of rivalry between local firms will spur
innovation and competitiveness.
In addition to the four determinants of the diamond, Porter also noted that government and chance play a
part in the national competitiveness of industries. Governments can, by their actions and policies, increase
the competitiveness of firms and occasionally entire industries.
Porter’s theory, along with the other modern, firm-based theories, offers an interesting interpretation of
international trade trends. Nevertheless, they remain relatively new and minimally tested theories.
Which Trade Theory Is Dominant Today?
The theories covered in this chapter are simply that—theories. While they have helped economists,
governments, and businesses better understand international trade and how to promote, regulate, and
manage it, these theories are occasionally contradicted by real-world events. Countries don’t have
absolute advantages in many areas of production or services and, in fact, the factors of production aren’t
neatly distributed between countries. Some countries have a disproportionate benefit of some factors. The
United States has ample arable land that can be used for a wide range of agricultural products. It also has
extensive access to capital. While it’s labor pool may not be the cheapest, it is among the best educated in
the world. These advantages in the factors of production have helped the United States become the largest
and richest economy in the world. Nevertheless, the United States also imports a vast amount of goods
and services, as US consumers use their wealth to purchase what they need and want—much of which is
now manufactured in other countries that have sought to create their own comparative advantages through
cheap labor, land, or production costs.
As a result, it’s not clear that any one theory is dominant around the world. This section has sought to
highlight the basics of international trade theory to enable you to understand the realities that face global
businesses. In practice, governments and companies use a combination of these theories to both interpret
trends and develop strategy. Just as these theories have evolved over the past five hundred years, they will
continue
Factor price equalization
Nevertheless there have been widespread misgivings about the effects of international
trade upon wage earners in developed countries. Samuelson‘s factor price equalization
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theorem indicates that, if productivity were the same in both countries, the effect of
trade would be to bring about equality in wage in both countries.
Trade Agreements free trade areas
Over the years average tariffs and other import controls have declined, with
progress especially marked in developing Asia and in Eastern Europe after the
break-up of the Soviet Union. But the breakdown of theDoha trade talks has
dashed hopes of a globally based multi-lateral reduction in import tariffs and
other forms of protectionism. In its place there has been a flurry of bi-lateral
trade deals between countries and the emergence of regional trading blocs.
Some of these deals are free-trade agreements that involve a reduction in current tariff
and non-tariff import controls to liberalise trade in goods and services between
countries. The most sophisticated RTAs include rules on flows of investment, coordination of competition policies, agreements on environmental policies and the free
movement of labour.
Need for Global competitiveness
International competitiveness
This refers to the ability of a country (or firm) to provide goods and services which provide
better value than their overseas rivals.
This is competitive advantage but on a international scale.
As there is constant threat from foreign competition it is essential for business to strive to
improve competitiveness.
Although there is a tendency to look to government to play a role in maintaining the
competitiveness of UK business, in the final analysis it is a matter for individual firms.
Some determinants of International competitiveness

Price relative to competitors
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
Productivity - output per worker

Unit costs

State of technology

Investment in capital equipment

Technology

Quality

Reliability

Lead time

Entrepreneurship

Exchange rate

Relative inflation

Tax rates

Interest rates
Increasing competitiveness
Firms can increase their international competitiveness by:

Rationalisation output to get rid of high cost plants

Relocating to places where labour costs are lower

Process innovation

Product innovation

Incorporating the latest technology into investment

Sourcing from abroad where appropriate

Seeking out new market opportunities

Improving relationships with suppliers and customer
Government’s role to improve international competitiveness
Governments seek policies which aim to:

Encourage R&D spending (e.g. through tax breaks)

Improve the skills base

Improve the economic infrastructure

Promote competition between firms

Operate macro-economic policies favourable to business expansion

Reduce interest rates to stimulate investment

Reduce tax rates to stimulate enterprise, effort and investment

Deregulation to promote competition
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
Reduce bureaucracy

Encourage sharing of ideas and best practice

Reduce protectionist barriers to stimulate competition

Encourage investment in human capital.
Scope and methodology International trading investment
The economic theory of international trade differs from the remainder of economic theory mainly because
of the comparatively limited international mobility of the capital and labour. [5] In that respect, it would
appear to differ in degree rather than in principle from the trade between remote regions in one country.
Thus the methodology of international trade economics differs little from that of the remainder of
economics. However, the direction of academic research on the subject has been influenced by the fact
that governments have often sought to impose restrictions upon international trade, and the motive for the
development of trade theory has often been a wish to determine the consequences of such restrictions.
The branch of trade theory which is conventionally categorized as "classical" consists mainly of the
application of deductive logic, originating with Ricardo’s Theory of Comparative Advantage and
developing into a range of theorems that depend for their practical value upon the realism of their
postulates. "Modern" trade theory, on the other hand, depends mainly upon empirical analysis.
rates. As noted above, that theorem is sometimes taken to mean that trade between an industrialized
country and a developing country would lower the wages of the unskilled in the industrialized country.
However, it is unreasonable to assume that productivity would be the same in a low-wage developing
country as in a high-wage developed country. A 1999 study has found international differences in wage
rates to be approximately matched by corresponding differences in productivity.
(Such discrepancies that remained were probably the result of over-valuation or under-valuation of
exchange rates, or of inflexibilities in labour markets.) It has been argued that, although there may
sometimes be short-term pressures on wage rates in the developed countries, competition between
employers in developing countries can be expected eventually to bring wages into line with their
employees' marginal products. Any remaining international wage differences would then be the result of
productivity differences, so that there would be no difference between unit labour costs in developing and
developed countries, and no downward pressure on wages in the developed countries.
Terms of trade
There has also been concern that international trade could operate against the interests of developing
countries. Influential studies published in 1950 by the Argentine economist Raul Prebisch and the British
economist Hans Singer suggested that there is a tendency for the prices of agricultural products to fall
relative to the prices of manufactured goods; turning the terms of trade against the developing countries
and producing an unintended transfer of wealth from them to the developed countries.
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Their findings have been confirmed by a number of subsequent studies, although it has been suggested
that the effect may be due to quality bias in the index numbers used or to the possession of market
power by manufacturers. The Prebisch/Singer findings remain controversial, but they were used at the
time - and have been used subsequently - to suggest that the developing countries should erect barriers
against manufactured imports in order to nurture their own “infant industries” and so reduce their need to
export agricultural products. The arguments for and against such a policy are similar to those concerning
the protection of infant industries in general.
Quotas prompt foreign suppliers to raise their prices toward the domestic level of the importing country.
That relieves some of the competitive pressure on domestic suppliers, and both they and the foreign
suppliers gain at the expense of a loss to consumers, and to the domestic economy, in addition to which
there is a deadweight loss to the world economy. When quotas were banned under the rules of the
General Agreement on Tariffs and Trade (GATT), the United States, Britain and the European Union
made use of equivalent arrangements known as voluntary restraint agreements (VRAs) or voluntary
export restraints (VERs) which were negotiated with the governments of exporting countries (mainly
Japan) - until they too were banned. Tariffs have been considered to be less harmful than quotas,
although it can be shown that their welfare effects differ only when there are significant upward or
downward trends in imports.[ Governments also impose a wide range of non-tariff barriers that are similar
in effect to quotas, some of which are subject to WTO agreements. ] A recent example has been the
application of the precautionary principle to exclude innovatory products.
Regional Trade Agreements (RTAs and Regional trade blocs)

The number of RTAs has risen from around 70 in 1990 to over 300 today

The European Union (EU) – a customs union, a single market and now with a
single currency

The European Free Trade Area (EFTA)

The North American Free Trade Agreement (NAFTA) – created in 1994

Mercosur - a customs union between Brazil, Argentina, Uruguay, Paraguay and
Venezuela

Association of Southeast Asian Nations (ASEAN) Free Trade Area (AFTA)

Common Market of Eastern and Southern Africa (COMESA)

South Asian Free Trade Area (SAFTA) created in January 2006 and containing
countries such as India and Pakistan
In 2012 there were numerous new bi-lateral trade agreements between countries –
here is a selection:
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

Panama – Peru

China – Costa Rica


New Zealand – Malaysia
Australia - Malaysia

South Korea – United States


European Union – South Korea
EU- Latin America

EU- Singapore
US- Columbia
Each of these is a reciprocal trade agreement between two or more partners that the
countries hope will stimulate cross-border trade and investment. One of the dangers
of this bi-lateral approach rather than progress in reaching multi-lateral trade
agreements through the World Trade Organization is that a patchwork quilt of trade
deals is emerging, including over-lapping agreements between clusters of countries.
Far from promoting mutual gains, RTAs might cause numerous distortions of markets.
Keep in mind also that trade agreements can be expensive to monitor – eating into
some of the economic welfare benefits.
Stage
of No Internal Common
Factor
Economic
Trade
External
Asset
Integration
Barriers
Tariff
Mobility
and Common
Common
Currency
Economic
Policy
Free Trade Area
X
Customs Union
X
X
Single Market
X
X
X
Monetary Union
X
X
X
X
Economic Union
X
X
X
X
Types of Regional trade Blocks or Economic Integration
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X
Customs Union
The European Union is a customs union. A customs union comprises countries which
agree to:
Abolish tariffs and quotas between member nations to encourage free movement of
goods and services. Goods and services that originate in the EU circulate between
Member States duty-free. However these products might be subject to excise duty and
VAT.
Adopt a common external tariff (CET) on imports from non-members countries. Thus,
in the case of the EU, the tariff imposed on, say, imports of Japanese TV sets will be the
same in the UK as in any other EU country.
Preferential tariff rates apply to preferential or free trade agreements that the EU has
entered into with third countries or groupings of third countries.
A customs union shares the revenue from the CET in a pre-determined way – in this
case the revenue goes into the EU budget fund. The EU receives its revenues from
customs duties from the common tariff, agricultural levies and countries paying 1% of
their VAT base. Payments are also made through contributions made by member states
based on their national incomes. Thus relatively poorer countries pay less into the EU
and tend to be net recipients of EU finances.
Single Market
A single market represents a deeper form of integration than a customs union. It
involves the free movement of goods and services, capital and labour and the concept
are broadened to encompass economic policy harmonization for example in the areas
of health and safety legislation and monopoly & competition policy. Deeper economic
and business ties requires some degree of political integration, which also requires
shared aims and values between nation.
TRADE BLOCKS
MERCOSUR
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Mercosur was established in 1991 by the Treaty
by the 1994 Treaty
of Asunción, which was later amended and updated
of Ouro Preto.
Mercosur originated in 1985, when Presidents Raúl
Alfonsín of Argentina and José Sarney of Brazil
signed the Argentina-Brazil Integration and Economics Cooperation Program or PICE (Portuguese:
Program de Integração e Cooperação Economical Argentina-Brazil, Spanish: Program de Integration y
Cooperation Economical Argentina-Brazil). The program also proposed the Gaucho as a currency for
regional trade The founding of the Mercosur Parliament was agreed upon at the December 2004
presidential summit. It was expected to have 18 representatives from each country by 2010, regardless of
population Full membership for Venezuela became effective on 31 July 2012, after the suspension of
Paraguay on 22 June 2012 for the violation of the Democratic Clause of Mercosur Impeachment of
Fernando Lugo). Previously, on 17 June 2006, Venezuela had signed a membership agreement,
Member States
Mercosur is composed of 5 sovereign member states: Argentina; Brazil; Paraguay; Uruguay;
and Venezuela. Bolivia became
the impeachment
an
accessing
member
on
7
December
2012.
Following
of President Fernando Lugo by the Paraguayan Senate, this country was
suspended from Mercosur, and the admittance of Venezuela as a full member became effective on 31
July 2012, In four years, Venezuela will have to fully adapt to the trade bloc regulations. Directly
subordinated to the Common Market Group, the Work Subgroups draw up the minutes of the decisions to
be submitted for the consideration of the Council, and conduct studies on specific Mercosur concerns.
Currently, the Work Subgroups are the following: Commercial Matters; Customs Matters; Technical
Standards; Tax and Monetary Policies Relating to Trade; Land Transport; Sea Transport; Industrial and
Technology Policies; Agricultural Policy; Energy Policy; Coordination of Macroeconomic Policies; and
Labor, Employment and Social Security Matters.
The meetings of the Work subgroups will be held quarterly, alternating in every member state, in
alphabetical order, or at the Common Market Group Administrative Office. Activities will be carried out by
the Work Subgroups in two stages: preparatory and conclusive. In the preparatory stage, the members of
the Work Subgroups may request the participation of representatives from the private sector of each
member state. The decision-making stage is reserved exclusively for official representatives of the
member states. The delegations of representatives from the private sector in the preparatory stage of the
Work Subgroup activities will have a maximum of three representatives for each member state directly
involved in any of the stages of the production, distribution or consumption process for the products that
fall within the scope of the subgroup's activities.
Geography
The territory of Mercosur consists of the combined territories of five of the twelve countries of South
America and their population. Including the overseas territories of member states, Mercosur experiences
most types of climate from Arctic to tropical, rendering meteorological averages for Mercosur as a
whole meaningless. The majority of the population lives in areas with a
subtropical climate (Uruguay,
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Southern Paraguay, Northeastern Argentina and Southern and Southeastern Brazil), or a
tropical
climate (Venezuela and Northeastern Brazil).
Demographical
.The combined
population of all 5 member states was estimated at 275.5 million as of 2011. The most
populous country of Mercosur is, by far, Brazil (195 million). The remaining member states' populations
are Argentina (41 million), Venezuela (30 million), Paraguay (6.5 million), and Uruguay (3.4 million).
The population density is of 33.7/km² (87/sq mi) in Venezuela, 23.1/km² (60/sq mi) in Brazil, 19.4/km²
(50/sq mi) in Uruguay, 16.4/km² (42/sq mi) in Paraguay, and 14.9/km² (39/sq mi) in Argentina.
global cities Buenos
Aires, Caracas, Rio de Janeiro and São Paulo. The white population is the majority in Argentina
The region is highly urbanized, and the largest cities in Mercosur are the
and Uruguay, although most genetic studies have shown that the so-called 'whites' in Argentina and
Uruguay have significant Native American and minor African Black ancestry. The white population
represents around half the population in Brazil, although in Brazil (like in Argentina and Uruguay), the
white population also have significant Black African and Native American genetic ancestry. Venezuela's
racial structure comprises 75% mestizo, mulatto, Native American, Black, and Asians, while about 25% of
the country's population is considered white, albeit, with significant non-European genetic
admixture.[15] Mestizos form the majority population in Paraguay.[1] All Mercosur nations have significant
Native American populations, especially in Paraguay (the Native America Guaraní is a national language
in the country along with Spanis,h and almost all Paraguayans have Guaraní genetic ancestry), Argentina
(especially in the country's North-Western, Northern, and Southern provinces), Brazil (in the Northern
Amazonian states of the nation, where Native American tribes have vast reservation lands), Venezuela
(in the nation's states of Amazonas, Barinas, and in the Andean states). Only Uruguay have very small
population of Amerindian ancestry. Most Brazilians are mixed racial, including Pardo (Brazilians
throughout the Southern, South-Eastern, Central-West and the North-Eastern states of the nation) and
Caboclos (the mestizo population in the Northern Amazonian states of Brazil).
Languages
Among the many languages and dialects used in Mercosur, it has 3 official and working
languages: Portuguese, Spanish and Guaraní. Brazil is the only Portuguese-speaking country
in Mercosur and in the Americas, as it formerly was part of Portuguese America. Argentina,
Paraguay, Uruguay, and Venezuela were part of Spanish America. Along with Paraguay (where it
is one of two official languages), sectors of Argentina and Brazil speak Guaraní.
Merchandise Trade
Intra-Mercosur merchandise trade (excluding Venezuela) grew from US$10 billion at the inception of the
trade bloc in 1991,[16] to US$88 billion in 2010; Brazil and Argentina each accounted for 43% of this
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total.[17] The trade balance within the bloc has historically been tilted toward Brazil, [16] which recorded an
intra-Mercosur balance of over US$5 billion in 2010.[17] [18] Trade within Mercosur amounted to only 16%
of the four countries' total merchandise trade in 2010, however; trade with the
European
Union (20%), China (14%), and the United States (11%) was of comparable importance.[17] Exports
from the bloc are highly diversified, and include a variety of agricultural, industrial, and energy goods.
Merchandise trade with the rest of the world in 2010 resulted in a surplus for Mercosur of nearly US$7
billion; trade in services, however, was in deficit by over US$28 billion.[17] The EU and China
maintained a nearly balanced merchandise trade with Mercosur in 2010, while the United States re
ASEAN
The Common Effective Preferential Tariff (CEPT) scheme
Unlike the EU, AFTA does not apply a
common external tariff on imported goods. Each ASEAN
member may impose tariffs on goods entering from outside ASEAN based on its national schedules.
However, for goods originating within ASEAN, ASEAN members are to apply a tariff rate of 0-5 %(the
more recent members of Cambodia, Laos, Myanmar and Vietnam, also known as CMLV countries, were
given additional time to implement the reduced tariff rates). This is known as the Common Effective
Preferential Tariff (CEPT) scheme.
ASEAN members have the option of excluding products from the CEPT in three cases: 1.) Temporary
exclusions; 2.) Sensitive agricultural products; 3.) General exceptions. Temporary exclusions refer to
products for which tariffs will ultimately be lowered to 0-5 %, but which are being protected temporarily by
a delay in tariff reductions.
Sensitive agricultural products include commodities such as rice. ASEAN members have until 2010 to
reduce the tariff levels to 0-5 %.
General exceptions refer to products which an ASEAN member deems necessary for the protection of
national security, public morals, the protection of human, animal or plant life and health, and protection of
articles of artistic, historic, or archaeological value. ASEAN members have agreed to enact zero tariff
rates on virtually all imports by 2010 for the original signatories, and 2015 for the CMLV countries.
Rule of Origin
The CEPT only applies to goods originating within ASEAN. The general rule is that local ASEAN content
must be at least 40% of the FOB value of the good. The local ASEAN content can be cumulative, that is,
the value of inputs from various ASEAN members can be combined to meet the 40% requirement. The
following formula is applied:
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( Raw material cost
+ Direct labour cost
+ Direct overhead cost
+ Profit
+ Inland transport cost )
However, for certain products, special rules apply:

Change in Chapter Rule for Wheat Flour;

Change of Tariff Sub-Heading for Wood-Based Products;

Change in Tariff Classification for Certain Aluminum and Articles thereof.
The exporter must obtain a “Form D” certification from its national government
attesting that the good has met the 40% requirement. The Form D must be presented to the customs
authority of the importing government to qualify for the CEPT rate. Difficulties have sometimes arisen
regarding the evidentiary proof to support the claim, as well as how ASEAN national customs authorities
can verify Form D submissions. These difficulties arise because each ASEAN national customs authority
interprets and implements the Form D requirements without much coordination.
Administration
Administration of AFTA is handled by the national customs and trade
authorities in each ASEAN member. The ASEAN Secretariat has authority to monitor and ensure
compliance with AFTA measures, but has no legal authority to enforce compliance. This has led to
inconsistent rulings by ASEAN national authorities. The ASEAN Charter is intended to bolster the ASEAN
Secretariat’s ability to ensure consistent application of AFTA measures.
ASEAN national authorities have also been traditionally reluctant to share or
cede sovereignty to authorities from other ASEAN members (although ASEAN trade ministries routinely
make cross-border visits to conduct on-site inspections in anti-dumping investigations). Unlike the EU or
NAFTA, joint teams to ensure compliance and investigate non-compliance have not been widely used.
Instead, ASEAN national authorities must rely on the review and analysis of other ASEAN national
authorities to determine if AFTA measures such as rule of origin are being followed. Disagreements may
result between the national authorities. Again, the ASEAN Secretariat may help mediate a dispute but has
no legal authority to resolve it.
ASEAN has attempted to improve customs coordination through the
implementation of the ASEAN Single Window project. The ASEAN Single Window would allow importers
to submit all information related to the transaction to be entered electronically once. This information
would then be shared with all other ASEAN national customs authorities.
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Dispute resolution
Although these ASEAN national customs and trade authorities coordinate
among themselves, disputes can arise. The ASEAN Secretariat has no legal authority to resolve such
disputes, so disputes are resolved bilaterally through informal means or through dispute resolution.
An ASEAN Protocol on Enhanced Dispute Settlement Mechanism governs
formal dispute resolution in AFTA and other aspects of ASEAN. ASEAN members may seek mediation
and good offices consultations. If these efforts are ineffective, they may ask SEOM (Senior Economic
Officials Meetings) to establish panel of independent arbitrators to review the dispute. Panel decisions
can be appealed to an appellate body formed by the ASEAN Economic Community Council.
The Protocol has almost never been invoked because of the role of SEOM in
the dispute resolution process. SEOM decisions require consensus among all ASEAN members, and
since both the aggrieved party and the alleged transgressor are both participating in SEOM, such
consensus cannot be achieved. This discourages ASEAN members from invoking the Protocol, and often
they seek dispute resolution in other for a such as the WTO or even the International Court of Justice.
This can also be frustrating for companies affected by an AFTA dispute, as they have no rights to invoke
dispute resolution yet their home ASEAN government may not be willing to invoke the Protocol. The
ASEAN Secretary General has listed dispute resolution as requiring necessary reform for proper
administration of AFTA and the AEC.
Membership

Indonesia Malaysia Philippines Singapore Thailand Myanmar Cam
bodia Laos Vietnam Papua New Guinea Timor-Leste China Japan South
Korea India Australia New Zealand
Economic integration
Economy of the European Union
Count Richard Nikolas von
Coudenhove-Kalergi, who wrote the Pan-Europe manifesto in 1923. His ideas
influenced Aristide Briand, who gave a speech in favor of a European Union in the League of
Nations on 8 September 1929, and who in 1930 wrote a "Memorandum on the Organization of a
One of the first to conceive of a union of European nations was
Regime of European Federal Union" for the Government of France which became the first European
government formally to adopt the principle.
At the end of World War II, the continental political climate favored unity in democratic European
countries, seen by many as an escape from the extreme forms of nationalism which had devastated the
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continent. In a speech delivered on 19 September 1946 at the University of Zürich,
Switzerland, Winston Churchill postulated a United States of Europe. The same speech however
contains remarks, less often quoted, which make it clear that Churchill did not initially see Britain as being
part of this United States of Europe: We British have our own Commonwealth of Nations ... And why
should there not be a European group which could give a sense of enlarged patriotism and common
citizenship to the distracted peoples of this turbulent and mighty continent and why should it not take its
rightful place with other great groupings in shaping the destinies of men?... France and Germany must
take the lead together. Great Britain, the British Commonwealth of Nations, mighty America and I trust
Soviet Russia-for then indeed all would be well-must be the friends and sponsors of the new Europe and
must champion its right to live and shine
The European Union operates a single economic market across the territory of all its members, and uses
a single currency between the Euro zone members. Further, the EU has a number of economic
relationships with nations that are not formally part of the Union through the
European Economic
Area and custom union agreements.
Free trade area
The creation of the EEC eliminated tariffs, quotas and preferences on goods among member states,
which are the requisites to define a free trade area (FTA).
Numerous countries have signed a European
Union Association Agreement (AA) with FTA
provisions. These mainly include Mediterranean countries (Algeria in 2005, Egypt in 2004, Israel in 2000,
Jordan in 2002, Lebanon in 2006, Morocco in 2000, Palestinian National Authority in 1997, and
Tunisia in 1998), albeit some countries from other trade blocs have also signed one (such as Chile in
2003, Mexico in 2000, and South Africa in 2000).
Further, many Balkan states have signed a Stabilization
and Association Agreement (SAA) with
FTA provisions, such as Albania (signed 2006), Montenegro (2007), Macedonia (2004), Bosnia and
Herzegovina and Serbia (both 2008, entry-into-force pending).
In 2008, Poland and Sweden proposed the Eastern
between the EU and Armenia, Azerbaijan,
Belarus,[11]
Partnership which would include setting a FTA
Georgia, Moldova and Ukraine.[12]
Customs union
The European
Union Customs Union defines an area where no customs are levied on goods
travelling within it. It includes all member states of the European Union. The abolition of internal
tariff barriers between EEC member states was achieved in 1968.
Andorra and San Marino belong to the EU customs unions with third states. Turkey is linked by
the European
Union-Turkey
Customs
Union.
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Single market
Maastricht Treaty in 1992 is establishing and
maintaining a single market. This seeks to guarantee the four basic freedoms, which are related to
A prominent goal of the EU since its creation by the
ensure the free movement of goods, services, capital and people around the EU's internal market.
The European
Economic Area (EEA) agreement allows Norway, Iceland and Liechtenstein to
participate in the European Single Market without joining the EU. The four basic freedoms apply.
However, some restrictions on fisheries and agriculture take place. Switzerland is linked to the European
Union by Swiss-EU bilateral agreements, with a different content from that of the EEA agreement.
The Euro
zone refers to the European Union member states that have adopted the euro currency
union as the third stage of the European Economic and Monetary Union (EMU). Further, certain
states outside the EU have adopted the euro as their currency, despite not belonging to the EMU. Thus, a
total of 23 states, including 17 European Union states and six non-EU members, currently use the euro.
The Euro zone came into existence with the official launch of the euro on 1 January 1999.
Physical coins and banknotes were introduced on 1 January 2002.
The original members were Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg,
Netherlands, Portugal, and Spain. Greece adopted the euro on 1 January 2001. Slovenia joined on 1
January 2007, Cyprus and Malta were admitted on 1 January 2008, Slovakia joined on 1 January 2009
and Estonia on 1 January 2011.
Outside the EU, agreements have been concluded with Monaco, San Marino, and Vatican City for formal
adoption, including the right to issue their own coins. Andorra also has an agreement to use the euro,
and will be permitted to issue coins once they meet several criteria in their agreement. Montenegro and
Kosovo
unilaterally
adopted
the
euro
when
it
launched.
Fiscal union
There has long been speculation about the possibility of the European Union eventually becoming
a fiscal union. In the wake of the European sovereign debt crisis, calls for closer fiscal ties,
possibly leading to some sort of fiscal union have increased; though it is generally regarded as
implausible in the short term, some analysts regard fiscal union as a long-term necessity. While stressing
the need for coordination, governments have rejected talk of fiscal union or harmonisation in this regard.
History of SAARC
The first concrete proposal for establishing a framework for regional cooperation in South Asia was made
by the late president of Bangladesh, Ziaur Rahman, on May 2, 1980. Prior to this, the idea of regional
cooperation in South Asia was discussed in at least three conferences: the
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Asian Relations
Conference in New Delhi in April 1947, the Baguio Conference in the Philippines in May 1950,
and the Colombo Powers Conference in April 1954. In the late 1970s, SAARC nations agreed upon
the creation of a trade bloc consisting of South Asian countries. The idea of regional cooperation in South
Asia was again mooted in May 1980. The foreign ministers of the seven countries met for the first
time in Colombo in April 1981. The Committee of the Whole, which met in Colombo in August 1985,
identified five broad areas for regional cooperation. New areas of cooperation were added in the following
years.[1]
SAARC Charter Desirous of promoting peace, stability, amity and progress in the region
through strict adherence to the principles of the UNITED NATIONS CHARTER and NONALIGNMENT, particularly respect for the principles of sovereign equality, territorial integrity,
national independence, non-use of force and non-interference in the internal affairs of other
States and peaceful settlement of all dispute

Conscious that in an increasingly interdependent world, the objectives of peace, freedom, social
justice and economic prosperity is best achieved in the SOUTH ASIAN region by fostering mutual
understanding, good neighborly relations and meaningful cooperation among the Member States
which are bound by ties of history and culture.

Aware of the common problems, interests and aspirations of the peoples of SOUTH ASIA and the
need for joint action and enhanced cooperation within their respective political and economic systems
and cultural traditions.

Convinced that regional cooperation among the countries of SOUTH ASIA is mutually beneficial,
desirable and necessary for promoting the welfare and improving the quality of life of the peoples of
the region.

Convinced further that economic, social and technical cooperation among the countries of SOUTH
ASIA would contribute significantly to national and collective self-reliance.

Recognizing

That increased cooperation, contacts and exchanges among the countries of the region will
contribute to the promotion of friendship and understanding among their peoples.

Recalling the DECLARATION signed by their Foreign Ministers in NEW DELHI on August 2, 1983
and noting the progress achieved in regional cooperation.

Reaffirming their determination to promote such cooperation within an institutional framework.
Objectives of SAARC
The objectives and the aims of the Association as defined in the Charter are:
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
to promote the welfare of the people of South Asia and to improve their quality of life;

to accelerate economic growth, social progress and cultural development in the region and to provide
all individuals the opportunity to live in dignity and to realize their full potential;

to promote and strengthen selective self-reliance among the countries of South Asia;

to contribute to mutual trust, understanding and appreciation of one another's problems;

to promote active collaboration and mutual assistance in the economic, social, cultural, technical and
scientific fields;

to strengthen cooperation with other developing countries;

to strengthen cooperation among themselves in international forums on matters of common interest;
and

to cooperate with international and regional organizations with similar aims and purposes.

to maintain peace in the region
Principles
The principles are as follows

Respect for sovereignty, territorial integrity, political equality and independence of all members states

Non-interference in the internal matters is one of its objectives

Cooperation for mutual benefit

All decisions to be taken unanimously and need a quorum of all eight members

All bilateral issues to be kept aside and only multilateral(involving many countries) issues to be
discussed without being prejudiced by bilateral issues
Bretton Woods Agreement
Agreement coming out of WWII (1945) to stabilize the world economy.
Created GATT, IMF, and the World Bank
GATT General Agreement on Tariffs and Trade. Revised under the “Uruguay
Round” in 1994.
IMF International Monetary Fund - lending and “consulting” organization for
member nations
World Bank Lending and “consulting” organization for non-member nations
WTO Non-elected administration and dispute resolution agency created by the
Uruguay round of GATT
MAI Multilateral Agreement on Investment. Amendments in 1996 to the IMF
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charter have essentially covered most of the issues the MAI was to address.
OECD Organization for Economic Cooperation and Development
Agreements
GATT General Agreement on Tariffs and Trade
Initiated after WWII and generally known as the Breton Woods Agreement the most
recent rounds of discussion are known as the “Uruguay Round” ended in 1994 and
became GATT as it is known today. “The Uruguay Round puts into place
comprehensive international rules about which policy objectives so-called
independent countries are permitted to pursue and which means a country might use
to obtain even GATT-legal objectives.
Currently more than 110 nations responsible for more than 4/5ths of world trade have
signed the agreement.
1. Established the World Trade Organization [WTO] as the ruling body in
international trade disputes.
2. GATT supersedes all national and regional law.
3. Provides nations and corporations the ability to sue other nations for barriers to
free trade. Examples of such barriers may be government subsidies for industries, or
to promote policy objectives.
4. Corporations must be given “national treatment,” meaning corporations must
receive the same treatment in bidding and contracting regardless of national or local
origin.
5. Includes non-tariff barriers as actionable. For example, environmental and worker
protection legislation. “Any nation, state, or local standard that provides more
protection than does a specified industry-shaped international standard” must past
WTO tests to determine whether
Trade Creation
Trade creation arising from trade deals between countries involves a shift in domestic
consumer spending from a higher cost domestic source to a lower cost partner source for
example - within the EU - as a result of the abolition tariffs on intra-union trade
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A trade bloc is a type of inter-governmental agreement (also known as trade pact), often part of a
regional inter-governmental organization, where regional barriers to trade, (such as tariffs
and non-tariff barriers) are reduced or eliminated among the participating states.
Advantages of Trading Blocks
The main advantages for members of trading blocs are as follows:
1) Free trade within the bloc: Knowing that they have free access to each other’s
markets, members are encouraged to specialize. This means that at the regional
level there is a wider application of the principle of comparative advantage.
2) Market access and trade creation:
Easier access to each other's markets
means that trade between members is likely to increase. Trade creation exists when
free trade enables high cost domestic producers to be replaced by low cost, more
efficient imports. Because low cost imports lead to lower priced imports, there is a
'consumption effect', with increased demand resulting from lower prices.
3) Economies of scale: Producers can benefit from the application of scale
economies, which will lead to lower costs and lower prices for consumers.
4)
Jobs: Jobs may be created as a consequence of increased trade between
member economies.
5) Protection: Firms inside the bloc are protected from cheaper imports from
outside, such as the protection of the EU shoe industry from cheap imports from
China and Vietnam.
Disadvantages of Trading Blocks
The main disadvantages for members of trading blocs are as follows:
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1) Loss of benefits: The benefits of free trade between countries in different blocs
are lost.
2) Distortion of trade: Trading blocs are likely to distort world trade and reduce and
reduce the beneficial effects of specialization and the exploitation of comparative
advantage.
3) Inefficiencies and trade diversion: Inefficient producers within the bloc can be
protected from more efficient ones outside the bloc. For example, inefficient..
So for example UK households may switch their spending on car and home insurance
away from a higher-priced UK supplier towards a French insurance company operating
in the UK market
Similarly, Western European car manufacturers may be able to find and then benefit
from a cheaper source of glass or rubber for tires from other countries within the
customs union than if they were reliant on domestic supply sources with trade
restrictions in place.
Trade creation should stimulate an increase in trade between countries that have
signed trade agreements and should, in theory, lead to an improvement in the efficient
allocation of scarce resources and gains in consumer and producer welfare.
Trade Diversion

Trade diversion is best described as a shift in domestic consumer spending
from a lower cost world source to a higher cost partner source (e.g. from
another country within the EU) as a result of the elimination of tariffs on imports
from the partner

The common external tariff on many goods and services coming into the EU
makes imports more expensive. This can lead to higher costs for producers and
higher prices for consumers if previously they had access to a lower cost / lower
price supply from a non-EU country
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
The diagram next illustrates the potential welfare consequences of imposing an
import tariff on goods and services coming into the European Union.

In general, protectionism in the forms of an import tariff results in a deadweight
social loss of welfare. Only short term protectionist measures, like those to
protect infant industries, can be defended robustly in terms of efficiency. The
common external tariff will have resulted in some deadweight social loss if it
has in total raised tariffs between EU countries and those outside the EU.
International Trade Barriers
Free trade refers to the elimination of barriers to international trade. The most common
barriers to trade are tariffs, quotas, and nontariff barriers.
A tariff is a tax on imports, which is collected by the federal government and which
raises the price of the good to the consumer. Also known as duties or import duties,
tariffs usually aim first to limit imports and second to raise revenue.
A quota is a limit on the amount of a certain type of good that may be imported into the
country. A quota can be either voluntary or legally enforced
Economic Talk
A tariff is a tax on imported goods, while a quota is a limit on the amount of goods that
may be imported. Both tariffs and quotas raise the price of and lower the demand for the
goods to which they apply. Nontariff barriers, such as regulations calling for a certain
percentage of locally produced content in the product, also have the same effect, but
not as directly.
You may wonder why a nation would ever choose to use a quota when a tariff has the
added advantage of raising revenue. The major reason is that quotas allow the nation
that uses them to decide the quantity to be imported and let the price go where it will. A
tariff adjusts the price, but leaves the post-tariff quantity to market forces. Therefore, it is
less predictable and precise than a quota.
The effect of tariffs and quotas is the same: to limit imports and protect domestic
producers from foreign competition. A tariff raises the price of the foreign good beyond
the market equilibrium price, which decreases the demand for and, eventually, the
supply of the foreign good. A quota limits the supply to a certain quantity, which raises
the price beyond the market equilibrium level and thus decreases demand.
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KV Institute of Management and Information Studies
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KV Institute of Management and Information Studies
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