Global Business Perspectives
The Global Business Environment
LeCTURE 7
Challenges and responsibilities
International trade and globalization
How countries and regions reap the benefits of trade
Summary of contents
Trends in world trade
Theories of international trade
National trade policies
Global and regional trade patterns
International regulation
GATT principles
The role of the WTO
Regional, bilateral and plurilateral agreements
Challenges and responsibilities
Conclusions
Trends in world trade
Exports – products leaving a country
Imports – products entering a country
Historically, developed countries are the main forces, but that lead is diminishing
Triad countries: Europe, North American and Japan
Developed countries account for half of merchandise trade and two-thirds of trade in services
Growing integration of developing countries
Over two-thirds of world trade is in intermediate goods
The rise of developing countries in global trade
Countries with low costs and abundant labour have promoted economic growth based on export-oriented manufacturing – China is the leading example
Participation in value chains has been aided by attracting FDI – such as electronics and textiles
China is the world’s leading merchandise exporter
Half of China’s exports and imports are intermediate goods
The US is the leading merchandise importer, but the US has a huge trade deficit
Trade profiles of contrasting countries
International trade theories
Theory of comparative advantage (Ricardo)
Points to countries specializing in particular industries in which they are most efficient, and trading with other countries to acquire other products
Product life cycle theory (Vernon) – links trade and FDI
Newer trade theories
Focus on globalized production, especially for complex products (Krugman)
Take into account innovation, economies of scale
First-mover advantages
Porter: the competitive advantage of nations
Competitive advantage – Why are some countries more successful than others?
Every country has four attributes:
Factor conditions, such as skilled labour and natural resources
Demand conditions – home demand for goods and services
Related and supporting industries
Firm strategy, structure and rivalry
Two other variables:
Chance and the role of government
How do national interests affect trade?
Industrialization can be promoted by restricting imported products – import substitution
Restricting imports can help to protect domestic jobs, but can lead to loss of competitiveness in the long term
Consumers usually benefit from freer trade, due to greater choice and keener prices
Strategic trade policy can be used to benefit domestic firms and to foster foreign policy objectives
National culture can be promoted by restricting the import of cultural products and availability of foreign media content
The free trade debate
Government perspectives on trade
Industrialization can be promoted by restricting imports, to encourage local firms – import substitution
Restricting imports helps to protect local jobs
Consumers benefit from cheap imports, but governments are concerned about issues of safety, and often restrict imports
Strategic interests, such as food production and national security
Protecting national culture – can lead to restricting foreign media
Tools of government trade policy
Protectionism can be implemented through both direct and indirect trade barriers
Tariffs (or duties), on imports or exports – a direct barrier
Import quotas
Voluntary export restraint (VER)
Non-tariff barriers, such as Local content requirements – an indirect barrier
Subsidies to local producers out of public funds
Can be justified on grounds of strategic need
But export subsidies distort markets
The global cotton market: how fair is it?
Cotton is a widely traded commodity
Leading producers: China, India and the US
The US is the world’s largest cotton exporter: 75% of its total crop is exported, amounting to one-third of all cotton exports globally
US cotton growers (mainly agribusinesses) are subsidized, leading to complaints of distortions in global markets, against WTO rules
The losers are poor farmers in developing countries
International regulation of trade: GATT principles
Principles which form the basis of the world trading system, carried through to the WTO
Most-favoured nation principle (MFN)
Equal tariff treatment among member states
National treatment – imported goods treated the same as domestic
Principle of fairness in trading practices
Anti-dumping agreement – allows an importing country to impose duties on goods from a country which is exporting them at prices below those charged domestically
The WTO and multilateral agreements
The WTO came into being in 1995
Co-ordinates multilateral trade negotiations among member states
Operates a dispute settlement procedure for resolving trade disputes
Doha round of trade negotiations
The ‘development’ round, but…
Divergence of perspectives between developed and developing countries, especially on the issue of farm subsidies in rich countries
Multilateralism in crisis?
The WTO failed to meet expectations of the Doha Round
Seemingly unbridgeable divides in negotiations among developing, emerging and developed countries
The India-US conflict exemplified the troubled Doha Round: the US objected to India’s food subsidies
The WTO has prioritized trade liberalization, but other concerns, including societal goods and the environment, loom large in national concerns
WTO failures have left a vacuum: bilateral and other trade agreements (generally lopsided) continue to be negotiated
Overlapping spheres of trade agreements
Global and regional trade patterns
Most of the trade of European countries is with other European countries, but they are also major exporters to the world’s other regions
Asian countries’ trade is also largely intra-regional
North America is a major destination of Asian exports, but Asian countries’ imports are under 10% from North America
African countries are not as integrated in intra-regional trade as other world regions. Asian exports to Africa are increasing - China’s exports to Africa doubled in 2 years
Regional trade agreements
Ascending degrees of regional integration:
Free trade area – agreement to remove trade barriers among member states
Customs union – free trade area, plus a common set of trade rules for external trade of member states.
Common market – Free movement of goods, labour and capital among member states
Economic union – Higher level of integration, with unity of member states’ economic policies
Political union – Transfer of sovereignty to supranational institutions
Regional integration: Europe
The EU
The Single Market aimed to dismantle internal barriers by 1992, but many still exist
Economic union has been partial – the eurozone has common monetary policy, but not fiscal policy
European Free Trade Area (EFTA) – non-EU European countries
European Economic Area (EEA) – free trade area of the EU and EFTA
The Americas
The Andean Community – a free trade area
Mercosur – a common market, whose main members are Brazil and Argentina
The North American Free Trade Agreement (Nafta) – a free trade area (the US, Mexico and Canada)
Facilitates exports of manufactures from low-cost Mexico into the US
Concerns that Mexico and Canada are too dependent on the US market
Asia and Africa
A region of diverse economies and political systems
Association of South East Asian Nations (Asean) – free trade area
Asia-Pacific Economic Co-operation Group (Apec) – co-operative grouping
Less regional integration than in other world regions
Economic Community of West African States (Ecowas) – customs union
East African Community (EAC) – common market
Plurilateral agreements: the future?
Trans-Pacific Partnership (TPP)
Sponsored by the US, and includes ISDS
Takes in 12 countries, and includes many bilateral agreements under the TPP umbrella
Transatlantic Trade and Investment Partnership (TTIP)
Sponsored by the US, and includes ISDS
The US and the EU, encompassing all member states
Would include regulatory regimes, giving rise to European fears for EU protective legislation
The US has encountered objections in both TPP and TTIP negotiations
Challenges and responsibilities
The increasing importance of global companies in supply chains and trade
Profit orientation of MNEs vs government priorities in trading countries
Challenges of meeting human needs and societal goals
‘Resource curse’ in resource-rich developing countries: businesses and government insiders gain, but societies lose out
Challenge of channelling trade to meet sustainable development goals
Conclusions
The post-war period has seen strong growth in trade, now involving both developing and developed economies in all regions of the globe
Globalization has opened up inequalities in trade among countries
The WTO has sought to bring the benefits of trade liberalization to all countries, but this ideal has foundered: developing countries have lost ground to powerful trading interests
While multilateralism has faltered in recent years, trading powers such as the US and its corporate leaders have fostered plurilateral trade and investment agreements