GLOBAL TRADE
ARIZONA STATE UNIVERSITY
OMT 440 - INTERNATIONAL BUSINESS
WEEK 2
CHAPTER OBJECTIVES:
After studying this chapter, you are expected to be able to :
a)
Explaining classical trade theory
b)
Explaining modern trade theory
c)
Explain the theory of international investment
d)
Understanding foreign direct investment
e)
Explaining political economy and international trade
f)
Understand international trade policy
International trade has divided the world's labor, with developed countries producing
industrial products and developing countries supplying raw materials for developed countries'
industries. Another implication of international trade is characterized by the development of
multinational companies or MNCs (Multi National Company) in various fields
(manufacturing, transportation, telecommunications, food processing, services, energy, etc.).
Trade globalization is an opportunity in developing business and marketing for
companies that are able to compete, but it will also be a challenge for companies or countries
that do not have high competitiveness. Various MNC companies have expanded their wings
to other countries, in addition to making variations in their products and services and
company management. Global trade requires companies to be able to compete not only on
comparative advantages but must prioritize competitive advantages. The development of
international business that enters across countries, of course, does not happen as easily as it
seems, because many factors need to be considered to start an international business. This is
because international business will involve people across countries who will certainly vary in
their behavioral, cultural and religious patterns.
CLASSICAL TRADE THEORY
Classical Trade Theory is divided into several notions as mentioned below:
a) Mercantilism
This mercantilist theory argues that the only way for a country to become rich is to
export as much as possible and minimize imports. This large difference in exports will
become state income which is then converted into gold. The gold is proof that the more
gold a country has, the richer it is.
b) Adam Smith's Absolute Advantage
The Absolute Advantage theory is based more on real rather than monetary
quantities/variables so it is often known as the pure theory of international trade. pure in
the sense that this theory focuses on real variables such as the value of a good measured
by the amount of labor used to produce goods. The more labor used, the higher the value
of the good.
Modern Trade Theory:
Modern Trade Theory consists of:
a) Comparative Advantage of J.S. Mill and David Ricardo
Comparative advantage theory from J.S. mill and David Ricardo says that a country will
produce and then export goods that have the greatest comparative advantage and import
goods that have a comparative disadvantage.
b) Heckscher-Ohlin (H-O) Theory
The H-O theory explains some trade patterns well. Countries tend to export goods that
use relatively abundant production factors intensively. According to Heckscher-Ohlin, a
country will trade with other countries because the country has a comparative advantage,
namely superiority in technology and superiority in production factors.
INTERNATIONAL INVESTMENT THEORY:
International business activities cannot be separated from investment activities. As we
have discussed in the previous chapter, international business activities are mainly export-
import and investment. The literal meaning of investment is investment in the sense that the
capital owned by entrepreneurs is invested in productive activities that will produce returns.
In international investment, there are several kinds of theories that are usually applied,
namely:
a)
Ownership Advantages Theories. This theory emphasizes that asset-owning companies
that have domestic competitive advantages can use these advantages to penetrate foreign
markets through foreign investment (FDI).
b)
Internalization Theories. This theory explains that companies expand their business by
taking into account transaction costs. If transaction costs are greater domestically, then
production abroad is more profitable.
c)
Dunning Eclectic Theories. For companies to invest abroad, they must have several
advantages, namely unique ownership, internalization and unique location.
d)
Monopolistic Advantage Theory. Foreign direct investments made by firms in
oligopolistic industries have technical and other advantages over indigenous firms.
e)
Market Imperfections for Products and Factors of Production. The knowledge
advantage allows the investing company to produce a product that consumers like as
much as the local one, thereby controlling the selling price and outperforming the
indigenous company.
f)
Cross Investment. Overseas direct investment by oligopolistic companies in their
respective home countries as a defense measure.
g)
The Follow-The-Leader Theory (Knickboxer). One firm that can enter the market in the
oligopolistic nature of the market, then other firms will follow.
h)
International Product Life Cycle Theory. The product life cycle consists of an initial
period-growth period-peak period and saturation period. If a company's product has
reached saturation in the domestic market. The company can still look for opportunities
to sell in other countries where the market is still growing.
FOREIGN DIRECT INVESTMENT:
According to Krugman (1994), Foreign Direct Investment (FDI) is an international
capital flow in which companies from one country establish or expand their companies in
other countries. Therefore, there is not only a transfer of resources but also the imposition of
supervision on companies abroad. Law No. 1 of 1967 on Foreign Investment was issued to
attract foreign investment to develop the national economy. In Indonesia, the authority to
manage foreign investment lies with the Investment Coordinating Board (BKPM) in terms of
approving and licensing foreign direct investment.
The objectives of a foreign company conducting FDI are diverse, including :
a) Seeking resources
In terms of finding resources, a company that invests abroad aims to find resources. This
is because companies are always looking for the cheapest resources in producing goods
or services. Looking for cheap resources can indeed be done by making foreign direct
investment, where companies can acquire companies that own resources in the
destination country or by opening/creating subsidiaries.
b) Searching the market
Foreign direct investment can create new markets for a company. The company can
further expand its market. Foreign direct investment allows a company to sell its
products across countries, across regions, and even across continents.
c) Seeking strategic assets
Strategic assets are one of the objectives of foreign direct investment. Every company
that has strategic assets will certainly have higher competitiveness than its competitors.
This causes multinational companies to compete to control strategic assets through
foreign direct investment.
d) Seeking political security
Another purpose of a company making foreign direct investment is that the company
seeks political security. This cannot be separated from the political and legal
environment factors that are often closely related to a multinational company, where
every activity is always accompanied by the political interests of the country concerned.
The methods often used by foreign companies in making foreign direct investment are:
a)
Joint venture
b)
Mergers and Acquisitions with existing companies
c)
License
d)
Management Contract
There are several considerations in making foreign direct investment including:
a) Understand direct investment procedures
Direct investment procedures in this case mean that every company that makes foreign
direct investment must fully understand and implement the procedures set by policy
makers in the destination country, so that its investment activities are carried out in a legal
manner.
b) Creating an investment promotion strategy
Multinational companies that will invest directly abroad must be able to create an
investment promotion strategy, this is because the bigger the market that the company will
get, the greater the challenge from competitors.
c) Establish effective partnerships
In making foreign direct investment, multinational companies must establish very
effective partnerships as much as possible. Especially if the company conducts joint
venture activities, because in a joint venture there must be an effective partnership pattern,
so that there can be synergy between the parties.
d) Utilizing information technology
Information technology creates various conveniences in the conduct of international
business activities. All activities can be effective and efficient. Multinational companies
must be able to use information technology as much as possible to maintain competition
with competitors.
POLITICAL ECONOMY AND INTERNATIONAL TRADE:
International trade cannot be separated from the economic and political influences of
the countries involved. Trade can be an engine of growth for a country. A country whose
export activities are much higher than import activities, then it is certain that the country will
become a country with a high level of economic growth. A country's export-import policy is
often influenced not only by economic motives, but also by the political situation and
conditions in a country.
International trade pushes each country towards specialization in the production of
goods in which the country has a comparative advantage. A country that has many
comparative advantages with a stable political situation and conditions can certainly focus on
specialization so that international trade activities can run well.
Currently, there is a tendency that most developing countries have a high level of
dependence on other countries to meet the needs of their people. This indicates that most
developing countries are unable to focus on developing their comparative advantages and
participate in international trade. What is faced by developing countries is high import
activities rather than export activities, this is quite worrying because if there is no change in
terms of economic and political policies, then developing countries will only become a
market for developed countries which in the end, developing countries will never be able to
change their status to become developed countries.
INTERNATIONAL TRADE POLICY
A tariff is a charge that passes through the customs area. Meanwhile, goods entering
the country are subject to import duties.
With the imposition of large import duties on goods from abroad, it is intended to protect the
domestic industry so as to obtain state revenue. A common form of tariff policy is the
imposition of import taxes at a certain percentage of the price of imported goods:
a)
Export duties. Export duties are taxes/duties levied on goods being transported to another
country.
b)
Transito duty. Transito duty is a tax/duty levied on goods passing through a country's
borders with the final destination of the goods in another country.
c)
Import duties. Import duties are taxes/charges levied on goods entering a country.
d)
Import Ban. Import ban is a government policy to prohibit the entry of goods from
abroad in order to protect domestic production and increase domestic production.
Quotas or Import Restrictions. A quota is a government policy to limit goods coming in
from abroad. The purpose of this quota is:
a)
Prevent important items from being in other countries.
b)
Ensure the availability of goods in the country at a sufficient level of proportion.
c)
For production supervision and price control to achieve domestic price stability.
Subsidy. A subsidy is a government policy to help cover some of the production costs per
unit of production so that domestic producers can sell their goods more cheaply and compete
with imported goods.
Dumping. Dumping is a government policy of price discrimination where producers sell
goods abroad cheaper than at home.
Free Trade Policy. Free trade policy is a government policy to conduct free trade between
countries. Those who support free trade policies argue that free trade will be possible if each
country focuses on producing goods that have comparative advantages.
Political Autarchy. Political Autarchy is a trade policy with the aim of avoiding the
influence of other countries both political, economic and military influence so that this policy
is contrary to the principles of international trade which demands free trade.
SUMMARY:
Trade globalization is an opportunity in developing business and marketing for
companies that are able to compete, but it will also be a challenge for companies or countries
that do not have high competitiveness. Various MNC companies have expanded their wings
to other countries, in addition to making variations in their products and services and
company management.
Global trade requires companies to be able to compete not only on comparative
advantages but must prioritize competitive advantages. The development of international
business that enters across countries, of course, does not happen as easily as it is seen,
because many factors need to be considered to start an international business. This is because
international business will involve people across countries who will certainly vary in their
behavioral, cultural and religious patterns.
International business activities cannot be separated from investment activities. As we
have discussed in the previous chapter, international business activities are mainly export-
import and investment. The literal meaning of investment is investment in the sense that the
capital owned by entrepreneurs is invested in productive activities that will produce returns.
International trade cannot be separated from the economic and political influences on
the countries involved. Trade can be an engine of growth for a country. A country whose
export activities are much higher than import activities, then it is certain that the country will
become a country with a high level of economic growth. A country's export-import policy is
often influenced not only by economic motives, but also by the political situation and
conditions in a country.
INTERNATIONAL MONETARY SYSTEM:
(International Monetary System)
OBJECTIVES:
After studying this chapter, you are expected to be able to :
a)
Explain the history of the international monetary system
b)
Explaining the foreign exchange market
c)
Explain international capital markets
d)
Explain the mechanism of currency exchange rates
International business creates an international monetary system that must be
understood by all countries and companies involved in it. The history of this international
monetary system is very long, starting from the post-World War II era until now it is still
developing. This international monetary system regulates how financial transactions are
carried out in international business activities.
HISTORY OF THE INTERNATIONAL MONETARY SYSTEM:
The international monetary and financial system plays a central role in the global
political economy. Since the late 19th century, the early formation of this system went
through various transformations in response to changing political and economic conditions at
both domestic and international levels. The most dramatic change was the crisis in the
integration of the international monetary and international regime during the interwar years.
The second transformation occurred after World War II when the Bretton Wood
system was in operation. For in the 1970s, the period of change under the Bretton Wood
system saw a shift from the gold exchange standard to the US dollar and a commitment to
capital controls. These changes had important political consequences on who gets what, when
and how in the global political economy.
Since 1880 Britain, Germany, Japan and America have adopted the Gold standard
system. With the gold standard in place, the value of each currency in units of other
currencies can be easily determined so as to catalyze international trade. Initially US$ 1 was
valued at 23.22 grain of pure gold where 1 ounce of gold is equal to 480 grains of gold. In
other words, the price of 1 ounce of gold is US$20.67. The amount of currency required to
buy an ounce of gold is referred to as the pari value of gold.
The gold standard was destroyed when World War 1 broke out. Currencies were
practically set on the basis of gold or other currencies loosely. Some attempts to return to the
gold standard were made after World War 1 ended. Gold was only traded with central banks,
not privately. Currency rates were set on the basis of gold. After 1934 and after the second
world war, convertibility of currencies that could be exchanged (convertible) with other
currencies.
After that period came the period of fixed exchange rates. This period began with the
Bretton Woods agreement. Through this agreement, all countries set their currency exchange
rates based on gold, but were not required to fulfill the convertibility of their currencies in
gold. Member countries were required to keep their exchange rates within 1% (up or down)
of par, and were willing to intervene to maintain the rate. The IMF assists its member
countries in maintaining their currency exchange rates.
The pressure of speculation made the fixed exchange rate system untenable. World
financial markets were closed for several weeks in March 1973. When these markets opened,
currency rates were allowed to float to rates determined by market forces.
On July 22, 1944, an international monetary conference was held, known as The
Bretton Woods Conference, which was attended by 44 countries. The conference aimed to
develop a plan to create a monetary system. Two years after the conference, the IMF and
World Bank were established to oversee the system.
During the period 1944-1973 the dollar was a very important currency in international
payment traffic. The role of the dollar arose after World War II, because at that time there
was a shortage of dollars. European countries are in dire need of money / funds to restore
their economic situation. The only source was the United States, so dollars were in high
demand. Consequently, gold was displaced by the dollar. Because, besides having strong
purchasing power in America, reserves in the form of dollars will buy interest income. As the
dollar became more important, each member set the ratio of its currency to the dollar, which
could then be exchanged for gold if necessary.
DMI consists of 134 countries, among which 10 developed countries have a very
strong position in making decisions. Each member receives a quota, of which 25% must be
paid in gold and the remaining 75% in its currency. The size of the quota determines its
voting rights as well as the amount of loans that can be obtained from the DMI. The DMI's
first fund is naturally 25% gold and 75% various currencies of the member countries. Loans
are made in the currencies of other countries which must be exchanged for the currency of the
borrowing country.
Since 1973 the international monetary system has been a mixture of fixed and
variable exchange rates. The yen, Canadian dollar, French franc, and Swiss currency fluctuate
depending on supply and demand. Often the monetary authorities of these countries intervene
in the foreign exchange market to reduce excessive exchange rate fluctuations. When a
country experiences a deficit in its balance of payments, the foreign exchange rate tends to
rise. To prevent this, the Central Bank sells foreign exchange. Likewise, if there is a surplus
in the balance of payments, the central bank buys foreign exchange in the market to reduce
the decline in the exchange rate. Such a rate system is called a "managed or dirty" float, as
opposed to a "clean" float where the Central bank does not intervene in the foreign exchange
market at all.
Five European countries (West Germany, Belgium, Luxembourg, Sweden, Netherlan
and Norway) have separate arrangements. The exchange rate was fixed between them, but it
fluctuated jointly against the currencies of other countries. This kind of exchange rate system
(floating together) resulted in snake-like fluctuations, which came to be called "Snake like".
European countries and Japan have untied their currencies to the US dollar. As such,
it has become a floating currency. However, the dollar still plays an important role in
international payment traffic. Foreign payments, foreign exchange intervention policies by
Central Banks, and statistical records of the International Monetary Fund and the United
Nations are still based on the dollar.
FOREIGN EXCHANGE
According to Sutanto (2008) the foreign exchange market is a place or institution that
trades foreign currencies. Foreign exchange is organized by government banks, national
private banks, and foreign private banks that have become foreign exchange banks and
institutions that specialize their activities in foreign currency trading. Institutions that
specialize in foreign currency trading activities are called money changers.
In the international payment traffic, the one who needs foreign exchange is the
importer while the exporter is the recipient of foreign exchange. The price of foreign
exchange is determined by the supply and demand process that occurs through the market
mechanism. There are several terms about foreign exchange rates including:
a)
Buy Rate
The buying rate shows the buying price of foreign exchange when a bank/money
changer buys foreign exchange or when someone exchanges foreign exchange for
rupiah.
b)
Selling Rate
The selling rate shows the selling price of foreign exchange when a bank/money changer
sells foreign exchange or when someone exchanges rupiah for foreign exchange.
c)
Central Rate
The middle rate is the difference between the selling rate and the buying rate.
The functions of the foreign exchange exchange include :
a)
Transferring the purchasing power of money between countries
b)
Provision of credit for foreign trade
c)
Buying and selling foreign exchange
d)
Streamline international trade and international payments
Some of the benefits of the foreign exchange market are :
1. Promote and facilitate trade between countries
2. Facilitate payments between countries
3. Increase the country's foreign exchange reserves
4. Increase export and import activities between countries so as to activate the business
world.
5. Increase foreign exchange reserves which will facilitate national development
INTERNATIONAL CAPITAL MARKETS:
The capital market is a meeting place for those who have excess capital and those
who lack capital. The capital market consists of two types of markets, namely:
a)
The bond market is a market where companies can issue debt securities called bonds.
This bond market is an instrument when companies cannot obtain additional capital
through credit loans to banks.
b)
The stock market is a market where companies can sell their ownership shares and
investors can trade their ownership shares to other investors. A company can fulfill its
capital needs in the stock market by selling its ownership shares to others.
Initially most companies looked to domestic banks and capital markets to borrow
funds or to issue bonds or shares. However, companies are interested in increasing the returns
from capital markets outside their own country. There are many advantages to meeting
funding needs outside of one's own country.
This is the background when a company trades its shares in multiple countries
because not only are there more potential investors, but the company is also likely to be in a
market that has better opportunities than the domestic stock market.
Global capital markets often have little regulation which helps to lower the cost of capital. A
company can list its shares on large efficient markets such as the New York stock exchange
or the London stock exchange.
CURRENCY EXCHANGE RATES:
The exchange rate is an agreement known as the currency exchange rate for current or
future payments between two currencies of each country or region.
Exchange rate determination mechanisms can be categorized into several groups:
a)
Free float. Under this system, currency rates are allowed to float freely depending on
market forces. Several factors that affect the exchange rate, e.g. inflation, economic
growth, inflation will be used by the market in evaluating the country's currency rate. If
these variables change, or the appreciation of these variables changes, the currency rate
will change. A free float system is also referred to as a clean float.
b)
Managed float. The free float system has the disadvantage of high exchange rate
uncertainty. A managed float system, often referred to as a dirty float, is done through
active Central Bank intervention. The Central Bank will then intervene if the exchange
rate is outside the predetermined limits. Some forms of intervention are: (1) stabilizing
daily fluctuations. The Central Bank does this with the aim of maintaining exchange rate
stability so that exchange rate changes are quite regular; (2) delaying the exchange rate
(leaning against the wind). Through this method, the central bank intervenes with the
aim of preventing or reducing sharp short-term fluctuations caused by temporary events.
c)
Unofficial pegging. In this way the Central Bank counteracts market forces by fixing
(officially) the exchange rate of its currency.
d)
Specific Target Zone Agreement. Through this agreement, several countries agree to
jointly determine the exchange rate of their currencies within the exchange rate areaa
certain rate. If the exchange rate crosses the upper or lower limit, the Central Bank of the
country in question will intervene.
e)
Linked to other currencies. About 62 countries out of 162 IMF member countries link the
value of their currency to other currencies. Some link their currencies to those of
neighboring countries.
f)
Linked to other currency groups. About 21 countries link their currencies to other
currency basket. These currency baskets, groups, or portfolios usually consist of the
currencies of important trading partners. 19 countries link their currencies to their own
portfolios.
g)
Linked to a specific indicator. Two countries, Chile and Nicaragua, link their currencies
to certain indicators, such as the real effective exchange rate, a rate that incorporates
inflation against their important trading partners.
h)
Fixed exchange rate system. Under a fixed exchange rate system, the government or
Central Bank sets the exchange rate officially. Then the Central Bank will always
intervene actively to maintain the set exchange rate. If the official exchange rate is felt to
be out of line with the country's economic fundamentals, a devaluation or revaluation is
carried out. Ways that can be done besides devaluation are: foreign loans, austerity, price
and wage controls, restrictions on capital outflows.
SUMMARY
There is no absolute international monetary system in the world today. Each country
has its own system. Most people don't understand how unusual this system is. For thousands
of years countries have pegged their currencies to one of the precious metals (gold or silver)
or to another currency.
But in the last quarter century since the international monetary system (Bretton
Woods) collapsed, countries have adopted their own monetary systems, a phenomenon that
has no historical precedent in the cooperation between countries known as the international
monetary system. Economists recognize that the interdependence of international monetary
systems is supported by the fact that countries' balance of payments are interconnected. If one
country has a surplus balance of trade then other countries have a deficit balance of trade. So
a country moves towards surplus or deficit which automatically affects other countries. This
has an influence in the currency exchange rate system. In a world of n countries with n
currencies, there are n-1 independent exchange rates. Each country cannot set its own
exchange rate. There will be many fixed exchange rates between countries. There is one
degree of freedom, which allows the following an increase in what economists call the
redundancy problem. The rule of additional degrees of freedom to maintain price stability, or
in the case of the gold standard, to maintain or stabilize the price of gold.
PRACTICE QUESTIONS
1. What is the international monetary system?
2. Explain the weaknesses of the international monetary system?
3. Explain the currency exchange rate fixing system?
GROUP DISCUSSION:
Gold Standard Setting:
The Case of Gold Standard Setting and Its Impact on the Economy The impact of the
depreciation of the rupiah against the dollar was devastating. The Jakarta Composite Index
(JCI) slumped. The monetary authority's policy of implementing a tight money policy to stem
the weakening of the rupiah by raising interest rates forced loan interest rates to rise. As a
result, projects were stalled and a number of companies went out of business. The next
impact was massive layoffs. The price of basic food and other goods increased sharply,
making the people suffer even more (Yusanto, 2001:3).
A more recent event was the financial crisis that hit Argentina. Argentina's currency,
the Peso was devalued by more than 100% of the benchmark US Dollar. One of the main
reasons for this devaluation policy was the decision to stop pegging the peso to the US
Dollar, which the IMF deemed untenable. The failure of the government's strategy and the
ensuing chaos has affected the situation of other US countries (Fredericks, 2004: 149).
In this unstable and miserable monetary condition, speculators faced the opposite
situation. According to Stiglizt (2003:199) the heavy blow that caused Thailand's real estate
and stock markets to bubble was caused by hot speculative money flowing into the country.
In fact, this change in the direction of speculative capital was at the root of the excessive
movements in the exchange rate. According to Stiglizt (2003:199) one of the sources of profit
for speculators is money coming from governments supported by the IMF. For example,
when the IMF and the Brazilian government issued about 50 billion dollars to maintain the
exchange rate which was at an overvalued level at the end of 1998, the money seemed to
disappear into the wind. But in fact the money mostly flowed into the pockets of speculators.
Some speculators may have suffered losses while others However, in general, it is the
speculators who earn all the money that the government suffers. In fact, according to Stiglizt
(2003:199) it is the IMF that keeps the speculators in business. Based on the above
explanation, it is very natural that a number of people began to question the fundamental
factors that triggered the various crises. They began to look for alternative solutions that
could stabilize monetary and financial conditions both domestically and internationally. One
of the countries that responded strongly to the monetary sector instability was Russia. The
Russian government has realized the speculative nature of the money market and the
instability caused by standardizing the currency.
On July 10, 2001 The Bank of Russia, which is the Central Bank of Russia, circulated
a gold currency called Chervonet. Thus the gold currency became legal tender. It is hoped
that in the short term Russians will be willing to convert their savings from dollars into
Chervonets in addition to the Rubles currently in circulation. In the long run, Russia is also
expected to make major changes in international financial policy amidst the turmoil of many
countries trying to break away from the world financial system that pivots on the interests of
the Anglo-US nation (Frederick, 2004: 195).
Even at the Mastrich agreement in February 1992-in an attempt to create a single
currency by 1999-the European Central Bank, which was a fusion of the Central Banks of
European countries, attempted to collect 50 billion Euros in gold from all member countries
as reserves. This was also the case on January 1, 1999. The Supervisory Board of the
European Central Bank has stipulated that 15% of its basic reserves of 9.5 billion euros
should be in gold (Salim, 2004). The desire of some economists and government officials to
return to the gold standard is not without reason.
In addition to the negative impacts that have been caused by the flat money standard,
the motive was also triggered by historical evidence of the gold standard's ability to maintain
monetary stability for approximately 100 years until 1914 when World War I broke out.
During this period, the gold standard was able to realize domestic and international monetary
stability and was able to create peace and prosperity for a long period of time (Kimball,
2005).
Inflation, which became a serious problem for the monetary authorities in the flat
money standard regime, could be stabilized. This was because the regime had an
automatically running monetary regime that could regulates the movement of money supply
in a country and is disciplined by the monetary authorities of each country. Thus the main
factor that triggers inflation in substitute money can be fully controlled (Herbener, 2002).
This was also recognized by Frederik Hayek (1976) as cited by Block (1999) that
"Significantly, this only happened in the heyday of the modern industrial system and during
the gold standard which lasted about two hundred years. At that time prices at the end of the
regime did not change. They are the same as they were at the beginning." (Hayek, 1976:16)
"Except for the two hundred years when the gold standard was in place. Moreover,
governments throughout history have used their exclusive power to cheat and steal the
people's wealth." (Hayek, 1976: 15) In addition, the existence of a fixed exchange rate
between a country's currency and that of other countries makes the flow of trade and
investment grow rapidly.
This is as stated by Grenspan (1966) who was also cited by Block (1999) that when
the gold standard was accepted as a medium of exchange by most countries, the unlimited
free international gold standard helped accelerate the division of labor and the expansion of
international trade.
Although the means of exchange (such as dollars, pounds, francs, etc.) differed from
country to country and were all fixed in gold, during that time there were no barriers to trade
or movement of capital." However, it must be recognized that the demographic, economic,
political and cultural conditions and technological developments of today's society have
undergone significant changes compared to those times. But at least there are some
fundamental factors that can be examined in the monetary standard in creating monetary and
financial stability compared to other monetary standards including the current paper currency
standard dominated by the Dollar.
INTERNATIONAL COOPERATION BETWEEN COUNTRIES
(International Cooperation Among Countries)
CHAPTER OBJECTIVES:
After studying this chapter, you are expected to be able to :
a)
Explaining the General agreement on Tariff and Trade.
b)
Explaining the World Trade Organization.
c)
Understand regional integration.
d)
Understand about the European Union
e)
Explain about the ASEAN Economic Community.
International business will never be separated from international cooperation activities
between countries. This happens because international business activities without cooperation
between countries will have many obstacles. International business activities are not only
business to business activities but also must involve government to government, especially
those related to policies that must be taken by the government regarding investment and
others.
GENERAL AGREEMENT ON TARIFFS AND TRADE
Its original purpose was to create a third institution to handle the trade cooperation
side of the international economy joining the two "Bretton Woods" institutions namely, the
World Bank and the International Monetary Fund. More than 50 countries participated in the
negotiations to create the International Trade Organization (ITO) as a specialized agency of
the United Nations. The draft ITO Charter was ambitious. It goes beyond the discipline of
world trade, to include rules on labor, commodity agreements, restrictive business practices,
international investment, and services.
Even before the talks concluded, 23 of the 50 participants decided in 1946 to
negotiate for reduced and binding customs tariffs. With the Second World War just over, they
wanted to give an early push to trade liberalization, and begin to repair the legacy of
protectionist measures that remained in place from the early 1930s.
The first round of negotiations resulted in 45,000 tariff concessions affecting $10
billion of trade, about a fifth of the world total. These 23 countries also agreed that they
should accept some regulations trade draft ITO Charter. The combined package of trade rules
and tariff concessions became known as GATT. It entered into force in January 1948, while
the ITO Charter was still being negotiated. 23 became founding members of GATT.
After the first round of negotiations in Geneva - Switzerland, GATT was enhanced
with 7 more rounds of negotiations. Finally, the 8th round named Uruguay Round created the
WTO.
WORLD TRADE ORGANIZATION
The World Trade Organization (WTO) is an international organization that sets the
rules for international trade through consensus among its member countries. It also settles
disputes between members, who are all signatories to a set of trade agreements. The WTO
states that its goal is to increase international trade by promoting lower trade barriers and
providing a platform for trade negotiations and their business.
WTO discussions should follow the basic principles of trade, namely:
a)
A trading system should be free from discrimination in the sense that one country
cannot privilege certain trading partners over others in the system, nor can it
discriminate against foreign products and services.
b)
A trading system should tend towards more freedom, i.e. towards fewer trade barriers
(Tariffs and non-tariff barriers).
c)
A trading system should be predictable, with foreign companies and governments
assured that trade barriers will not be raised arbitrarily and that markets will remain
open.
d)
A trading system should tend towards greater competition.
e)
A trading system should be more accommodating to developing countries, giving them
more time to adjust, greater flexibility, and more privilege.
The World Trade Organization pays particular attention to the following areas:
a)
Agriculture
b)
Services
c)
Non-farm
d)
Intellectual Property Rights
e)
Investment, competition, policy, government procurement and trade facilitation Trade
f)
Trading Rules
g)
Settlement Dispute
h)
Trade and the environment
i)
Trade, finance and debt
j)
Trade and technology transfer
k)
Electronic commerce
The role of the WTO in trade in this era of globalization includes the following:
a)
support the implementation, regulation, and administration of agreements that have been
reached to realize the objectives of these agreements,
b)
as a forum for Member States to negotiate on the agreements reached and their annexes,
including decisions determined later in the Ministerial Negotiations,
c)
regulates the implementation of the provisions on trade dispute settlement;
d)
regulates the mechanism for reviewing policies in the field of trade.
e)
creating a framework for global economic policy-making in cooperation with the
International Monetary Fund (IMF) and World Bank, and affiliated agencies.
REGIONAL INTEGRATION:
Regional economic integration is an agreement between countries in a geographical
area to reduce to eliminate tariff and non-tariff barriers to goods and services and production
factors. The growth of regional economic integration is driven by :
a)
Economic potential is maximized so that it has better competitiveness.
b)
Political potential especially for small but rich countries.
c)
Conflict resolution.
To carry out a regional economic integration, there must be a condition called the
precondition of integration, namely:
a)
Social assimilation
b)
Similarities
c)
Mutual benefits
d)
Relatively low cost
e)
Close relationship with the past
f)
External influences
In an economic integration there is a so-called level of economic integration, namely:
a)
Free Trade Area d) Economic Union
b)
Custom Union e) Political Union
c)
Common Marke
EU
According to Hill (2014), the European Union is the result of two political factors,
namely the destruction of Western Europe and the desire of Europeans to maintain their own
political and economic stage in the world. In addition, many Europeans realized the potential
economic benefits of closer economic integration of the European Union countries.
Attempts to unify European nations predate the formation of modern states; they have
occurred several times in European history. Three thousand years ago, Europe was dominated
by the Celts, and later conquered and ruled by the Mediterranean-centered Roman Empire.
The beginning of this unification was created by force. The Franks Empire of Charlemagne
and the Holy Empire of Rome united vast territories under loose administration for several
hundred years. The later customs union under Napoleon Bonaparte in the 1800s, and the
conquest in the 1940s by Nazi Germany were only temporary.
Due to the collection of European languages and cultures, these unification attempts
usually involve unwilling countries, creating instability. One attempt at peaceful unification
through cooperation and equality of members was made by pacifist Victor Hugo in 1851.
After World War I and World War II, the desire to establish a European Union intensified,
driven by the desire to rebuild Europe and eliminate the possibility of another war. Hence, the
European Coal and Steel Community was formed by Germany, France, Italy, and the
Benelux countries. This was brought about by the Treaty of Paris (1951), signed in April
1951 and commenced in July 1952.
After that, the European Economic Community was established by the Treaty of
Rome in 1957 and implemented on January 1, 1958. Later the community was transformed
into the European Community which is the 'first pillar' of the European Union. The EU has
evolved from a trade body to an economic and political cooperation.
From its name change from "European Economic Community" to "European
Community" to "European Union", the organization has changed from an economic union to
a political union. This trend is characterized by the increasing number of policies within the
EU.
This picture of increasing concentration is offset by two factors, namely:
First, some member states have some strong domestic traditions of regional governance. This
led to an increased focus on European regional and territorial policy. A Committee of the
Regions was established as part of the Maastricht Treaty.
Second, EU policy covers a number of different areas of cooperation:
a)
Autonomous decision-making: Member States have granted the European Commission the
power to issue decisions in certain areas such as competition law, State Aid controls and
liberalization.
b)
Harmonization: the laws of member states are harmonized through the EU legislative
process, which involves the European Commission, the European Parliament and the
Council of the European Union. As a result, EU law is increasingly present in the systems
of the member states.
c)
Co-operation: member states, meeting as the Council of the European Union agree to
cooperate and coordinate their domestic policies.
Tensions between the EU and national (or sub-national) competences have persisted
throughout the development of the European Union. All prospective member states must
enact legislation to harmonize with the common European legal framework, known as the
acquis communautaire.
ASEAN ECONOMIC COMMUNITY:
The Association of Southeast Asian Nations (ASEAN) is an organization of countries
in the Southeast Asian region founded in Bangkok, Thailand, on 8 August 1967 based on the
Bangkok Declaration by Indonesia, Malaysia, the Philippines, Singapore, and Thailand.
For more than four decades ASEAN has undergone many positive and significant
changes and developments towards a new stage that is more integrative and forward-looking
with the establishment of the ASEAN Community in 2015. This is strengthened by the
ratification of the ASEAN Charter, which will specifically serve as the legal basis and
foundation of ASEAN's identity going forward.
The establishment of the ASEAN Community began with the commitment of ASEAN
leaders with the signing of ASEAN Vision 2020 in Kuala Lumpur in 1997 which envisioned
ASEAN as a forward-looking community, living in an environment of peace, stability and
prosperity, and united by partnership.
The determination to form the ASEAN Community was then reaffirmed at the 9th
ASEAN Summit in Bali in 2003 with the signing of the ASEAN Concord II. ASEAN
Concord II affirms that ASEAN will become a safe, peaceful, stable and prosperous
community by 2020.
In fact, at the 12th ASEAN Summit in Cebu, Philippines, in January 2007, the
commitment to realize the ASEAN Community was accelerated from 2020 to 2015 with the
signing of the "Cebu Declaration on the Acceleration of the Establishment of an ASEAN
Community by 2015". The purpose of the establishment of the ASEAN Community is to
further strengthen ASEAN integration in the face of developments in the international
political constellation. ASEAN fully realizes that ASEAN needs to adjust its perspective in
order to be more open in dealing with internal and external problems.
ASEAN countries proclaimed the formation of the ASEAN Community, which consists of
three pillars:
a)
ASEAN Security Community (ASC),
b)
ASEAN Economic Community (AEC), and
c)
ASEAN Socio-Cultural Community (ASCC).
The three supporting pillars will be the new paradigm that will move ASEAN cooperation
towards a new, more binding community and identity.
The ASEAN Economic Community 2015 will be directed towards the establishment of
a regional economic integration by reducing trade transaction costs, improving trade and
business facilities, and increasing the competitiveness of the MSME sector. The AEC 2015
aims to create a single market and production base that is stable, prosperous, highly
competitive, and economically integrated with effective regulations for trade and investment,
in which there is a free flow of traffic in goods, services, investment, and capital as well as
facilitated free movement of businesses and labor. The 2015 AEC implementation will focus
on 12 priority sectors, consisting of seven goods sectors (agricultural industry, electronic
equipment, automotive, fisheries, rubber-based industry, wood-based industry, and textiles)
and five services sectors (air transportation, healthcare, tourism, logistics, and information
technology industry or e-ASEAN).
SUMMARY
International business will never be separated from international cooperation activities
between countries. This happens because international business activities without cooperation
between countries will have many obstacles. International business activities are not only
business to business activities but also must involve government to government, especially
those related to policies that must be taken by the government regarding investment and
others.
The World Trade Organization (WTO) is an international organization that sets the
rules for international trade through consensus amongst its member countries. It also resolves
disputes between members, who are all signatories to a set of trade agreements. The WTO
states that its objective is to increase international trade by promoting lower trade barriers and
providing a platform for trade negotiations and their business.
Regional economic integration is an agreement between countries in a geographical
area to reduce to eliminate tariff and non-tariff barriers to goods and services and production
factors. The growth of regional economic integration is driven by :
1. Economic potential is maximized so that it has better competitiveness.
2. Political potential especially for small but rich countries.
3. Conflict resolution.
According to Hill (2014), the European Union is the result of two political factors,
namely the destruction of Western Europe and the desire of Europeans to maintain their own
political and economic stage in the world. In addition, many Europeans realized the potential
economic benefits of closer economic integration of the European Union countries.
PRACTICE QUESTIONS
1. Explain the background of international cooperation between countries?
2. Explain the background of the formation of GATT?
3. Explain what are the benefits of the World Trade Organization (WTO)?
4. Describe the ASEAN Economic Community?
GROUP DISCUSSION
JAKARTA, KOMPAS.com - Chairman of the Indonesian Chamber of Commerce
(Kadin) Suryo Bambang Sulisto assessed that the implementation of the ASEAN Free Trade
Area (AFTA) could have a negative impact on the Indonesian economy. This is because
Indonesia's strategic industry is still inferior to foreigners.
"The implementation of AFTA does not have a positive impact. It threatens many of
our strategic industries," Suryo said in a press conference on Kadin's Economic Projections
2013 at Grand Sahid Hotel Jakarta, Tuesday (11/12/2012).
Suryo pointed out that foreign franchise businesses have grown significantly. This has
impacted traditional businesses. Luckily, the Ministry of Trade has implemented new rules on
franchising that support local entrepreneurs to compete. "For this regulation, we support it.
So that national entrepreneurs can also enjoy the franchise industry," he added.
Kadin notes that the trade performance of industrial products in 2007-2011 was in
deficit, except for India. Import growth was 2-3 times higher than export growth. With Japan,
Indonesia's import growth reached 31.2 percent. However, Indonesia's export growth was
only 7.07 percent. With China, import growth is more than 300 percent, so the trade deficit is
getting bigger.
"In the case of free trade, Indonesia is on the losing side, victimized by industrial
sector entrepreneurs. Indeed, trade conditions between countries and regions are different, but
learning from these cases the government
