Chapter 05,

Intenational
Business
International Trade Policies and
Institutions

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 • Discuss the role of the major
transnational institutions, regional
institutions and FTAs that affect world
trade.
Learning • Evaluate the comparative trade
objectives position of major economies.
• Understand policy responses to trade
problems.
• Discuss the strategic outlook for trade
and investment policies

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 • Trade policies consist of either taxes or
subsidies, quantitative restrictions or
encouragements, on either imported or
exported goods, services and assets.
• Tariffs
Tools for • Import Quotas
trade • Voluntary Export Restraints (VERs)

policy • Export Taxes

• Export Subsidies
• Voluntary Import Expansions (VIEs)
• Other Trade Policies

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Tariffs

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Subsidy
• A subsidy is a benefit given to an individual,
business, or institution, usually by the
government.
• It can be direct (such as cash payments) or
indirect (such as tax breaks).
• The subsidy is typically given to remove
some type of burden, and it is often
considered to be in the overall interest of
the public, given to promote a social good
or an economic policy.

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Quotas
• A quota is a government-imposed trade restriction that
limits the number or monetary value of goods that a
country can import or export during a particular period.
• Countries use quotas in international trade to help
regulate the trade volume between them and other
countries.
• Countries sometimes impose quotas on specific products
to reduce imports and increase domestic production.
• In theory, quotas boost domestic production by
restricting foreign competition.
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 • Local content requirements (LCRs) are one
of several economic instruments used by
governments to protect infant domestic
industries or to generate employment.
Local content • For example, to be sold as “Swiss-made,” the
requirements watch must be assembled, inspected, and
developed in Switzerland.
(LCRs) • In addition to that, 60% of all costs must be
incurred in Switzerland.
• Finally, the movement must be made in
Switzerland according to Swiss Law.

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Standardization
• The government of a country may require all foreign products to
adhere to certain guidelines.
• For instance, the UK Government may demand that all imported
shoes include a certain proportion of leather.
• Standardization measures tend to reduce foreign products in the
market.

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Purposes of protectionism
• A protectionist trade policy allows the government of a country
-to promote domestic producers,
-to boost the domestic production of goods and services
-to limit foreign goods and services in the marketplace.
• Although domestic producers are better off, domestic consumers are
worse off as a result of protectionist policies, as they may have to
pay higher prices for somewhat inferior goods or services.
• Protectionist policies, therefore, tend to be very popular with
businesses and very unpopular with consumers.

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 • The theory of comparative advantage
• Reducing tariff barriers leads to trade
creation
• Increased exports
Benefits of • Economies of scale
free trade • Increased competition
• Trade is an engine of growth
• Make use of surplus raw materials
• Tariffs may encourage inefficiency

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 Economies of Scale

• CONSTANT RETURNS TO SCALE (CRS)

» doubling of all inputs doubles output
• INCREASING RETURNS TO SCALE (IRS)
» doubling of all inputs MORE than doubles output
• DECREASING RETURNS TO SCALE (DRS)
» doubling of all inputs DOESN’T QUITE double
output
Slide 11
 • Foreign direct investment (FDI) is an ownership
stake in a foreign company or project made by an
investor, company, or government from another
country.
What Is a • Generally, the term is used to describe a business
Foreign decision to acquire a substantial stake in a
foreign business or to buy it outright to expand
Direct operations to a new region.
Investment • The term is usually not used to describe a stock
investment in a foreign company alone.
(FDI)? • FDI is a key element in international economic
integration because it creates stable and long-
lasting links between economies.

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Examples of FDI
• Foreign direct investments may involve mergers, acquisitions, or
partnerships in retail, services, logistics, or manufacturing.
• They indicate a multinational strategy for company growth.
• Foreign direct investment (FDI) is a method of business expansion—
it involves international mergers, acquisitions and the development
of new facilities outside geographical boundaries.

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More Examples of FDI
• Foreign direct investments may
involve mergers, acquisitions, or
partnerships in retail, services,
logistics, or manufacturing.
• They indicate a multinational
strategy for company growth.

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 o Foreign direct investments are
commonly categorized as-
Types of • Horizontal,
FDI • Vertical, or
• Conglomerate.

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A Horizontal FDI
• With a horizontal FDI,
- A company establishes the same
type of business operation in a
foreign country as it operates in its
home country.
• A U.S. based cellphone provider
buying a chain of phone stores in
China is an example.

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 • In a vertical FDI, a business acquires a
complementary business in another
country.
Vertical
• For example, a U.S. manufacturer
FDI might acquire an interest in a foreign
company that supplies it with the raw
materials it needs.

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 • In a conglomerate FDI, a company invests
in a foreign business that is unrelated to its
core business.
Conglomerate • Because the investing company has no prior
FDI experience in the foreign company’s area of
expertise, this often takes the form of a joint
venture.

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 • The World Trade Organization (WTO) is
the only global international organization
dealing with the rules of trade between
Transnational nations.
institutions • At its heart are the WTO agreements,
negotiated and signed by the bulk of the
affecting world world’s trading nations and ratified in their
trade: WTO parliaments.
• The goal is to help producers of goods and
services, exporters, and importers conduct
their business.

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 • Regional economic integration has enabled
countries to focus on issues that are relevant
to their stage of development as well as
encourage trade between neighbours.
Regional • There are four main types of regional
economic integration.
Economic • Free trade area: Member countries remove
Integration all barriers to trade between themselves and
are free to independently determine trade
policies with nonmember nations.
• An example is the North American Free
Trade Agreement (NAFTA).

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Regional Economic Integration
• Customs union: This type provides for economic cooperation as in a
free-trade zone. Barriers to trade are removed between member
countries. The primary difference from the free trade area is that
members agree to treat trade with nonmember countries similarly.
• Common market. Trade barriers are removed, as are any
restrictions on the movement of labour and capital between member
countries. Like customs unions, there is a common trade policy for
trade with nonmember nations. The primary advantage to workers is
that they no longer need a visa or work permit to work in another
member country of a common market. An example is the Common
Market for Eastern and Southern Africa (COMESA)
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Regional Economic Integration

Economic union: This type of union is created when

countries enter into an economic agreement to remove
barriers to trade and adopt common economic policies.
An example is the European Union (EU).

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European Union
• European Union (EU), international organization comprising 27
European countries and governing common economic, social, and
security policies.
• Originally confined to western Europe, the EU undertook a robust
expansion into central and eastern Europe in the early 21st century.
• The EU’s members are Austria, Belgium, Bulgaria, Croatia, Cyprus,
the Czech Republic, Denmark, Estonia, Finland, France, Germany,
Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg,
Malta, the Netherlands, Poland, Portugal, Romania, Slovakia,
Slovenia, Spain, and Sweden.
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Asia-Pacific Economic Cooperation
• This is an inter-governmental forum for 21 member economies in the
Pacific Rim that promotes free trade throughout the Asia-Pacific
region.
• APEC started in 1989 in response to the growing interdependence
of Asia-Pacific economies and the advent of regional trade blocs in
other parts of the world; it aimed to establish new markets for
agricultural products and raw materials beyond Europe.

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Association of Southeast Asian Nations
(ASEAN)
• It is a political and economic union of 10 member states in Southeast
Asia, which promotes intergovernmental cooperation and facilitates
economic, political, security, military, educational, and sociocultural
integration between its members and countries in the Asia-Pacific.
• ASEAN's primary objective was to accelerate economic growth and
through that social progress and cultural development.
• A secondary objective was to promote regional peace and stability
based on the rule of law and the principles of the UN Charter.

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North American Free Trade Agreement
• NAFTA: It was a claimed free trade agreement between the United
States , Canada and Mexico .
• The agreement was implemented on 1 January 1994 , and was an
extension of the previous FTA free trade agreement between the
United States and Canada from 1989.
• President Donald Trump initiated renegotiation of the agreement
after he came to power in 2017, and as of July 1, 2020, the agreement
was replaced by the United States–Mexico–Canada Agreement .

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 • SAFTA is the free trade arrangement of the
South Asian Association for Regional
Cooperation (SAARC).
• The agreement came into force in 2006,
South Asian succeeding the 1993 SAARC Preferential
Trading Arrangement. SAFTA signatory
Free Trade countries are Afghanistan, Bangladesh, Bhutan,
India, Maldives, Nepal, Pakistan and Sri
Area Lanka.
Accord • SAFTA recognizes the need for special and
differential treatment for LDCs in its preamble.
• Market access: LDCs benefit from smaller
sensitive lists in some of the SAFTA members
and less stringent rules of origin.
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