Global Trade and Investment

Course: MBASubject: GLOBAL BUSINESS ENVIRONMENT

Unit: 3

GENERAL AGREEMENT ON TARIFF AND TRADEAnd

WORLD TRADE ORGANISATION

BACKGROUND

PRINCIPLES ADOPTED BY GATT

Between 1947 and the last year of GATT there were 8 rounds of negotiations between the participating countries.

The first 6 rounds were related to curtailing tariff rates. 7th round included the non tariff obstacles.

The 8th round was entirely different from the previous rounds because it included a number of new subjects for consideration. This 8th round was

known as “URUGUAY ROUND”.

The discussions at this round only gave birth to WORLD TRADE ORGANISATION (WTO).

ROUNDS OF GATT NEGOTIATION

Following the UR agreement, GATT was converted from a provisional agreement into a formal international

organization called World Trade Organization (WTO), with effect from January 1, 1995

FROM GATT TO WTO

World Trade Organization (WTO)• The World Trade Organization (WTO) deals with the global rules of

trade between nations. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible.

• WTO is an organisation for liberalising trade, a forum for governments to negotiate trade agreements and a place for them to settle trade disputes

• At the heart of the system — known as the multilateral trading system — are the WTO’s agreements, negotiated and signed by a large majority of the world’s trading nations, and ratified in their parliaments.

• The WTO has larger membership than GATT, with the numbers being 153. India is one of the founder members of GATT.

Functions of WTO:

WTO is based in Geneva, Switzerland. Its functions are:

Administering the multilateral trade agreements which together make up the WTO

Acting as a forum for multilateral trade negotiations

Seeking to resolve trade disputesWTO is not a “Free trade” institution. It permits

tariffs and other forms of protection but only in limited circumstances.

Principles of WTO• Non discrimination• Free Trade: Promote free trade between nations

through negotiations. • Stability in the trading system: Member countries

are committed not to raise tariff and non tariffs barriers arbitrarily.

• Promotion of Fair Competition: WTO provides for transparent, fair and undistorted competition.

• It discourages unfair competitive practices such as export subsidies and dumping.

TRIPS (Trade Related Intellectual Property Rights Agreement)

• The agreement requires member countries to provide patent protection to all products or processes in all fields. The protection is granted subject to the following three conditions:– The product or process is a new one.– It contains an inventive step.– It is capable of industrial application for 20 years

from the grant of the patent

TRIPS (Trade Related Intellectual Property Rights Agreement)

• TRIPS agreement covers the following seven intellectual properties:– Patents– Copyright and other related Rights– Geographical Indications– Industrial Designs– Trade marks– Layout design of integrated circuits– Undisclosed information including trade secrets

GATS (General Agreement on Trade in Services)The GATS agreement covers four modes of supply for the delivery of services in cross-border trade:

Criteria Supplier Presence

Mode 1: Cross-border supply

Service delivered within the territory of the Member, from the territory of another Member. Eg: transborder data flows

Mode 2: Consumption abroad

Service delivered outside the territory of the Member, in the territory of another Member, to a service consumer of the Member. Eg : Tourism

Service supplier not present within the territory of the member

Mode 3: Commercial presence

Service delivered within the territory of the Member, through the commercial presence of the supplier (provision of services abroad through FDI or representative offices).

Mode 4: Presence of a natural person

Service delivered within the territory of the Member, with supplier present as a natural person (entry and temporary stay of foreign consultants)

Service supplier present within the territory of the Member

TRIMS (Trade Related Investment Measures)

• TRIMS refers to certain conditions or restrictions imposed by a government in respect of foreign investment in the country.

• In the late 1980's, there was a significant increase in foreign direct investment throughout the world.

• TRIMS are widely employed by developing countries. The Agreement on TRIMs provides that no contracting party shall apply any TRIM which is inconsistent with the WTO articles

Anti Dumping Measures:

• The WTO Agreement provides clarity in the method of determining that a product is dumped.

• A product is regarded as dumped when its export price is less than the normal price in the exporting country or its cost of production plus a reasonable amount of administrative, selling and any other costs.

• Anti-dumping duties are to be imposed on goods that are deemed to be dumped and causing injury to producers of competing products in the importing country. These duties are equal to the difference between the goods’ export price and their normal value, if dumping causes injury.

• Countervailing measures - Action taken by the importing country, usually in the form of increased duties to offset subsidies given to producers or exporters in the exporting country.

Evaluation of WTO

• The WTO members now account for over 97% of the international trade indicating the potential of bringing about an orderly development of international trade.

Benefits of WTO:• GATT / WTO has made significant achievements in

reducing tariff and non tariff barriers to trade. Developing countries too have been benefiting significantly.

• Liberalization of investments has been fostering economic growth of a number of countries.

• It has a system in place to settle trade disputes between nations.

• It has a mechanism to deal with violation of trade agreements.

Drawbacks:• Negotiations and decision making in the WTO

are dominated by the developed countries.

• Many developing countries do not have the financial and knowledge resources to effectively participate in WTO discussions and negotiations.

• Due to the dependence of developing countries on the developed ones, the developed countries are able to resort to arms twisting tactics.

Tariff: A tariff is a tax. It adds to the cost of imported goods and is one of several trade policies that a country can enact.

Non-tariff barriers to trade (NTBs) are trade barriers that restrict imports but are not in the usual form of a tariff. Some common examples of NTB's are anti- dumping measures and countervailing duties.

sanitary and phytosanitary measures (SPS): • SPS measures refer to any measure, procedure, requirement,

or regulation, taken by governments to protect human, animal, or plant life or health from the risks arising from the spread of pests, diseases, disease causing organisms, or from ‑additives, toxins, or contaminants found in food, beverages, or feedstuffs.

• Specific Tariffs : A fixed fee levied on one unit of an imported good is referred to as a specific tariff. For example, a country could levy a $15 tariff on each pair of shoes imported, but levy a $300 tariff on each computer imported. Ad Valorem Tariffs this type of tariff is levied on a good based on a percentage of that good's value. An example of an ad valorem tariff would be a 15% tariff levied by Japan on U.S. automobiles. Import Quotas : An import quota is a restriction placed on the amount of a particular good that can be imported.

• free trade area : Trade within the group is duty free but members set their own tariffs on imports from non-members (e.g. NAFTA).

The International

Monetary System

Introduction

The international monetary system refers to the institutional arrangements that countries adopt to govern exchange rates

Introduction

International monetary systems are sets of internationally agreed rules, conventions and supporting institutions that facilitate international trade, cross border investment and generally the reallocation of capital between nation states

Introduction

It addresses to solve the problems relating to international trade:

a. Liquidityb. Adjustmentc. Stability

The problem of Liquidity

The problem of liquidity existed even in the domestic transactions through barter

system Barter system was replaced by precious metals as a medium of exchange and store

of value Gold standard system of international payments came into existence

The Gold Standard

The first modern international monetary system was the gold standard

Put in effect in 1850Participants – UK,

France, Germany & USA

USAJapan

Gold

Trade

Gold Standard- I ( 1876-1913)

● In this system, each currency was linked to a weight of gold

● Under gold standard, each country had to establish the rate at which its currency could be converted to a weight of goldE.g. $ 20.67/ ounce ; Pound 4.247/ once

Gold Standard- I ( 1876-1913)

● Most of the countries used to declare par value of their currency in terms of gold

● The problem was every country needed to maintain adequate reserves of gold in order to back its currency

The Gold Standard

● After World War I, the exchange rates were allowed to fluctuate

● Since gold was convertible into currencies of the major developed countries, central banks of different countries either held gold or currencies of these developed countries

The System of Bretton Woods ( 1944-71)

In July, 1944, 44 countries met in Bretton Woods, New Hampshire, USA – a new International Monetary System was created

John Maynard Keynes of Britain and Harry Dexter White of USA were the key movers

The Bretton Woods Agreement

Creation of International Monetary Fund (IMF) to promote consultations and collaboration on international monetary problems and countries with deficit balance of payments Establish a par value of currency with approval of IMF Maintain exchange rate for its currency within one percent of declared par value

The Bretton Woods Agreement

Each member to pay a quota into IMF pool – one quarter in gold and the rest in their own currency The pool to be used for lending Dollar was to be convertible to gold till international instrument was introduced International Bank for Reconstruction and Development (IBRD) was created to rehabilitate war-torn countries and help developing countries

The System of Bretton Woods ( 1944-71)

So in effect this was a gold – dollar exchange standard ( $35/ounce)- known as fixed

exchange rate system or adjustable peg Devaluation could not be resorted arbitrarily When BOP problem became structural i.e. repetitive, devaluation upto ten percent was permitted by IMF Thus each currency was tied to dollar directly or indirectly

The end of the Bretton Woods System (1972–81)

The system dissolved between 1968 and 1973

By March 1973, the major currencies began to float against each other

The end of the Bretton Woods System (1972–81)

IMF members have been free to choose anyform of exchange arrangement they wish(except pegging their currency to gold):

Allowing the currency to float freely Pegging it to another currency or a basket of currencies Adopting the currency of another country, participating in a currency bloc, or Forming part of a monetary union

Exchange Systems after 1973

• Exchange Rate systems are classified on the basis of the flexibility that the monetary authorities show towards fluctuations in the exchange rates and are divided into two categories:

1. Systems with a fixed exchange rate ( “fixed peg” or “hard peg”) and

2. Systems with a flexible exchange rate ( “Floating” systems)

Exchange Systems after 1973

• But as usual, between these two extreme positions there exists also an intermediate range of different systems with limited flexibility, usually referred to as “soft pegs”

Exchange Rates Since 1973

• Since 1973, exchange rates have become more volatile and less predictable than they were between 1945 and 1973, due to:

Oil crisis -1971 Loss of confidence in the dollar - 1977-78 Oil crisis – 1979, OPEC increases price of oil Unexpected rise in the dollar - 1980-85 Rapid fall of the dollar - 1985-87 and 1993-95 Partial collapse of European Monetary System – 1992 Asian currency crisis - 1997

Exchange Rates Since 1973

● The merits of each continue to be debated

● There is no agreement as to which system is better

● Many countries today are disappointed with the floating exchange rate system

Foreign Exchange Market

WHAT IS FOREIGN EXCHANGE

Foreign exchange is the mechanism by which the currency of one country gets converted into the currency of another country.

The conversion of currency is done by the banks who deal in foreign exchange. These banks maintain stocks of one currencies in the form of balances with banks

Operation of foreign exchange market:

Foreign exchange market operates either as:- Spot Market: (Current Market)Spot market for foreign exchange is that market which handles only spot transaction or current transactions.  Principle characteristics:- Spot Market is of daily nature. It does not trade in future deliveries. Spot rate of exchange is that rate which happens to prevail at the time when transactions are incurred.

 

Forward Market: Forward Market for foreign exchange is that market which handles such transaction of foreign exchange as are meant for future delivery.  Principles Characteristics:- It only caters to forward transaction. It determines forward exchange rate at which forward transaction are to be honored.

Exchange Rate

►Fixed Exchange Rate SystemFixed rates provide greater certainty for exporters and importers.

►Flexible Exchange Rate SystemFlexible exchange rate or floating exchange rates change freely and are determined by trading in the forex market.

International Economic Institutions

Why were they created?

• To boost the economic cooperation among countries

• To help a quicker recovery of the international

economy

The World Trade Organization (WTO)

• In 1947 The General Agreement on Tariffs and Trade (GATT) was formed

• In 1995 the WTO replaced the GATT

• General Director: Pascal Lamy

• Has 153 members

• Is located in Geneva, Switzerland

• Website: www.wto.int

Objectives• Restrict barriers to international trade

• Set a framework for trade policies

• Check global economic policy-making

• Supervise the implementation, administration and operation of the covered agreements in the Rounds of negotiation

• Provide a forum for negotiations and for settling disputes

• Review the national trade policies

• Assist developing, least-developed and low-income countries through technical cooperation and training

• Economic research and analysis

The International Monetary Fund (IMF)

• Created in 1946

• Has 185 members

• Is located in Washington D.C., USA

• Managed by Dominique Strauss-Kahn

• Website: www.imf.org

Objectives• Promote global monetary cooperation

• Guarantee financial stability

• Assist the equilibrated growth of international trade by the creation of a multilateral payment system

• Follow global economic trends and performance

• Supply a forum for policy dialogue

The World Bank

• Created as a result of the Bretton Woods Conference in 1944

• Preside by Robert Zoellick

• Has 186 members

• Located in Washington D.C., USA

• Website: www.worldbank.org

Objectives• Reach development and improve living standards by reducing

poverty,hunger, illiteracy and desease

• Supply financial and technical support to developing countries

• Create infrastructure

• Develop financial systems

• Protect individual and property rights

• Implement legal systems that encourages business

• Combat corruption

Criticism• Free trade leads to a divergence instead of convergence

of income levels within rich and poor countries

• Comercial issues takes priority over depelopment

• Financial aid is always bound to conditionalities and they retard social stability

• They are run by a small number of economically powerful countries

INTERNATIONAL INVESTMENT AND FINANCING

Environment at International Level

• the knowledge of latest changes in forex rates

• instability in capital market

• interest rate fluctuations• macro level charges• micro level economic

indicators• savings rate• consumption pattern

• investment behaviour of investors

• export and import trends• Competition• banking sector

performance• inflationary trends• demand and supply

conditions etc.

International financial management practitioners are required the knowledge in the following fields.

International financial manager will involve the study of

• exchange rate and currency markets• theory and practice of estimating future exchange rate• various risks such as political/country risk, exchange

rate risk and interest rate risk• various risk management techniques• cost of capital and capital budgeting in international

context• working capital management• balance of payment, and • international financial institutions etc.

Features of International Finance

• Foreign exchange risk• Political risk• Expanded opportunity sets• Market imperfections

Foreign exchange risk• In a domestic economy this risk is generally ignored

because a single national currency serves as the main medium of exchange within a country.

• When different national currencies are exchanged for each other, there is a definite risk of volatility in foreign exchange rates.

• The present International Monetary System set up is characterized by a mix of floating and managed exchange rate policies adopted by each nation keeping in view its interests.

• In fact, this variability of exchange rates is widely regarded as the most serious international financial problem facing corporate managers and policy makers.

Political risk• Political risk ranges from the risk of loss (or gain) from

unforeseen government actions or other events of a political character such as acts of terrorism to outright expropriation of assets held by foreigners.

• For example, in 1992, Enron Development Corporation, a subsidiary of a Houston based Energy Company, signed a contract to build India’s longest power plant. Unfortunately, the project got cancelled in 1995 by the politicians in Maharashtra who argued that India did not require the power plant. The company had spent nearly $ 300 million on the project.

Expanded Opportunity Sets• When firms go global, they also tend to

benefit from expanded opportunities which are available now.

• They can raise funds in capital markets where cost of capital is the lowest.

• The firms can also gain from greater economies of scale when they operate on a global basis.

Market Imperfections• domestic finance is that world markets today

are highly imperfect• differences among nations’ laws, tax systems,

business practices and general cultural environments

Sources• http://www.slideshare.net/hh_hjs/gatt-and-wto-foundation-

15827439• http://www.slideshare.net/manoharprasad/4-international-

monetary-system-part-i?related=1• http://www.slideshare.net/jprateekkundu/foreign-exchange-

marketfinal-pptmy-15743008• http://www.slideshare.net/guest8aee8b2/international-economic-

institutions• http://www.slideshare.net/guest8aee8b2/international-economic-

institutions?related=3• http://www.slideshare.net/ramusakha/international-financial-

management-20245001