Foreign Trade Policies

History of World Trade:

– Stock market crash of 1929; U.S. gave up on free trade
– Other countries retaliated and world trade collapsed into a
global depression
– After World War II, the U.S. and the industrialized nations
wanted free trade
– World trade increased 22-fold since 1950
– General Agreement on Tariffs and Trade (GATT) was formed in
1944 to help reduce tariffs

Global Perspective
Trade Barriers: An International Marketer’s Minefield
• Many countries take advantage of U.S. open markets while putting barriers in the way of
U.S. exports
– Japan (snow skis, rice, baseballs, and beef)
– France (American movies and songs)
– Britain (taxing of P&G’s Pringle potato chips)
• Trade barriers not only limit how much U.S. companies can sell, they also raise prices for
imported products much higher than they sell for in the U. S.
• Since the birth of the WTO (World Trade Organization), efforts have been made by many
countries to reduce trade barriers, benefiting the world socially, politically, and economic
ally

The International Trade Environment

• Yesterday’s competitive market battles were fought in western Europe, Japan, and the
United states; now these battles have expanded to Latin America, eastern Europe, Russia,
China, India, Asia, and Africa.
• This emerging global economy brings significant advantages to both marketers and
consumers:
– Marketers benefit from new markets that give them viable business opportunities
– Consumers benefit from a wide array of goods at the lowest prices.
Top Ten 2009 U.S. Trading Partners
($ billions, merchandise trade)

Twentieth to the Twenty-First Century

• First Half of the Twentieth Century
o The Depression era (1930s) between two world wars - WW I (1914-1919) and
WW II (1939-1945)
• Capitalism was promoted by the U.S. through the Marshall Plan:
o Economically rebuilding Europe and Japan
o Fostering economic growth in the underdeveloped world
• In short, the United States helped make the world’s economies stronger, which enable
them to buy more from us.

• GATT (General Agreement on Tariffs and Trade) was created in 1986 by world leaders
to help negotiate reductions in tariffs and other trade barriers.
• WTO (World Trade Organization) was created in 1995 to reinforce GATT rules and
legislate trade disputes.
• Last half of the 20th century marred by competing approaches to economic development
between the Socialist Marxist and Democratic capitalist.

World Trade and U.S. Multinationals

st
• 21 century ushered in the era of new global marketing opportunities
• 1950s – U.S. companies began to export and make significant investments in
overseas marketing and production facilities
 • 1960s – U.S. multinational corporations (MNCs) faced major challenges on two
fronts
o Resistance to direct investment
o Increasing competition in export markets

• American MNCs were confronted by a resurgence of competition from all over

the world
o Japan, Germany, NIC (Newly Industrialized Countries – Brazil, Mexico,
India, South Korea, Taiwan, Singapore , Hong Kong), developing countries
such as Venezuela, Chile, Bangladesh established SOE (State-Owned
Enterprises)
• The U.S. role as an economic powerhouse was challenged on two fronts:
o U.S. position in world trade (see chart on the next slide)
o U.S. trade deficit (as high as $700 billion in 2007)
th
• Last decade of the 20 century saw profound changes in the way world trade
would be done
o Free trade zones developed such as NAFTA, AFTA, and APEC

World’s 100 Largest Industrial Corporations (Annual Revenues)

Beyond the First Decade of the 21st Century
• Growth of the U.S. economy slowed dramatically in the last few years especially in 2009
• Economies of the developed world expected on average to grow annually at 3% for the
next 25 years (OECD)
• Economies of the developing world expected on average to grow annually at 6% for the
next 25 years (OECD)
• As a result, economic power and influence will move away from industrialized nations to
developing nations (Latin America, Asia, Eastern Europe, and Africa)

• Companies are looking for ways to become more efficient, improve productivity, and
expand their global reach while maintaining an ability to respond quickly and deliver
products that the markets demand.
• Nestle, Samsung, Whirlpool
• Smaller companies also using novel approaches to target global markets
• Nochar Inc. (fire retardant)
• Buztronics Inc. (promotional lapel buttons)

Balance of Payments
Balance of payments is defined as the system of accounts that records a nation’s international
finance transactions. A balance of payments represents the difference between receipts from
foreign countries on one side and payments to them on the other.
• Transactions recorded annually
• Must always be in balance
• A record of condition, not determinant of condition

On the plus side of the country’s balance of payments are merchandise export sales, money spent
by foreign tourists, payments to the country for insurance, transportation, payments of dividends
and interest on investments abroad, return on capital invested abroad, new foreign investments in
the country and foreign government payments to the country.

On the minus side are the costs of goods imported, spending by country’s tourists overseas, new
overseas investments and the cost of foreign military and economic aid.

A deficit results when international payments are greater than receipts. It can be reduced or
eliminated by increasing a country’s international receipts (i.e gain more from exports to other
countries or more tourists from other countries) and/or reducing expenditures in other countries.

Balance of payments include three accounts:

– Current account (exports, imports, services, funds)
– Capital account (investments and short-term capital)
 – Reserves account (gold, foreign exchange, and liabilities)

Significance of Current Account

The current account is important because it includes all international merchandise trade and
service accounts, that is, accounts for the value of all merchandise and services imported and
exported and all receipts and payments from investments and overseas employment.

Receipts (+) Payments (-)

• Export sales • Cost of goods
• Money spent by imported
foreign tourists • Spending by
• Transportation American
• Insurance to the tourists
government overseas
• Dividend and • New overseas
interest on investments
investments • Cost of
abroad foreign
• Foreign military
government • Economic aid
payments to the
country

Protectionism
The reality of world trade is that countries protect its markets from intrusion by foreign
companies by setting up tariffs, quotas, and nontariff barriers.
• Barriers to trade can take any of the following forms:
– Legal (tariffs and quotas)
– Exchange
– Psychological (nontariffs)
– Private market

Protection: Logic and Illogic

Countless reasons to maintain government restrictions on trade are supported by protectionists,
but essentially all arguments can be classified as follows:
– Protection of infant industry
– Protection of the home market
– Need to keep money at home
– Encouragement of capital accumulation
– Maintenance of the standard of living and real wages
 – Conservation of natural resources
– Industrialization of a low-wage nation
– Maintenance of employment and reduction of unemployment
– National defense
– Increase of business size
– Retaliation and bargaining

Does Protectionism Help?

• A recent study on 21 protected industries showed that while jobs are protected,
consumers pay much higher prices because of protectionism:
– U.S. consumers pay about $70 billion per year in higher prices because of tariffs
and other protective restrictions.
– At the same time, the average cost to consumers for saving one job in these
protected industries was $170,000 per year.
• Protectionism is politically popular, particularly during times of declining wages, and/or
high employment, but it rarely leads to renewed growth in a declining industry.

Trade Barriers
• Tariffs
• Quotas and Import Licenses
• Voluntary Export Restraints (VER)
• Boycotts and embargoes
• Monetary barriers
– Blocked currency
– Government approval
• Standards
• Antidumping penalties
• Domestic subsidies and economic stimuli

Tariffs
Tariffs are taxes imposed by a government on goods entering its borders.

Increase Inflationary pressures, special interests’ privileges,

government control and political considerations in
economic matters, and the number of tariffs

Balance-of-payment positions, supply and

Weaken
demand patterns, and international relations
by starting trade wars

Restrict Manufacturer’s supply sources, choices available to

consumers, and competition
 Trade Barriers
Quotas and Import Licenses
Quota is a specific unit or dollar limit applied to a particular type of good (increases price of
good)
– Import licenses limits quantities on a case-by-case basis
– Japan and foreign rice: When Japan first let foreign rice into their country, it was on a
quota basis, but since 2000 the quotas have been replaced by tariffs.
– Banana wars between the United States and the European Union resulted in a mix system
wherein a quota of bananas is allowed into the European Union with a tariff, then a
second quota comes in tariff-free

Voluntary Export Restraints (VER)

Often used in the 1980s is an agreement between the importing country and the exporting
country for a restriction on the volume of exports.
– Also named as orderly market agreements (OMAs)
– Common in textiles, clothing, steel, agriculture and automobiles
– Japan’s VER on U.S. automobiles

Boycotts and Embargoes

Boycotts
A government boycott is an absolute restriction against the purchase and importation of certain
goods and /or services from other countries.
– This restriction can even include travel bans
– A public boycott can be either formal or informal and may be government sponsored or
sponsored by an industry
– It is not unusual for the citizens of a country to boycott goods of other countries at the
urging of their government or civic group.
– Nestle products were boycotted by a citizens group that considered the way Nestle
promoted baby formula in less developed countries misleading to mothers and harmful to
their babies.

Embargoes
An embargo is a refusal to sell to a specific country.

Monetary Barriers
A government can effectively regulate its international trade position by various forms of
exchange-control restrictions. A government may enact such restrictions to preserve its balance
of payments position or specifically for the advantage or encouragement of particular industries.
Two such barriers are blocked currency and government approval requirements for securing
foreign exchange.
Blocked Currency
Blocked currency is used as a political weapon or as a response to difficult balance of payments
situations. In effect, blockage cuts off all importing or all importing above a certain level.
Blockage is accomplished by refusing to allow an importer to exchange its national currency for
the sellers’ currency.

Government Approval
Government Approval to secure foreign exchange is often used by countries experiencing severe
shortages of foreign exchange. At one time or another, most Latin America and East European
countries have required all foreign exchange transactions to be approved by a central minister.
Thus, importers who want to buy a foreign good must apply for an exchange permit, that is,
permission to exchange an amount of local currency for foreign currency.
– The exchange permit may also stipulate the rate of exchange, which can be an
unfavorable rate depending on the desires of the government.
– In addition, the exchange permit may stipulate that the amount to be exchanged must be
deposited in a local bank for a set period prior to the transfer of goods.

Standards
Nontariff barriers of this category include standards to protect health, safety and product quality.
The standards are sometimes used in an unduly stringent or discriminating way to restrict trade,
but the sheer volume of regulations in this category is a problem in itself.
Different standards are one of the major disagreements between the United States and Japan.
– The size of knotholes in plywood shipped to Japan can determine whether or not the
shipment is accepted. If a knothole is too large, the shipment is rejected because quality
standards are not met.
– In the Netherlands, all imported hen and duck eggs must be marked in indelible ink with
the country of origin.

Antidumping Penalties
Anti-dumping laws were designed to prevent foreign producers from “predatory pricing”, a
practice whereby a foreign producer intentionally sells its products in the country for less than
the cost of production to undermine the competition and take control of the market.
- This barrier was intended as a kind of antitrust law for international trade.

Domestic Subsidies and Economic Stimuli

Agricultural subsidies in the United States and Europe have long been the subject of trade
complaints in developing countries.
– The economic doldrums beginning in 2008 triggered new, huge, domestic bailout
packages in the larger economies for banks and auto makers, to name just a couple.
– Developing countries complained that such subsidies of domestic industries gave
companies in those countries unfair advantages in the global market place.
– Smaller countries defended themselves with a variety of tactics.
Easing Trade Restrictions
Lowering the trade deficit has been a priority of the U.S. government for a number of
years. Many believe that too many countries are allowed to trade freely in the United
States without granting equal access to U.S. products in their countries. Japan was for
two decades the trading partner with which we had the largest deficit and which elicited
the most concern about fairness.

The Omnibus Trade and Competitiveness Act

– The Omnibus Trade and Competitiveness Act of 1988 is many faceted, focusing
on assisting businesses to be more competitive in world markets as well as om
correcting perceived injustice in trade practices.
– The trade act was designed to deal with trade deficits, protectionism, and the
overall fairness of our trading partners.
– Congressional concern centered on the issue that U.S. markets were open to most
of the world but markets in Japan, western Europe, and many Asian countries
were relatively closed.
– The act reflected the realization that we must deal with our trading partners based
on how they actually operate, not on how we want them to behave.
– Some see the act as a protectionist measure, but the government sees it as a means
of providing stronger tools to open foreign markets and to help exporters be more
competitive.
– The issue of the openness of the markets for U.S goods is addressed as market
access. Many barriers restrict prohibit goods from entering a foreign market.
Unnecessarily, restrictive technical standards, compulsory distribution systems,
customs barriers, tariffs, quotas and restrictive licensing requirements are just a
few.
– Export controls, the Foreign Corrupt Practices Act (FCPA),and export promotion
were specifically addressed in the export expansion section of the act.
– Export licenses could be obtained more easily and more quickly for products on
the export control list.
– In addition, the act reaffirmed the government’s role in being more responsive to
the needs of the exporter.
– Export trade is a two-way street: We must be prepared to compete with imports in
the home market if we force foreign markets to open to U.S. trade.
– Recognizing that foreign penetration of U.S. markets can cause serious
competitive pressure, loss of market shares and occasionally severe financial
harm, the import relief section of the Omnibus Trade and Competitiveness Act
provides a menu of remedies for U.S. businesses adversely affected by imports.
– The act has resulted in a much more flexible process for obtaining export licenses,
in fewer products on the export control list, and in greater access to information
and has established a basis for negotiations with India, Japan and other countries
to remove or lower barriers to trade.
– As the global market place evolves, trading countries have focused attention on
ways of eliminating tariffs, quotas and other barriers to trade.
 – Four ongoing activities to support the growth of international trade are GATT, the
associated WTO, the International Monetary Fund (IMF) and the World Bank
Group.

The General Agreement on Tariffs and Trade (GATT)

• Shortly after World War II, the U.S. and 22 other countries signed GATT (1947)
which paved the way for the first effective worldwide tariff agreement
• Basic elements of the GATT
– Trade shall be conducted on a nondiscriminatory basis
– Protection shall be afforded domestic industries through customs
tariffs, not through such commercial measures as import quotas
– Consultation shall be the primary method used to solve global trade
problems
• Eliminating international trade barriers – Uruguay Round
– The General Agreement on Trade in Services (GATS)
– Trade-Related Investment Measures (TRIMs)
– Trade-Related aspects of Intellectual Property Rights (TRIPs)

The World Trade Organization (WTO)

• WTO which is an institution, not an agreement, was founded in 1994.
– Sets many rules governing trade between its 148 members
– Provides a panel exports to hear and rule on trade disputes
between members
– Issues binding decisions
– All member countries will have equal representation
– Member countries have open their markets and to be bound by
the rules of the multilateral trading system
• U.S. ratification concerns
– Possible loss of sovereignty over its trade laws to WTO
– Lack of veto power
– Role U.S. would assume when a conflict arises over an
individual state’s laws that might be challenged by a WTO
member
• China became member of the WTO (2001); Vietnam (2007)

Skirting the spirit of GATT and WTO

• Loopholes
– China reduced tariffs while at the same time increased number and
scope of technical standards and inspection requirements
• Imposing antidumping duties
• Negotiating bilateral trade agreements
– May lead to multinational concessions
– Not necessarily consistent with WTO goals and aspirations
International Monetary Fund (IMF)
Because of inadequate money reserves and unstable currencies, the IMF was created to assist
nations in becoming and remaining economically viable
• Objectives of the IMF
– Stabilization of foreign exchange rates
– Establishment of freely convertible currencies to facilitate the
expansion and balanced growth of international trade

World Bank Group

By promoting sustainable growth and investment in people, the World Bank Group is an
institution created in 1944 to reduce poverty and improve standard of living
• The World Bank has five institutions which perform the following services:
• Lending money to the governments of developing countries
• Providing assistance to governments for developmental projects
to the poorest developing countries (per capital incomes of $925 or
less)
• Lending directly to the private sector
• Providing investors with guarantees against “noncommercial risk”
• Promoting increased flows of international investment

Anti-globalization Protests
• The unintended consequences of globalizing
– Environmental concerns
– Worker exploitation and domestic job losses
– Cultural extinction
– Higher oil prices
– Diminished sovereignty of nations
• Protests
– WTO meeting in Seattle (November 2009)
– World Bank and IMF meetings in Washington D.C. (April 2010)
– World Economic Forun meeting in Australia (September 2010)
– IMF meeting in Prague (September 2010)