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International Business Environment

Overview of International Business International business is business across national borders. That is very basic definition one that glosses over the much potential for profits and the many pitfalls and problems that can be encountered. The exchange of goods, services, and capital across countries can be extremely challenging. International business is a necessity in todays world. The gains for greater awareness and knowledge of international business for nations, multinational enterprises, trading companies, exporters and even individuals. To go global, the first step would be to understand the international business environment. International business is nothing but extending the areas of activities.

A company may exist in its four forms:

1. Domestic Company: A domestic company operates in its home country. The business strategies of such company focus on domestic market. Domestic market opportunities /threats, suppliers and customers are the main concerns of domestic companies. 2. International Company: A company that extends its domestic business operations into the foreign market is called international company and such business activities are considered as international business. 3. Multinational Company: If a company wants to establish itself in the foreign market , it needs to produce goods acceptable to the customer across the globe. For this it requires to incorporate necessary changes in its marketing mix strategy.

4. Global Company: A Global company adopts global marketing strategies or global strategies. It produces its products in the home country or in a single country and focuses on marketing these products globally, or produces these products globally and focuses on marketing these products domestically. Types of International Business 1) Merchandise Export and Imports: Companies may export or import either goods or services. More companies are involved in exporting and importing than in any other international mode. This is especially true for smaller companies, even though they are less likely than large companies to engage in exporting. Merchandise exports are tangible products goods sent out of a country, merchandise imports are goods brought into a country. Because these goods can be seen leaving and entering a country, they are sometimes called visible exports and imports.

2) Service Exports and Imports: Service exports and imports generate non-product international earnings. The company or individual receiving payment is making a service export. The company or individual paying is making a service import. Service exports and imports take many forms. It includes: i) Tourism and Transportation ii) Performance of services iii) Use of assets 3) Investment: Foreign investment means ownership of foreign property in exchange for a financial return, such as interest and dividends. Foreign investment takes two forms: i) Direct Investment ii) Portfolio Investment

Balance of Payment The balance of payments of a country is a systematic record of all its economic transactions with the outside world in a given year. It is a statistical record of the character and dimensions of the countrys economic relationships with these of the world. Balance of payment of a country is one of the important indicators for International Trade, which significantly affect the economic policies of a government. As every country strives to have a favorable balance of payment, the trends in and the position of the balance of payments will significantly influence the nature and types of regulation of export and import business in particular.

Components of Balance of Payments Current Account Current account is typically divided into three sub-categories: the merchandise trade balance, the service balance and the balance on unilateral transfers. Entries in this account are current in value as they do not give rise to future claims. A surplus in the current account represents an inflow of funds while a deficit represents an outflow of funds. Merchandise Invisible Exports and Imports Capital Account The capital account represents transfers of money and other capital items and changes in the countrys foreign assets and liabilities resulting from the transactions recorded in the current account. Flows recorded in the capital account are divided into three sectors private, banking and official.

1) Private capital: This item include capital transactions of resident individuals, firms, privately owned non-financial corporate enterprises and non-bank financial enterprise with nonresidents including international institutions. 2) Baking Capital: This item covers changes in the foreign financial assets and liabilities of deposit money banks, comprising commercial banks, whether privately owned or state owned and such co-operative banks which re authorized to deal in foreign exchange. 3) Official Capital: The official capital comprises transactions affecting foreign financial assets and liabilities of the Government of India and the Reserve Bank of India.

Disequilibrium in BOP The BOP of a country is said to be in equilibrium when the demand for foreign exchange is exactly equivalent to the supply of it. The BOP is in disequilibrium when there is either a surplus or deficit in the BOP. When there is a deficit in the BOP, the demand for foreign exchange exceeds the demand for it. Causes of Disequilibrium in the BOP Natural factors: Natural calamities, such as the failure of rains or the coming of floods may easily cause disequilibrium in the BOP by adversely affecting agricultural and industrial production in the country. Economic Factors The economic factors can be further subdivided under the following four sub-heads:


Cyclical Fluctuations: Business fluctuations induced by the operation of the trade cycle may also cause disequilibrium in a countrys BOP. For example, if there occurs a business recession in foreign countries it may easily cause a fall in the exports and exchange earnings of the country concerned in a disequilibrium in the BOP. ii) Inflationary spiral at Home: An inflationary rise in prices within the country may also produce disequilibrium in the BOP. The prices of export items may go up, causing a decline in the volume of exports from the country concerned. iii) Capital Movement: The capital movement can also cause disequilibrium in the BOP of a country. A massive inflow of foreign capital into a country is followed by an unfavorable BOP. iv) Miscellaneous Factors: The change in the taste, habits, fashions of the people, the discovery of new substitutes for exports; the development of alternative source of supply etc may also produce disequilibrium in the countrys BOP

3. Political factors: The political factors may also produce serious disequilibrium in the countrys BOP. For example, the existence of political instability may result in disrupting the productive apparatus within the country, causing a decline in exports and an increase in imports. Correction Measure in the BOP 1. Monetary policy: Monetary policy may be devised to correct a deficit in the BOP of a country. The deficit occur because of high imports and low exports. This is to be reversed. In this regard, the country may adopt deflationary or dear money policy by raising the bank rate and restricting credit. Under deflation, price fall which makes exports attractive and import relatively costlier.

2. Exchange Depreciation: By exchange depreciation is meant a decline in the rate of exchange of one country in terms of another. Suppose the Indian rupee exchange for 30 cents of American currency. If India experiences an adverse BOP with regard to America, the Indian demand for American cuurency will rise. 3. Devaluation: It is an alternative to exchange depreciation. It is suitable under the present IMF system. Devaluation means official decrease in the external value of currency in terms of foreign currency or good or SDRs. Suppose 1$ = Rs. 8 and if Indian Government puts it as 1$ =Rs. 0 it means a 25% devaluation of the Indian rupee in terms of the U.S. dollar. 4. Exchange Control: Restrictions on the use of foreign exchange by the central bank is called exchange control. When exchange control is adopted, all the exporters have to surrender their foreign exchange earnings to the central bank. Under exchange control, the central bank releases foreign exchange only for essential imports and conserves the rest of the balance.

5. Fiscal Policy: Fiscal policy is another method of correcting unfavorable BOP. Under budgetary provisions, tariff or import duties may be imposed so that import becomes dearer and the propensity to import is checked. As a result, imports are reduced an the BOP becomes favorable. 6. Import Quotas: Fixing of import quotas is another and perhaps a better device used for correcting an adverse BOP. Under the quota system, the government may fix and permit the maximum quantity or value of a commodity to be imported during a given period. By restricting imports through the quota system deficit is reduced or eliminated and thereby the BOP position is improved. 7. Export Promotion: To correct disequilibrium in the BOP, it is necessary that exports should be increased. Government may adopt export promotion program for this purpose. Export promotion program includes subsidies, tax concessions to exporters, marketing facilities, incentives for exports etc.

Macro-Economic Management The most important development in the global macroeconomic system over the past several decades has been the liberalization of international capital markets that got underway in the 1970s. This change from the Bretton Woods system has had enormous consequences for both developed and developing economies. One important outcome has been a marked increase in the volatility of capital movements and asset prices, amplified by international contagion. Exchange rate fluctuations, in particular have been highly destabilizing they are major transmitters of shocks. It is argued that spot rates have no fundamentals in the sense of price or quantity variables that can determine rate levels when they are permitted to float. The only prices a spot rate floats against are expected future values of itself and other asset values.

In forward market, conventions about the future determine these expectations. They can shift very rapidly, adding instability to the system. Foreign Trade foreign trade means exporting and importing goods and services from countries across the national borders. That is exports + imports + foreign trade. In international markets both imports and exports go on simultaneously as some items are needed in one country and it is able get them cheaper and of desired quality outside the country. Export is one of profitable and attractive business activities. Government of India is extending necessary help and incentives to export more and earn foreign exchange. Government is also coordinating the activities in introduction of new technologies in the exporting units and it provides essential inputs for production.

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Imports arise out of necessity for domestic consumption and to help exports. Cheaper materials are imported from outside national boundaries to add value by manufacturing Importance of Foreign Trade Importance of Imports: Import are of great importance for any country in the following ways: Help in Development of the Economy: Capital goods like machinery and equipment are required for industrial development. Industrial development also depends upon infrastructural facilities like power, transport etc. Agriculture also requires machines like tractors, harvestors etc, for faster growth. A developing country does not have sufficient resources or know-how to produce such goods or even if it is producing these goods, the production may not be sufficient. This deficiency can be made by importing these goods.




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To meet shortages: Imports can fill the gap between domestic demand and domestic supply of essential goods like food, cooking oils, etc. Imports for Better living Standards: The developing countries may not be producing non-essential goods like luxury and semi-luxury items such as television, motorcars, washing machines etc. the rising income levels in the developing countries create demand for such goods. Improving quality of production: The import of goods may help in improving the quality of domestic production. When faced with competition from foreign goods, the domestic producers try to improve the quality of their products. Important of Exports: Exports are important in the following ways: Help in Growth of the Economy: Exports help in the growth of the economy in the following ways:


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Exports help in Increasing Production: Exports help in selling surplus production. For example, in India demand for tea is less than its potential production. If we had not been exporting tea, our total production of tea would have been smaller. Thus export to European markets has helped us to expand our tea production. Exports helps in employment and income generation Expansion of related industries Overall increase in demand for other goods Better utilization of resources Source of foreign exchange: Exports are an important source of earning foreign exchange. Foreign exchange means foreign currencies. Any country need foreign exchange to pay for its imports. This foreign exchange can be earned through exports.

Trade Theories
Mercantilism The Mercantilism philosophy, which prevailed in Europe during 1500 1800, refers to the view of a heterogeneous group of influential people as to how a nation could regulate its domestic and international affairs so as to promote its own interest. The principle of mercantilism was that a nations wealth and prosperity reflected in its stock of precious metals, gold and silver. At that time, as gold and silver were the currency of trade between nations, a country could accumulate gold and silver by exporting more and importing less.

The ordinary means therefore to increase our wealth and treasure is by foreign trade, wherein we must ever observe this rule: to sell more to strangers yearly than we consume of theirs in value. The mercantilism, therefore, argued that Government should do everything possible to maximise exports and minimise imports. Imports were to be restricted by such measures as tariffs and quotas and exports were to be subsidised. The importance given to precious metals under mercantilism resulted in what was referred to as bullionism i.e. government control of the use and exchange of precious metals their export by individuals was prohibited and the governments let specie leave the country only out of necessity.

Neo-Mercantilism The criticism of mercantilism by economists, it is by no mean dead. In most trade negotiations, the negotiating countries, both developed and developing, often press for more trade liberalisation in areas where their own comparative advantages are the strongest and to resist liberalisation in areas where they are less competitive and fear that imports would replace domestic production. Absolute Cost Theory Adam Smith, the father of Economics, thought that the basis of international trade was absolute cost advantage. According to his theory, trade between two countries would be mutually beneficial if one country could produce one commodity at an absolute advantage (over the other country) and the other country could, in turn produce another commodity at an absolute advantage over the first.

Absolute Cost Differences



No. of units of wheat per unit of labour No. of units of cloth per unit of labour


US has an absolute advantage in the production of wheat over UK and UK has an absolute advantage in the production of cloth over US. Hence, according to Adam Smith theory, US should specialise in the production of wheat and meet its requirement of cloth through import from UK. On the other hand, UK should specialise in the production of cloth and should obtain wheat from US. Such trade would be mutually beneficial. Adam Smith pointed out that the scope for division of labour (i.e., spcialisation) depended on the size of the market. Free international trade, therefore, increase division of labour and economic efficiency and consequently economic welfare. Comparative Cost Theory The Comparative Cost Theory was first systematically formulated by the English economist David Ricardo in his Principles of Political Economy and Taxation published in 1817.

The doctrine of comparative cost maintains that if trade is left free, each country in the long run, tends to specialise in the production and export of those commodities in whose production it enjoys a comparative advantage in terms of real cost, and to obtain by importation those commodities which could be produced at home at a comparative disadvantage in terms of real costs and that such specialisation is to the mutual advantage of the countries participating in it. Ricardos illustration of the Comparative Cost Theory, using a two country-two-commodity model, shows that trade between nations can be profitable even if one of the two nation can produce both the commodities more efficiently than the other nation provided that it can produce one of these commodities with comparatively greater efficiency than the other commodity.

The law of comparative advantage indicates that a country should specialise in the production of those goods in which it is more efficient and leave the production of the other commodity to the other country. The two nations will then have more of both goods by engaging in trade. Opportunity Cost Theory One of the main drawbacks of the Ricardian comparative cost theory was that it was based on the labour theory of value which stated that the value or price of a commodity was equal to the amount of labour time going into the production of the commodity. Gottfried Haberler gave new a life to the comparative cost theory by restating the theory in terms of opportunity costs in 1933.

The opportunity cost of anything is the value of the alternatives or other opportunities which have to be foregone in order to obtain that particular thing. For example, assume that a given amount of productive resources can produce either 10 units of cloth or 20 units of wine. Then the opportunity cost of 1 unit of cloth is 2 unit of wine. Thus the opportunity cost approach defines cost in terms of the value of the alternatives of other opportunities which have to be foregone in order to achieve a particular thing. According to the opportunity cost theory, the basis of international trade is the differences between nations in the opportunity cost for a commodity has a comparative advantage in that commodity and a comparative disadvantage in other commodity.

Suppose that the opportunity cost of one unit of X is 2 units of Y in country A and 1.5 unit of Y in country B. Then country A must specialise in production of Y and import its requirements of X from B, and B should specialise in the production of X and import Y from A rather than producing it at home. Factor Endowment Theory The Factor Endowment theory was developed by Swedish economist Eli Heckscher and his student Bertil Ohlin. The factor endowment theory consist of two important theorems, namely, the Heckscher-Ohlin Theorem and the Factor Price Equilibrium Theorem. Heckscher-Ohlin Theorem Heckscher and Ohlin have explained the basis of international trade in terms of factor endowment. The classical theory demonstrated that the basis of international trade was comparative cost difference.

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However, it made little attempt to explain the causes of such comparative cost difference. The alternative formulation of the comparative cost doctrine developed by Heckscher and Ohlin attempts to explain why comparative cost differences exist internationally. They attribute international differences in comparative costs to: Different prevailing endowment of the factor of production The fact that production of various commodities requires that the factors of production be used with different degree of intensity. In short, it is difference in factor intensities in the production functions of goods along with actual differences in relative factor endowments of the countries which explains international differences in comparative cost of production. Heckscher-Ohlin theory states that a country will specialise in the production and export of goods whose production requires a relatively large amount of the factor with which the country is relatively well endowed.

Factor Price Equalisation Theorem The factor price equlaisation theorem states that free international trade equalises factor prices between countries relatively and absolutely and this serves as a substitute for international factor mobility. International trade increases the demand for abundant factor and decreases the demand for scarce factors because when nations trade, specialisation takes place on the basis of factor endowments. According to Ohlin, The effect of inter-regional trade is to equalise commodity prices. Furthermore, there is also a tendency towards equalisation of the prices of the factor of production, which means their better use and a reduction of the disadvantages arising from the unsuitable geographical distribution of the productive factors.

Investment Theories
A number of attempts have been made to formulate a theory to explain the international investment. Theory of Capital Movement The earliest theoreticians, who assumed in the classical tradition, the existence of a perfectly competitive market, considered foreign investment as a form of factor movement to take advantage of the differential profit. The validity of this theory is clear from the observation of the noted economist Charles Kindleberger that under perfect competition, foreign direct investment would not occur and that would be unlikely to occur in a world where in the conditions were even approximately competitive.

Market Imperfections Theory One of the important market imperfections approach to the explanation of the foreign investment is the Monopolistic Advantage Theory profounded by Stephen in 1960. According to this theory, foreign direct investment occurred largely in oligopolistic industries rather than in industries operating under near perfect competition. Hymer suggested that the decision of a firm to invest in foreign markets was based on certain advantages the firm possessed over the local firms such as economies of scale, superior technology or skills in the fields of management, production, marketing and finance.

Internalisation Theory According to the Internalisation theory, which is an extension of the Market Imperfections theory, foreign investment results from the decision of a firm to internalise a superior knowledge. For example, if a firm decides to externalise its know-how by licensing a foreign firm, the firm (the licensor) does not make any foreign investment in this respect but, on the other hand, if the firm decides to internalize it may invest abroad in production facilities. Methods of internalisation include formal ways like patents and copy rights and informal ways like secrecy and family network.

Appropriability Theory According to the Appropriability theory, a firm should be able to appropriate the benefits resulting from a technology it has generated. If this condition is not satisfied, the firm would not be able to bear the cost of technology generation and therefore would have no incentive for research and development. MNCs tend to specialise in developing new technologies which are transmitted efficiently through their internal channels. Location Specific Advantage Theory The Location Specific Advantage Theory suggests that foreign investment is pulled by certain location specific advantage. According to Hood and Young, there are four factors which are pertinent to the Location Specific Theory. They are:

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Labour costs Marketing factors (like market size, market growth, stage of development and local competition) Trade barriers Government policy The above factor have, of course very important bearing on foreign investment. However, there are also other factors like cultural factors which influence foreign investment. Further, it is the total cost and not labour cost alone that is important. Eclectic Theory John Dunning has attempted to formulate a general theory of international production by combining the postulates of some of the other theories. According to Dunning, foreign investment by MNCs results from three comparative advantage which they enjoy, viz,

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Firm specific advantages Internalisation advantages Location specific advantages Product Life Cycle Theory

Government Influence on Trade

International trade is affected by a number of factors including, in particular, the government policies. The economic policies, in general, may affect the foreign trade. The trade policy and regulations have a direct bearing on the trade. Protectionism One of the most important features of the international trading environment is the proliferation of the trade barriers.


Reasons for Protection The main objectives of imposing trade barriers are protect domestic industries from foreign competition, to promote indigenous research and development, to conserve the foreign exchange resources of the country, to make the BOP position favorable, to curb conspicuous consumption, to mobilise revenue for the government and to discriminate against certain countries. There are a number of arguments put forward in favour of protection. Some of these arguments are very valid while some others are not. Infant Industry Argument: The infant industry argument advanced by Alexander Hamilton and others asserts that a new industry having a potential comparative advantage may not get started in a country unless it is given temporary protection against foreign competition.


Diversification Argument: It is necessary to have a diversified industrial structure for an economy to be strong and reasonably self-sufficient. An economy that depends on a very limited number of industries is subject to many risks. A depression or recession in these industries will seriously affect the economy. (iii) Improving the Terms of Trade: It is argued that the terms of trade can be improved by imposing import duty or quota. By imposing tariff the country expects to obtain larger quantity of imports for a given amount of exports or conversely to part with a lesser quantity of exports for given amount of imports. (iv) Improving BOP: This is a very common ground for protection. By restricting imports, a country may try to improve its BOP position. The developing countries, especially may have problem of foreign exchange shortage. Hence it is necessary to control imports so that the limited foreign exchange will be available for importing the necessary items.


Anti-Dumping: Protection is also resorted to as an antidumping measure. Dumping, certainly can do harm to the domestic industry, the relief the consumers get will only be temporary. It is possible that after ruining the domestic industry by dumping, the foreign firms will obtain monopoly powers and exploit the home market. (vi) Bargaining: It is argued that a country which already has a tariff can use it as a means of bargaining to obtain from other countries lower duties on its exports. (vii) Employment Argument: Protection has been advocated also as a measure to stimulate domestic economy and expand employment opportunities. Restriction of imports will stimulate import competing industries and its spread effects will help the growth of other industries. These, naturally, create more employment opportunities.

(VIII) National Defence: Even if purely economic factors do not justify such a course of action, certain industries will have to be developed domestically due to strategic reasons. Depending on foreign countries for our defence requirements is rather foolish because factors like change in political relations can do serious damage to a countrys defence interest. (IX) Key Industry Argument: It is also argued that a country should develop its own key industries because the development of other industries and the economy depends a lot on the output of the key industries. (X) Keeping Money at Home: This argument is well expressed in the form of a remark falsely attributed to Abraham Lincoln: I do not know much about the tariff, but I know this much: when we buy manufactured goods abroad we get the goods and foreigner gets money. When we buy the manufactured goods at home we get both the goods and money.

(XI) The Pauper Labour Argument: The essence of this argument is that if in the home country the wage level is substantially high compared to foreign countries, the foreign producers will dominate the home market because the cheap labour will allow them to sell goods cheaper than the domestic goods and this will affect the interests of the domestic labour. (XII) Size of the Home Market: It is argued that protection will enlarge the market for agricultural products because agriculture derives large benefits not only directly from the protective duties levied on competitive farm products of foreign origin but also indirectly from the increase in the purchasing power of the workers employed in industries similarly protected.

Tariff Barriers There are broadly, two types of trade barriers viz, tariff barriers and non-tariff barriers. Tariffs in international trade refer to the duties or taxes imposed on internationally traded goods when they cross the national borders. India has had one of the highest tariff walls in the World. The Government, following the recommendation of the Tax Reform Committee substantially reduced the import duty levels. However, India is still among the countries with high customs duties. Non-Tariff Barriers Non-tariff barriers (NTBs), some of which are described as new protectionism measures have grown considerably, particularly since around the beginning of the 1980s. The export growth of many developing countries has been seriously affected by th NTBs.

Types of NTBs The NTBs are of two categories. The first category includes those which are generally used by developing countries to prevent foreign exchange outflows or result from their chosen strategy of economic development. These are mostly traditional NTBs such as import licensing, import quotas, foreign exchange regulations and canalisation of imports. The second category of NTBs are those which are mostly used by developed economies to protect domestic industries which have lost international competitiveness and/ or which are politically sensitive for governments of these countries. One of the most important new protectionism measures under this category is the voluntary export restraint (VER).

There are different forms of NTBs. The NTBs which have significant restrictive effect are described as hardcore NTBs. These include import prohibitions, quantitative restrictions, voluntary export restrictions (VERs), variable levies, multi-fibre arrangement (MFA) restrictions, and non-automatic licensing. NTBs and Indias Export The problem of NTBs for Indian exports has been growing. Indian exports of iron and steel, chemicals, textiles, vegetables and allied categories find market access very difficult in the developed world, essentially by the imposition of a variety of NTB; admissible under the present trading regime. Some NTBs such as anti-dumping measures countervailing procedures, sanitary and phytosanitary sanctions, quota restrictions environmental clause and intellectual property rights are really garroting exports. According to estimates of GOI (2002), about 44% of the total exports to the US faced some or other form of NTBs.

Foreign Exchange Management Act (FEMA) Foreign exchange transactions were regulated in India by the Foreign Exchange Regulations Act (FERA), 1973. This Act also sought to regulate certain aspects of the conduct of business outside the country by Indian companies and in India by foreign companies. The main objective of FERA, framed against the background of serve foreign exchange problem and the controlled economic regime, was conservation and proper utilisation of the foreign exchange resources of the country. There was a lot demand for a substantial modification of FERA in the light of the ongoing economic liberalization and improving foreign exchange reserves position. Accordingly, a new Act, the Foreign Exchange Management Act (FEMA), 1999, replaced the FERA.

Objectives The objectives of FEMA are:

To facilitate external trade and payment. To promote the orderly development and maintenance of foreign exchange market.



FERA and FEMA A Comparison Important differences between FERA and FEMA have been summed up as follows: In FEMA, only the specified acts relating to foreign exchange are regulated; while in FERA, anything and everything that has to do with foreign exchange was controlled. Also, the aim of FEMA is facilitating trade as against that of FERA, which was to prevent misuse. FEMA is a much smaller enactment --- only 49 section as against 81 of FERA.

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In the process of simplification, many of the laid down of the erstwhile FERA have been withdrawn. Many provisions of FERA like the ones relating to blocked accounts, Indians taking up employment abroad, employment of foreign technicians in India, contracts in evasion of the act, etc have no appearance in FEMA. World Trade Organization (WTO) The global business environment is very significantly influenced by the World Trade Organization (WTO)s principles and agreements. They also affect the domestic environment. For example, India has had to substantially liberalise imports, including almost complete removal of quantitative import restriction. The liberalisation of imports implies that domestic firms have to face an increasing competition from foreign goods. Liberalisation of foreign investment can result in growing competition from MNCs.

These liberalisations on the other hand, also provide new opportunity for Indian firms as the foreign markets become more open for export and investments. The liberalisation also enables Indian firms to seek foreign equity participation and foreign technology. This could help them to expand their business or improve competitiveness. GATT The General Agreement on Tariff and Trade (GATT), the predecessor of WTO was born in 1948 as result of the international desire to liberalise trade. The GATT was transformed into a World Trade Organization (WTO) with effect from January 1995. Thus, after about five decades, the original proposal of an International Trade Organization has taken shape as the WTO. The WTO which is a more powerful body than the GATT has an enlarged role than the GATT.

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Objective The primary objective of GATT was to liberalise and expand trade to bring about all-round economic prosperity. The preamble to the GATT mentioned the following as its important objectives: Raising standard of living Ensuring full employment and a large and steadily growing volume of real income and effective demand. Developing full use of the resources of the world Expansion of production and international trade. The Uruguay Round Uruguay Round (UR) is the name by which the eighth and the latest round of the multilateral trade negotiations (MTNs) held under the auspices of the GATT is popularly known because it was launched in Punta del Este in Uruguary, a developing country in September 1986.

The complexities of the issues involved and the conflicts of interests among the participating countries, the Uruguay Round could not be concluded in Dec 1990 as was originally scheduled. When the negotiations dragged on, Arther Dunkel, the Director General of GATT, presented a Draft Act embodying what he thought was the result of the Uruguay Round. This came to be popularly known as Dunkel Draft. This was replaced by an enlarged and modified text which was approved by delegations from the member countries of the GATT on 15th December 1993. This Final Act was signed by ministers of 125 governments on 15th April 1994.


The first six Rounds of MTNs concentrated almost exclusively on reducing tariffs, while the Seventh Round (Tokyo round: 1973-79) moved on to tackle non-tariff barriers (NTBs). The UR sought to broaden the scope of MTNs far wider by including new areas such as: Trade in service Trade related aspects of intellectual property (TRIPs) Trade related investment measures (TRIMs) Functions of WTO The WTO has the following five specific functions: The WTO shall facilitate the implementation, administration and operation and further the objectives of the Multilateral Trade Agreements and shall also provide the framework for the implementation, administration and operation of plurilateral trade agreement.



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The WTO shall provide the forum for negotiations among its members concerning their multilateral trade relations in matters dealt with under the Agreements. The WTO shall administer the Understanding on Rules and Procedures Governing the settlement of Disputes. The WTO shall administer the Trade Review Mechanism. With a view to achieving greater coherence in global economic policy making, the WTO shall cooperate, as appropriate with the IMF and IBRD and its affiliated agencies. WTO Principles The WTO agreements have three main objectives: To help trade flows as freely as possible To achieve further liberalization gradually through negotiation To set up an impartial mean of setting disputes.

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Trade Policy /EXIM policy The economic policy which regulates the export-import activities of any economy is known as the trade policy. It is also called foreign trade policy or the EXIM policy. This policy needs regular modifications depending upon the economic policies of the economies of the world or the trading partners. The Export-Import policy (EXIM Policy) announced under the Foreign Trade Act, 1992, would reflect the extent of regulations or liberalization of foreign trade and indicate the measures for export promotion. Although the EXIM policy is announced for a five-year period. Objectives of EXIM Policy To establish the framework for globalisation To promote the productivity competitiveness on Indian industries. To encourage the attainment of high and internationally accepted standards of quality.



To augment export by facilitating access to raw material, intermediate components, consumables and capital goods from the international market. To promote internationally competitive import substitution and self-reliance. Foreign Trade Policy (EXIM Policy) 2009-2014 Foreign trade has gained immense importance in India in the recent years. The EXIM policy of India has laid guidelines for India to become a major player in the world trade, an all encompassing; comprehensive view needs to be taken for the overall development of the countrys foreign trade. The new EXIM policy states that reasonableness and consistency among trade and other economic policies is important for maximising the contribution of such policies to development.

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The EXIM policy of India can be viewed at the website which is updated on a regular basis. The import laws of India are governed by the foreign trade policy. All exporters/importers trading from India have to adhere to the Foreign EXIM policies in order to gain benefits on the tradefront. Features of Foreign Trade Policy 2009-2014 Extension of concessions for export-oriented units till March 2011 Export target of $200 billion set for 2010-11 Growth target of 15% for next two years, 25% thereafter Inter-ministerial group to address issues raised by exporters. Obligation under export promotion capital goods scheme relaxed. Permission for tax refund scheme for jewelry sector No fee on grant of incentives to cut transaction costs.

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Steps to help exporters in reducing transaction costs. Plan for diamond bourses in the country Single-window scheme for farm exports. Re-export of unused leather allowed subject to 50% duty Minimum value addition for tea reduced to 50% from 100% Export units allowed to sell 90% of goods in domestic market Provision for state-run banks to provide dollar credit 26 new markets added to focus market scheme Zero duty under technology upgrade scheme. International Commodity Agreements International Commodity Agreements are inter-governmental arrangements concerning the production of and trade in, certain primary products with a view to stabilising their prices.

Commodity agreements have been tried in different cases for quite some time now. The worsening for primary product exporters of their terms of trade in the second half of the fifties, their lagging export earnings, inadequate reserves, mounting external indebtness and the consequential frustration of plans for rapid economic developments caused these countries to cast around for ways of escaping from their predicament. Commodity Agreements may take any of the four forms, namely, quota, buffer stock, bilateral contract or multilateral contract. Quota Agreements International quota agreements seek to prevent a fall in commodity prices by regulating their supply. Under the quota agreement, export quotas are determined and allocated to participating countries according to some mutually agreed formula and they undertake to restrict the export or production by a certain percentage of the basic quota decided by the central committee or council.

For instance, Coffee Agreement among the major producers of Latin America and Africa limited the amount that could be exported by each country. Buffer Stock Agreement Buffer stock agreements stabilize the price by increasing the market supply by the sale of the commodity when the price tends to rise and by absorbing the excess supply to prevent a fall in the price. The buffer stock plan, thus requires an international agency to set a range of prices and to buy commodity at the minimum and sell at the maximum. Bilateral /Multilateral Contracts Bilateral contract to purchase and sell certain quantities of a commodity at agreed prices may be entered into between major importer and exporter of the commodity.

In such an agreement, an upper price and a lower price are specified. If the market price, throughout the period of the agreement, remains within these specified limits, the agreement becomes inoperative. But if the market price rises above the upper limit specified, the exporting country is obliged to sell to the importing country a certain specified quantity of commodity at the upper price fixed by the agreement. On the other hand, if the market price falls below the lower limit specified, the importer is obliged to purchase the contracted quantity at the specified lower price. Regional Economic Integration (Trade Blocs) Economic integration schemes also referred to as trade blocs, Regional Integration Agreements (RIAs), Regional Trade Agreements (RTAs) is an important international business environment.

An economic integration scheme is conceived as a building block of economic development of the member countries. It may sometimes become a stumbling block for companies located outside the bloc. Besides the integration schemes, their have been other efforts to foster economic cooperation between countries. Types of Integration There are different degrees or levels of economic integration. The important form of integration are outlined below: Free Trade Area A free trade area is a grouping of countries to bring about free trade between them. The free trade area abolishes all restrictions on trade among the members but each member is left free to determine its own commercial policy with nonmembers.

Custom Union A custom union is a more advanced level of economic integration than the free trade area. It not only eliminates all restrictions on trade among members but also adopts a uniform commercial policy against the non-members. Common Market The common market is a step ahead of the custom union. A common market allows free movement of labour and capital within the common market, besides having the two characteristics of the customs union namely, free trade among members and uniform tariff policy towards outsiders. Economic Union A still more advanced level of integration is the economic union. Apart from satisfying the conditions of the common market, the economic union achieves some degree of harmonisation of national economic policies, through a common central bank, unified monetary and fiscal policy etc.

Economic Integration The ultimate form is full economic integration characterised by the completion of the removal of all barriers to intra-bloc movement of goods and factors, unification of social as well as economic policies and all the members bound by decisions of a supernational authority consisting of executive, judicial and legislative branches. EPZs, EOUs, TPs & SEZs As a part of the export promotion drive, Government have from time to time introduce several schemes to promote units primarily devoted to export. These include Export Processing Zones (EPZs), 100% ExportOriented Industrial Units (EOUs) and different categories of Technology Parks (TPs). In 2000, a scheme of Special Economic Zones (SEZs) was also introduced.

Export Processing Zones/EOUs Export Processing Zones (EPZs) are industrial estates which form enclaves from the national customs territory of a country and are usually situated near seaports or airports. The entire production of such a zone is normally intended for exports. Such zones are provided with well developed infrastructural facilities. Industrial plots/sheds are normally made available at concessional rates. Units in these zones are allowed foreign equity even up to 100%. A Free Trade Zone (FTZ) is different from the EPZ. Goods imported to a free trade zone may be re-exported without any processing, in the same form. But goods exported by units in an EPZ are expected to have undergone some value addition by manufacturing or other processing. A free port is one in to which imports and from which exports are free from trade barriers.

The Kandla Free Trade Zone (KFTZ) set up in 1965, is Indias first EPZ. This multi-product zone is located 10Kms away from the Kandla Port, Gujarat State. The second one is the Santa Cruz Electronics Export Processing Zone (SEEPZ) set up in 1974. This exclusive zone is situated near Santa Cruz Airport, Mumbai. Government also introduced schemes for Electronic Hardware Technology Park (EHTP) units and Software Technology Park (STP) units. 100% export-oriented unit (EOU) refers to an industrial unit which offers for exports its entire production, excluding permitted levels of rejects. EOUs were allowed in industries in respect of which the export potential and export targets were considered by the relevant Export Promotion Council.

Thus, the scheme of 100% export oriented units had been designed to create additional export capacity; units which results in mere substitution for the existing units production were not to be permitted. Special Economic Zones (SEZs) SEZs are specifically described duty-free enclaves, deemed as foreign territory for the purposes of trade operations and application of duties and tariffs. SEZs can be set up for manufacture of goods and the rendering of services, production, processing, assembling, trading, repair, remarking, reconditioning, re-engineering including making of gold/silver/plantinum jewellery and articles thereof or in connection therewith. Units for generation/distribution of power can also be set up in the SEZs. Goods going into the SEZ area from Domestic Tariff Area (DTA) are treated as deemed exports and goods coming from the SEZ area into DTA are treated as if the goods are being imported.

Objectives of SEZ Act Generation of additional economic activity. Promotion of exports of goods and services. Promotion of investment from domestic and foreign sources. Creation of employment opportunities. Development of infrastructure facilities. Indian Scenario The Indian picture has not at all been bright. In 2005-06, the contribution of SEZs to the total merchandise exports of the country was only about 5%. When it has reached the threshold of making a leap forward it is mired in a host of political/administrative and developmental debates, controversies, conflicts and confusions.

After the coming into effect of the SEZ Act 2005,although 154 SEZ were notified as of 3rd October 2007, most of them were of small size; only a few are of more than 1000 hectares in size, with two of them with more than 2000 hectares each. In addition to the notified SEZs, there are a large number which have received formal approvals and in principle approvals. At the end of August 2007, while there were 142 notified SEZs, there were 366 with valid formal approvals and 176 with valid in principle approvals in the country.

After the coming into effect of the SEZ, Act 2005, although 154 SEZ were notified as of 3rd October 2007, most of them were of small size; only a few are of more than 1000 hectares in size, with two of them with more than 2000 hectares each. In addition to the notified SEZs, there are a larger number which have received formal approvals and in principle approvals. At the end of August 2007, while there were 142 notified SEZs there were 366 with valid formal approvals and 176 with valid in principle approvals in country.