International Business Practice - Assignment Example

?International Business Practice Introduction: The term ‘Preferential Trade Agreement’ refers to agreements under which member s impose lower incidence of trade barriers on goods produced within a country, offering some degree of flexibility and allowances for member countries to the extent of such reduction. In other words, it could also be seen as offering preferential treatment to certain trading partners. Common examples of Preferential Trade Agreements (PTAc) could be in terms of the Andean Pact and the Central American Common Market (CACM). The major off shoots of preferential trade Agreements are trade creation and trade diversion. Trade creation occurs when domestic production is substituted with imports from member states; sometimes it entails the condition of a less efficient system, albeit there is reduction in trade transaction costs. However, trade diversion occurs when it is carried out with member states. Whereas, earlier, trade was being carried out with other countries outside the Union. The portion of trade that was carried out with other countries or states is now diverted to member states under preferential trade agreements and due to this, trade diversion occurs. There are several reasons why countries resort to signing PTA; the main reasons are as follows: The underlying influence of Europe: The shift of the American Position Unbalanced nature of current multilateral trade regime and utmost dissatisfaction with it. Besides modern trade barriers are much more complicated in multilateral settings and most countries find it easier to deal with regional or sectoral trade. Failure of the World Trade Organization (WTO) to become a major stabilizing force in global trade It is now necessary to consider each of these aspects individually and separately. The underlying influence of Europe: The influence of the European Community (EC) now known as the European Union has indeed been formidable. Although it faced several setbacks during 1992, it was successful in overcoming mighty odds in its search for regional trade co-operation The EU has been able to achieve despite the challenges it had to face, a major expansion of the European community, in terms of scope, depth and geographical coverage. “This success has undoubtedly had a demonstration effect, encouraging emulation in the form of regional initiatives in other parts of the world” (Frankel, 1977, P.5). The influence of the EU on setting up of several regional PTAs has indeed been reassuring, especially in the case of PTAs like the European Free Trade Association, (EFTA), Andean Group, Mercosur and ASEAN. The shift of the American Position: With Europe entering into progressive trade unionism ostensibly to avoid the prospects of further wars, America now needed to adopt a stance of its own, although without confronting the EC plans. It turned towards geo-political solutions and “proposing a new round of liberalization negotiations in the GATT so as to keep the momentum in the multilateral direction.” (Frankel, 1977, P.5). Since then American policies have shifted from multilateralism to regional trade partnership, which is quite evident from the US -Israel Free trade agreement and the Caribbean Basin initiative. “Where the Americans had previously reacted multilaterally to European action on the regional front, now they reacted regionally to European Action on the multilateral front” (Frankel, 1977, P.5). The American policies were clear cut and transparent – if the multilateral routes were closed, they were ready to explore regional routes for trade development and believed that the breakdown of such barriers was essential for trade to flourish. There were several factors that contributed to the US trade policy. The first being that over the few decades, the US had lost global hegemony it had enjoyed since World War II, and its trade position has slipped down alarmingly in recent years. Secondly, the EU has been a strong economic and trade force in Europe and has matched US supremacy. Under such circumstances, the US had no alternative but to protect its own turf through regionalists trade covenants with nearby countries, taking a cue from the EU; and the others, competing against regional trade agreements. Thus, realization having dawned now that now its global trade dominance is on the wane and that there were other powers that could now lay claim on being economic Super Powers, US has begun concentrating on protecting its own territories and consolidating its regional trade alliances Unbalanced kind of current multilateral trade regime: While multilateralism in trade has lost much of its sheen due to regionalist proclivities by many countries, it would also need to be mentioned that adherents and practitioners of multilateral treaties and progressive steps had done little in terms of helping global trade to and progress and maximize. By adopting individualistic and opportunistic designs, mainly to promote their own vested interests, many developing and Third World countries were totally dissatisfied with trade multilateralism since it did not address their problems nor created conditions for better and proliferating trade. Thus smaller nations were forced to huddle in a corner and work things out for themselves. There were, consequently, corresponding growth of regional trade agreements, with active participation of developing countries. For instance, in year 1991, Mercosur was formed between four countries in South America, that is, Argentina, Brazil, Paraguay and Uruguay. However, , Venezuela and Colombo rekindled the Andean pact in the North West parts of that country and also agreed to establish common markets within a period of two years. Whereas, the South east Asian countries decided to form the Asean Free Trade Area, thereby consolidating their hold and influence in those regions. These alliances took place since the trading world was disillusioned with multilateral agreements, which did nothing except accentuating the dominance of stronger countries over the weaker, so much so that even wealthy nations considered trade only with equal partners. This polarization of world trade on regionalist patterns had both pros and cons. On the good side, it made the countries economically more sound and commercially viable and also enforced a regime of economic progress with the dismantling, or reduction of trade barriers. Moreover, slow developing countries in many regions accelerated their pace of development through trade deals and agreements. Modern trade barriers are very complicated and most countries prefer dealing with regional or sectoral trade over operating trade deals with distant and uneconomic trade partners, which was unviable, costly and onerous. On the other side, often less influential countries could not gain good trade partners because of this policy of discrimination and regionalism. However, the biggest danger was in terms of regional blocks that could polarize trade along regional and geographical lines, thus defeating the purpose of agencies like GATT, ushering in a borderless and barrier free economic order, which was what the US and other major powers were intend on. However, the US and other trade Super Powers had only themselves for the sordid and preferential genre of trade that had evolved over the years. When the big powers themselves indulged in differential and discriminating trade links, they could hardly blame smaller countries for adopting a regionalist and preferential trade order, since they also needed to form trade cliques and associations to survive in a tough and competitive global marketplace. Besides, except for heavily endorsing GATT and its trade ramifications, and forming trade alliances on multilateral lines, the big powers had hardly attended to the trade demands of smaller and less developed counties in the globe. Perhaps regionalism and PTAs would have been natural and innate outcomes of the trade policies pursued by richer and more influential countries to establish their own hegemony over world trade: perhaps to their own commercial advantages and benefits. Failure of World Trade Organization (WTO) to become a major stabilizing force in global trade The World Trade Organization, (WTO), is the main global forum in bringing about growth and development in free trade without any kind of discrimination, drawing up the chart of worldwide trade. However, it has been held up in controversy and seen to be influenced by the trade motives of only rich countries, thus worsening the lot of the poor and inviting remonstration and intense criticism from several quarters. Being very opaque and not allowing enough public participation, while being very gracious and co operative to only big business enterprises that do not help the claims of free, open and democratic countries, the WTO becomes an organization with a bias view. Importing nations cannot distinguish how something is made while trading, though it may be reasonable along the norms of equality in trade and non discriminatory, the truth is that some nation-specific laws and decisions for the safeguard and defense of the health, surroundings and regional economies have been certified as obstacles to free trade. Countries that take pride in membership of countries cannot protest against compulsory trade or use of generically engineered food or synthetic or food products that possesses fundamentally processed growth chemicals that could result in health hazards. . Besides, various global trade agreements have been marketed in such a way that they often undermine local laws and constitutions. For example, if local health or environmental protections are in conflict with such trade agreemens, then they often have to be revoked or modified to enforce their implementation. Besides, the influence of WTO has been more to suit the whims and fancies of richer and more industrialized nations at the expense of poorer and less competent ones, thus leading to mismatch between trade relations that ought to have been started on equal footing basis. Gravity equation: Coming next to the Gravity equation it is seen as follows: Fij = G Mi Mj / Dij Fij is the Flow of goods from State i to State j The denominations Mi and Mj are the sizes of economies i and j. Dij is the distance between i and j. G represents “everything else”; known as the “gravitational constant.” Thus interpreting this above equation would bring the following results: Flow of goods from country i to country j could be seen as the gravitation constant x sizes of the economies i and j / the geographical distance between country i and j. Before going into deeper waters on the gravity matter, it is important to understand its relevance in the matter of trade, especially, trade between geographically proximate countries. The limited popularity of Gravity Model is important when one considers: 1. Its practical success in predicting bilateral trade amongst countries 2. Improved subjective foundation and modern theories of trade, especially in the matter of modern theories of imperfect trade substitutions and finally 3. A novel approach by economists to consider geographical aspects in terms of being physically placed in specific locations rather than separate builds. Next, hazarding a common definition of the gravity model- it could be said to be bilateral trade in its more basic form, states that trade between countryi and countryj is proportionate to products of GDPi and GDPj and inversely related to the distance between them. Moreover, there are other dummy variables also which are to be considered, like aspects of landlocked countries, geographical, cultural and language similarities, and of course sharing common borders. Geographical proximity offers scope for better trade among countries and this could be reinforced by the above mentioned dummy variables, which could be used to consolidate the interpretation of data though not as solid and underlying evidences. Many theories for gravity models have been placed forward by theoreticians and practitioners and each has its own advantage and disadvantage. But by far, the best interpretations that bilateral trade is dependent on GDPs have been made by Helpman and Kruger who argue that consumers seek varieties in the goods they purchase and consume, products are differenced by firms and not countries of origins and such firms are “monopolistically competitive.” (Frankel, 1977, P.53). To the uninitiated in complex masses of statistical data, it is easy to acknowledge that trade would indeed depend positively upon the incomes of countries, on one hand, and inversely depend to their geographical distances on the other hand. Transportation costs plays an important part most occasions as it falls in the sphere of the importing country. The more distant the proximity between countries, the more transportation al costs would have to be incurred. The Model also recognizes the lesser roles played by, for instance, sharing of common borders, considering India and Pakistan, who share common borders, people could nip across each others countries and purchase whatever they wishes and come back, just on an overnight trip. This Model makes a major differentiation between industrialized and developing nations. Perhaps this could be due to reasons like more data is available on industrialized nations, the influences of European Community or European Union as it is known now. One needs to concern oneself with important determinants like GNP and population. This is because some countries believe in the revenues that occur from trade, while for others it is just that their larger population could provide the necessary impetus and stimulus for trade especially human capital. Thus while countries like Singapore and Malaysia would be thinking in terms of growth through larger largesse of trade revenues, countries like China and India (1.4B population) would be seeking to use large human capital for trade in goods and services. Conclusion: The results of empirical studies have proved beyond reasonable doubts that 5 statistical gravity variances with strong statistical significance, are indeed valid. Besides, Preferential trade agreements are on the rise, as is evident that a plethora of PTAs are increasing over time; and trade agreements and links are being reinforced. The Models of Andean Group, Mercosur, ASEAN, have truly and correctly reflected the success stories of PTAs not only in a regionalistic basis but also on a larger global canvas. Thus is also true in the case of agreements that have been signed under the aegis of the European Union, the trade agreements conducted by America, Eastern Asian countries and other trade Blocs. Finally, it needs to be concluded that PTAs have to rebuild themselves and serve a greater cause not only for the member countries who benefit from them economically and trade wise, but also in terms of creating a new trading world order, departing significantly from the erstwhile concepts of large powers and power blocs that completely dominate the trade scene, marginalizing and even encroaching on the growth prospects of lesser developed and developing nations. The time is now ripe for regional covenants that not only imbibes the spirit of a borderless and discrimination free trading environment but should also consider the global scenario, in terms of creating a better, more diversified and modulated world trade order without parochial considerations. No country is an island, at least not in terms of trade with the outside world, and all need to bring themselves on a common platform in order to sink regional and parochial differences and work towards global progress and development. It is only then, that global trade would continue to grow and flourish in the coming centuries, as it is based on the principles of free enterprise, goodwill and mutual understanding and respect for each trading nation, free of discrimination or vested interests. The larger trading partners need to set personal examples to smaller ones in terms of how well and robustly overall development and growth prospects in trade could be carried out. Reference List Frankel, JA., 1997. Regional trading blocs in the world economic system. [Online] Peterson Institute, Available at: http://books.google.com/books?id=1GNwBYHpy3cC&lpg=PP1&dq=frankel%20regional%20trading%20blocs&pg=PP1#v=onepage&q&f=false [Accessed 29 March 2011]. Read More