Global Economic Perspectives - Essay Example

 Institutions in international Trade – an evaluation of the contribution of one such organization to the process of international trade. Some of the prominent institutions in international trade are: The World Trade Organisation (WHO) IMF and the World bank International trade Organisation (ITO) UNCTAD Aid agencies engaged in trade-related aid throughout the world. National organizations engaged in international trade that represents their nations in international trade. At the end of the Second World War, the allied nations wanted to create organizations that would eliminate the economic causes of war by establishing equal and fair global trade practices that were inherently non-partisan in nature. As a result, the World Bank, the international Monetary Fund and the International Monetary Fund were established, also known as Bretton Woods institutions, named after the resort where the agreement was signed. Of these, the ITO was not created, but General Agreement on Tariffs and Trade (GATT) became the agreement and the organisation to carry forward its mandate. GATT became the WTO in 1995. The major principles around which GATT / WHO function are: Non discrimination: All member countries are treated at par and on the merits of the trade issue at hand and even the smallest members have the opportunity to present their case against any other member irrespective of size or global clout to protect its international trade interests. Transparency: Members of WTO can review and debate issues of international trade and agreements in an open forum, and due its functioning being similar to that of a tribunal, absolute transparency is assured in the search for their resolution in a timely manner. Member-driven organisation: The WTO is run by and for its members, and all decisions are taken with the complete knowledge of all members after consultation in an open forum. The WTO contributes to international trade in many different ways. Assisting developing and transition economies: Out of a total of 148 members, about three fourths are developing countries, and in addition to economies that are transitioning to the open market, play an ever-increasing role in the functioning of the WTO. With the increasing influence of these countries in the functioning of the WTO, as also their increasing influence in world affairs, the WTO assists these nations in meeting their needs and solving their problems. The WTO Secretariat’s Training and Technical Cooperation Institute organizes training programmes and workshops for officials of such governments, either in Geneva or in their countries themselves. These programmes deal with all aspects of entering the WTO, its working and upholding its commitments, to international negotiations. These programmes equip these countries to communicate their needs and national aspirations in terms of trade to the other members, and maximises timely and positive outcomes for such issues. Developing countries, especially the least-developed among them, are helped with trade and tariff data relating to their own export interests and to their participation in WTO bodies. The International Trade center: This arm of the WTO was established by GATT to assist developing countries to promote their exports at a global level. It acts as a consultant to assist countries in formulating their export programmes as also import operations and techniques. It trains personnel in these countries in these practices, and provides these services for a nominal fee. The least developed countries get these services free of charge. The WTO has made and applies specific laws to resolve issues in international trade in goods. Tariff negotiations Anti-dumping and subsidies Technical barriers to trade TBT: Agreement on Technical Barriers to Trade SPS: Agreement on Sanitary and Phytosanitary Measures Trade in textiles Trade in agriculture Global Economy Policy-making: The WTO cooperates with other international trade institutions in formulating International trade and economic policies. These policies set out parameters for international trade as well as dispute resolution. Ensuring free trade and trade liberalization. The WTO gas been instrumental in using its substantial standing in the world to support and even assist countries to deal with economic slowdowns by allowing them easier conditions in international trade and some degree of buffering against pure market forces till their period of vulnerability is past. Steps against protectionism and dumping, both considered improper practices as they artificially stimulate countries into unnatural cycles of economic activity that may spiral into a slowdown or even a meltdown on one hand, or a closing off of world markets into pockets. Aid. The WTO oversees humanitarian or post-disaster aid to countries, and audits the need for such aid, as also arranges for action from countries based on those commitments. It also evaluates the extent, amount, form and intensity of aid and its recommendations are followed. Dispute settlement. The WTO solves disputes between nations or groups of nations on aspects of trade like protectionism, alleged dumping by member states, international patents or violation of intellectual property rights. However there are some exceptions ot WTO’s otherwise equal treatment and non-biased functioning. Free trade agreements Article XXIV of GATT, Article V of GATS Textile trade restrictions, MFA Trade preferences for developing countries National treatment: Negotiated in GATS Non-reciprocity for developing countries in negotiations. Foreign Direct Investment – a critical appraisal of the step taken by one business organisation to engage in FDI. We shall look at three parts to the answer. FDI in developing nations, with a focus on India. Hospitality sector FDI in India. Appraisal of steps taken by one business organisation (Marriott International in India) In the past few years, FDI has increased at a robust rate of growth, and it has been seen that FDI in developing nations has been substantial, to the extent that it has been acknowledges as an engine of growth for these nations. It has also been seen as a barometer of the world’s confidence in a nations future. In countries like India, a comprehensive set of laws have been formulated to facilitate FDI in various sectors. Several companies with a global footprint have already set up base in India, and many more are in the process of doing so, attracted by a holistic approach in policy-making by the government and the huge largely untapped market of one billion strong individuals. FDI in India continues to face some problems. Bureaucracy and red tape. Lack of stability in the central government, and therefore a slow down of reform and policy-making. Infrastructure: Availability of basic infrastructural needs for any project, like power, water and access is not consistent, and infrastructure often needs to be developed at the project promoter’s cost. Rampant corruption, despite government policies to streamline and speed up procedures, including single-window clearance. Commercial Law and Government regulations: Indian company law has undergone a number of significant changes in 1999, supposedly paving for smoother inflow of FDI. The Companies (Amendment) Act of 1999 allowed Indian companies for the first time to buy back their shares and substantially relaxed the restrictions on inter-corporate loans and investments. Multiple taxes: India has a complex tax structure that varies from state to state, resulting in double taxation at times. Sectors like hospitality are taxed at 35% as against 10-15% in other countries in the Asia-Pacific region. FDI for the hospitality sector in India has been a profitable venture for all comers, with the sector currently suffering from a shortfall of 130000 rooms. There have been policy decisions to speed up FDI in this sector among others, by introducing a straight no-permissions-required approval for 100% FDI through the ‘automatic route’. This has allowed these companies to continue to control their oversees interests in India, while maintaining the option of exiting if required. Marriott international took a conscious decision to enter emerging markets and developing Marriott international has completed ten years in India, and has entered the Indian hospitality market with three specific goals. Tap the market of India’s emerging middle class with their larger disposable income, and the fruits of a much steadily rising number of business travelers that constitute domestic tourism in India. Position themselves as an International brand in India with an Indian ethos while serving their customers with a global level of service. Use the considerable resources at their disposal to tap the market in business and leisure hospitality properties in tier 2 and 3 cities in India. Marriott entered India with a high initial investment in terms of number of properties and target demographic, as that would launch the brand without diluting it, and by leveraging the economies of scale for their operations. In addition to the above, Setting up a 300 room hotel India costs between $50-$80 million, considerably less than in the west. A completely indigenously hired team was employed, including the Managing Director, and the whole hospitality vertical as also consultants for their properties. Teams were trained extensively in Marriott’s methodologies and methods before the opening of all properties. The underlying strategy of Marriott international is to build a brand in India by studying local cultural and business nuances and by hiring a group of local people from all walks of life to work in their properties, thereby reducing cultural alienation of their company. Marriott has also been actively involved in promoting several social causes and humanitarian initiatives. The company has also learnt from other multinationals like KFC who have run afoul of locals, by paying particular attention to local perceptions, and by setting up operations in a very transparent and culturally-sensitive manner. A consideration of the risks involved when participating in international trade. An understanding and a plan managing risks is essential for the preparation of any plan for international strategy. The risks of international trade and some steps to manage such risks are: Customer risk. The credit worthiness of the customer or the international partners in business is essential. These checks include a. Checking on the legal existence of the entity in the country of trade. b. Checking the usual credit period offered in the target country. c. Affirmation and confirmation of the credit limits offered to the trade partners. d. Confirming whether the partners are comfortable with your trading model, and are able to actually add value to the venture in their country. e. Checking insolvency. Will the business partners and the team have the resources and working capital to last through the gestation period, until trade starts offering profit? Country Risk. These are of three basic types. a. Sovereign: It is the ability of the government to pay or service its debts. This depends on the country’s political climate, threats to the country, international trade performance and the balance of payments record for the country, as also other factors like FE reserves and national debt. Other political reasons may include trade barriers, quotas, embargos or other restrictions like anti-dumping duties and other tariffs. b. Private: depends on the state of the economy and the propensity of the private sector to pay for its debts. The strength of the domestic financial institutions and the competence of its banking and financial sector. c. Natural: An evaluation of risks posed by natural phenomena that occur with a frequency to pose a credible risk of business-discontinuity in the country. Credit Risk: is the risk during the process of extending credit in any form to partners in international trade. The methods to manage credit risk involve ascertaining: a) What is the maximum amount of credit to be extended to the partners, and under what circumstances. b) How will the offered credit period be financed. Will the company have sufficient liquidity to allow credit terms as a part of international trade as a regular part of the business cycle. Foreign Exchange risk: occur as a result of fluctuations in the exchange rates of different currencies. These changes pose risks that have to be managed. Cultural risks: are risks faced due to a lack of understanding or misunderstanding arising out of a lack of study on the local culture of the partner country. These risks often result in misconceptions about the trading entity, and cause losses until issues are resolved and business returns to normal. Intellectual property / copyright risks: these are risks associated with created content or creative content that may be misused or distributed illegally in other countries unless legal ramifications and potential losses are not quantified and compensated for. These risks are associated with movies, music, books, software etc, and involve unauthorized duplication and piracy. In India it also includes widespread plagiarism of feature films from Hollywood. Ethical risks: are risks to the image and moral position of any entity, and may occur due to non-pracitce of ethical business practices. These include a) Bribery of local officials, or kickbacks or commissions paid to get any work done or permissions from authorities. b) Use of trade to inflict unfair conditions on the partner country by dumping, rate manipulations or any other unfair practice. c) Use of child labour, or any activities contravening international law. Management of risks: Companies can take several broad measures to mitigate risks in international trade. These steps are: a) Preliminary study and survey on the country of business, its business practices, its financial and political condition, and its capital structure. b) Study of the prevailing situation in its own sphere of trade, and an objective assessment of potential opportunities and pitfalls. c) Communication with locals and empanelment of local experts to advise. d) Insurance of its commitments. e) Assessment of credit risks and formulation of an exit plan, with clear indicators of triggers to exit. f) Partnership with local organisations to dilute exposure to local fluctuations in circumstances. g) In case of a service-oriented foray into international trade, the involvement of local people is very important, as it mitigates the risks associated with cultural disconnects. It is also essential for the proper positioning of the brand in the market. Local expertise also assists in tapping opportunities that are not apparent to a foreign organisation. h) Sources within the government and local authorities are essential to advise on policy decisions. i) A strong local legal team to assess and carry out due-diligence for all large immovable purchases like land, offices, warehouses etc. j) Practicing of responsible trade, and procedures of ‘self-auditing’ of parameters on ethical business and trade practices. k) A totally transparent and unbiased zero-tolerance policy towards unethical trade practices. Governmental Intervention in international trade There are essentially three situations or scenarios in which governments intervene in markets or in international trade. 1. Corrections and distortions in the market: Such interventions are made by the government when allowing natural market actions would cause an unacceptable amount of damage. Such interventions assist in correcting balance in the financial landscape of a nation. 2. Redistribution of income. These happen as a matter of policy in all nations, as differential income tax slabs. Similarly, different goods and services are taxed differently, so as to regulate supply and demand. In some countries, essential commodities like petroleum and ATF manufacturing are totally state controlled, and prices are subsidized, to increase affordability for poorer citizens. The government also has the choice of regulating import and export of agricultural products, to regulate supply, and to prevent dumping while protecting domestic markets without overt signs of protectionism. 3. Non-economic intervention: These interventions in trade are usually of a humanitarian nature, usually after natural disasters, when the government buys relief and rehabilitation supplies and makes their supply cheaper by waiving taxis or adjusting tariffs temporarily. Such intervention also occur in the case of large infrastructure projects like dams, and procurement thru trade for materials required for their construction. Other forms of intervention in international trade by governments are: Subsidies to certain industries as also facilitation to assist international trade for some industries. Governments often support their indigenous handicraft industries so as to bring prosperity to the lowest financial rung of their citizens. When the same actions are taken to encourage the growth of industries against other nations, it is known as protectionism. Direct tax subsidies or exemptions that are dependant on export performance of industries. Preferential bank financing and underwriting of loans to assist in the growth of production and cost-concious exports. Provision of land and raw materials for industries with a reduced taxation structure. Encouragement of mergers and acquisitions within an industry or a sector to consolidate resources to become more competitive, or outright investment in a sector for similar purposes. Easier debt-refinancing for existing loans from state-owned banks and financial institutions for sectors facing a cash crunch. Provision of SEZ (Special Economic Zones) to encourage trade in specific sectors, and to encourage FDI and give an impetus to international business in goods and services. These areas also have very superior tax structures, including 5 year tax holidays and no central government taxation at all. This provides the goods and services produced therein with a cost advantage while providing employment to thousands of people. Restricting the imports of certain goods and services by taxing them heavily, thus protecting the domestic economy. The WTO assists and formulates global policies with governments, so as to achieve free trade without disparity and discord between nations. Recently, USA has proposed a higher tax structure on companies that outsource to other countries, thereby intervening in international trade. This has been seen as protectionism by many, but has been precipitated by the increasing unemployment in the USA. It has also been seen that USA has been losing out on cost competitiveness to countries like India and China due to outsourcing. Theories of international trade Ricardian Model: This theory has been propagated by David Ricardo, who has been credited by theories of economics like the Law of Diminishing returns and the Theory of Comparative advantage. The theory is one that is based on each country producing what it specializes in, thus manufacturing the goods and services most efficiently, and thus of the best quality and at the lowest price, and trading it with other countries that manufacture what they specialize in. To a large extent, this theory is in practice in the world today, as some countries produce and export their specialized products, in exchange for other goods produced elsewhere. He also propagated the concept of minimum wage, as he believed that goods produced by skilled labour would be better, and would demand a higher price. Ricardo also thought that every product’s price should include the cost of labour or machinery that was utilized to produce that item. These theories, though propagated in the 18th century, form the basis of modern economics and international trade. Heckscher-Ohlin model: The Heckscher-Ohlin model was introduced as a more complicated alternative to the Ricardian economic model, but was not proven as a much more accurate model. This model predicts production and export of goods that are produced using abundantly available raw materials and skills, and import of goods made with materials and skills scarse in that country. It is a theoretically sound theory, but fails empirically, probably due to vast deviations in actual circumstances and its assumptions. Problems in the Heckscher-Ohlin model appeared during Professor Wassily W. Leontief's attempt to test the Heckscher-Ohlin theory empirically. It was found that America, despite being the world’s most capital intensive nation, exported labour-intensive goods and imported capital intensive commodities, in contradiction of the Heckscher-Ohlin model. This is known as Leontief paradox. Core assumptions of the H-O model: (1) Labor and capital flow freely between sectors (2) The production of shoes is labor intensive and computers is capital intensive (3) The amount of labor and capital in two countries differ (difference in endowments) (4) Free trade (5) Technology is the same across countries (long-term) (6) Tastes all over the world are the same Specific Factors model: This model postulates that in the short term, specific factors of production cannot be moved between industries or sectors. In the Ricardian model, labour is considered as the only factor of production, and is fully mobile. However, in real economic reality, a country may benefit from trade as a whole, but the utilisation of various factors of production effect the distribution of income within the country. The Specific Factors Model identifies and analyses the distributive effects of trade on income, assuming three major contributory factors of production; Land, Labour and capital. This model predicts the presence of winners and losers from trade, but an overall profit from trade. The specific factors model of international trade is accurate for modeling trade behavior within an industry, but does not lend itself well towards analysis of trade patterns. New trade theory The theory supports the view that a protectionism-created artificial monopoly for producing goods in an economy can grow to a sufficient size as a protected monopoly, before being allowed to compete internationally. This theory is fundamentally against free trade in the initial stages of an industry’s development, on the assumption that a lack of international competition shall allow domestic industry to grow by leveraging its status as a monopoly, thereby growing faster than in a competitive environment. Although the concept was not new, its mathematical basis was thorough, and argued that development of specific industries from inception to international stature was path-dependant, subject to tariff control and other measures that can only be called protectionist. This theory was formed and presented at a time when protectionism was not a bad word, as the world was much farther from pure free trade than it is now. Japan is cited as an example of positive outcomes from ‘intelligent’ protectionism, countries like India, that protected its core industries for the same reasons, found themselves decades behind the rest of the world, and found competition through economic reform to be the only way to move towards progress. Gravity model The gravity model is an econometric model, was initially not based on a theoretical model of international trade. It is known as ‘gravity model’ doe to its apparent similarity with Newton’s laws of gravitation. It states that bilateral trade between any two countries is positively related to their relative sizes and negatively related to the cost of trade between them . According to this model, parameters such as actual physical distance, common language, common history, colonial links, common currency, movement of humans as migratory flows etc are the variables that effect international trade between two countries. Although estimation of patterns in international trade using the gravity model consists of physical factors like distance and relative sizes of populations and economies of trading countries, it has also been used to test hypotheses put forward by purely economic theories of trade. An examination of cultural and ethical considerations involved in international trade. In the modern world, and corporate entity of any size that indulges in any form of international trade has to formulate procedures that benchmark its cultural and ethical footprint in its country of trade. Although ethical and cultural considerations are often enmeshed in their projection, we shall enumerate them separately. Cultural considerations: Knowledge and awareness about different norms of communication, body language and nuances of expression. Awareness of religious beliefs and potential disconnects arising out of current topics of contention and debate. An attempt to understand their perception of your company and its intentions. This especially relevant while trading with developing nations or nations with an unpleasant colonial past. Historic stereotyping should be shunned, and all relationships should be built on transparency and clarity of purpose. Willingness to adapt to the other culture and its work environment. An attempt to run roughshod over local methods will invariably be a failure. Awareness of local social customs, value differences, priorities and customs. Understanding direct and indirect communication. What may be considered professional and ‘to-the-point’ in one culture, may be considered rude and obnoxious in another. Following protocol according to local customs, including terms of addressing peers, seniors and methods of greeting. Understanding the social hierarchy of the trading partner country and adapting to a hierarchal structure that they can relate to. Undertake comprehensive socio-cultural research prior to advertising, as some of the biggest mistakes in international product launches have been due to lingual gaffes. Ethical considerations: Multi-national companies have an obligation, especially when entering developing markets, to fulfill certain ethical and social obligations towards the host country’s citizens, even if not expressly required to do so. They should also not indulge in any practice, which may directly or indirectly cause harm to the country of trade in the short, medium or long term. The United Nations has enumerated obligations in the areas of human rights, environmental awareness and labour standards that serve as a guide. However, every country and every industry faces challenges that have to be dealt with individually and responsibility. Business should support and protect human rights within their area of influence, and should monitor any infraction of these rights by any employee, either explicitly or implicitly. Careful review of direct and indirect impacts of doing business in any form with countries, governments or organisations with poor human rights records. The same standards to labour in terms of quality of workspace and work should be accorded to employees irrespective of their nationality, location or context. Elimination of forced labour and child labour. Eliminate any discrimination on the basis of caste, creed, religion, sexual orientation, gender or any other basis except merit. Refusal to use bribery in any form, to anyone in order to expedite business. Provide social initiatives in for the local community where possible, with stress on alleviating region-centric problems like illiteracy, hunger etc in whatever way and at whatever scale possible. Involve locals in the operations of the company, as that enriches the company itself, while making its operations more local. Such steps also motivate the community to consider the company as their own, and not an alien entity. Encourage the application and use of environmentally friendly technologies and methods, and spread their awareness as much as is possible. Empower and educate locals towards sustainability and encourage local ‘green initiatives.’ Protectionism; current economic climate and the future. The current financial crisis has hit businesses all over the world, to the extent that nations that had been the proponents of pure capitalism unfettered by governmental interference are the most deeply hit. The United States’ banking system had been functioning in an artificial bubble of apparent prosperity that burst with the sub-prime crisis, and took along with it several British, European and Asian banks due to their heavy investments in these institutions. As a result of the drying up of credit, working capital for companies became hard to come by as short term loans dried up. The situation recently was at its worst, which resulted in the governments of the world literally buying into these financial institutions to keep basics like the insurance sector and pension funds of working Americans afloat. Due to these recessionary cues, unemployment is increasing at an alarming rate, industrial production is declining, and consumerism, the basis of the American way of life, has slowed down. Americans are spending less, as the economic uncertainty forces families to cut back on non-essential expenditure. As a step towards arresting the increasing unemployment numbers, the US government is proposing no aid and additional taxation on companies that outsource to other countries. This is being seen as protectionism, and has been admitted as such by the US president. As it has been seen since the G-20 summit in London, although the problem is global, every country is trying to protect itself and its economic interests by trying to insulate itself from the problem. This has given rise to several instances of knee-jerk protectionism that are more populist than effective. However, protectionism as a phenomenon has been there since international trade began, with several countries protecting their industries from international competition, often for decades, using unfair trade practices and tariff barriers. China has used every method of protectionism and dumping to encourage its steel industry, at the cost of transparency and accountability. The only method by which the current economic crisis can be overcome is by dealing with it as a cohesive entity, without protectionist measures, as these will harm the very industries that they were supposed to protect in the long term. For example, if outsourcing of software development to India is stopped, these companies will stop having access to a vast pool of talent and shall not be able to make cheaper, better software while these protectionist policies are in place, thus losing out on progress and market share. Protectionism by a government takes three forms; direct subsidies, indirect subsidies and structural subsidies. Some protectionist steps taken by governments are: Tax reductions on export performance. Preferential financing to certain sectors and industries. Low interest loans and debt write-offs for chosen industries to increase profitability to garner larger market share as compared to imported products. Energy and raw material grants. Provision of land and infrastructure at low cost, in the guise of generating local employment, while making competitors products less competitive. Directed credit form state-owned banks, with lower than market interest rates. High Import barriers to encourage use of domestic products. Creation of Special Economic Zones, with very liberal tax structures and extensive tax holidays. High import duties to discourage import of selected products. Governmental intervention in formation of corporate policy and strategic investments abroad. Although some of these steps, though protectionist, are not necessarily negative when viewed in a broader context. For Example, India has very high import duties to discourage used cars being imported into India, simply because the road infrastructure in India would not be able to support a meteoric rise in cars. Predictions for the future: Despite the protectionist measures undertaken by several governments, the positives from an open economy thriving on free trade based on the merit of the product far outweigh short term advantages of these measures. In the US, the companies that shall continue to use outsourcing as a part of their global business model shall see profits from their larger talent pool overshadow the tax saved by staying local. In the long term, outsourcing frees up more high-value processes to be developed in the US, with a much more productive workforce. Due to the internet, the impacts of psychic distance on perceptions of international trade are negligible. Any country can sell its best goods and services to any other country, irrespective of its physical distance. This has ensured the movement of the world towards free trade, though with a higher amount of involvement and regulation from governments so as to prevent another economic crisis in the future. Read More