Economics of Global Trade and Finance

7/27/2019 Economics of Global Trade and Finance

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ECONOMICS OF GLOBAL

TRADE AND FINANCESEM I


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International Trade : Is the conduct of business

transactions across national boundaries.

People in nations tend to produce those goods and

services for which they are best suited and then

exchange those with other nations for mutual benefits.

Thus, items tend to be produced in those countries

where its cost of production is lower. And thenexchanged it with other nations for profit.

INTRODUCTION: INTERNATIONAL TRADE


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International Trade

Comprises of Imports & Exports (foreign trade)i.e. buying and/or selling abroad to fulfill needsof company.

International Trade is trans-bordertransaction between

a) Private party to private party abroad

b) Private party to foreign government

c) Home govt. to foreign government &d) Home govt. to private party abroad.


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Items involved in International trade are

a) Merchandise or Goods (commodity or brands)

b) Services

c) Investments

d) Technologies etc.


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Difference between Domestic & Internationaltrade

Specific Terms : The terms import & export are

used only in international trade.

Heterogeneous markets : Internal trade is among us

while international trade is between us & them.Political differences : Each government applies

various regulations to protect its own interests. Eg.

Tariff barriers, quotas etc.


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Difference between Domestic & Internationaltrade

Different rules : Different nations have differentnorms for trade. Businesses have to take care of adifferent set of external environment.

Different currency : Most important difference. Eachcountry has a different currency policy. Fluctuationsin exchange rates make a huge difference.

Factor immobility : Factors like labour, capital,

enterprise are immovable.


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Gains from International tradeOptimum allocation of world resources.

Gains of specialization.

Enhanced wealth.

Larger output.

Global welfare.Cultural exchange.

Partial solution to the problem of scarcity.

Advantages to global consumers due to increasedcompetitiveness. Wide & open market for gainingeconomies of scale.


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Types of Tariffs

Tariff is a tax / duty payable when goods enter into a country.

Tariff can be classified by the merit of :

Direction : Import / Export

Purpose : Protective / Revenue

Rates : Specific duties / Ad Val Orem duties

Length : Tariff surcharge / Countervailing duties.

Distribution Point : Single Stage / Value Added / Excise tax.

Non Tariff Barriers : Subsidies / Classification / Valuation /Documentation / Quotas / Health & Safety regulations etc


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10/10/2013 Presentation by Prof. H.Ganguly 9

Tariff & Non-Tariff Barriers on Sourcing

In order to achieve InternationalPolitical ambitions in addition toi) generating revenuefor the nation and

ii) checking outf low of foreign exchange;

nations impose Trade Barriersas Tariff & Non-Tariff barriers.

A. Tariff Barriers -- are artificial blockades put in the path ofSourcing through taxes and duties like :

a) Specif ic Duty --Customs duty realised on import of goods into the

nation per unit, volume, weight etc. For example, charging specific duty

@ Rs. 100/- per shirt, Rs. 20/- per kg. of Steel or Rs. 6.50 per litre ofmilk etc.

b) Ad valorem -- Customs duty levied as a percent of value orprice ;

e.g. 10%, 50% etc. of FOB price. For example, customs duty @ 24.5% on

F.O.B. price of Petroleum jelly imported into the country.


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c) Compound Duty -- It is a combination of Specific and Ad valorem

duties. For example, customs duty on automobiles may be charged

@ 150% of C.I.F. value of price + Rs. 50/- for every kilogram of itsrubber content.

Depending upon purpose , the type of duty viz. Specific,

Ad valorem or Compound and their values are decided.

Effect of Tariff Barrier

1. Due to tariff barrier, the price of supplies increase on landing at

buyers nation because of which export price of finished product

(containing the imported item) gets increased, leading to fall in its

competitiveness when exported.2. Tariff barrier on imports increase FDI into the nation, leading to

increase in competition.

3. In cases of Import tariff, price in sourcers country goes up leading

to fall in demand locally.


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B. NonTariff Barriers :

These are artificial barriers put in the path of imports from

countries abroad through means other import and export duties. These arelevied for protective and political purposes in the form of

i) Price-influencing Non-Tariff Barriers &

ii) Quantityinfluencing Non-Tariff Barriers

i) Price-influencingNTBs --

1. Production Subsidies -- Monetary assistance provided by Govt. to

make products competitive in export markets e.g., Govts. of US, EU,

Japan etc. provide subsidy on export production of agri. items to farmers.

2. Indirect Subsidies -- When some of the expenses in production are

defrayed by Govt. e.g. cost of seeds, fertiliser, water, electricity etc. In

agri. production as provided by Govt of India.3. Conditional Subsidies -- Monetary assistance provided by Govt. on

fulfillment of export related targets.

4. Countervailing Duties -- When importing nations economy is

adversely affected by export subsidies provided by exporting nations,

importing country can levy Countervailing duty to neutrslise its effect.


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5. Antidumping Duties -- When a nation exports a product at a price

lower than its home-country price or manufacturing cost, it is called

Dumping. Importing nations may levy a heavy charge in such casescalled Antidumping Duty to check injury to domestic industry.

6. Consular Formality -- Some nations insist on legalisation of

exporters documents by consulate of their nation in exporters country for

payments through bank.

i i ) Quantity

inf luencing NTBs1. Import Restrictions -- Some nations insist upon import licences to

allow import of restricted items.

2. Export Quotas -- Some nations work on a quota for exports. For

example, OPEC nations fix quotas for quarterly quota of nations.

3. Foreign Exchange Regulation -- Nations facing Balance of Paymentcrisis, may impose restrictions on imports and payment in foreign

exchange .

4. Technical & Administrative Regulations -- Many nations impose

restriction on packaging and information on labels .

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DUMPING

In international trade, the export by a country or

company of a product at a price that is lower in the

foreign market than the price charged in the domestic

market. As dumping usually involves substantial exportvolumes of the product, it often has the effect of

endangering the financial viability of manufacturers or

producers of the product in the importing nation.


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Japan was accused of dumping steel , tv sets , computer chips inUnited States.

Most industrial nations (majorly Europian Nations) have tendencyof persistently dumping excessive agricultural commodities arrisingfrom their farm support programs.


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Types of Dumping

1. Sporadic Dumping: Occasional sale of a commodity at below costin order to unload an unforeseen and temporary surplus of thecommodity such as cheese, milk, wheat etc. in the

international market without reducing domestic prices.

2. Predatory Dumping: Temporary sale of a commodity at below itsaverage cost or a lower price abroad in order to derive foreignproducers out of business, after which prices are raised to takeadvantage of the monopoly power abroad.

3. Persistent Dumping: Continuous tendency of a domestic

monopolist to maximize total profits by selling the commodity at ahigher price in the domestic market than internationally (to meetthe competition of foreign rivals).


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Causes of Dumping

Dumpig usually occurs because of the following reasons:

(1) Producers in one country are trying to stay competitive withproducers in another country,

(2) Producers in one country are trying to eliminate the producers inanother country and gain a larger share of the world market,

(3) Producers are trying to get rid of excess stuff that they can't sellin their own country,

(4) Producers can make more profit by dividing sales into domestic

and foreign markets, then charging each market whatever price thebuyers are willing to pay.


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SUBSIDIES

A subsidy is a grant or other financial assistance given by one partyfor the support or development of another.

The most common definition of a subsidy refers to a payment madeby the government to a producer. Subsidies can be direct cashgrants, interest-free loans or indirect tax breaks, insurance, low-

interest loans, depreciation write-offs, rent rebates. This form ofsupport can be legal, illegal, ethical or unethical. Subsidies are usedfor a variety of purposes, including employment, production andexports.

Subsidies are often regarded as a form of protectionism or tradebarrier by making domestic goods and services artificiallycompetitive against imports.


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Types of subsidies

Production SubsidyA production subsidy encourages suppliers to increase the output ofa particular product by partially offsetting the production costs orlosses. The objective of production subsidies may be to expandproduction of a particular product at a lower price.

Export Subsidy

An export subsidy is a support from the government for products

that are exported, as a means of assisting the countrys balance ofpayments.


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Employment Subsidy An employment subsidy serves as an incentive to businesses to

provide more job opportunities to reduce the level ofunemployment in the country (income subsidies) or to encourageresearch and development.[4] With an employment subsidy, the

government provides assistance with wages. Another form ofemployment subsidy is the social security benefits. Employmentsubsidies allow a person receiving the benefit to enjoy someminimum standard of living.
http://en.wikipedia.org/wiki/Subsidyhttp://en.wikipedia.org/wiki/Subsidy


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CARTELS

A cartel is a formal "agreement" among competingfirms. It is aformal organization of producers and manufacturers that agree tofix prices, marketing, and production. Cartels usually occur inan oligopolistic industry, where the number of sellers is small(usually because barriers to entry, most notably startup costs, are

high) and the products being traded are usually homogeneous.Cartel members may agree on such matters as price fixing, totalindustry output, market shares, allocation of customers, allocationof territories.

The aim of such collusion (also called the cartel agreement) is to

increase individual members' profits by reducing competition.


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One can distinguish private cartels from public cartels. In the publiccartel a government is involved to enforce the cartel agreement,and the government's sovereignty shields such cartels from legalactions.

E.g.: OPEC

Inversely, private cartels are subject to legal liability underthe antitrust laws now found in nearly every nation of the world.Furthermore, the purpose of private cartels is to benefit only thoseindividuals who constitute it, public cartels work to pass on benefitsto the populace as a whole.


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There are several factors that will affect thefirms' ability to monitor a cartel:

]

Number of firms in the industry

Characteristics of the products sold by the firms

Production costs of each member

Behaviour of demand

Frequency of sales and their characteristics Number of firms in industry

The fewer the number of firms in the industry, the easier for the members of thecartel to monitor the behaviour of other members. Given that detecting a pricecut becomes harder as the number of firms increases, the bigger are the gains

from price cutting. The greater the number of firms, the more probable it is that one of those firms is

a maverick firm; that is, a firm known for pursuing aggressive and independentpricing strategy. Even in the case of a concentrated market, with few firms, theexistence of such a firm may undermine the collusive behaviour of the cartel.[8]
http://en.wikipedia.org/wiki/Cartelhttp://en.wikipedia.org/wiki/Cartelhttp://en.wikipedia.org/wiki/Cartelhttp://en.wikipedia.org/wiki/Cartelhttp://en.wikipedia.org/wiki/Cartel


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Characteristics of products sold

Cartels that sell homogeneous products are more stable than those thatsell differentiated products. Not only do homogeneous products makeagreement on prices and/or quantities easier to negotiate, but also theyfacilitate monitoring. If goods are homogeneous, firms know that achange in their market shareis probably due to a price cut (or quantity

increase) by another member. Instead, if products are differentiated,changes in quantity sold by a member may be due to changes in consumerpreferences or demand.

Production costs

Similar cost structures of the firms in a cartel make it easier for them to co-ordinate, as they will have similar maximizing behaviour as regards prices andoutput. Instead, if firms have different cost structures then each will havedifferent maximizing behaviour, so they will have an incentive to set adifferent price or quantity. Changes in cost structure (for example when afirm introduces a new technology) also give a cost advantage over rivals,making co-ordination and sustainability more difficult. [8]
http://en.wikipedia.org/wiki/Cartelhttp://en.wikipedia.org/wiki/Cartelhttp://en.wikipedia.org/wiki/Cartel


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Behavior of demand

If an industry is characterized by a varying demand (that is, a demand withcyclical fluctuations), it is more difficult for the firms in the cartel to detectwhether any change in their sales volume is due to a demand fluctuationor to cheating by another member of the cartel. Therefore, in a marketwith demand fluctuations, monitoring is more difficult and cartels are less

stable. Characteristics of sale

If each firm's sales consist of a small number of high-value contracts, thenit can make a relatively large short-term gain from cheating on theagreement and thereby winning more of these contracts. If, instead, its

sales are high-volume and low-value, then the short-term gain is smaller.Therefore, low frequency of sales coupled with high value in each of thesesales make cartels less sustainable. When the demand of the product isfluctuating, parties that are in a cartel are less interested to remain in thecartel, because they are not able to make regular profit.


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International commodity agreement

An international commodity agreement is an undertaking by a group ofcountries to stabilize trade, supplies, and prices of a commodity for thebenefit of participating countries. An agreement usually involvesa consensus on quantities traded, prices, and management of stock. Anumber of international commodity agreements serve solely as forumsfor information exchange,analysis, and policy discussion.

Example - The International Cocoa Agreement

In 2003, an agreement was made between the seven main cocoaexporting countries, Cameroon, Ivory Coast, Gabon, Ghana, Malaysia,Nigeria and Togo, and the main importing countries including the EUmembers, Russia, and Switzerland. The main purpose of this agreementwas to promote the consumption and production of cocoa on a globalbasis as well as stabilise cocoa prices, which had been falling steadily. Theagreement was planned to continue until 2010.


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Commodity agreements often involve intervention schemes, such asbuffer stocks, and usually only last for a few years, whereupon they arere-negotiated. They differ from cartels such as OPEC, largely becausediscussions and negotiations involve both producer and consumercountries, unlike cartels, which are established to protect the interest ofproducers only.

Economics of Global Trade and Finance

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