Trade theories and Wto

Presented by: Maria Kanwal

Sana Jameel Hailey college of commerce

2O14-2O183rd semester

HISTORY The WTO’s predecessor, the general agreement on traiffs and

trade(GATT),was estabilsh after world warII in the wake of other multilateral institutions dedicated to International economic corporation.

GATT was the only multilateral instruement governing international trade from 1948 until the WTO was estabilshed on january 1,1995.

ABOUT WTOThe World trade organisation is an organisation that intends to supervise and liberalise international trade.WTO was officially commenced on january 1, 1995 WTO was created by uruguay round negotiation (1986-94).

There are total 153 member countrries was

counted in the year 2011.

Budget 196 million swiss france in the year 2011.

Currently there are total 629 staff members are present in WTO.

OBJECTIVES OF WTO

WTO reiterates the objectives of GATT, some of them are as follows:-

Promote trade flows by encouraging nations to adopt nondiscriminatory and predictable trade policies.

Raising standard of living and income. Introduce sustainable development.

FUNCTIONS OF WTO Acting as a forum for multilateral trade negotiations. Seeking to resolve trade disputes. Acting as a watchdog of international trade. Maintaining trade related database.

Cooperating with other international institutions involved in global economic policy making.

Acting as a management consultant for world trade.

Technical assistance and training for developing countries.

What is international business??

What’s a MNC ?• A MNC ( Multi National Company ) is a company that operates or has

assets in more than one country.

• As the operations of a large sized firm expand and as it’s international image builds up it seeks more and more extension of it’s activities beyond the physical boundaries of the country in which it is incorporated.

EXAMPLES

Unilever

wipro

McKinsey

Benefit of an MNC?

•Employment Opportunities

•Updating of current technology

•Use of local Services

•Raise in standard of living

•Better Foreign Exposure, Culture.

•Increase in FDI ( Foreign direct Invst. )

Which enterprise can be a MNE• Global multinational enterprises (MNEs) are companies that

operate on a global scale, as opposed to MNEs that are regionally focused. There are various definitions of what constitutes a truly ‘global’ company, but one way to interpret this is a company that has at least 20% of its sales in each of at least three different continental markets.

• So, a company where 70% of their sales are generated in Asia would not be considered a global MNE even though they might have significant operations in more than one country, but one where 30% of sales are from each of Asia, Africa and Europe would be considered a global MNE.

• Example• Companies who are MNEs such as McKinsey, Unilever and Wipro

generate sales and profits in multiple locations across the world. [1]

International Business vs Domestic Business

International business Domestic business

1 It is extension of Domestic Business and Marketing Principles remain same.

The Domestic Business Follow the marketing Principles

2 Conduct and selling procedure changes

Selling Procedures remain unaltered

3 Working environment and management practices change to suit local conditions.

No such changes are necessary

4 Long Distances and hence more transaction time.

Short Distances, quick business is possible.

5 Currency, interest rates, taxation, inflation and economy have impact on trade.

Currency, interest rates, taxation, inflation and economy have little or no impact on Domestic Trade.

International Business vs Domestic Business

International business Domestic business

6 MNC’s have perfected principles, procedures and practices at international level

No such experience or exposure.

7 MNCs take advantage of location economies wherever cheaper resources available.

No such advantage once plant is built it cannot be easily shifted.

8 High Volume cost advantage. Cost Advantage by automation, new methods etc.

9 Global Standardization No such advantage

10 Global business seeks to create new values and global brand image.

No such advantage

•Why do business expand internationally??

Why do firms expand internationally??

• Firms expand internationally for various motives

Market motive

Economic motive

Strategic motive

Market motive….• Market motives can be two types

• An offensive motive is to seize market opportunities in foreign countries through trade or investment..

• A defensive motive is to protect and hold a firm`s market power or competitive position in the face of threats from domestic rivalry or changes in government policies.

offensive defensive

Dell computers

An American hardware computer company which develops ,manufacture sells and supports a wide range of

personal computers Data storage devicesNetwork switchesPersonal digital assistants

The key to the success of any company s to have strong defensive as well as an offensive strategy

Economic motive• Firms go internationally to increase their return through higher

revenues and or lower cost..

Benefits Difference in costs of labors Natural resourcesCapital regulatory treatments

ExamplesMotorola MicrosoftCompaq intel

Examples

Strategic motives

In strategic motive they may tend to capitalize on their distinctive resources or capabilities already developed at home.by doing soFirms may be able to increase their cash inflowsFirms may also go international to be first movers in the target

foreign marketFirm may create strategic benefits such as Technological leadership Brand image Customer loyalty Competitive position

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What Is Mercantilism?

This theory stated that a country’s wealth was determined by the amount of its gold and silver holdings.

A country should increase its holdings of gold and silver by promoting exports and discouraging imports.

Then they have to pay you the difference in gold and silver.

Cont………..The objective of each country was to have a trade surplus,

Although mercantilism is one of the oldest trade theories, it remains part of modern thinking. Countries such as Japan, China, Singapore, Taiwan, and even Germany still favor exports and discourage

This theory id criticized by Adam`s Smith.

•Absolute theory

What Is Smith’s Theory Of Absolute Advantage?• Adam Smith argued that a country has an absolute advantage

in the production of a product when it is more efficient than any other country in producing it• countries should specialize in the production of goods for which

they have an absolute advantage and then trade these goods for the goods produced by other countries

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How Does The Theory Of Absolute Advantage Work?• Assume that two countries, Ghana and South Korea,

both have 200 units of resources that could either be used to produce rice or cocoa• In Ghana, it takes 10 units of resources to produce one

ton of cocoa and 20 units of resources to produce one ton of rice • Ghana could produce 20 tons of cocoa and no rice, 10 tons of rice

and no cocoa, or some combination of rice and cocoa between the two extremes

• In South Korea it takes 40 units of resources to produce one ton of cocoa and 10 resources to produce one ton of rice• South Korea could produce 5 tons of cocoa and no rice, 20 tons of

rice and no cocoa, or some combination in between5-33

Numerically• Both countries have 200 units resources• If Ghana use 10 units in cocoa and 20 for rice

200 units÷ 10 units˭20 tons 200 units ÷ 20 units˭ 10 tons

If south korea use 20 units in cocoa and 10 for rice

200 units÷ 4 units˭ 5 tons 200 units ÷10 units˭ 20 tons

How Does The Theory Of Absolute Advantage Work?• Without trade• Ghana would produce 10 tons of cocoa and 5 tons of rice• South Korea would produce 10 tons of rice and 2.5 tons of cocoa

• With specialization and trade• Ghana would produce 20 tons of cocoa• South Korea would produce 20 tons of rice• Ghana could trade 6 tons of cocoa to South Korea for 6 tons of

rice• After trade• Ghana would have 14 tons of cocoa left, and 6 tons of rice• South Korea would have 14 tons of rice left and 6 tons of cocoa

• If each country specializes in the production of the good in which it has an absolute advantage and trades for the other, both countries gain

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What Is Ricardo’s Theory Of Comparative Advantage?• David Ricardo asked what might happen when one country

has an absolute advantage in the production of all goods • Ricardo’s theory of comparative advantage suggests that

countries should specialize in the production of those goods they produce most efficiently and buy goods that they produce less efficiently from other countries, even if this means buying goods from other countries that they could produce more efficiently at home

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How Does The Theory Of Comparative Advantage Work?Assume REHAN is a Wall Street lawyer who charges $500 per hour for

her legal services. It turns out that REHAN can also type faster than the

administrative assistants in her office, who are paid $40 per hour.

Even though REHAN clearly has the absolute advantage in both skill sets, should he do both jobs?

No. to type instead of do legal work, he would be giving up $460 in income. Her productivity and income will be highest if he hires the most qualified administrative assistant, who can type fast, although a little slower than REHAN.

Trade theories and Wto

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