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Among different countries, how and why to vary the marketing mix variables:
- the attributes of products
- distribution strategy
- advertising and promotion strategy
- pricing strategy
investment in another country (land, capital, etc.)
must own 10% of this company.
Parent has direct managerial control
The degree of direct managerial control depends on the extent of ownership of the foreign entity and on other contractual terms of the FDI.
Test is typically at least 10% ownershipNo managerial involvement = portfolio investment
" The result is a new commercial reality – the emergence of global markets for standardized consumer products on a previously unimagined scale of magnitude. Corporations geared to the new reality benefit from enormous economies of scale in production, distribution, marketing and management. ... Gone are accustomed differences in national or regional preferences. ... The globalization of markets is at hand.”
The “Clash of Civilizations:” The Huntington Argument
Civilization “is defined both by common objective elements, such as language, history, religion, customs, institutions and by the subjective self-identification of people.” (p.4)
“Civilization identity will be increasingly important in the future, and the world will be shaped in large measure by the interactions among seven or eight major civilizations. These include Western, Confucian, Japanese, Islamic, Hindu, Slavic-Orthodox, Latin American and possibly African civilizations. The most important conflicts of the future will occur among the cultural fault lines separating these civilizations from one another.” (p.5)
Political, economic and legal systems differ among countries.
The differences have bearing on economic progress, but also change over time.
In general today, more political systems are moving towards individualism, and more economic systems are moving towards market-based approaches.
Legal system in which there is not one set of laws; there are multiple and realize the scope of it all.
Many laws will be based on religious views
A contract specifies
conditions under which an exchange will happen rights/obligations of parties
Disputes that can’t be resolved between parties on their own need to be resolved based on a particular country’s legal system.
Under which system to be arbitrated? By whom? Traditional litigation, mediation, arbitration? Find a third country?
Find ways to to lessen this issue:
Understand the role of contracts in business and use of courts varies considerably across the world.
UN Convention on Contracts for the International Sale of Goods (CIGS)
OECD Convention on Bribery of Foreign Public Officials in International Business Transactions
- Comparative Advantage
- Product Life Cycle Theory
- New Trade Theory
- Porter’s National Competiveness Diamond
The world does not consist of two countries and two goods; no transportation costs assumed; resources are mobile between goods within countries, but not across countries; constant returns to scale; fixed stocks of resources; and no effects on income distribution within countries.
nation’s position in factors of production such as skilled labor or infrastructure necessary to compete in a given industry.
the nature of home demand for the industry’s product or service.
the presence or absence in a nation of supplier industries or related industries that are nationally competitive.
the conditions in the nation governing how companies are created, organized, and managed and the nature of domestic rivalry.
Desire for industrialization/ agriculture
Balance of payments
Diversification: import substitution
Foreign policy, sphere of influence and national identity
Long-term it also hurts them, ex: India - companies became not as innovative, certain equipment from other countries wont be available
Government Policy FDI Policies
- Home country
- Outward FDI encouragement
- Risk reduction policies (financing, insurance, tax incentives)
- Outward FDI restrictions - National security, BOP
- Host country
Inward FDI encouragement
- Investment incentives
- Job creation incentives
Inward FDI restrictions
- Ownership extent restrictions (national security; local nationals can safeguard host country’s interests)
1. Balance of Payments
2. Interest Rates
4. Monetary and Fiscal Policy
5. International Competitiveness
6. Monetary Reserves
7. Government Controls and Incentives
8. Importance of Currency in World
9. Political Party and Leader Philosophies
10. Proximity of Elections or Change in Leadership
12. Forward Exchange Market Prices
The extent to which the reported consolidated results and balance sheets of a corporation are affected by fluctuations in foreign exchange values.
the impact of currency exchange rate variances between foreign currency holdings and the value of those holdings as reported on the financial statements of a company. The resulting accounting gains or losses are unrealized (they are “paper” gains and losses) until the time the foreign currency holdings are converted to the home country's currency (when real gains or losses from exchange occur).
The extent to which income from individual transactions is affected by fluctuations in foreign exchange.
The extent to which foreign exchange movements may affect income or costs on current (open) company obligations, such as receipt of revenue or payments due in foreign currency.
The extent to which a firm’s future international earning power (or costs) affected by changes in exchange rates.
concerned with the long-run effect of changes in exchange rates on future revenue and costs.
This is distinct from transaction exposure, which is concerned with the effect of exchange rate changes on currently open transactions, most of which will be executed within a few months.
The foreign exchange (forex) market
It is almost a 24/7 market (except weekends and bank holidays)
USD $5 trillion worth of exchange daily for:
- Risk management - Tourism
The market is connected by high-speed computers; it’s actually more like one virtual market.
London was dominant because:
- History (capital of the first major industrialized nation) & Geography(betweenTokyo/Singapore and New York)
Now some shifts noticeable to Asia, specifically Hong Kong.
the current real-time relationship between two currencies when the foreign exchange market is open (this rate can change continuously, often second by second).
Spread is the difference between the ask price (the lowest price a seller is willing to sell at) and the bid price (the highest price a buyer has offered). Remember: Depending on one's participation in the foreign exchange market (trading at the very nexus of the market on one of the proprietary exchanges or being a casual, small time participant) the spread may vary. Also the spread varies for currencies that are not traded at the volumes and frequencies that hard currencies are exchanged.
Is the main central reserve asset of many countries
Is the most used vehicle currency and intervention currency
Is in great demand worldwide as a result of its safe haven aspect and its universal acceptance*
Other currencies have problems with counterfeiting and laundering problems
Other liquid or “hard” currencies include EUR, GBP and JPY
In competitive markets free of transportation costs and trade barriers, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency
Example: US/Euro exchange rate: $1 = .6 euro. A jacket selling for $100 in NewYork should retail for 60 euros in Paris.
By comparing the prices of identical products in different currencies, it should be possible to determine the ‘real’ exchange rate - if markets were efficient.
In relatively efficient markets (few impediments to trade and investment) then a ‘basket of goods’ should be roughly equivalent in each country.
fixed rate offered for exchanging a currency pair at a future date in time (most often 3, 6, 9 and 12 months in the future).
They are used in forward foreign exchange contracts to help businesses hedge transaction risk.
Hard currency, also known as a safe haven currency or strong currency, refers to a globally traded currency that serves as a reliable and stable store of value. Stability for hard currencies arise from their breadth of use and global acceptance as well as the deep financial pools that back them. The currencies serve as the reserve assets for many governments. Additional factors contributing to currency’s hard status include full-convertibility, freely floating rate and the issuing country's (or group of countries) geopolitical importance. The world's current hard currencies are: USD, JPY, EUR and GBP.
In a pegged or fixed exchange rate regime a currency's value is set against the value of another single currency or to a basket of other currencies (or to another measure of value, such as gold--recall the gold standard). A fixed exchange rate is used to stabilize the value of a currency against the currency it is pegged to; it is designed to remove foreign exchange risk. In theory, fixed exchange rates are meant to impose discipline on the governments issuing the pegged currency, as they must manage the economy to "support" the rate and cannot engage in policies that cause competitive devaluations. Fixed exchange rate are also designed to diminish speculation by foreign exchange traders and others who may try to destabilize a currency (especially one issued by a relatively small economy).
helps governments retain foreign exchange reserves. Most countries need an adequate supply of reserves to:
-service international debt
-make international purchases on behalf of govt
-protect against capital flight: would effectively lead to elimination of the local currency and adoption of a foreign currency and that issuing nation's monetary policies.
-shield economies from imports
Convertibility restrictions aren't meant to effect conversion of foreign currency to local currency. Most governments want to encourage foreign funds coming into their economy for tourism, investments, etc. and which ultimately add to their reserves.
Fixed/Pegged Exchange Rate: The government plays the primary role. It sets the exchange rate, and manages the economy in an effort to "support" the rate.
Crawling Peg Exchange Rate: The government plays the primary role. It sets the exchange rate, and makes adjustments at intervals of time that it determines.
Managed/Dirty Float Exchange Rate: The government intervenes (buy & sells), as needed in the currency markets when a destabilizing event occurs. Governments typically justify their interventions in terms of “smoothing market irregularities” or “assuring orderly markets”.
Free Floating/Floating Exchange Rate: The government focuses on management of the economy rather than directly intervening in the market or setting exchange rates. (For some currencies given the volume and value of the currency traded in the forex market it might be impossible for the government to really intervene even if it wanted to.)
Fixed/Pegged Exchange Rate: The rate is mean to be fixed over a long period of time. The issuing government chooses when to revise the rate. (History has shown governments are sometimes not proactive nor prudent and market forces ultimately make governments take action on revaluing or devaluing their currency).
Crawling Pegged Exchange Rates: The rate is revised at time intervals the issuing government determines.
Managed/ Dirty Float Exchange Rate: No one revises the rates, but it changes each time there is a transaction,
responding to demand & supply. The government can acts as a player on the exchange market, buying or selling the currency and thus influencing its exchange rate.
Free Floating / Floating Exchange Rates: The rate changes each time there is a transaction in the forex market, responding to demand & supply.
Fixed/Pegged Exchange Rates: The issuing government sets the exchange rate
Crawling Peg: The issuing government sets the exchange rate
Managed/Dirty Float: The government + supply & demand in the forex market
Floating: supply & demand in the forex market
- Exchange rate regime
- Reserve asset
Government controls that limit the legal uses of a currency in international transactions
In general, only the relatively rich industrial countries have few or no currency exchange controls
1. Official exchange rates
- Example: Set your currency exchange rate at an ar'ficially low rate such that imports are not desirable for your citizens but exports are encouraged. This limits domestic citizens’ demand (exchange) of domestic currency to foreign currency and yet provides foreign currency inflows (from export earnings).
2. Convertibility restrictions
Governments intervene in the currency markets as they perceive their national interests to be served
Nations may explain their interventions in terms of “smoothing market irregularities” or “assuring orderly markets”
Closest approach to perfect competition - aggregate supply and demand for currency affects exchange rates - not government intervention
Equilibrium follows from overall macroeconomic indicators
Governments focus more on interest rates and fiscal policy
when countries agree to buy or sell gold for an established number of currency units (fixed value of exchange)
Also a government could not create money not backed by gold
By 1880 most countries on gold standard
- Balance of trade equilibrium for all countries
- Value of exports should equal value of imports
- Flow of gold used to make up differences
System broke down in 1914
Stable exchange rates were desirable
Floating or fluctuating exchange rates had proved unsatisfactory
The government controls of trade, exchange and production that had developed through WWII were wasteful and discriminatory (though this would still play out through the adoption of different economic models internally).
MF maintained exchange rate
- National governments had to manage inflation through their money supply
- Excessive drawing from IMF funds came with IMF supervision of monetary and fiscal policies - “conditionality”
- Provides loans to help members states with temporary balance-of-payment deficit
- Allows time to bring down inflation
- Relieves pressures to devalue
- Members allowed 10% devaluations and more with IMF approval
A derivative “currency” that aims to diversify reserve currency holdings
Objective is to make the SDR the principal reserve asset in the international monetary system -- to avoid over-dependence on one specific currency/asset
A currency that exists only within/between IMF and member nations - Value of the SDR
- The SDR’s value is based on a basket of four currencies: - US Dollar, Euro, Japanese Yen, British Pound
- Credibility/inappropriate policies?
- Recommended practices (crises keep happening)
- Moral Hazard?
- Lack of accountability?
- Power divide/voting power allocation
(International Bank for Reconstruction & Development)
- Refinanced post-WWII reconstruction and development
- Provides low-interest long term loans to developing economies
- Raises funds from member states
- Loans only to poorest countries
- 50 year repayment at 1% per year interest
- Voting power
- Future role?
When a currency’s forward rate is stronger than spot
When a currency’s forward rate is weaker than spot (versus the other currency)
The International Fisher Effect states that for any two countries, the spot exchange rates should change in an equal amount but in the opposite direction to the difference in their nominal interest rates.
For Example: If the U.S. nominal interest rate is higher than Japan’s reflecting greater expected rate of inflation in the U.S, the value of the dollar against the yen should fall by that interest rate differential in the future. So if the annual interest rate in the US is 10% and in Japan is 6%, we would expect the value of the dollar to depreciate by 4% against the Japanese yen over a one year period.
Nominal Interest Rate (i) = Real Rate of Interest (r) + Expected Inflation Rate (I) Equivalently, i = r + I
Nothing guaranties it; the future currency rates could happen to coincide with the calculations though that is unlikely since so many things affect currency value and we don't know what will happen in the future. The forward rate can be used to hedge transaction risks, but as we have reiterated, it is difficult (or impossible) to predict a future exchange rate/spot rate.
A system of values and norms shared by a society
Values: abstract ideas about good, the right, the desirable
Example: What is a reasonable work week?
Social rules and mores
To develop a fixed, unvarying idea about
A principle, statement or idea having general application.
to move from having knowledge (a skill) to having the ability to leverage (a strategy) by using your understanding and appreciation.
Cultures change over time so it is important to let new information in and to keep up to date.
Better understanding of yourself and your nation/society
Cultural smarts can help you find third ways of accomplishing goals and can help you become more efficient and productive as your ability to adapt grows.
Avoid misunderstandings and conflict
Richer, more meaningful interactions and relationships
Profit (or fewer costly mistakes)
Degree of social inequality considered normal, acceptable
Directive style leadership
Degree to which people in a country prefer place primary emphasis of themselves as individuals (I or me) or as a member of a group (we)
Managerial mobility between companies
Good general skills
Teamwork more difficult,
Exposure to different ways of doing business
- Loyalty and commitment to company
- In-depth knowledge of company
- Specialist skills
- Easy to build teams, collaboration
- Emotional identification with group or company (maybe enhanced loyalty)
Degree of perceived needs to avoid uncertainty about the future
Also, degree of preference for structured versus unstructured situations. Should we try to control the future, or just let it happen? What can we do to help protect against future uncertainty?
- Formal, rigid relationships and patterns (lots of social rules to
- Change and risk okay (let the future happen)
Sometimes referred to as “Quantity vs. Quality” Division of roles and values in a society
Where Masculine values prevail:
- assertiveness, competition, material rewards for success
Where Feminine values prevail:
- quality of life, maintenance of warm personal relationships, service, care for the weak, solidarity
Short Term (Normative)
- Absolute truth
- Great respect for tradiCons
- Quick results
- Small propensity to save for the future
Long Term (Pragmatic)
- Truth depends on situation, context and time
- Ability to adapt traditions to changed conditions
- Strong propensity to save and invest
External environment, situation, non-verbal behavior
Explicit information, blunt communicative style
Keeping on schedule, staying “on task”
Intercultural communication generally involves a greater investment of time
Keep context and non-verbals in mind
Avoid yes and no questions
Restate key messages using different words and phrases: “overcommunicate”
- factors in inefficiencies
- slower process in front
- slower process after
1. Resource breakdown
key overseas positions staffed by home managers
Pros:puts qualified managers in place creates global culture transfer of core competences
Cons:local manager resentment cultural myopia immigration barriers, costly
key overseas positions staffed by local managers
pros: alleviates cultural myopia inexpensive to implement
cons: limits career mobility isolates HQ from overseas subs
Global and Transnational strategy
best for job gets it
pros: uses HR efficiently builds strong global culture and informal management network
cons:costly immigration barriers
Expatriate success predictors
- Self-esteem, self-confidence, mental well-being
- Adaptability to food, music, sport, outside interests
- Superior technical competency, and managerial and administrative skills
- Enhance ability to interact effectively with host nationals - Relationship development, willingness to communicate
- Perceptual ability
- Understand why people in other countries behave the way they do
- Non-judgmental, non-evaluative in interpreting others’ behavior
- Cultural toughness
- How tough is host culture to adjust to?
- Other issues
- Language ability - Family situation
- Differing national standards
- Expatriate pay issues: base pay, cost of living adjustments, various allowances, foreign service or hardship premiums, double taxation, medical/pension benefits, home leave and possibly more. Don’t assume people know how to value compensation properly.
- Other things to consider:
- How are relationships, networks and trust established where you will be? May need to seek appropriate fringe benefits.
- It’s harder to maintain a credit rating while one is abroad.
- Performance appraisal
Expatriate’s career often depends on home-country perception
Host-nation managers , “foreign spy” syndrome
Two groups evaluate expatriate managers, both biased
- Steps in the export process
- Some facets of transactions
- The basics of payments and pricing
- Control, security and compliance
transport costs and tariffs. Also terms of sale determine who is taking responsibility of different facets of the transaction.
Why payments and documentation are so important - Can also be an issue with agents and distributors
Proactive/reactive - Buy in
4. Exports require volumes of specialized paperwork and knowledge
- Market research
- Country research
- Export control research
- Payment methods
- Terms of sale, including INCOTERMS
- Shipping your product
- Pre-shipment documents
- Pro forma invoice or purchase order
- Main commercial documents
Insurance policy or certificate
- Arrival documents
- Arrival notice
- Customs entry
Official International Chamber of Commerce rules for interpretation of trade terms
First created in 1936, now the world standard
Reference to INCOTERMS in sales contracts defines obligations of the each party, reduces risk of legal complications. But you should be specific:“Incoterms 2010”
- Divide costs, risks and responsibilities between seller and buyer
- Provide useful shorthand for doing so
- Serve as checklist for seller and buyer
- Reduce potential for misunderstandings
- BUT, they do not
- Convey title
- sales contract must stipulate this
- Eliminate all problems in international trade
- Exporter of payment
- Importer of product
Banks offer financing intermediary service
-Letters of credit: bank guarantee of payment to exporter “bought” by the corresponding importer
-Draft or bill of exchange: instructions to bank to pay at a certain time based on certain documentation
Carriers provide to the exporter
- Bill of lading: receipt, contract and document of title
Export control, security and compliance
- A diverse range of products and services could constitute an export: software or technology, blue prints, design plans, etc. Some of this is sensitive.
- Security and export compliance
- Bureau of Industry and Security overseas export controls
- Exporters must know: whether a license is needed, what is being exporting, to where the items will be exported, who will receive the item and for what purpose items will be used.
- Exporters must check potential exports against several lists: denied persons list, unverified list, entity list, specially designated nationals list (Treasury Department, Office of Foreign Assets Control), debarred list, nonproliferation sanctions, General Order 3 part 736.
- Other issues
- Compliance with Automated Export System
- Packaging (example: heat treating wood for sanitation)
- Plus many compliance issues for importation
Profit determined by:
The amount of value customers place on firm’s goods or services (V)
Firm’s cost of production(C)
Firm creates profit by increasing value or lowering cost
Two basic strategies to create value and attain competive advantage according to Porter:
- Low cost
- Differentiaition strategy
- Realized by performing a value creation activity in an optimal location anywhere around the globe
- Often arise due to differences in factor costs and endowments
- Can lower costs of value creation to enable low cost strategy and/or help in differentiation of products from competitors
- Global web: different stages of value chain are dispersed to those locations where perceived value is maximized or costs of value creation are minimized
Leveraging subsidiary skills
- Value created through identification and application to a firm’s global network of operations
- Some Challenges:
- Managers must create an environment where incentives are given to take necessary risks and reward them
- Need a process to iden9fy new skill development
- Need to facilitate transfer of new skills or best practices within the firm
- As technology evolves quickly, product life cycles shorten and firms streamline to focus on core competencies, it is likely many new “subsidiary skills” will actually come from outside the firm through suppliers, consultants and even the government and universities.
Pressures for local responsiveness
Differences in consumer tastes, preferences and cultures.
Infrastructure & traditional practices
Differences indistribution channels
Host-government demands and administrative policies
The process of identifying groups of consumers whose purchasing behavior is unique in important ways
- Is based on demography, geography, social-cultural factors, psychological factors
- Allows firms to adjust marketing mix to meet the needs of separate market segments
International marketing mix: product
Attributes need to be adapted to a greater or lesser extent to satisfy
Consumer preferences/tastes due to culture
Economic development levels that affect consumer behavior
National product/technical standards that are state mandated
Optimal channel a company chooses to deliver the product
Perhaps the most locally responsive element of marketing mix because distribution channels vary dramatically across countries
- Retail system: concentrated or fragmented
- Channel length: long, short
- Channel exclusivity
Communicating the product attributes/benefits to customers
Barriers to international communication
- Cultural barriers
- Source effects (country of origin effects)
- Noise levels
Is standardized advertising strategy possible? Often times, standardized advertising strategy execution more difficult or not possible (culture, laws)
- Push vs pull strategies
Push strategy: personal selling emphasis
Pull strategy: mass media advertising emphasis
- Marketing message may be carried via print/electronic media
personal selling emphasis
- Industrial products; complex new products, or new to consumers (or just new consumers)
- Short distribution channels
- Few print or electronic media outlets
mass media advertising emphasis
- Consumer goods
- Long distribution channels
- Marketing message may be carried via print/electronic media
Reduce holding and warehousing costs
Better manage transportation costs as demand can be used inform shipment locations and levels
- Reduce depreciation of products with short life cycles (e.g., high-tech products)
Rests on management of uncertainty - Examples: FedEx, UPS
New advances in manufacturing technology are allowing for faster “turnover” of production processes--allows for more flexibility in production.
- Example: Robotic paint sprayers
Supplier diversity and “+1 strategies”
- Value to volume and/or value to weight ratio (cost)
- Stresses of mode
Transportation: ocean freight
Costs low because of standardization, better logistics, technology, growing size of ships, fewer crew member
Over 90% of international trade by weight
- Currently not ideal for international trade
- Public and private ownership/investment issues - Different gauges
- 34% in terms of value of products shipped internationally
- Highly predictable
to identify, measure, and communicate economic information to allow informed judgments and decisions by constituents
Internal company users
External: investors and creditors, and competitors
Securities oversight, protection of investors and creditors
International accounting involves accounting and taxation issues for companies that have international economic activities across borders, and the standards and practices vary internationally
These differences influence reported income and profits, valuation of assets and inventories, tax liabilities, country attractiveness, etc.
- Dealing with tax authorities
- Are financial statements for required published disclosures also representative of tax liabilities?
Example: U.S. SEC vs. IRS
- What kinds of data are required?
- Some nations require disclosures on social responsibility, environmental and employment practices
- Corruption/sophistication of institutions
- Valuation of assets (historical price vs. allowed revaluations)
- Capitalization of R&D expense
- Treatment of goodwill
Why harmonize of accounting standards
- Increasing regional integration
- Falling investment barriers
- Lack of comparability
Difficulties and expenses with different accounting standards
- Lack of accountability
Enron and other governance related issues have renewed calls for greater accountability and transparency
International Accounting Standards Board
- Formed in March 2001
- Replaced International Accounting Standards Committee, which had been formed in 1973 to develop a single set of global accounting standards (International Financial Reporting Standards)
MNE international taxation issues
- International businesspeople can face some of the same issues as MNEs, but we will focus on corporate taxes
- Minimizing taxes is a method to increase profitability
Use transfer prices to your advantage
Try to eliminate double taxation/U.S. corporate income taxation
- Governments taxes can be levied according to:
- Use treaties to help alleviate burden of double taxation
- Use other strategies such as headquartering in havens
Foreign branches can be established in treaty nations and these branches don’t pay host country taxes (are viewed as foreign entities by host countries); home country taxes are paid
- Under diplomatic law, foreign missions and diplomats are viewed this way
Foreign subsidiaries become legal entities in the host nation. They pay host nation taxes and do not pay home country taxes. Governments may charge parent company a withholding tax on income remittances sent to home country.
- Offer exceptionally low, or in some cases zero, taxes on income
A method to maximize profits and minimize taxes by changes costs at which intra-firm transactions are conducted.
Can create the need for two sets of books or other performance measures as subsidiary performance can be distorted by transfer prices
Regulations depend on location and accounting systems, but host governments are sensitive to effects of manipulated transfer payments on taxes and seek “market” or “arms-length” priced transfer prices:
- At cost plus a reasonable markup for the subsidiary
- Prevailing market price for the part/component/assembly
By manipulating transfer prices, firms can also attempt to:
- Reduce ad valorem tariff duties, another form of tax (by reducing the transfer price charged to importing country entity)
- Or even get money out of a country where income repatriation is limited or currency expected to depreciate. Example: Increase fees due to the overseas parent.
U.S. practice for corporate income taxes
Allows for direct and indirect tax credits on foreign taxes paid so overall U.S. tax on foreign income is level with the rate assessed on domestic income.
Indirect tax credit: For amounts paid by overseas entities to host country governments
Direct tax credit: For amount paid directly by parent company to a foreign government such as in the case of withholding taxes for dividend payments, royalty payments, etc.
For amounts paid by overseas entities to host country governments
For amount paid directly by parent company to a foreign government such as in the case of withholding taxes for dividend payments, royalty payments, etc.
Occurs when tax credits exceed the U.S. tax liability
- Tax Credit Rules
- Foreign Tax Credit Limitation - Cannot be used to reduce taxes on domestic income
- Carry Forward/Carry Back - Can be carried forward (five years) or carried back (two years)
Agreements among nations to reduce/remove tariff and non-tariff barriers to free flow of
- Factors of production
Economic and political arguments for/against
We will focus on NAFTA and TPP today but most of the same issues apply for other such agreements
Reasons for/against regional integration
- Economic enhancement of the member states
- Free trade
- More attractive for FDI
Linkages of economies create interdependencies that reduce the potential for violent conflict or instability
Grouping gives countries more political clout world-wide
Levels of economic integration
- Free Trade Area(FTA):
- removes trade barriers among members, but members retain own trade policies toward others
- Customs Union (CU): FTA+
- common trade policy toward others
- Common Market (CM): CU+
- factors of production can move freely between members
- Economic Union (EU): CM+
- full integration of member economies (common currency, common monetary and fiscal policy and harmonization of taxes)
- Political Union: EU+
- coordinated integration of economic, social and foreign policy
Based upon Canadian-U.S. Free Trade Agreement of 1988
- U.S.-Canadian trade is largest bilateral trade in the world
- Response to the EU
Rules of Origin & Local Content (NAFTA)
- Country of Origin: Goods and services must originate in North America to get access to lower tariffs
- Local Content:
The percentage of value that must be from North America for the product to be considered “North American” for the country of origin qualification: 50 percent for most products.
- Government procurement
Is NAFTA working?
Positive increase in trade (300% since inception)
Shift in some jobs to Mexico
- Maquiladoras generate significant employment and forex earnings for Mexico
Significant increase of U.S. FDI in Canada & Mexico
Positive impact in Mexico, especially in its “standing”
- A long way to go minimize the GDP/capita differences between U.S./Canada & Mexico
- Low lead times due to speed of freight
- Immigration/security impact
Some studies have shown a small positive overall effect on U.S. jobs
General Agreement on Tariffs and Trade: 1947-1994
WWII allies wanted international organization in trade arena similar to UN in political arena.
There was an idea at Bretton Woods to form the International Trade Organization, but that failed.
GATT was formed at a United Nations conference in Havana in1947 as a temporary step towards ITO.
- First round affected about $10 billion in trade, which amounted to about 20% of world trade at that time.
GATT members agree not to raise tariffs above negotiated rates.
Four pillars of GATT
- Had a structure, rules and predictability
- Members would have access to Most Favored Nation (now Normal Trade Relations) rate
- Worked by consensus so power was shared -
- Accomplished over many “rounds”
- Members would try to work out issues themselves, but the organization would also hear cases
How GATT became WTO
- GATT had become world’s major trade-liberalization organization, but...
Its growth over the years gave it increasing credibility, but “positive consensus” dispute settlement was becoming an issue as countries increasingly took unilateral and bilateral actions...many felt that settlement process lacked “teeth.”
Many alleged cases of dumping as anti-free trade sentiment was growing and only signatories to certain agreements could be held accountable “GATT-a-la-carte”
Countries also start using non-tariff barriers
GATT mostly covered trade in goods only
Most comprehensive trade agreement in history - Created the World Trade Organization in 1995
Agriculture subsidies (stumbling block: U.S./EU)
General Agreement on Trade of Services (GATS)
Trade Related Aspects of Intellectual Property Rights (TRIPs)
Strengthened GATT monitoring and enforcement
- Location: Geneva, Switzerland
- Established: 1 January 1995
- Membership: 160 member countries – 97% world trade
Administering WTO trade agreements
Forum for trade negotiations
Handling trade disputes
Monitoring national trade policies
Technical assistance and training for developing countries
Cooperation with other international organizations
- Multilateral trade & dispute resolution
- Nations treated equally - Article III
- MFN (Most Favored Nation) status - Article I
- National treatment - once goods enter a market they must be treated the same as domestically-produced goods (non- discrimination)
- Anti-dumping provisions
- Regional and bilateral trade pacts - Developing nations
- Often given longer times to adjust
- Given more leeway to encourage exports
WTO Dispute Settlement
- Process has more structure, security and predictability over GATT
- Dispute settlement no longer by consensus
- Complainants have right to a panel hearing
- Respondents have right to appeal if they object to panel ruling
- Rulings are binding and if offending country does not comply, complainants have right to impose countervailing sanctions (that’s where power ends)
- 1995-2004: >304 trade cases brought to WTO for decision (75% resolved by late 2003 through bilateral consultations)
- GATT dealt with 196 cases from 1947-1995.
Large populaHon coupled with limitaHons on arable land and water supply.
The environment is increasingly a constraint on development, sustainability and quality of life.
China is a large importer of energy.
China needs many resources to fuel its further growth.
Changing Landscape: Aspects of the Twelfth Five Year Plan (2011-2016) and Related Policies
- Ensure “Harmony”
- Restrict “hedonism”
- Bans on advertising luxury goods
- Limits to Party spending (example: banquets)
- Currently urban incomes average 3.3 times rural incomes (Is this Socialist?)
- Create affordable housing
- Move investment incentives to inland China
- But transportation costs erode lower investment costs in the interior - Need more infrastructure (highways and rail)
- Environmental Protection and Energy Independence
- Switch to non-fossil fuels (Nuclear, Hydroelectric Power and Solar) - Lower energy imports
- Move up the Value Chain
- High Tech Agriculture
- “Scientific Development”
Changing Landscape: Aspects of the Twelfth Five Year Plan (2011-2016) and Related Policies
- Ensure “Harmony”
bans luxury goods advertising, limits to party spending, create affordable housing, move investment to inland china,
- Environmental Protection and Energy Independence
- Move up the Value Chain
- Life seems expensive, even to the successful
- The government has less justification to keep the RMB at lower valuation because it hurts the purchasing power of citizens.
- Brain drain/migration
- Funds also flowing offshore
- Government has to untangle itself from economy but difficult during this period of slower growth
- 1947-1985 time period featured post-Independence focus on
- Swaraj - self rule
- Swadesh - self sufficiency
- Five year economic plans
- Preference for government control over private activity in a centrally planned economy
- 145 sectors controlled by government
- Many through State Owned Enterprises (SOEs)
- Some through “License and Permit Raj” beneficiary firms- High levels of protectionism
- Some reserved for “small-scale” sectors
- Restrictive to foreign investments- “Hindu rate of growth”: averaged 3.5%
- The Balance of Payments crisis
- Chronic current account deficit
- External debt ~ $70 billion
- India’s credit rating downgraded
- The Gulf War
- Oil prices up
- Remittances are down
- Loss of Middle-East markets for Indian exports
- Forex reserves down to three weeks’ worth of imports
- IMF $500 million Structural Adjustment Loan in Dec ’91
- Two-pronged agenda:
- Address immediate balance of payments crisis
- Reform conditions which laid the foundation for a policy environment that has slowly allowed for greater freedom of entry, investment flexibility and mobility, as well as choice of technology and location, market pricing and privatization.
- India joined WTO in 1995
- About half the population (600 million) struggles to meet basic needs though government defines poverty at 22%—using a low barometer for the threshold.
- Including basic nutrition and calories
- In rural India:
- Most people don’t have any sanitation systems (~70%)
- Besides environmental issue, huge impact on health and safety
- 35%+ of women are illiterate, plus a sizable portion of men
- Most of India has a water crisis:
- Agriculture is rain dependent - Water access intermittent
- On one hand, a rapidly growing and confident consumer market
- Consumption is 54% of India’s economy, versus 40% in China, 56% in Europe
and 70% in the USA
- But India’s economy overall is much smaller than others above
- New nuclear households and internal migration driving growth in consumer products
- On the other hand,a high savings rate~34% of GDP
- Household savings constitute majority of savings, but most of it kept in physical assets versus financial investments (mostly cash and gold)
- Gains from economic growth not showing in INR strength (high inflation)
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