Forms of International business.International trade

Such reserves are liquid assets held by a country’s government or central bank for the purpose of

intervening in the foreign exchange market. These include gold or convertible foreign currencies and government securities denominated in these currencies.

Theories of free international trade. The benefits of the division of labour suggest that if each of the world’s countries with its own endowment of both natural or ‘God-given’ and ‘man-made’ resources specialises in ‘what it does best’, total world output can be increased compared to a situation without specialisation. A country possesses an absolute advantage in an industry if it is technically more efficient at producing a good or service than other countries. A comparative advantage is measured in terms of an opportunity cost.

According to Adam Smith trade between two nations is based on absolute advantage. When

one nation is more efficient than another in the production of one commodity but is less efficient than the other nation in producing a second commodity, then both nations can gain by their specialisation.

For example, because of climatic conditions, Canada is efficient in growing wheat but inefficient in growing bananas. On the other hand, Nicaragua is efficient in growing bananas but inefficient in growing wheat. Thus, Canada has an absolute advantage over Nicaragua in the cultivation of wheat but an absolute disadvantage in the cultivation of bananas. The opposite is true for Nicaragua.

In this respect, they produce only that commodity which they can make most efficiently and then exchange part of their output for the other commodities they need.

In 1817 Ricardo published Principles of Political Economy and Taxation, in which he presented the law of comparative advantage. According to the law of comparative advantage, even if one nation is less efficient than the other nation in the production of both commodities, there is still a basis for mutually beneficial trade. The first nation should specialise in the production and export of the commodity in which its absolute disadvantage is smaller and import the commodity in which its absolute disadvantage is greater.

Atlantis produces : 4 guns and 2 tons of butter

Pacifica produces: 1 gun and 1 ton of butter

In terms of technical efficiency, Atlantis is 'best at' - or has an absolute advantage in - producing both guns and butter, but it only possesses a comparative advantage in gun production. The opportunity cost of producing one extra gun in Atlantis is half a ton of butter, but Pacifica would have to spend a whole ton of butter. But what about butter production? When increasing its butter output by one ton, Atlantis gives up two guns. By contrast, Pacifica would only have to give up one gun to produce an extra ton of butter. Thus, Pacifica possesses a comparative advantage in butter production even though it has an absolute disadvantage in both products. A regional trading bloc is a group of countries within a geographical region that protect themselves from imports from non-members. Trading blocs are a form of economic integration, and increasingly shape the pattern of world trade. There are several types of trading bloc: Preferential Trade Area -exist when countries within a geographical region agree to reduce or eliminate tariff barriers on selected goods imported from other members of the area. Free Trade Area - are created when two or more countries in a region agree to reduce or eliminate barriers to trade on all goods coming from other members. Customs Union - union involves the removal of tariff barriers between members, plus the acceptance of a common (unified) external tariff against non-members. Common Market is the first significant step towards full economic integration, and occurs when member countries trade freely in all economic resources – not just tangible goods. This means that all barriers to trade in goods, services, capital, and labour are removed. There may also be common policies affecting key industries, such as the Common Agricultural Policy (CAP) and Common Fisheries Policy (CFP) of the European Single Market (ESM). Protectionism - a theory of defending the producers in a country from foreign competition in the home market by the imposition of such discriminating duties on goods of foreign production that will restrict or prevent their importation. In general trade is controlled because governments think nationally rather than internationally. There are several Non-economic arguments:1) To encourage the production of a good of strategic importance 2) To foster closer political ties 3) To prosecute political objectives 4) To promote social policies - to avoid depression in rural districts. Economic Arguments Having Some Justification (economic)1) To raise revenue to the budget 2) To improve the terms of trade - a selective tax is shared between a producer and a consumer. A government can levy a tax on an imported good to improve the terms of trade if demand for the good is more elastic than the supply.3) To protect an ‘infant’ industry - protection from well-established foreign competitors. 4) To enable an industry to decline gradually. To escape fundamental changes in demand for a good. Give the industry more time to contract or restructure. 5) To prevent dumping. Goods may be sold abroad at a lower price than in the home market. 6) To correct a temporary balance of payments disequilibrium Economic Arguments Having Little Validity 1) To retaliate against the tariffs of another country - to influence another country to modify a restrictive policy. 2) To maintain home employment in a period of depression 3) To protect home industries from ‘unfair’ foreign competition

Methods of Controlling International Trade The economic theory suggests that trade should be as free as possible. In practice all countries follow policies which prevent goods from moving freely. Methods vary. These may be price-based constraints, like customs duties and tariffs or government subsidies to certain domestic industries; quantity limits, like quotas and embargoes; Buyers’ or Sellers’ cartels, like OPEC; limits on FDInon-tariff barriers, like political and administrative constraints (licences and other documents); financial limits, like exchange control.

Customs Duties and TariffsCustoms duties are duties imposed on imported and exported goods, assessed according to special customs tariffs. If the customs duties are assessed in proportion to the estimated value of goods, they are ad valorem duties. If they are imposed according to the weight of goods or according to their quantity, they are specific duties. Tariff - a tax levied by a government on imports or occasionally exports for purposes of protection, support of the balance of payments, or the raising of revenue.Revenue tariff serves as a source of revenue for the government. Protective tariff is intended to protect domestic industrial or agricultural production from foreign competition. Prohibitive tariff is so high that it makes the importation of goods subject to it practically impossible. Preferential tariff promotes and supports the development of trade between two countries, the duties on their goods being lower than those on the goods coming from other countries.

Subsidies are a financial aid supplied by a government for reasons of public welfare, the balance

of payments, etc. Subsidies may be given on grounds of income distribution, to improve the income of

producers or consumers. Rich also get subsidies. A quota is a prescribed number or quantity, as of items to be manufactured, imported, or exported. A quota may be set as a minimum or a maximum. A quota for jobs for disadvantaged groups, or for compulsory would be a minimum. A limit to imports of cars, or quantity of milk sold under the Common Agricultural Policy would be a maximum. The use of quotas tends to inhibit competition, directly if quotas are allocated to individual producers, and indirectly, if they are fixed en bloc. Quotas have two main disadvantages. 1) As a result of the artificial shortage of supply, the price may be increased by the foreign supplier or by the importer. 2) Quotas are usually based on a firm’s past imports, which makes the economy rigid by penalising the efficient firm wishing to expand.

Physical ControlsA complete ban – an embargo – may be placed on the import or export of certain goods. A general embargo is intended as an expression of disapproval; an embargo on particular products is generally based on defence considerations, to prevent the spread of advanced weaponry. Foreign exchange control is a system under which holders of a national currency require official

permission or approval to convert it into other currencies. The General Agreement on Tariffs and Trade, established in 1947, has three major objectives: 1) to reduce existing trade barriers; 2) to eliminate discrimination in international trade; 3) to prevent the establishment of further trade barriers by getting nations to agree to consult one another rather than take unilateral action. Here the most-favoured-nation principle applies – any tariff concession granted by one country to another

must automatically apply to all other participating countries.

Date: 2015-12-17; view: 1261