International investments

International production cooperation

Production relations for joint activities in terms of international labour division. Joint ventures and multinationals are the examples of this form. Nowadays employing foreign assets is widely spread: selling and purchasing patents and licences, employing foreign technologies, trademarks and brands, franchising, transfer of know-how, etc.

International services

Economic goods which do not take a tangible and storable form but bring benefit to the consumer. They include consulting, transport, insurance, scientific and technical, tourist and other services.

International finance and credit relations

World business related to the operations with money and securities.

International investments

The activity based on international capital transfer from one country to another aiming at profit gaining and social effect. There are direct investments acquiring the right of ownership and portfolio investments.

Approaches to Doing Business

Economist Kenneth Boulding uses the term ‘cowboy capitalism’ to describe the American economy of yesterday. He compares yesterday’s capitalism to the early American West. The land was so rich and the resources so vast that people could abuse their environment with impunity. And if erosion began to take the land or the animals got sparse, the answer was easy: move on to a virgin territory, and leave the worn-out land behind. The cowboy capitalist cannot operate successfully without a vast world of untapped markets.

Another term to describe our world became popular in the 1960s. We are on ‘spaceship Earth’, according to some writers. All persons are part of one survival system, hurtling through space together. Each one's actions affect everyone else on the spaceship. We can no longer afford to use up resources. We must recycle them and use them again.

Reasons for and Advantages of International Trade

International trade arises simply because countries differ in their demand for goods and in their ability to produce them. On the demand side, a country may be able to produce a particular good but not in the quantity it requires.

On the supply side, resources are not evenly distributed throughout the world. One country may have an abundance of land; another may have a skilled labour force.

Nor can these factors be transferred easily from one country to another.

Because factors are difficult to shift, the alternative – moving goods made by those factors – is adopted. What happens is that countries specialise in producing those goods in which they have the greatest comparative advantage, exchanging them for the goods of other countries.

International trade has the following advantages.

1) It enables countries to obtain the benefits of specialisation. Specialisation by countries improves their standard of living. It is obvious that without international trade many countries would have to do without certain products. The law of comparative costs shows that, provided countries differ in the relative costs of producing certain goods, they can probably gain by specialisation and trade. The law of comparative costs merely shows how two countries can specialise to advantage when their opportunity costs differ.

2) By expanding the market, international trade enables the benefits of large-scale production to be obtained.

3) International trade increases competition and thereby promotes efficiency in production.

4) International trade promotes beneficial political links between countries.

The Document in Which International Trade Transactions Are Reflected

The balance of payments is an overall statement of a country’s economic transactions with the rest of the world over some period, often a year.

A table of the balance of payments shows amounts received from foreign countries and amounts spent abroad.

If receipts exceed spending, a country has a balance surplus.

If spending exceeds receipts, a country has an adverse balance.

There are a great many of transactions with ‘invisible’ items, such as trade in services and ‘visible’ items which are exports and imports of goods that have to be physically transported between countries.

The balance of payments record or account is divided into the current account and the capital account.

The current account records payments and receipts for immediate transactions, such as the sale of goods and rendering of services. It is subdivided into the merchandise, or visible account (often also termed the trade account or balance of trade), comprising the movement of goods; and invisible account, comprising the movement of services, transfers and investment income. Services comprise transport, travel, banking, insurance, broking and other activities. Transfers include money movement for the transmission of legacies, pensions and other non-commercial items. Investment income consists of the interest, profits and dividends deriving from capital placed abroad.

The current account is contrasted with the capital account, where transactions do not involve income or expenditure, but change the form in which assets are held.

Receipt of a loan, for example, is not income, but exchange of cash now for a promise to repay, usually with interest, in the future. The capital account shows money movements not immediately devoted to trade, such as investments; it is a record of international exchanges of assets and liabilities.

This account is normally subdivided into long-term and short-term capital.

Long-term capital is again subdivided into foreign direct investment (FDI) capital and portfolio investment capital.

FDI implies the acquisition of real assets abroad. This may be done by remitting money abroad to be spent on acquiring land, mines, or machinery, or buying existing foreign businesses. With FDI, the right to control property is acquired.

Portfolio investments do not provide the right to control property; they only give a profit or yield.

The third element in the balance of payments is changes in official foreign exchange reserves. 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.

The Case for Free Trade

The case for specialisation and trade between countries stems from two important economic principles

· the benefits of the division of labour

· the principle of comparative advantage.

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’ resources such as soil, climate and minerals, and ‘man-made’ resources such as capital, know-how and labour skills, specialises in ‘what it does best’, total world output or production can be increased compared to a situation without specialisation.

By engaging in trade, a country can escape the constraints of limited natural resources and small domestic markets.

A country possesses an absolute advantage in an industry if it is technically more efficient at producing a good or service than other countries, i.e. if it produces a greater output from given inputs or resources. An absolute advantage must not be confused with the rather more subtle concept of a comparative advantage.

A comparative advantage is measured in terms of an opportunity cost, or what a country gives up when it increases the output of an industry by one unit. The country which gives up the least other goods when increasing output of a commodity by one unit possesses a comparative advantage in that good.

Trade Based on Absolute Advantage

According to Adam Smith, trade between two nations is based on absolute advantage. When one nation is more efficient than (or has an absolute advantage over) another in the production of one commodity but is less efficient than (or has an absolute disadvantage with respect to) the other nation in producing a second commodity, then both nations can gain by each specialising in the production of the commodity of its absolute advantage and exchanging part of its output with the other nation for the commodity of its absolute disadvantage. By this process, resources are utilised in the most efficient way and the output of both commodities will rise.

A nation behaves no differently from individuals who do not attempt to produce all the commodities they need. Rather, they produce only that commodity which they can make most efficiently and then exchange part of their output for the other commodities they need or want. As a consequence, total output and the welfare of all individuals are maximised.

The mercantilists believed that one nation could gain only at the expense of another nation. Adam Smith believed that all nations would gain from free trade and strongly advocated a policy of laissez-faire.

The protection of industries important for national defense. In view of this, it seems paradoxical that today most nations impose many restrictions on the free flow of international trade.

Trade restrictions benefit the few at the expense of the many (who will have to pay higher prices for competing domestic goods).

Trade Based on Comparative Advantage: David Ricardo

In a two-nation, two-commodity world, once it is determined that one nation has a comparative advantage in one commodity, then the other nation must necessarily have a comparative advantage in the other commodity.

How the Comparative Advantage Rule Works?

1. If no specialisation occurs country will produce both commodities

2. If each country completely specialises in producing. With complete specialisation production of one good has risen, production of the other falls.

3. Partial specialisation – this situation does not meet the efficiency gain rule. Specialisation should result in at least as much of one good and more of the other, compared to when there is no specialisation.

Relative Price

Relative Price versus Nominal Price In order to understand whether it is worth selling or purchasing a certain product or to conclude that trade in it does not seem reasonable altogether, the concepts of relative and nominal prices are to be spotlighted. The difference between a nominal price and a relative, or real price, (as an exchange ratio) is often made. The nominal price is the price quoted in money while the relative or real price is the exchange ratio between real goods regardless of money. The distinction is made to make sense of inflation. When all prices are quoted in terms of money units, and the prices in money units change more or less proportionately, the ratio of exchange may not change much.

The relative price is an opportunity cost, that is, what must be given up in exchange for the good or service that is being purchased.

Trade between countries takes place only when it is mutually beneficial for the parties involved, i.e. each party gets an advantage. Here a problem arises: when it is better to buy, when to sell and when trade does not make sense at all.

A conclusion is to be made: it does not matter which way the relative price differs; what matters is that they do differ for the trade to take place. There is almost always a price difference in different countries (and on different planets!) because of the distinction in relative costs of products, tastes or resources.

· A nation should sell those goods that other nations value at a higher relative price.

· A nation should buy (visa versa) those goods that other nations value at a lower relative price.

Controlling International Trade

Reasons for Government Control of Foreign Trade

1) Non-Economic Arguments

a) To encourage the production of a good of strategic importance

b) To foster closer political ties

c) To prosecute political objectives

d) To promote social policies

2) Economic Arguments Having Some Justification

a) To raise revenue to the budget

b) To improve the terms of trade following the elasticity of supply and demand

c) To protect an ‘infant’

d) To enable an industry to decline gradually

e) To prevent dumping

f) To correct a temporary balance of payments disequilibrium

3) Economic Arguments Having Little Validity

a) To retaliate against the tariffs of another country

b) To maintain home employment in a period of depression

c) To protect home industries from ‘unfair’ foreign competition because competition in labour costs, wages, profitability is always fair to promote international trade.

Methods of Controlling International Trade

Custom Duties And Tariffs

Customs duties are closely connected with the prices of goods and customs tariffs are, therefore, of greatest interest. 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. 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.

Most-favoured-nation (MFN) treatment is a clause in international commercial agreements or treaties in which tariff privileges accorded by a country to any other are extended to all other countries with which it signs treaties awarding most-favoured-nation treatment.

Unconditional MFN clauses automatically extend the benefits of tariff concessions to all countries enjoying MFN status with the tariff-reducing country, whether the concessions are given freely or reciprocally, that is in return for concessions. Conditional MFN clauses make extension of the privilege dependent upon the grant of similar concessions by the country benefiting from them.

Subsidies

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.

Quotas

In the context of international trade 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 deliveries by former planned economy farmers to state marketing organisations, would be a minimum. A limit to imports of cars, or quantity of milk sold under the Common Agricultural Policy (CAP) in the European Union, would be a maximum.

Physical Controls

An embargo is a prohibition on trading with a country, generally or in some particular 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.

Exchange Control

Foreign exchange control is a system under which holders of a national currency require official permission or approval to convert it into other currencies. Managed floating exchange rate is more common nowadays.

The General Agreement on Tariffs and Trade (GATT)

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 and

3. To prevent the establishment of further trade barriers by getting nations to agree to consult one another rather than take unilateral action.

Date: 2016-01-14; view: 962