BCom 1st Year International Trading Environment Notes Study Material

BCom 1st Year International Trading Environment Notes Study Material

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BCom 1st Year International Trading Environment Notes Study Material
BCom 1st Year International Trading Environment Notes Study Material

BCom 1st Year International Trading Environment Notes Study Material

An Overview

Countries are becoming economically interdependent, characterized by a movement of goods, services, labour and capital across borders. Cooperation enables better linkages among the smaller marginalized producers and between smaller and larger mainstream enterprises. Firms are buying and selling goods and services across national boundaries. The level of world trade has grown rapidly in recent decades and has brought increased wealth to many countries.

The International trading environment consists of all business activities designed to plan, price, promote and direct the flow of a company’s goods and services to customers or users in more than one nation for earning profit. The international trading environment module is made to perceive all the aspects of globalization on how trade and exports led to job creation, poverty reduction, prosperity and development in many communities. (BCom 1st Year International Trading Environment Notes Study Material)

The entire international trading environment can be broadly divided into two factors i.e. controllable factors and uncontrollable factors. (i) The Controllable factors are those factors which are internal to the enterprise and an enterprise may effectively control them. For example, human resources, capital, policies, transportation, communication, innovation of new ideas etc. (ii) The uncontrollable factors are those factors which are external to the organization but directly or indirectly affect its functioning and further decisions. For example, economic forces, technological forces, competitive forces, geographical structure, political forces, cultural forces etc. (BCom 1st Year International Trading Environment Notes Study Material)

OBJECTIVES TO THE STUDY OF THE INTERNATIONAL TRADING ENVIRONMENT

The international trading environment has played a major role to develop and improve world trade, especially for developing countries and won entrepreneurs. During the last two decades, the trade performance of developing countries is highly related to and dependent upon the output growth of the world.

In this era, growing liberalization of economic systems across the w and economic interdependencies, globalization of markets, free flow of capital and knowledge, and rapidly changing customer tastes have rendered the global business scenario much more violate and competitive. The requirement for the study of the international trading environment is clear from the following points:

(i) To understand how the world is changing through globalization and the impact that this can have on your company;

(ii) To learn about the benefits, risks and challenges of international trade and the questions that you should ask when considering exporting;

(iii) Be more aware of the rules, regulations and international trade agreements governing global markets and how they can affect your export activities;

(iv) To know what sources of information to consult in order to stay informed about the current domestic and international trade environment;

(v) Increase the international trade agreements among different nations, corporate houses etc;

(vi) Increase in foreign investment;

(vii) Increased role of international organizations like IMF, WTO, World Bank, UNCTAD etc;

(viii) Increasing role of Multi-National Corporations (MNCs);

(ix) Free flow of technology etc.

WORLD TRADE

World trade is highly related and dependent upon the output growth of the developing world. According to the United Nations Conference on Trade and Development (UNCTAD), “trade and development of international challenges facing the international community are to ensure that the potential gains from the more developed economy are enjoyed by all, particularly the poorest countries and community.”

International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history, its economic, social and political importance has been on the rise in recent centuries. It is the presupposition of international trade that a sufficient level of geopolitical peace and stability are prevailing in order to allow for the peaceful exchange of trade and commerce to take place between nations. (BCom 1st Year International Trading Environment Notes Study Material)

Trading globally gives consumers and countries the opportunity to be exposed to new markets and products. Almost every kind of product can be found on the international market: food, clothes, spare parts, oil, jewellery, wine, stocks, currencies and water. Services are also traded: tourism, banking, consulting and transportation. A product that is sold to the global market is an export, and a product that is bought from the global market is an import. Imports and exports are accounted for in a country’s current account in the balance of payments.

Industrialization, advanced technology, transportation, globalization, multinational corporations, and outsourcing are all having a major impact on the international trade system. Increasing international trade is crucial to the continuance of globalization. Without international trade, nations would be limited to the goods and services produced within their own borders. International trade is, in principle, not different from domestic trade as the motivation and the behaviour of parties involved in a trade do not change fundamentally regardless of whether a trade is across a border or not. (BCom 1st Year International Trading Environment Notes Study Material)

The main difference is that international trade is typically more costly than domestic trade. The reason is that a border typically imposes additional costs such as tariffs, time costs due to border delays and costs associated with country differences such as language, the legal system or culture. Another difference between domestic and international trade is that factors of production such as capital and labour are typically more mobile within a country than across countries. Thus international trade is mostly restricted to trade in goods and services, and only to a lesser extent to trade in capital, labour or other factors of production. (BCom 1st Year International Trading Environment Notes Study Material)

COSTS AND BENEFITS OF FOREIGN TRADE

For participating countries, the main benefits of unrestricted foreign trade stem from the increased access of their producers to larger, international markets. For a national economy that access means an opportunity to benefit from the international division of labour, on the one hand, and the need to face stronger competition in world markets, on the other. Domestic producers produce more efficiently due to their international specialization and the pressure that comes from foreign competition, and consumers enjoy a wider variety of domestic and imported goods at lower prices. (BCom 1st Year International Trading Environment Notes Study Material)

In addition, an actively trading country benefits from the new technologies that “spill over” to it from its trading partners, such as through the knowledge embedded in imported production equipment. These technological spillovers are particularly important for developing countries because they give them a chance to catch up more quickly with developed countries in terms of productivity. Former centrally planned economies, which missed out on many of the benefits of global trade because of their politically imposed isolation from market economies, today aspire to tap into these benefits by reintegrating with the global trading system.

But active participation in international trade also entails risks, particularly those associated with the strong competition in international markets. For example, a country runs the risk that some of its industries—those that are less competitive and adaptable-will be forced out of business. Meanwhile, reliance on foreign suppliers may be considered unacceptable when it comes to industries with a significant role in national security. For example, many governments are determined to ensure the so-called food security of their countries, in case food imports are cut off during a war. (BCom 1st Year International Trading Environment Notes Study Material)

In addition, governments of developing countries often argue that recently established industries require temporary protection until they become more competitive and less vulnerable to foreign competition. Thus governments often prohibit or reduce selected imports by introducing quotas, or making imports more expensive and less competitive by imposing tariffs.

Such protectionist policies can be economically dangerous because they allow domestic producers to continue producing less efficiently and eventually lead to economic stagnation. Wherever possible, increasing the economic efficiency and international competitiveness of key industries should be considered as an alternative to protectionist policies. (BCom 1st Year International Trading Environment Notes Study Material)

RECENT TRENDS IN WORLD TRADE

Although world trade quickly recovered swiftly from the effects of the global economic crisis, it has grown only modestly since 2011. From 2011 to 2013 world was at a rate of about 2 per cent per year, notably below the growth rate of more than 5 per cent per year observed in the pre-crisis period. Between 2011 and 2013 world trade in merchandise goods increased by close to half a trillion US $ to reach around US $18.8 trillion in 2013.

Trade in services increased from approximately US$4.3 to 4.7 trillion during the same period. The modest increase in the value of world trade is owing to a combination of sluggish import demand in many countries, alongside lower commodity prices. In practice, while most international trade flows are now generally larger than their pre-crisis levels of 2008, the increase in world trade since 2011 has been relatively limited and almost exclusively driven by increases in import demand from the East Asian region.

As of 2013 developed countries still remain the main players in international trade accounting for about half of the value of world trade in goods and about two-thirds of the value of trade in services. During the past few years, developing countries have continued their integration into the world economy although at a typically slower pace and to a diverse extent. On the one hand, East Asian countries have continued to outperform many other developing countries in terms of export and import growth. On the other hand, recent years have witnessed a decline in international trade for a number of Latin American and especially Sub-Saharan African countries. (BCom 1st Year International Trading Environment Notes Study Material)

Despite having greatly increased during the last decade, trade amongst developing countries (South-South) has also stagnated since 2011. South-South trade in goods for 2013 was valued at circa US $ 5 trillion. South-South trade is largely linked to East Asian economies. In 2013 more than 75 per cent of South-South trade was shipped to or from countries in the East Asian region. The diverging degree of international integration of East Asia vis-a-vis other developing regions is also reflected in levels of intra-regional trade.

Whereas almost 50 per cent of East Asian trade occurs within the region, intra-regional trade is of much lower significance for Latin America and the Transition Economies (about 20 per cent), as well as remaining developing regions where this percentage falls to around 10 per cent or less. In addition, with the exception of East Asian countries, since 2011 intra-regional trade has either not increased to any extent or not as much as extra-regional trade.

With regard to specific economic sectors, fuels (at about US $ 3 trillion in 2013) and chemicals (at about US $ 2 trillion) continue to represent the largest product categories in terms of the value of trade. Since 2011 trade flows in many commodity-related sectors have declined, while they have increased in manufacturing sectors such as motor vehicles, machinery and electronics. Trade in agricultural products has remained roughly stable. In the case of services, most sectors have continued to register significant rates of growth, with transportation, travel and business services reaching values of about US $ 1 trillion in 2013.

International trade largely relates to physical goods. Although increasing, International trade in services accounts for a much lower share. As of 2013 world trade in goods has been valued at more than US $ 18.5 trillion, while trade in services has accounted for almost US $ 5 trillion. Trade in both goods and services promptly rebounded to reach pre-crisis levels by 2011. Since then year-on-year growth rates have been considerably lower.

International trade can be broadly distinguished between trade in goods (merchandise) and services. The bulk of international trade concerns physical goods, while services account for a much lower share.

World trade in goods has increased dramatically over the last decade, rising from less than US $ 8 trillion in 2003 to more than US $ 18 trillion in 2013. Trade in services has also greatly increased between 2003 and 2013 (from about US $ 2 trillion to about US $ 4.7 trillion). As of 2013, the value of international trade of both goods and services has completely recovered from the dip in 2009, and largely surpassed pre-crisis levels. Developing countries’ growth rates have tended to surpass those of developed countries in most years in the case of both goods and services. (BCom 1st Year International Trading Environment Notes Study Material)

The share of developed and developing economies in world GDP is given illustrated in table 24.1 below:

International Trading Environment Notes Study Material
Shares of Developed and Developing Economies in World GDP, 1980-2011

The parallel development of trade and output in developing countries and shares of developed and developing economies in world GDP are shown in table 24.1, both at purchasing power parity (PPP) and at current prices. The share of developing economies in GDP at PPP rose from 31 per cent in 1980 to 52 per cent in 2011. (BCom International Trading Environment Notes Study Material)

Equivalent shares at current exchange rates were smaller, 24 per cent in 1980 and 39 per cent in 2011. The fact that the share of developing economies in world imports in 2011 remained well. (BCom 1st Year International Trading Environment Notes Study Material)

TRADE PROBLEMS OF DEVELOPING COUNTRIES

One of the most significant changes in the shape of the world economy has been the increase in the share of developing countries in global GDP. The onset of the global economic and financial crisis initially reinforced this trend, as growth in developing countries in 2008-2009 decelerated less and recovered more rapidly than in developed countries.

As a result, the share of developed countries in global GDP declined from 79 per cent in 1990 to about 60 per cent in 2012, while that of developing countries more than doubled, from 17 per cent to 36 per cent, over the same period. Most of this change occurred from 204 onwards. (BCom 1st Year International Trading Environment Notes Study Material)

However, economic developments in developed countries remain crucial for growth in developing countries. Definitely, the growth acceleration in the latter set of countries during the 1990s, and especially during the period 2003-2007, was associated with a larger proportion of international trade in the composition of their aggregate demand. (BCom 1st Year International Trading Environment Notes Study Material)

Combined with the generally favourable external economic environment, such as growing imports by developed countries (especially the United States) and historically high commodity prices, particularly during the five years prior to the onset of the current crisis, the greater outward orientation of developing countries contributed to their growth. (BCom 1st Year International Trading Environment Notes Study Material)

In addition, these under-developed countries still face the following problems concerning international trade:

  1. Poverty in Developing Countries: Most developing countries are still facing the problem of poverty due to drought, wars, rapid population growth, and the general failure of development efforts. Due to these problems, their share in world trade is comparatively lower than in developed countries. It must be pointed out that using exchange rates to convert the per capita income of other countries into dollars without taking into account differences in the purchasing power of money in each country greatly exaggerates, the differences in per capita income between high and low-income economies. This exaggeration is larger, and the lower the development of the country.
  2. Low Level of Industrialization: World trade is increasing in manufactured goods but the industrial growth rate is still slow in developing countries. A large number of developing countries are still dependent upon primary products for which there is wide fluctuation in prices. Thus, they are greatly affected by price instability, challenges of international markets and low levels of industrialization towards participation in world trade. (BCom 1st Year International Trading Environment Notes Study Material)
  3. Raising Public Revenues: The “fiscal space” for strengthening domestic demand, directly or indirectly, through increased public spending in developing countries, especially in low-income and least-developed countries, tends to be more limited than in developed countries. This is not only because their tax base is smaller, but also because their capacity to administer and enforce tax legislation is often weak. (BCom 1st Year International Trading Environment Notes Study Material)
    Moreover, in many of these countries, public finances are strongly influenced by factors that are beyond the control of their governments, such as fluctuations in commodity prices and in interest rates on their external debt. But to a large extent, fiscal space is also determined endogenously, since the spending of public revenue creates income, and thus additional spending in the private sector, thereby enlarging the tax base.
  4. Regional Trading Groupings: The regional trading grouping like European Union is a big setback for developing countries; they cannot compete with the goods of other member countries as well as with countries that have special privileges of low tariffs. There are a large number of such groupings all over the world whether in Europe, Africa, America or Asia. All the agreements are restrictive and privileges given to a number of countries restrict imports from the rest of the world to remove them.
  5. Subsidies: A number of countries, including developed countries, are providing subsidies both to primary and manufactured products in a number of ways for production and marketing. This is particularly true for agricultural products and there are many hidden subsidies. In real terms level of the market, protection is not coming down. (BCom 1st Year International Trading Environment Notes Study Material)
  6. Therefore, WTO is trying its best to get these subsidies removed. However, in spite of general agreements to remove subsidies, very little has been achieved because no country wants to remove them. (BCom 1st Year International Trading Environment Notes Study Material)
  7. Restriction on Imports: Developed countries are having a number of quota restrictions on imports of products of special interest to developing countries. WTO has stated in its reports (in 2004) about the slow pace of elimination of restrictions on textiles and clothing. WTO has appointed a number of working groups on electronic commerce, the Working Group on Relationship between Trade and Investment, the Working Group on Transparency in Government Procurement, the Working Group on Interaction between Trade and Competition etc. to find out the causes of slow progress in various areas.
  8. Anti-Dumping Duties: When developed countries are not able to compete with imports they levy anti-dumping duties neglecting all WTO agreements. In 2001-02, when Indian steel gave tough competition to the local manufacturers in the U.S.A. and European Union they levied anti-dumping duties on Indian steel. India could offer a lower price because it could succeed in reducing the cost of production of steel, which is not acceptable to developed countries.
    They, therefore, imposed anti-dumping duties. Thus even when a country is able to offer lower prices because of a reduction in the cost of production it is not getting free access to developed countries. (BCom 1st Year International Trading Environment Notes Study Material)
  9. Lack of Exportable Surplus: The developing countries have dual problems in exports. In some products there are supplies but there is no adequate demand. There are other products for which there is demand but no adequate supplies. For instance, India is constrained to expand exports of cashew, lather, meat, games and jewellery and a few other products due shortage of exportable surplus. Similarly, some African countries have been constrained to expand exports because they do not have an adequate exportable surplus in products required, such as processed food products and meat. (BCom 1st Year International Trading Environment Notes Study Material)

SUGGESTIONS TO OVERCOME THE PROBLEMS

There are some suggestions for developing countries to overcome the problems regarding world trade as below:

(i) Developing countries should control population increase.

(ii) Control over domestic price rise and price instability.

(iii) Developing import substitutes in the economy.

(iv) Adoption of modern technology.

(v) Promoting mutual trade among developing nations.

(vi) Effective trade agreements for developing nations.

(vii) Diversification of exports and minimization of imports.

BCom 1st Year International Trading Environment Notes Study Material

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