Unit II - INTERNATIONAL BUSINESS THEORIES 2.

1 INTRODUCTION International business began with international trade operations, facilitated by the laissez faire in the world economy. It improved the well-being of many nations, and the imposition of trade barriers reduced the gains from trade, giving rise to the search for alternate avenues to exporting. The latter resulted in the establishment of subsidiaries in foreign countries through FDI. In this context, it is pertinent to understand the determinants of and the effects of international trade and FDI on the trading partners, international operations of multinationals and the economies of the home and host countries. everal theories have been formulated, from time to time, which form the bases of international trade and FDI. 2.2 THEORY OF MERCANTILISM During the sixteenth to the three-fourths of the eighteenth centuries, the world trade was being conducted according to the doctrine of mercantilism. It comprised many modern features li!e belief in nationalism and the welfare of the nation alone, planning and regulation of economic activities for achieving the national goals, curbing imports and promoting exports. The mercantilists believed that the power of a nation lied in its wealth, which grew by ac"uiring gold from abroad. This was considered possible by increasing exports and impeding imports. uch reasoning gathered support on the ground that gold could finance military expeditions and wars, and the exports would create employment in the economy. #ercantilists failed to realize that simultaneous export promotion and import regulation are not possible in all countries, and the mere possession of gold does not enhance the welfare of a people. $eeping the resources in the form of gold reduces the production of goods and services and, thereby, lowers welfare. The concentration in the production of goods for domestic consumption by using resources in a less efficient manner would also mean lower production and smaller gains from international trade. The theory of mercantilism was re%ected by &dam mith and 'icardo by stressing the importance of individuals, and pointing out that their welfare was the welfare of the

nation. They believed in liberalism and enlightenment, and treated the wealth of the nation in terms of the (the sum of en%oyments( of the individuals in society. &ny activity, which would increase the consumption of the people, was to be considered with favour. Their trade doctrines were based upon the principles of free trade and the specialisation in the production of those goods where resources were most suitable. 2.3 THEORY OF ABSOLUTE COST ADVANTAGE The theory of absolute cost advantage was propounded by &dam mith )*++,-, arguing that the countries gain from trading, if they specialize according to their production advantages. .is doctrine may be understood with an example presented in Table /.*. TABLE 2.1 LABOUR COST OF PRODUCTION (in Ho !"# * unit of goods & 1ountry I 1ountry II *2 /2 * unit of goods 0 /2 *2

Table /.* shows that, in the absence of trade, both the goods are produced in both the countries, because of their demand in the domestic mar!ets. The cost of production is determined by the amount of labour re"uired in the production of the respective goods. The greater the amount of labour, the higher will be the cost of production, and the commodity will have a larger value in exchange. The pre-trade exchange ratio in country I would be /&3*0 and in country II I&3/0. If trade ta!es place between these two countries then they will specialise in terms of absolute advantage and gain from trading with each other. 1ountry I en%oys absolute cost advantage in the production of good & and country II in good 0. 4ne unit of good & may be produced in country I with *2 hours of labour, whereas it costs /2 hours of labour in country II. The production of the unit of good 0 costs /2 hours of labour in country I

and *2 hours of labour in country II. &fter trade, the international exchange ratio would lie somewhere between the pre-trade exchange ratio of the two countries. If it is nearer to country I domestic exchange ratio then trade would be more beneficial to country II and vice versa. &ssuming the international exchange ratio is established I&3I0, then both the trading partners would be able to save *2 hours of labour, which may be used either for the production of other goods and services or may be en%oyed by the wor!ers as leisure, which improves their welfare in either way. The terms of trade between the trading partners would depend upon their economic strength and the bargaining power. 2.$ THEORY OF COMPARATIVE COST ADVANTAGE 'icardo )*5*+-, though adhering to the absolute cost advantage doctrine of &dam mith, pointed out that cost advantage to both the trade partners was not a necessary condition for trade to occur. It would still be beneficial to both the trading countries even if one country can produce all the goods with less labour cost than the other country. &ccording to 'icardo, so long as the other country is not e"ually less productive in all lines of production, measurable in terms of opportunity cost of each commodity in the two countries, it will still be mutually gainfull for them if they enter into trade. 'icardo6s theory may be explained by referring to Table /./. TABLE 2.2 LABOUR COST OF PRODUCTION (in Ho !"# * unit of goods & 1ountry I 1ountry II 52 */2 * unit of goods 0 72 *22

In Table /./, country I en%oys absolute cost advantage in the production of 8both the goods & and 0 as compared to their production in country II. 0ut country I has comparative cost advantage in good & and country II in good 0. 9e ta!e the help of the concept of opportunity cost in order to !now the relative comparative advantage in the

production of the goods in the two countries me opportunity cost to produce one unit of good
& is the amount of good 0 which has to be sacrificed for producing the additional unit of good &.

2.% HEC&SEHER-OHLIN TRADE MODEL &dam mith and 'icardo6s trade models considered labour as the only factor

input and the differences in the labour productivity determining the trade. :li .ec!scher )*7*7- and 0ertin 4hlin )*7;;- developed the international trade theory )..4. Trade #odel- with two factor inputs, labour and capital, pointing out that different countries have been bestowed with different factor endowments, and the differences in factor endowments cause trade between the trading partners. The theory is based on the assumption that there are impediments to trade, and that there is perfect competition in both the product and factor mar!ets. Further, the theory is based on the comparative advantage in terms of the relative factor prices. & country specialising in the production of the goods which re"uire its abundant factor can export them. Thus, if a country is rich in capital, it will produce capital intensive products and export them in exchange for the labour intensive products. 4n the other hand, another country, rich in labour, will produce labour intensive goods and export them. It will import capital intensive goods. In the ..4. trade theory, the factor abundance has two meanings the factor abundance in terms of the factor prices, and the, factor abundance in terms of the physical amount of the factors. &ssume there are two countries< I and II, then the richness of the country in terms of factor prices means relatively low price of the factors of production. 1ountry I is rich in capital as compared to country II, if = ic>=ig ? =/c>=/c. =ic is the price of capital in country I and =i@ is the price of labour in country I, and =/c is the price of capital in country II and =/@ is the price of labour in country II. The second definition of the factor abundance compares the overall physical amount of labour and capital. 1ountry I is capital rich, if the ratio of capital to labour in this country is larger. 1 *>@I A 1/>@/, where 1* and @* are the total amount of capital and labour in country I, and 1 / @/ are the total amount of capital and labour in country II, respectively. The ..4. trade theory holds good, if the factor abundance is defined in terms of factor prices, because of the incorporation of the demand factor in it. The importance of this theory, which has the

effect of determining the trade patterns and the gains from trade, may be summarised in Figure /.;.

Figure /.; illustrates the pre-trade and after-trade production and consumption in the two countries. 1ountry I--capital rich, is measured along the B axis and country II-labour abundant, is measured along the C axis. There are two goods. & and 0. Dood & is capital intensive and good 0 is labour intensive. 0efore trade country I is producing and consuming at D and country II at .. The II, II* community indifference curve in the two countries is tangent to their production possibility curves &0 and & *0* at D and ., respectively. In the domestic mar!et of country I, good & is cheaper and good 0 is expensive. In country II, it is good 0 which has lower price, good & being costly. In the overseas mar!et, the price is given by the =/=/ international price line. Eow, the countries move to the points F and $ tangent to the international price line, and country I is producing more of good & and country II more of good 0. 0y exchanging goods of their specialisation under free trade, they reach to the I /I*/ indifference curve at

point : and en%oy gains from the international trade as : lies on the higher indifference curve. &s in the case of the classical trade model, the ..4. trade theory also cannot guarantee the.)desired- income distribution among different classes in the country. In country I, the returns to capital are higher and, in country II, the returns to labour are higher because of the greater demand for producing respective goods for the world mar!et. The basic trade models are based upon certain assumptions, such as no transportation cost and free flow of information to all the producers and consumers. They do not ta!e into account the effect6s of trade on the world prices. These trade theories are static, and ignore the effects of technological progress on the growth of the world economy. These are the real issues and need to be incorporated in a modified version of the classical and neo-classical theories. If a nation has monopoly in certain products, it may influence the world price. It may enhance its gains by (optimum tariffs66, which see! to maximize the welfare of the country. Trade may complicate the growth process. It may affect the employment and may even reduce the welfare of the country. This may occur in the case of immeserising growth )when benefits from the higher output are neutralised by the unfavourable terms of trade-. The country ends up with lower real income after growth because the gains arising from higher output are wiped out by the deteriorating terms of trade. It may, however, by noted that the modified version of the basic theory does not alter the conclusion that a country produces and exports the commodity in which it has comparative advantages, and uses the abundant factor in its production. Trade benefits the nation, but the distribution of gains may be s!ewed. &d%ustment to trade is not costless but the short-term cost to ad%ustment should be weighted against the long-term gains from trade. 2.' INSTRUMENTS OF TRADE POLICY Trade policy uses seven main instruments< tariffs, subsidies, import "uotas, voluntary export restraints, local content re"uirements, administrative policies, and antidumping duties. Tariffs are the oldest and simplest instrument of trade policy. &s we

shall see later in this chapter, they are also the instrument that D&TT and 9T4 have been most successful in limiting. & fall in tariff barriers in recent decades has been accompanied by a rise in nontariff barriers, such as subsidies, "uotas, voluntary export restraints, and antidumping duties. 2.'.1 TARIFFS & t(!i)) is a tax levied on imports. Tariffs fall into two categories. S*+,i)i, t(!i))" are levied as a fixed charge for each unit of a good imported )for example, G; per barrel of oil-. A- .(/o!+0 t(!i))" are levied as a proportion of the value of the imported good. The :uropean Hnion has imposed such a tariff on imports of bananas from @atin &mericaI the tariff amounts to *J to /2 percent by value on the first /.J million tons of imports of bananas from @atin &merica )see the opening case-. & tariff raises the cost of imported products. In most cases, tariffs are put in place to protect domestic producers from foreign competition. In the mid-*752s when the H. . automobile industry was losing share to Fapanese competitors, the H. . government placed a /J percent by value tariff on the importation of light truc!s into the Hnited tates )light truc!s include sport utility vehicles-. The tariff raised the price of light truc!s imported into the Hnited tates and gave H. . automobile companies some protection from foreign competition )although a cynic might note that all the tariff did was speed up the plans of :uropean and Fapanese automobile companies to build light truc!s in the Hnited tates-. 9hile the principal ob%ective of most tariffs is to protect domestic producers and employees against foreign competition, they also raise revenue for the government. Hntil the income tax was introduced, for example, the H. . government raised most of its revenues from tariffs. The important thing to understand about a tariff is who suffers and who gains. The government gains, because the tariff increases government revenues. Domestic producers gain, because the tariff affords them some protection against foreign competitors by increasing the cost of imported foreign goods. 1onsumers lose because they must pay more for certain imports. 9hether the gains to the government and domestic producers exceed the loss to consumers depends on various factors such as the

amount of the tariff, the importance of the imported good to domestic consumers, the number of %obs saved in the protected industry, and so on. &lthough detailed consideration of these issues is beyond the scope of this boo!, two conclusions that can be derived from a more advanced analysis.* First, tariffs are unambiguously pro-producer and anti-consumer. 9hile they protect producers from foreign competitors, this restriction of supply also raises domestic prices. Thus, as noted in the opening case, the tariff on banana imports into the :uropean Hnion has raised prices for bananas in the :H, and cost consumers some G/ billion a year. &nother study by Fapanese economists calculated that tariffs on imports of foodstuffs, cosmetics, and chemicals into Fapan in *757 cost the average Fapanese consumer about G572 per year in the form of higher prices./ &lmost all studies that have loo!ed at this issue find that import tariffs impose significant costs on domestic consumers in the form of higher prices.; For another example, see the accompanying 1ountry Focus, which loo!s at the cost to H. . consumers of tariffs on imports into the Hnited tates. econd, tariffs reduce the overall efficiency of the world economy. They reduce efficiency because a protective tariff encourages domestic firms to produce products at home that, in theory, could be produced more efficiently abroad. The conse"uence is an inefficient utilization of resources. For example, tariffs on the importation of rice into outh $orea have caused the land of outh $orean rice farmers to be used in an unproductive manner. It would ma!e more sense for the outh $oreans to purchase their rice from lower-cost foreign producers and to utilize the land now employed in rice production in some other way, such as growing foodstuffs that cannot be produced more efficiently elsewhere or for residential and industrial purposes. 2.'.2 SUBSIDIES & " 1"i-2 is a government payment to a domestic producer. ubsidies ta!e many forms including cash grants, low-interest loans, tax brea!s, and government e"uity participation in domestic firms. 0y lowering production costs, subsidies help domestic producers in two ways< they help them compete against foreign imports and they help them gain export mar!ets.

&griculture tends to be one of the largest beneficiaries of subsidies in most countries. In *775, for example, developed countries paid some G;,2 billion in support to farmers. In Fapan, agricultural subsidies amounted to a staggering ,/ percent of the value of gross farm receipts, or G/*,222 per farmer. In the :uropean Hnion, where the 1ommon &gricultural =olicy )1&=- has long provided subsidies to help farmers stay in business, subsidies amounted to K; percent of the value of gross farm receipts, or G*7,222 per farmer. In the Hnited tates, subsidies were // percent of gross farm receipts, which again amounts to G*7,222 per farmer. In 1anada, subsidies were *5 percent of gross farm receipts, or G5,222 per farmer. 4utside of agriculture, subsidies are much lower, but they are still significant. 4ne study found that government subsidies to manufacturing industries in most industrialized countries amounted to between / percent and ;.J percent of the value of industrial output. The average rate of subsidy in the Hnited tates was 2.J percentI in Fapan it was * percent, and in :urope it ranged from %ust below / percent in Dreat 0ritain and 9est Dermany to as much as , to + percent in weden and Ireland.J These figures, however, almost certainly underestimate the true value of subsidies, since they are based only on cash grants and ignore other !inds of subsidies )e.g., e"uity participation or lowinterest loans-. The main gains from subsidies accrue to domestic producers, whose international competitiveness is increased as a result of them. &dvocates of strategic trade policy )which, as you will recall from 1hapter K, is an outgrowth of the new trade theory- favor subsidies to help domestic firms achieve a dominant position in those industries where economies of scale are important and the world mar!et is not large enough to profitably support more than a few firms )e.g., aerospace, semiconductors-. &ccording to this argument, subsidies can help a firm achieve a first-mover advantage in an emerging industry )%ust as H. . government subsidies, in the form of substantial 'LD grants, allegedly helped 0oeing-. If this is achieved, further gains to the domestic economy arise from the employment and tax revenues that a ma%or global company can generate. 0ut subsidies must be paid for. Dovernments typically pay for subsidies by taxing individuals. Therefore, whether subsidies generate national benefits that exceed their

national costs is debatable. In practice, many subsidies are not that successful at increasing the international competitiveness of domestic producers. 'ather, they tend to protect the inefficient, rather than promoting efficiency, and promote excess production. &gricultural subsidies )*- allow inefficient farmers to stay in business, )/- encourage countries to overproduce heavily subsidized agricultural products, );- encourage countries to produce products that could be grown more cheaply elsewhere and imported, and, therefore, )K- reduce international trade in agricultural products. 4ne recent study estimated that if advanced countries abandoned subsidies to farmers, global trade in agricultural products would be J2 percent higher and the world as a whole would be better off to the tune of G*,2 billion., This increase in wealth arises from the more efficient use of agricultural land. 2.'.3 IMPORT 3UOTAS AND VOLUNTARY E4PORT RESTRAINTS &n i0*o!t 5 ot( is a direct restriction on the "uantity of some good that may be imported into a country. The restriction is usually enforced by issuing import licenses to a group of individuals or firms. For example, the Hnited tates has a "uota on cheese imports. The only firms allowed to import cheese are certain trading companies, each of which is allocated the right to import a maximum number of pounds of cheese each year. In some cases the right to sell is given directly to the governments of exporting countries. This is the case for sugar and textile imports in the Hnited tates. & variant on the import "uota is the voluntary export restraint )M:'-. & .o/ nt(!2 +6*o!t !+"t!(int is a "uota on trade imposed by the exporting country, typically at the re"uest of the importing countryNs government. 4ne of the most famous examples is the limitation on auto exports to the Hnited tates enforced by Fapanese automobile producers in *75*. & response to direct pressure from the H. . government, this M:' limited Fapanese imports to no more than *.,5 million vehicles per year. The agreement was revised in *75K to allow *.5J million Fapanese vehicles per year. The agreement was allowed to lapse in *75J, but the Fapanese government indicated its intentions at that time to continue to restrict exports to the Hnited tates to *.5J million vehicles per year.+ Foreign producers agree to M:'s because they fear far more damaging punitive tariffs or import "uotas might follow if they do not. &greeing to a

M:' is seen as a way of ma!ing the best of a bad situation by appeasing protectionist pressures in a country. &s with tariffs and subsidies, both import "uotas and M:'s benefit domestic producers by limiting import competition. &s with all restrictions on trade, "uotas do not benefit consumers. &n import "uota or M:' always raises the domestic price of an imported good. 9hen imports are limited to a low percentage of the mar!et by a "uota or M:', the price is bid up for that limited foreign supply. In the case of the automobile industry, for example, the M:' increased the price of the limited supply of Fapanese imports. &ccording to a study by the H. . Federal Trade 1ommission, the automobile industry M:' cost H. . consumers about G* billion per year between *75* and *75J. That G* billion per year went to Fapanese producers in the form of higher prices.5 The extra profit that producers ma!e when supply is artificially limited by an import "uota is referred to as a 5 ot( !+nt. If a domestic industry lac!s the capacity to meet demand, an import "uota can raise prices for both the domestically produced and imported good. This happened in the H. . sugar industry, where an import "uota has long limited the amount foreign producers can sell in the H. . mar!et. &ccording to one study, as a result of import "uotas the price of sugar in the Hnited tates has been as much as K2 percent greater than the world price.7 These higher prices have translated into greater profits for H. . sugar producers, who have lobbied politicians to !eep the lucrative agreement in place. They argue that H. . %obs in the sugar industry will be lost to foreign producers if the "uota system is scrapped. &nother industry that has long operated with import "uotas is the textile industry, which has a complex set of multinational agreements that govern the amount one country can export to others. In this industry, "uotas on imports into the Hnited tates have restricted the supply of certain apparel products and increased their price by as much as +2 percent.*2 Ouotas also encourage firms to engage in strategic actions de-signed to circumvent "uotas. The accompanying #anagement Focus loo!s at how one company, .ong $ong-based :s"uel, has altered the geographic distribution of its production system to circumvent "uotas on the importation of certain textile products into the Hnited tates.

The Hnited

tates is not alone in imposing "uotas on textile imports. #ost other

developed nations have similar "uotas. Hnder a 9orld Trade 4rganization agreement struc! in *77J, many of the "uotas on textile products are scheduledto be phased out by /22J. 2.'.$ ADMINISTRATIVE POLICIES In addition to the formal instruments of trade policy, governments of all types sometimes use informal or administrative policies to restrict imports and boost exports. A-0ini"t!(ti.+ t!(-+ *o/i,i+" are bureaucratic rules that are designed to ma!e it difficult for imports to enter a country. ome would argue that the Fapanese are the masters of this !ind of trade barrier. In recent years FapanNs formal tariff and nontariff barriers have been among the lowest in the world. .owever, critics charge that the countryNs informal administrative barriers to imports more than compensate for this. For example, the Eetherlands exports tulip bulbs to almost every country in the world except Fapan. In Fapan, customs inspectors insist on chec!ing every tulip bulb by cutting it vertically down the middle, and even Fapanese ingenuity cannot put them bac! together againP Federal :xpress has had a tough time expanding its global express shipping services into Fapan because Fapanese customs inspectors insist on opening a large proportion of express pac!ages to chec! for pornography, a process that can delay an QexpressR pac!age for days. Fapan is not the only country that engages in such policies. France re"uired that all imported videotape recorders arrive through a small customs entry point that was both remote and poorly staffed. The resulting delays !ept Fapanese M1's out of the French mar!et until a M:' agreement was negotiated.** &s with all instruments of trade policy, administrative instruments benefit producers and hurt consumers, who are denied access to possibly superior foreign products. 2.'.% ANTIDUMPING POLICIES In the context of international trade, - 0*in7 is variously defined as selling goods in a foreign mar!et at below their costs of production, or as selling goods in a foreign mar!et at below their QfairR mar!et value. There is a difference between these two definitionsI the QfairR mar!et value of a good is normally %udged to be greater than the costs of producing that good because the former includes a QfairR profit margin.

Dumping is viewed as a method by which firms unload excess production in foreign mar!ets. ome dumping may be the result of predatory behavior, with producers using substantial profits from their home mar!ets to subsidize prices in a foreign mar!et with a view to driving indigenous competitors out of that mar!et. 4nce this has been achieved, so the argument goes, the predatory firm can raise prices and earn substantial profits. &n alleged example of dumping occurred in *77+, when two outh $orean

manufacturers of semiconductors, @D emicon and .yundai :lectronics, were accused of selling dynamic random access memory chips )D'&#s- in the H. . mar!et at below their costs of production. This action occurred in the middle of a worldwide glut of chipma!ing capacity. It was alleged that the firms were trying to unload their excess production in the Hnited tates. &ntidumping policies are designed to punish foreign firms that engage in dumping. The ultimate ob%ective is to protect domestic producers from QunfairR foreign competition. &lthough antidumping policies vary somewhat from country to country, the ma%ority are similar to the policies used in the Hnited tates. If a domestic producer believes that a foreign firm is dumping production in the H. . mar!et, it can file a petition with two government agencies, the 1ommerce Department and the International Trade 1ommission. In the $orean D'&# case, #icron Technology, a H. . manufacturer of D'&#s, filed the petition. The government agencies then investigated the complaint. If they find it has merit, the 1ommerce Department may impose an antidumping duty on the offending foreign imports )antidumping duties are often called ,o nt+!.(i/in7 - ti+"-. These duties, which represent a special tariff, can be fairly substantial and stay in place for up to five years. For example, after reviewing #icronNs complaint, the 1ommerce Department imposed 7 percent and K percent countervailing duties on @D emicon and .yundai D'&# chips, respectively. Unit 8 III FOREIGN E4CHANGE DETERMINATION SYSTEMS BASIC CONCEPTS RELATING TO FOREIGN E4CHANGE INTRODUCTION

&n Indian resident, who is dealing, day in and day out in various commodities and to buy and sell them, uses legal currency of India i.e., Indian 'upee. 0ut to buy and sell commodities and services, if he has a currency, which is other than his countryNs currency, what will happenS ay for example, an Indian resident receives H Dollar *,222 from his relative, for using in India, he cannot straightaway use the Dollar, but has to convert in Indian 'upees and use it to buy commodities>services. .ence can we define Foreign :xchange in the following mannerS *- The currencies of other countries in the form of 1urrency Eotes, TravellersN 1he"ues, Drafts, Telegraphic Transfers, #ail Transfers etc. /- The mechanism by which our legal tender is converted into another currency and vice versa. 9HY CONVERSION IS NECESSARY: 1onversion of 1urrencies with each other has become a necessity. 0ecause no country in this Hniverse can claim that they manufacture all the goods and services, that their people re"uire to consume. :ven the mighty H & is no exception. They import 1offee from 0razil, India etc. for their consumption. goods, Technology etc. from 9estern 1ountries. &ll are aware that there is no Hniversal 1urrency through which such settlements across the national barriers and borders could be made and settlements ta!e place in the sellersN>buyersN>any mutually accepted currency. .ence the invention of conversion mechanism. 9HY E4CHANGE CONTROL: India is having the following Inflows and 4utflows< INFLO9S *- Inward 'emittances /- 'emittances to to all ban! accounts OUTFLO9S 4utward 'emittances =ayments relating imports imilarly India imports 1apital

;- Foreign &ids>@oans >0orrowings by :xport related payments li!e commission, 1orporates etc. legal fees, etc. K- :xport 'eceivables J- TouristsN income Tour>Travel related expenses @oan repayments > servicing of loans

Eormally in India, there is a shortfall of inflows than outflows. 4ur import payments are very crucial for the countryNs economy and e"ually important are our payments towards repayment of loans and its servicing. 9hen demand outplays supply, it is only prudent that we manage our foreign exchange reserves %udiciously. .ence 'eserve 0an! of India, under the provisions of Foreign :xchange 'egulation &ct *7+;, controls the inflow and outflow of foreign exchange. Through the :xchange 1ontrol #anual )*77; :dition- and subse"uent &D )#&- 1irculars, it enforces the proper management of countryNs foreign exchange. TRADE CONTROL It is e"ually important for any country to effectively monitor the movement of goods. 9hile the movement of foreign exchange is being controlled through :xchange 1ontrol #anual )*77;- and subse"uent &D )#&- circulars, goods movement in and out of the country is being monitored under the provisions of Foreign Trade )Development and 'egulations- &ct, *77/. The controlling authority in this case is Director Deneral of Foreign Trade, Eew Delhi and their various offices in other places headed by Foint Director of Foreign Trade. D.D.F.T. and F.D.F.T. are guided by the :CI# =4@I1B )*77+-/22/-, which is being provided by the #inistry of 1ommerce, Dovernment of India. 1ustoms are the authorities who are ensuring the movement of goods according to the above-said provisions, besides collection of revenues by way of duty on goods imported or exported. HO9 THE FOREIGN E4CHANGE IS HANDLED: 'eserve 0an! of India under the provisions of F:'& *7+;, has delegated the authority of handling Foreign :xchange to tate 0an! of India )and its subsidiaries-, =ublic ector 0an!s, =rivate ector 0an!s and Foreign 0an!s. They have delegated the

authority of handling Foreign :xchange and they are explained through various 1hapters of :xchange 1ontrol #anual, a boo! released by 'eserve ban! of India, the latest one being *77; edition. Hnder :1#, designated &uthorised Dealers )of Foreign :xchangewill be dealing in various Foreign :xchange transactions, to comply with all terms and conditions. &gain 0an!s that are authorised to handle Foreign :xchange, designate certain branches to handle the Foreign :xchange transactions, depending the necessity and potentiality of branchNs location and they are called &uthorised dealing branches. 0esides the above, 'eserve 0an! of India also authorises reputed .otels and other private establishments to handle Foreign :xchange in a limited way )say they can issue > encash Foreign 1urrency TravellersN 1he"ues > Foreign 1urrency Eotes- to cater to the foreign touristsN re"uirements. They are called &uthorised #oney 1hangers )&#1-. They are classified as FH@@-F@:DD:D > ': T'I1T:D #4E:B1.&ED:' . TYPES OF FOREIGN E4CHANGE TRANSACTIONS; &uthorised Dealers can handle two types of transactions viz. =urchase and ale of Foreign :xchange. 9hen customers tender export bills denominated in Foreign 1urrency, &Ds shall purchase the Foreign 1urrency 0ill. @i!ewise, when customers re"uest for a remittance in Foreign 1urrency towards payment of Import bills, then &Ds have to sell Foreign 1urrency to him. From this, we understand that both selling and purchasing transactions are from the ban!Ns angle. SETTLEMENT OF FOREIGN E4CHANGE TRANSACTIONS; ettlements of Foreign :xchange Transactions are made through the following accounts< *- E4 T'4 &ccount< 4ur &ccount with youI ex< The account maintained by an &uthorised Dealer with a foreign ban! is called (E4 T'4( &ccount or (4ur &ccount with Bou(. 9hen an instrument li!e a che"ue or an export bill is purchased the same is sent to the overseas ban! )correspondent- for realisation, the amount is collected and credited to &uthorised DealerNs account with them.

imilarly, when a draft is issued on a ban!s foreign correspondent it will be paid at the overseas centre by debiting the E4 T'4 &ccount of the issuing ban!. /- M4 T'4 &ccount< Bour &ccount with us :x.< Foreign ban!s )1orrespondents- also maintain accounts with any ban! in India in Indian 'upees for the purpose of settling their rupee transactions and these accounts are called (M4 T'4( &ccounts meaning (Bour &ccount with us(. ;- @4'4 &ccount< Their account with them :x.< Fust li!e tate ban! 4f India maintaining an account with foreign

correspondent say 0T1, Eew Bor!, 1anara 0an! may also maintain a Eostro &ccount with them. 9hen 0I advises 0T1 Eew Bor! for transfer of funds to 1anara 0an! &ccount with them, 1anara 0an! &ccount is titled as @oro &ccount (i.e. their account with you(. 9hen our ban! deals in an export credit bill on collection basis>on realisation of export bills negotiated >purchased>discounted, the foreign currency funds is to be credited to our account. For this purpose, we maintain Foreign 1urrency accounts with our various correspondents abroad. The account is called E4 T'4 account. 4nce the proceeds are credited in our E4 T'4 account, we receive the statement, based on which, the concerned branch, who have handled the transaction, will be informed. @i!ewise, when we would li!e to ma!e remittances, on behalf of our customers towards import payments, miscellaneous remittances etc., we give instructions to our correspondents, to debit our E4 T'4 account and effect payment. ometimes our correspondents maintain M4 T'4 accounts )'upee accounts of Eon-resident ban!s- with our ban! and payment or receipts are made through this account. For exports, they will authorise us to debit their M4 T'4 account and for imports, they will give instructions to credit their account. @i!ewise whenever the account of one ban! in the boo!s of the same correspondent, where we are maintaining our E4 T'4 account, the other ban!Ns account with the correspondent is referred as @4'4 account. That is the account

maintained by Indian 0an! with our correspondent 0an!ers Trust 1o Eewyor!, will be referred as @4'4 account of Indian 0an!. E4CHANGE RATES The rate, at which a currency is converted into another currency, is called the rate of exchange. uch rates are arrived from the base rate, which is decided by mar!et forces and is "uoted on a daily basis. 0an!s "uote various rates for different types of operations li!e 0ill buying, 0ill selling, TT )DD>#T>TT- buying , TT )DD>#T>TT- elling etc. The rates are arrived after loading suitable margins, as per F.:.D.&.I. )Foreign :xchange Dealers &ssociation of India- guidelines. FOREIGN E4CHANGE MAR&ET Foreign :xchange #ar!et is an 4ver the 1ounter #ar!et. It means that there is no fixed mar!et place. #ar!et players are differently and distantly located. It has no borders and barriers. &ll the transactions are put through over telecommunications followed up by written confirmations. .ence there is the need of high level professionalism for the mar!et players, which is in place. #ar!et =layers are &uthorised Dealers, 'ecognised Foreign :xchange bro!ers, :xporters, Importers, 'eserve 0an! of India. ometimes mar!et dealers include foreign ban!s abroad. &s such, Foreign :xchange #ar!et is a three tier mar!et viz.< a- #erchant #ar!et < 0etween &uthorised Dealers and the public. b- Inter 0an! #ar!et < 0etween &uthorised Dealers in India including 'eserve 0an!. c- IET:'E&TI4E&@ #&'$:T < 1omprising all 0an!s who deal in Foreign :xchange at select international Foreign :xchange 1entres li!e ingapore, .ong $ong, To!yo, @ondon, Eew Bor! etc. 9hen an &uthorised Dealer is unable to cover a deal in the local mar!et, he will approach the other 0an!ers in the International #ar!et for covering his deal.

Foreign :xchange is a scarce commodity, .ence, it is sub%ect to control.

It

commands a price due to the forces of supply and demand. It has an active mar!et )both domestic and international-. &uthorised Dealers maintain stoc!s of Foreign :xchange abroad to meet contingencies in the form of balances in Eostro &ccounts with their 1orrespondent 0an!s. F.E.D.A.I. (Fo!+i7n E6,<(n7+ D+(/+!" A""o,i(tion o) In-i(# It is an association of all the &D ban!s in India to liaise with each other, with '0I and other agencies. They prescribe the rules and charges for various foreign exchange transactions, with the concurrence of all the members. THE DETERMINATION OF E4CHANGE RATES :xchange-rate regimes are either fixed or floating, with fixed rates varying in terms of %ust how fixed they are and floating rates varying with respect to %ust how much they are allowed to float. A. F/o(tin7 R(t+ R+7i0+" Floating rates regimes are those whose currencies respond to the conditions of supply and demand. Technically, an independent floating currency is one that floats freely, unhampered by any form of government intervention. Equilibrium exchange rates are achieved when supply e"uals demand. B. M(n(7+- Fi6+--R(t+ R+7i0+" In a managed fixed exchange-rate system, a nationNs central ban! intervenes in the foreign exchange mar!et in order to influence the currencyNs relative price. To buy foreign currencies, it must have sufficient reserves on hand. 9hen economic policies and mar!et intervention donNt wor!, a country may be forced to either revalue or devalue its currency. & currency that is pegged to another )or to a bas!et of currencies- is usually changed on a formal basis. In *777, the D+ group of industrial countries was expanded to the D/2 for the purpose of including some developing countries in the discussion of effective exchange-rate policies. C. P !,<("in7-Po=+! P(!it2

The theory of purchasing-power parity states that the prices of tradable goods, when expressed in a common currency, will tend to e"ualize across countries as a result of exchange-rate changes. =ut another way, the theory claims a change in the comparative rates of inflation in two countries necessarily causes a change in their relative exchange rates in order to !eep prices fairly similar. )&n interesting illustration of this theory is the Q0ig #ac IndexR )see Table *2./-.- 9hile purchasing-power parity may be a reasonably good long-term indicator of exchange-rate movements, it is less accurate in the short run because it is difficult to determine an appropriate bas!et of commodities for comparison purposes, profit margins vary according to the strength of competition, different tax rates will influence prices differently and the theory falsely assumes no barriers to trade exist and transportation costs are zero. D. Int+!+"t !(t+" &lthough inflation is the most important long-run influence on exchange rates, interest rates are also important. 9hile the Fisher Effect theory lin!s inflation and interest rates, the International Fisher Effect (IFE) theory lin!s interest rates and exchange rates. The Fisher Effect theory states a countryNs nominal interest rate r )the actual monetary interest rate earned on an investment- is determined by the real interest rate R )the nominal rate less inflation- and the inflation rate i as follows< )* T r- 3 )* T R-)* T i-. 0ecause the real interest rate should be the same in every country, the country with the higher interest rate should have higher inflation. Thus, when inflation rates are the same, investors will li!ely place their money in countries with higher interest rates in order to get a higher real return. The International Fisher Effect implies the currency of the country with the lower interest rate will strengthen in the future, i.e., the interest-rate differential is an unbiased predictor of future changes in the spot exchange rate. The country with the higher interest rate )and higher inflation- should have the wea!er currency. In the short run, however, and during periods of price instability, a country that raises its interest rate is li!ely to attract capital and see its currency rise in value due to increased demand. E. Ot<+! F(,to!" in E6,<(n7+-R(t+ D+t+!0in(tion

& !ey factor affecting exchange-rate movements is confidence in a countryNs economy and administration. Technical factors such as the seasonal demand patterns for a given currency, the release of national economic statistics and events such as 7>**, corporate scandals and budget deficits also exert their influence. HISTORY ABOUT INDIAN RUPEE AND ITS E4CHANGE RATE 9ITH US> From *7J2 to *7+; Indian rupee was lin!ed to 0ritish =ound. In *7,, and *7+; devaluation happened. 4n /Kth eptember *7+J, the connection between Indian rupee and pound was bro!en. In *7+J, the rupee ties to the pound sterling were disengaged. India established a float exchange regime. 9ith the rupeesN effective rate placed on controlled, floating basis and lin!ed to a Qbas!et of currenciesR of IndiaNs ma%or trading partners. In *77; liberalised exchange rate system )@:'# - was replaced by the unified exchange rate system and hence the system of mar!et determined exchange rate was adopted. .owever, the '0I did not relin"uish its right to intervene in the mar!et to enble and control the Indian currency. 0efore /2** India had faced two ma%or devaluation that is in the year *7,, and *77*. o letNs understand the reasons and the measures adopted by government for the ma%or devaluations that too! place in India. UNIT 8 III INTERNATIONAL INSTITUTION UNCTAD FOUNDATION

In the early *7,2s, growing concerns about the place of developing countries in international trade led many of these countries to call for the convening of a fullfledged conference specifically devoted to tac!ling these problems and identifying appropriate international actions.

The first Hnited Eations 1onference on Trade and Development )HE1T&D- was held in Deneva in *7,K. Diven the magnitude of the problems at sta!e and the need to address them, the conference was institutionalized to meet every four years, with intergovernmental bodies meeting between sessions and a permanent secretariat providing the necessary substantive and logistical support.

imultaneously, the developing countries established the Droup of ++ to voice their concerns. )Today, the D++ has *;* members.-

The prominent &rgentinian economist 'aUl =rebisch, who had headed the Hnited Eations :conomic 1ommission for @atin &merica and the 1aribbean, became the organization6s first ecretary-Deneral.

PHASE 1; THE 1?'@S AND 1?A@S

In its early decades of operation, HE1T&D gained authoritative standing<

o

as an int+!7o.+!n0+nt(/ )o! 0 )o! No!t<-So t< -i(/o7 + (nn+7oti(tion" on issues of interest to developing countries, including debates on the BN+= Int+!n(tion(/ E,ono0i, O!-+!B.

for its (n(/2ti,(/ !+"+(!,< and *o/i,2 (-.i,+ on development issues.

&greements launched by HE1T&D during this time include<

o

the G+n+!(/iC+- S2"t+0 o) P!+)+!+n,+" (1?'D#, whereby developed economies grant improved mar!et access to exports from developing countries.

a number of Int+!n(tion(/ Co00o-iti+" A7!++0+nt", which aimed at stabilizing the prices of export products crucial for developing countries.

the 1onvention on a Co-+ o) Con- ,t )o! Lin+! Con)+!+n,+", which strengthened the ability of developing countries to maintain national merchant fleets.

the adoption of a et of #ultilaterally &greed :"uitable =rinciples and 'ules for the Cont!o/ o) R+"t!i,ti.+ B "in+"" P!(,ti,+" . This wor! later evolved into what is today !nown as (Trade and 1ompetition =olicies(.

Furthermore, HE1T&D was a !ey contributor to<

o

the definition of the target of 2.+V of gross domestic product )DD=- to be given as official development aid by developed countries to the poorest countries, as adopted by the Hnited Eations Deneral &ssembly in *7+2.

the identification of the Droup of @east Developed 1ountries )@D1s- as early as *7+*, which drew attention to the particular needs of these poorest countries. HE1T&D became the focal point within the HE system for tac!ling @D1-related economic development issues.

PHASE 2; THE 1?D@S

In the *752s, HE1T&D was faced with a changing economic and political environment<
o

There was a significant transformation in liberalization and privatization of state enterprises.

+,ono0i, t<inEin7.

Development strategies became more mar!et-oriented, focusing on trade

& number of developing countries were plunged into severe -+1t ,!i"+". Despite structural ad%ustment programs by the 9orld 0an! and the International #onetary Fund, most developing countries affected were not able to recover "uic!ly. In many cases, they experienced negative growth and high rates of inflation. For this reason, the *752s become !nown as the (lost decade(, particularly in @atin &merica.

E,ono0i, int+!-+*+n-+n,+ in the world increased greatly.

In the light of these developments, HE1T&D multiplied efforts aimed at<

o

strengthening the analytical content of its int+!7o.+!n0+nt(/ -+1(t+, particularly regarding 0(,!o+,ono0i, 0(n(7+0+nt and international financial and monetary issues.

broadening the scope of its activities to assist developing countries in their efforts to integrate into the =o!/- t!(-in7 "2"t+0. In this context,

the t+,<ni,(/ (""i"t(n,+ provided by HE1T&D to developing countries was particularly important in the Hruguay 'ound of trade negotiations, which had begun under the Deneral &greement on Tariffs and Trade )D&TT- in *75,. HE1T&D played a !ey role in

supporting the negotiations for the Deneral &greement on Trade in ervices )D&T -.

HE1T&D6s wor! on t!(-+ +))i,i+n,2 )customs facilitation, multimodal transport- made an important contribution to enabling developing economies to reap greater gains from trade.

HE1T&D assisted developing countries in the !+",<+- /in7 o) o))i,i(/ -+1t in the =aris 1lub negotiations.

promoting So t<-So t< ,oo*+!(tion. In *757, the &greement on the G/o1(/ S2"t+0 o) T!(-+ P!+)+!+n,+" (0on7 D+.+/o*in7 Co nt!i+" )D T=- came into force. It provided for the granting of tariff as well as non-tariff preferences among its members. To date, the &greement has been ratified by KK countries.

addressing the concerns of the poorest nations by organizing the )i!"t UN Con)+!+n,+ on L+("t D+.+/o*+- Co nt!i+" in 1?D1. ince then, two other international conferences have been held at *2-year intervals.

PHASE 3; FROM THE 1??@S UNTIL TODAY

$ey developments in the international context<

o

The conclusion of the U! 7 (2 Ro n- of trade negotiations under the D&TT resulted in the establishment of the 9orld Trade 4rganizationin *77J, which led to a strengthening of the legal framewor! governing international trade.

& spectacular increase in international )in(n,i(/ )/o=" led to increasing financial instability and volatility.

&gainst this bac!ground, HE1T&D6s analysis gave early warning concerning the ris!s and the destructive impact of )in(n,i(/ ,!i"+" on development. 1onse"uently, HE1T&D emphasized the need for a more development-oriented (international financial architecture(.

Foreign direct investment flows became a ma%or component of globalization.

HE1T&D highlighted the need for a differentiated approach to the problems of developing countries. Its tenth conference, held in 0ang!o! in February /222, adopted a political declaration W (T<+ S*i!it o) B(n7EoE( W as a strategy to address the development agenda in a globalizing world.

In recent years, HE1T&D has

o

further focused its (n(/2ti,(/ !+"+(!,< on the lin!ages between trade, investment, technology and enterprise development.

put forward a (*o"iti.+ (7+n-(( for developing countries in international trade negotiations, designed to assist developing countries in better understanding the complexity of the multilateral trade negotiations and in formulating their positions.

:xpanded wor! on int+!n(tion(/ in.+"t0+nt i"" +", following the merger into HE1T&D of the Eew Bor!Wbased Hnited Eations 1entre on Transnational 1orporations in *77;.

+6*(n-+- (n- -i.+!"i)i+- it" t+,<ni,(/ (""i"t(n,+, which today covers a wide range of areas, including training trade negotiators and addressing trade-related issuesI debt management, investment policy reviews and the promotion of entrepreneurshipI commoditiesI competition law and policyI and trade and environment.

IMF The Int+!n(tion(/ Mon+t(!2 F n- )IMF- is an international organization that was initiated in *7KK at the 0retton 9oods 1onference and formally created in *7KJ by /7 member countries. The I#F6s stated goal was to assist in the reconstruction of the worldNs international payment system post-9orld 9ar II. 1ountries contribute money to a pool through a "uota system from which countries with payment imbalances can borrow funds temporarily. Through this activity and others such as surveillance of its

members6 economies and the demand for self-correcting policies, the I#F wor!s to improve the economies of its member countries. The I#F describes itself as Qan organization of *55 countries, wor!ing to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.R The organization6s stated ob%ectives are to promote international economic cooperation, international trade, employment, and exchange rate stability, including by ma!ing financial resources available to member countries to meet balance of payments needs. Its head"uarters are in 9ashington, D.1., Hnited tates. ROLE OF IMF The I#F wor!s to foster global growth and economic stability. It provides policy advice and financing to members in economic difficulties and also wor!s with developing nations to help them achieve macroeconomic stability and reduce poverty. The rationale for this is that private international capital mar!ets function imperfectly and many countries have limited access to financial mar!ets. uch mar!et imperfections, together with balance of payments financing, provide the %ustification for official financing, without which many countries could only correct large external payment imbalances through measures with adverse effects on both national and international economic prosperity. The I#F can provide other sources of financing to countries in need that would not be available in the absence of an economic stabilization program supported by the Fund. Hpon initial I#F formation, its two primary functions were< to oversee the fixed exchange rate arrangements between countries, thus helping national governments manage their exchange rates and allowing these governments to prioritize economic growth, and to provide short-term capital to aid balance-of-payments.X,Y This assistance was meant to prevent the spread of international economic crises. The Fund was also intended to help mend the pieces of the international economy post the Dreat Depression and 9orld 9ar II. The I#FNs role was fundamentally altered after the floating exchange rates post *7+*. It shifted to examining the economic policies of countries with I#F loan

agreements to determine if a shortage of capital was due to economic fluctuations or economic policy. The I#F also researched what types of government policy would ensure economic recovery. The new challenge is to promote and implement policy that reduces the fre"uency of crises among the emerging mar!et countries, especially the middle-income countries that are open to massive capital outflows. 'ather than maintaining a position of oversight of only exchange rates, their function became one of QsurveillanceR of the overall macroeconomic performance of its member countries. Their role became a lot more active because the I#F now manages economic policy instead of %ust exchange rates. In addition, the I#F negotiates conditions on lending and loans under their policy of conditionality, which was established in the *7J2s. @ow-income countries can borrow on concessional terms, which means there is a period of time with no interest rates, through the :xtended 1redit Facility ):1F-, the tandby 1redit Facility ) 1F- and the 'apid 1redit Facility )'1F-. Eonconcessional loans, which include interest rates, are provided mainly through tand-0y &rrangements ) 0&-, the Flexible 1redit @ine )F1@-, the =recautionary and @i"uidity @ine )=@@-, and the :xtended Fund Facility. The I#F provides emergency assistance via the newly introduced 'apid Financing Instrument )'FI- to all its members facing urgent balance of payments needs. IBRD The Int+!n(tion(/ B(nE )o! R+,on"t! ,tion (n- D+.+/o*0+nt )IBRD- is an international financial institution which offers loans to middle-income developing countries. The I0'D is the first of five member institutions which compose the 9orld 0an! Droup and is head"uartered in 9ashington, D.1., Hnited tates. It was established in *7KK with the mission of financing the reconstruction of :uropean nations devastated by 9orld 9ar II. Together, the International 0an! for 'econstruction and Development and its concessional lending arm, the International Development &ssociation, are collectively !nown as the 9orld 0an! as they share the same leadership and staff.X*YX/YX;Y Following the reconstruction of :urope, the 0an!6s mandate expanded to advancing worldwide economic development and eradicating poverty. The I0'D provides commercial-grade or concessional financing to sovereign states to fund pro%ects that see!

to improve transportation and infrastructure, education, domestic policy, environmental consciousness, energy investments, healthcare, access to food and potable water, and access to improved sanitation. The I0'D is owned and governed by its member states, but has its own executive leadership and staff which conduct its normal business operations. The 0an!6s member governments are shareholders which contribute paid-in capital and have the right to vote on its matters. In addition to contributions from its member nations, the I0'D ac"uires most of its capital by borrowing on international capital mar!ets through bond issues. In /2**, it raised G/7 billion H D in capital from bond issues made in /, different currencies. The 0an! offers a number of financial services and products, including flexible loans, grants, ris! guarantees, financial derivatives, and catastrophic ris! financing. It reported lending commitments of G/,.+ billion made to *;/ pro%ects in /2**. FEATURES OF IBRD The I0'D provides financial services as well as strategic coordination and information services to its borrowing member countries. The 0an! only finances sovereign governments directly, or pro%ects bac!ed by sovereign governments. The 9orld 0an! Treasury is the division of the I0'D that manages the 0an!6s debt portfolio of over G*22 billion and financial derivatives transactions of G/2 billion. The 0an! offers flexible loans with maturities as long as ;2 years and customtailored repayment scheduling. The I0'D also offers loans in local currencies. Through a %oint effort between the I0'D and the International Finance 1orporation, the 0an! offers financing to subnational entities either with or without sovereign guarantees. For borrowers needing "uic! financing for an unexpected change, the I0'D operates a Deferred Drawdown 4ption which serves as a line of credit with features similar to the 0an!6s flexible loan program. &mong the 9orld 0an! Droup6s credit enhancement and guarantee products, the I0'D offers policy-based guarantees to cover countries6 sovereign default ris!, partial credit guarantees to cover the credit ris! of a sovereign government or subnational entity, and partial ris! guarantees to private pro%ects to cover a government6s failure to meet its contractual obligations. The I0'D6s :nclave =artial 'is! Duarantee to cover private pro%ects in member countries of the ID& against sovereign

governments6 failures to fulfill contractual obligations. The 0an! provides an array of financial ris! management products including foreign exchange swaps, currency conversions, interest rate swaps, interest rate caps and floors, and commodity swaps. To help borrowers protect against catastrophes and other special ris!s, the ban! offers a 1atastrophe Deferred Drawdown 4ption to provide financing after a natural disaster or declared state of emergency. It also issues catastrophe bonds which transfer catastrophic ris!s from borrowers to investors. The I0'D reported G/,.+ billion in lending commitments for *;/ pro%ects in fiscal year /2**, significantly less than its GKK./ billion in commitments during fiscal year /2*2. 9TO The 9orld Trade 4rganization )9T4- is the only global international organization dealing with the rules of trade between nations. &t its heart are the 9T4 agreements, negotiated and signed by the bul! of the worldNs trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business. ROLE OF 9TO The 9T4 is run by its member governments. &ll ma%or decisions are made by the membership as a whole, either by ministers )who usually meet at least once every two years- or by their ambassadors or delegates )who meet regularly in Deneva-. 9hile the 9T4 is driven by its member states, it could not function without its ecretariat to coordinate the activities. The ecretariat employs over ,22 staff, and its experts Z lawyers, economists, statisticians and communications experts Z assist 9T4 members on a daily basis to ensure, among other things, that negotiations progress smoothly, and that the rules of international trade are correctly applied and enforced. T!(-+ n+7oti(tion" The 9T4 agreements cover goods, services and intellectual property. They spell out the principles of liberalization, and the permitted exceptions. They include individual countriesN commitments to lower customs tariffs and other trade barriers, and to open and !eep open services mar!ets. They set procedures for settling disputes. These agreements

are not staticI they are renegotiated from time to time and new agreements can be added to the pac!age. #any are now being negotiated under the Doha Development &genda, launched by 9T4 trade ministers in Doha, Oatar, in Eovember /22*. I0*/+0+nt(tion (n- 0onito!in7 9T4 agreements re"uire governments to ma!e their trade policies transparent by notifying the 9T4 about laws in force and measures adopted. Marious 9T4 councils and committees see! to ensure that these re"uirements are being followed and that 9T4 agreements are being properly implemented. &ll 9T4 members must undergo periodic scrutiny of their trade policies and practices, each review containing reports by the country concerned and the 9T4 ecretariat. Di"* t+ "+tt/+0+nt The 9T4Ns procedure for resolving trade "uarrels under the Dispute ettlement Hnderstanding is vital for enforcing the rules and therefore for ensuring that trade flows smoothly. 1ountries bring disputes to the 9T4 if they thin! their rights under the agreements are being infringed. Fudgements by specially appointed independent experts are based on interpretations of the agreements and individual countriesN commitments. B i/-in7 t!(-+ ,(*(,it2 9T4 agreements contain special provision for developing countries, including longer time periods to implement agreements and commitments, measures to increase their trading opportunities, and support to help them build their trade capacity, to handle disputes and to implement technical standards. The 9T4 organizes hundreds of technical cooperation missions to developing countries annually. It also holds numerous courses each year in Deneva for government officials. &id for Trade aims to help developing countries develop the s!ills and infrastructure needed to expand their trade. O t!+(,< The 9T4 maintains regular dialogue with non-governmental organizations, parliamentarians, other international organizations, the media and the general public on various aspects of the 9T4 and the ongoing Doha negotiations, with the aim of enhancing cooperation and increasing awareness of 9T4 activities.

ADVANTAGES OF 9TO The 9T4 agreements are lengthy and complex because they are legal texts covering a wide range of activities. 0ut a number of simple, fundamental principles run throughout all of these documents. These principles are the foundation of the multilateral trading system. Non--i",!i0in(tion & country should not discriminate between its trading partners and it should not discriminate between its own and foreign products, services or nationals. #ore open @owering trade barriers is one of the most obvious ways of encouraging tradeI these barriers include customs duties )or tariffs- and measures such as import bans or "uotas that restrict "uantities selectively. P!+-i,t(1/+ (n- t!(n"*(!+nt Foreign companies, investors and governments should be confident that trade barriers should not be raised arbitrarily. 9ith stability and predictability, investment is encouraged, %obs are created and consumers can fully en%oy the benefits of competition Z choice and lower prices. Mo!+ ,o0*+titi.+ Discouraging [unfairN practices, such as export subsidies and dumping products at below cost to gain mar!et shareI the issues are complex, and the rules try to establish what is fair or unfair, and how governments can respond, in particular by charging additional import duties calculated to compensate for damage caused by unfair trade. Mo!+ 1+n+)i,i(/ )o! /+"" -+.+/o*+- ,o nt!i+" Diving them more time to ad%ust, greater flexibility and special privilegesI over three-"uarters of 9T4 members are developing countries and countries in transition to mar!et economies. The 9T4 agreements give them transition periods to ad%ust to the more unfamiliar and, perhaps, difficult 9T4 provisions. P!ot+,t t<+ +n.i!on0+nt

The 9T4Ns agreements permit members to ta!e measures to protect not only the environment but also public health, animal health and plant health. .owever, these measures must be applied in the same way to both national and foreign businesses. In other words, members must not use environmental protection measures as a means of disguising protectionist policies. UNIT 8 V REGIONAL ECONOMIC INTEGRATION INTRODUCTION E,ono0i, int+7!(tion is the unification of economic policies between different states through the partial or full abolition of tariff and non-tariff restrictions on trade ta!ing place among them prior to their integration. This is meant in turn to lead to lower prices for distributors and consumers with the goal of increasing the combined economic productivity of the states. The trade stimulation effects intended by means of economic integration are part of the contemporary economic Theory of the econd 0est< where, in theory, the best option is free trade, with free competition and no trade barriers whatsoever. Free trade is treated as an idealistic option, and although realized within certain developed states, economic integration has been thought of as the (second best( option for global trade where barriers to full free trade exist. REGIONAL ECONOMIC INTEGRATION IN EUROPE E !o*+(n int+7!(tion is the process of industrial, political, legal, economic )and in some cases social and cultural- integration of states wholly or partially in :urope. :uropean integration has primarily come about through the :uropean Hnion and the 1ouncil of :urope. REGIONAL ECONOMIC INTEGRATION IN USA In the past decade, the economic integration process in both Eorth and outh &merica hasgradually gained momentum and is currently geared up to a new level. The creation of E&FT& between 1anada, H & and #exico in *77K and its success in boosting trade between these countries constitutes an important test case for further economic integration in the &mericas. imilarly, the recent agreement between the

&ndean 1ommunity and #ercosur to create a Free Trade &rea )FT&- encompassing virtually the whole outh &merican continent shows that the trend towards further regional economic integration is accelerating. 0esides these two examples, numerous other interesting developments have recently ta!en place, which warrant a closer loo!. For instance, the :uropean 1ommunity ):1- and #ercosur are currently negotiating an &ssociation &greement between them. imultaneously, 1hile is negotiating an &ssociation &greement with the :1 along the same lines, while 1hile has already established FT&s with #exico and 1anada as a first step towards %oining E&FT&. #eanwhile, the negotiations for the creation of a Free Trade &rea of the &mericas )FT&&- are ma!ing substantial progress and it is intended to be established in /22J. EUROPEAN UNION The :uropean Hnion ):H- is a political and economic partnership that represents a uni"ue form of cooperation among /+ member states.* 0uilt through a series of binding treaties, the Hnion is the latest stage in a process of integration begun after 9orld 9ar II to promote peace and economic prosperity in :urope. Its founders hoped that by creating specified areas in which member states agreed to share sovereigntyZinitially in coal and steel production, economics and trade, and nuclear energyZit would promote interdependence and ma!e another war in :urope unthin!able. ince the *7J2s, this :uropean integration pro%ect has expanded to encompass other economic sectors, a customs union, a single mar!et in which goods, people, and capital move freely, a common trade policy, a common agricultural policy, many aspects of social and environmental policy, and a common currency )the euro- that is used by *+ member states. ince the mid-*772s, :H member states have also ta!en significant steps toward political integration, with decisions to develop a 1ommon Foreign and ecurity =olicy )1F =- and efforts to promote cooperation in the area of Fustice and .ome &ffairs )F.&-, which is aimed at forging common internal security measures. ASEAN The A""o,i(tion o) So t<+("t A"i(n N(tion" )ASEAN rarely is a geo-political and economic organization of ten countries located in outheast &sia, which was formed on 5 &ugust *7,+ by Indonesia, #alaysia, the =hilippines, ingapore and Thailand. ince

then, membership has expanded to include 0runei, 0urma )#yanmar-, 1ambodia, @aos, and Mietnam. Its aims include accelerating economic growth, social progress, cultural development among its members, protection of regional peace and stability, and opportunities for member countries to discuss differences peacefully. & :&E covers a land area of K.K, million !m\, which is ;V of the total land area of :arth, and has a population of approximately ,22 million people, which is 5.5V of the world6s population. The sea area of & :&E is about three times larger than its land counterpart. In /2**, its combined nominal DD= had grown to more than H G / trillion. If & :&E were a single entity, it would ran! as the eighth largest economy in the world. BRIC In economics, BRIC is a grouping acronym that refers to the countries of Brazil, Russia, India and China, which are all deemed to be at a similar stage of newly advanced economic development. It is typically rendered as (the BRIC"( or (the BRIC countries( or (the BRIC economies( or alternatively as the (0ig Four(. The acronym was coined by Fim 46Eeill in a /22* paper entitled (0uilding 0etter Dlobal :conomic 0'I1s(. The acronym has come into widespread use as a symbol of the shift in global economic power away from the developed D+ economies towards the developing world. It is estimated that 0'I1 economies will overta!e D+ economies by /2/+. &ccording to a paper published in /22J, #exico and outh $orea were the only other countries comparable to the 0'I1s, but their economies were excluded initially because they were considered already more developed, as they were already members of the 4:1D. The same creator of the term (0'I1( coined the term #I$T, that includes #exico and outh $orea. everal of the more developed of the E-** countries, in particular Tur!ey, #exico, Indonesia and Eigeria, are seen as the most li!ely contenders to the 0'I1s. ome other developing countries that have not yet reached the E-** economic level, such as outh &frica, aspire to 0'I1 status. :conomists at the 'euters /2** Investment 4utloo! ummit, held on ,W+ December /2*2, dismissed the notion of outh &frica

%oining 0'I1. Fim 46Eeill told the summit that he was constantly being lobbied about 0'I1 status by various countries. .e said that outh &frica, at a population of under J2 million people, was %ust too small an economy to %oin the 0'I1 ran!s. .owever, after the 0'I1 countries formed a political organization among themselves, they later expanded to include outh &frica, becoming the 0'I1 . Doldman achs has argued that, since the four 0'I1 countries are developing rapidly, by /2J2 their combined economies could eclipse the combined economies of the current richest countries of the world. These four countries, combined, currently account for more than a "uarter of the world6s land area and more than K2V of the world6s population. Doldman achs did not argue that the 0'I1s would organize themselves into an economic bloc, or a formal trading association, as the :uropean Hnion has done. .owever, there are some indications that the (four 0'I1 countries have been see!ing to form a 6political club6 or 6alliance6(, and thereby converting (their growing economic power into greater geopolitical clout(. 4n Fune *,, /227, the leaders of the 0'I1 countries held their first summit in Be!aterinburg, and issued a declaration calling for the establishment of an e"uitable, democratic and multipolar world order. ince then they have met in 0ras]lia in /2*2, met in anya in /2** and in Eew Delhi, India in /2*/. In recent years, the 0'I1s have received increasing scholarly attention. 0razilian political economist #arcos Troy%o and French investment ban!er 1hristian D^s^glise founded the 0'I1@ab at 1olumbia Hniversity, a Forum examining the strategic, political and economic conse"uences of the rise of 0'I1 countries, especially by analyzing their pro%ects for power, prosperity and prestige through graduate courses, special sessions with guest spea!ers, :xecutive :ducation programs, and annual conferences for policyma!ers, business and academic leaders, and students. SAARC The So t< A"i(n A""o,i(tion )o! R+7ion(/ Coo*+!(tion )SAARC- is an organisation of outh &sian nations, which was established on 5 December *75J when the government of 0angladesh, 0hutan, India, #aldives, Eepal, =a!istan, and ri @an!a formally adopted its charter providing for the promotion of economic and social progress,

cultural development within the

outh &sia region and also for friendship and

cooperation with other developing countries. It is dedicated to economic, technological, social, and cultural development emphasising collective self-reliance. Its seven founding members are ri @an!a, 0hutan, India, #aldives, Eepal, =a!istan, and 0angladesh. &fghanistan %oined the organisation in /22+. #eetings of heads of state are usually scheduled annuallyI meetings of foreign secretaries, twice annually. It is head"uartered in $athmandu, Eepal. INTEGRATION FOR BUSINESS 0usiness integration is a strategy whose goal is to synchronize information technology )IT- and business cultures and ob%ectives and align technology with business strategy and goals. 0usiness integration is a reflection of how IT is being absorbed as a function of business. 0usiness integration has many implications for the role of the corporate 1I4, one of which is that the 1I4 will be ta!ing on additional responsibilities such as business process management. In the past, the 1I4 was mainly responsible for IT processes. &s technology increasingly becomes an embedded business function, many experts predict that information technology will fall under the domain of business leaders instead of technology experts.