ECONOMICS OF GLOBAL TRADE AND FINANCE SEM I

INTRODUCTION: INTERNATIONAL TRADE

International Trade : Is the conduct of business transactions across national boundaries. People in nations tend to produce those goods and services for which they are best suited and then exchange those with other nations for mutual benefits. Thus, items tend to be produced in those countries where its cost of production is lower. And then exchanged it with other nations for profit.

International Trade
Comprises of Imports & Exports (foreign trade) i.e. buying and/or selling abroad to fulfill needs of company. International Trade is trans-border transaction between a) Private party to private party abroad b) Private party to foreign government c) Home govt. to foreign government & d) Home govt. to private party abroad.

Items involved in International trade are a) Merchandise or Goods (commodity or brands) b) Services c) Investments d) Technologies etc.

Difference between Domestic & International trade

Specific Terms : The terms import & export are used only in international trade. Heterogeneous markets : Internal trade is among us while international trade is between us & them. Political differences : Each government applies various regulations to protect its own interests. Eg. Tariff barriers, quotas etc.

Difference between Domestic & International trade

Different rules : Different nations have different norms for trade. Businesses have to take care of a different set of external environment. Different currency : Most important difference. Each country has a different currency policy. Fluctuations in exchange rates make a huge difference. Factor immobility : Factors like labour, capital, enterprise are immovable.

Gains from International trade

Optimum allocation of world resources. Gains of specialization. Enhanced wealth. Larger output. Global welfare. Cultural exchange. Partial solution to the problem of scarcity. Advantages to global consumers due to increased competitiveness. Wide & open market for gaining economies of scale.

Types of Tariffs
Tariff is a tax / duty payable when goods enter into a country. Tariff can be classified by the merit of : Direction : Import / Export Purpose : Protective / Revenue Rates : Specific duties / Ad Val Orem duties Length : Tariff surcharge / Countervailing duties. Distribution Point : Single Stage / Value Added / Excise tax. Non Tariff Barriers : Subsidies / Classification / Valuation / Documentation / Quotas / Health & Safety regulations etc

Tariff & Non-Tariff Barriers on Sourcing

In order to achieve International Political ambitions in addition to i) generating revenue for the nation and ii) checking outflow of foreign exchange ; nations impose Trade Barriers as Tariff & Non-Tariff barriers.

A. Tariff Barriers -- are artificial blockades put in the path of

Sourcing through taxes and duties like : a) Specific Duty -- Customs duty realised on import of goods into the nation per unit, volume, weight etc. For example, charging specific duty @ Rs. 100/- per shirt, Rs. 20/- per kg. of Steel or Rs. 6.50 per litre of milk etc. b) Ad valorem -- Customs duty levied as a percent of value or price ; e.g. 10%, 50% etc. of FOB price. For example, customs duty @ 24.5% on F.O.B. price of Petroleum jelly imported into the country.
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c) Compound Duty -- It is a combination of Specific and Ad valorem duties. For example, customs duty on automobiles may be charged @ 150% of C.I.F. value of price + Rs. 50/- for every kilogram of its rubber content. Depending upon purpose , the type of duty viz. Specific, Ad valorem or Compound and their values are decided.

Effect of Tariff Barrier 1. Due to tariff barrier, the price of supplies increase on landing at buyers nation because of which export price of finished product (containing the imported item) gets increased, leading to fall in its competitiveness when exported. 2. Tariff barrier on imports increase FDI into the nation, leading to increase in competition. 3. In cases of Import tariff, price in sourcers country goes up leading to fall in demand locally.
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B. Non Tariff Barriers : These are artificial barriers put in the path of imports from countries abroad through means other import and export duties. These are levied for protective and political purposes in the form of i) Price-influencing Non-Tariff Barriers & ii) Quantity influencing Non-Tariff Barriers i) Price-influencing NTBs -1. Production Subsidies -- Monetary assistance provided by Govt. to make products competitive in export markets e.g., Govts. of US, EU, Japan etc. provide subsidy on export production of agri. items to farmers. 2. Indirect Subsidies -- When some of the expenses in production are defrayed by Govt. e.g. cost of seeds, fertiliser, water, electricity etc. In agri. production as provided by Govt of India. 3. Conditional Subsidies -- Monetary assistance provided by Govt. on fulfillment of export related targets. 4. Countervailing Duties -- When importing nations economy is adversely affected by export subsidies provided by exporting nations, importing country can levy Countervailing duty to neutrslise its effect.
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5. Antidumping Duties -- When a nation exports a product at a price lower than its home-country price or manufacturing cost, it is called Dumping. Importing nations may levy a heavy charge in such cases called Antidumping Duty to check injury to domestic industry. 6. Consular Formality -- Some nations insist on legalisation of exporters documents by consulate of their nation in exporters country for payments through bank. ii) Quantity influencing NTBs 1. Import Restrictions -- Some nations insist upon import licences to allow import of restricted items. 2. Export Quotas -- Some nations work on a quota for exports. For example, OPEC nations fix quotas for quarterly quota of nations. 3. Foreign Exchange Regulation -- Nations facing Balance of Payment crisis, may impose restrictions on imports and payment in foreign exchange . 4. Technical & Administrative Regulations -- Many nations impose restriction on packaging and information on labels . ----10/10/2013 Presentation by Prof. H.Ganguly

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DUMPING
In international trade, the export by a country or company of a product at a price that is lower in the foreign market than the price charged in the domestic market. As dumping usually involves substantial export volumes of the product, it often has the effect of endangering the financial viability of manufacturers or producers of the product in the importing nation.

 Japan was accused of dumping steel , tv sets , computer chips in United States. Most industrial nations (majorly Europian Nations) have tendency of persistently dumping excessive agricultural commodities arrising from their farm support programs.

Types of Dumping
1. Sporadic Dumping : Occasional sale of a commodity at below cost in order to unload an unforeseen and temporary surplus of the commodity such as cheese, milk, wheat etc. in the international market without reducing domestic prices. 2. Predatory Dumping: Temporary sale of a commodity at below its average cost or a lower price abroad in order to derive foreign producers out of business, after which prices are raised to take advantage of the monopoly power abroad. 3. Persistent Dumping: Continuous tendency of a domestic monopolist to maximize total profits by selling the commodity at a higher price in the domestic market than internationally (to meet the competition of foreign rivals).

Causes of Dumping
Dumpig usually occurs because of the following reasons:

(1) Producers in one country are trying to stay competitive with producers in another country, (2) Producers in one country are trying to eliminate the producers in another country and gain a larger share of the world market, (3) Producers are trying to get rid of excess stuff that they can't sell in their own country, (4) Producers can make more profit by dividing sales into domestic and foreign markets, then charging each market whatever price the buyers are willing to pay.

SUBSIDIES
A subsidy is a grant or other financial assistance given by one party for the support or development of another. The most common definition of a subsidy refers to a payment made by the government to a producer. Subsidies can be direct cash grants, interest-free loans or indirect tax breaks, insurance, lowinterest loans, depreciation write-offs, rent rebates. This form of support can be legal, illegal, ethical or unethical. Subsidies are used for a variety of purposes, including employment, production and exports. Subsidies are often regarded as a form of protectionism or trade barrier by making domestic goods and services artificially competitive against imports.

Types of subsidies
Production Subsidy A production subsidy encourages suppliers to increase the output of a particular product by partially offsetting the production costs or losses. The objective of production subsidies may be to expand production of a particular product at a lower price.

Export Subsidy An export subsidy is a support from the government for products that are exported, as a means of assisting the countrys balance of payments.

 Employment Subsidy An employment subsidy serves as an incentive to businesses to provide more job opportunities to reduce the level of unemployment in the country (income subsidies) or to encourage research and development. [4] With an employment subsidy, the government provides assistance with wages. Another form of employment subsidy is the social security benefits. Employment subsidies allow a person receiving the benefit to enjoy some minimum standard of living.

CARTELS
A cartel is a formal "agreement" among competing firms. It is a formal organization of producers and manufacturers that agree to fix prices, marketing, and production. Cartels usually occur in an oligopolistic industry, where the number of sellers is small (usually because barriers to entry, most notably startup costs, are high) and the products being traded are usually homogeneous. Cartel members may agree on such matters as price fixing, total industry output, market shares, allocation of customers, allocation of territories. The aim of such collusion (also called the cartel agreement) is to increase individual members' profits by reducing competition.

 One can distinguish private cartels from public cartels. In the public cartel a government is involved to enforce the cartel agreement, and the government's sovereignty shields such cartels from legal actions. E.g.: OPEC Inversely, private cartels are subject to legal liability under the antitrust laws now found in nearly every nation of the world. Furthermore, the purpose of private cartels is to benefit only those individuals who constitute it, public cartels work to pass on benefits to the populace as a whole.

There are several factors that will affect the firms' ability to monitor a cartel:

Number of firms in the industry

Characteristics of the products sold by the firms

Production costs of each member Behaviour of demand Frequency of sales and their characteristics Number of firms in industry The fewer the number of firms in the industry, the easier for the members of the cartel to monitor the behaviour of other members. Given that detecting a price cut becomes harder as the number of firms increases, the bigger are the gains from price cutting.

The greater the number of firms, the more probable it is that one of those firms is a maverick firm; that is, a firm known for pursuing aggressive and independent pricing strategy. Even in the case of a concentrated market, with few firms, the existence of such a firm may undermine the collusive behaviour of the cartel.[8]

 Characteristics of products sold Cartels that sell homogeneous products are more stable than those that sell differentiated products. Not only do homogeneous products make agreement on prices and/or quantities easier to negotiate, but also they facilitate monitoring. If goods are homogeneous, firms know that a change in their market shareis probably due to a price cut (or quantity increase) by another member. Instead, if products are differentiated, changes in quantity sold by a member may be due to changes in consumer preferences or demand.
Production costs Similar cost structures of the firms in a cartel make it easier for them to coordinate, as they will have similar maximizing behaviour as regards prices and output. Instead, if firms have different cost structures then each will have different maximizing behaviour, so they will have an incentive to set a different price or quantity. Changes in cost structure (for example when a firm introduces a new technology) also give a cost advantage over rivals, making co-ordination and sustainability more difficult. [8]

 Behavior of demand If an industry is characterized by a varying demand (that is, a demand with cyclical fluctuations), it is more difficult for the firms in the cartel to detect whether any change in their sales volume is due to a demand fluctuation or to cheating by another member of the cartel. Therefore, in a market with demand fluctuations, monitoring is more difficult and cartels are less stable. Characteristics of sale If each firm's sales consist of a small number of high-value contracts, then it can make a relatively large short-term gain from cheating on the agreement and thereby winning more of these contracts. If, instead, its sales are high-volume and low-value, then the short-term gain is smaller. Therefore, low frequency of sales coupled with high value in each of these sales make cartels less sustainable. When the demand of the product is fluctuating, parties that are in a cartel are less interested to remain in the cartel, because they are not able to make regular profit.

International commodity agreement

An international commodity agreement is an undertaking by a group of countries to stabilize trade, supplies, and prices of a commodity for the benefit of participating countries. An agreement usually involves a consensus on quantities traded, prices, and management of stock. A number of international commodity agreements serve solely as forums for information exchange,analysis, and policy discussion. Example - The International Cocoa Agreement In 2003, an agreement was made between the seven main cocoa exporting countries, Cameroon, Ivory Coast, Gabon, Ghana, Malaysia, Nigeria and Togo, and the main importing countries including the EU members, Russia, and Switzerland. The main purpose of this agreement was to promote the consumption and production of cocoa on a global basis as well as stabilise cocoa prices, which had been falling steadily. The agreement was planned to continue until 2010.

 Commodity agreements often involve intervention schemes, such as buffer stocks, and usually only last for a few years, whereupon they are re-negotiated. They differ from cartels such as OPEC, largely because discussions and negotiations involve both producer and consumer countries, unlike cartels, which are established to protect the interest of producers only.