International Business Management

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UNIT II INTERNATIONAL TRADE AND INVESTMENT ROLE OF GATT / WTO General Agreement on Tariffs and Trade (GATT) The General Agreement on Tariffs and Trade (GATT) was originally created by the Bretton Woods Conference as part of a larger plan for economic recovery after World War II. The GATT’s main purpose was to reduce barriers to international trade. This was achieved through the reduction of tariff barriers, quantitative restrictions and subsidies on trade through a series of different agreements. The GATT was an agreement, not an organization. Originally, the GATT was supposed to become a full international organization like the World Bank or IMF called the International Trade Organization. However, the agreement was not ratified, so the GATT remained simply an agreement. The functions of the GATT have been replaced by the World Trade Organization. Purpose of GATT According to the Preamble of GATT, the objectives of the contracting parties include, • raising standards of living • ensuring full employment • a large and steadily growing volume of real income and effective demand • developing the full use of the resources of the world • expanding the production and exchange of goods. The Preamble also states the contracting parties’ belief that “reciprocal and mutually advantageous arrangements directed to the substantial reduction in tariffs and other barriers to trade and to the elimination of discriminatory treatment in international commerce” would contribute toward these goals. Importantly, “free trade” is not the stated objective of GATT. The role of GATT in integrating developing countries into an open multilateral trading system is also of major consequence. The increasing participation of developing countries in the GATT trading system and the pragmatic support provided to them through the flexible application of certain rules helped developing countries to both expand and diversify their trade. It could now be said that a great number of these countries have already become full partners in the system as can be witnessed by their active participation in the Uruguay Round. The task of helping to integrate further the least-developed countries is one of the challenges that

lies ahead in the WTO. Similarly, the full integration of countries with economies in transition into the trading system must be achieved in order to strengthen economic interdependence as a basis for greater prosperity and world peace. These negotiations were critical to ensure the future health of the world economy and the trading system. The globalization of the world economy over the past decade has created a greater reliance than ever on an open multilateral trading system. Free trade has become the backbone of economic prosperity and development throughout the world. Partly as a result of this, there has been a shift in trade policy mechanisms from border measures to internal policy measures, substantially affecting the management of trade relations. The Uruguay Round sought to establish a new balance in rights and obligations among trading nations as a result of this phenomenon. We are gradually moving towards a global marketplace, and for that, we need a global system of rules for trade relations among partners in that market place. The challenges that we face are therefore enormous. The only way back from this globalization in the world economy would be through depression and eventual chaos. We therefore have no choice but to move forward. In doing so, however, we must be sure to preserve to the highest extent possible the spirit and tradition of the GATT, which to a large extent was the key to its success.

World Trade Organization (WTO) The World Trade Organization (WTO) is an international organization that establishes rules for international trade through consensus among its member states. It also resolves disputes between the members, which are all signatories to its set of trade agreements. The WTO states that its aims are to increase international trade by promoting lower trade barriers and providing a platform for the negotiation of trade and to their business. Principles of the trading system The WTO discussions should follow these fundamental principles of trading. 1. A trading system should be free of discrimination in the sense that one country cannot privilege a particular trading partner above others within the system, nor can it discriminate against foreign products and services. 2. A trading system should tend toward more freedom, that is, toward fewer trade barriers (tariffs and non-tariff barriers). 3. A trading system should be predictable, with foreign companies and governments reassured

that trade barriers will not be raised arbitrarily and that markets will remain open. 4. A trading system should tend toward greater competition. 5. A trading system should be more accommodating for less developed countries, giving them more time to adjust, greater flexibility, and more privileges. Role of WTO in Globalization WTO plays an important role in the principle of trade without discrimination in the free market trade. 1. Most-favoured-nation (MFN): Treating other people equally. Under the WTO agreements, countries cannot normally discriminate between their trading partners. Grant someone a special favour (such as a lower customs duty rate for one of their products) and you have to do the same for all other WTO members. 2. National treatment: Treating foreigners and locals equally. Imported and locally-produced goods should be treated equally at least after the foreign goods have entered the market. 3. Freer trade: Gradually, through negotiation lowering trade barriers is one of the most obvious means of encouraging trade. The barriers concerned include customs duties (or tariffs) and measures such as import bans or quotas that restrict quantities selectively. 4.Predictability Through binding and transparency: With stability and predictability, investment is encouraged, jobs are created and consumers can fully enjoy the benefits of competition choice and lower prices. The multilateral trading system is an attempt by governments to make the business environment stable and predictable. 5. Promoting fair competition: The WTO is sometimes described as a “free trade” institution, but that is not entirely accurate. The system does allow tariffs and, in limited circumstances, other forms of protection. More accurately, it is a system of rules dedicated to open, fair and undistorted competition. 6. Encouraging development and economic reform: The WTO system contributes to development. On the other hand, developing countries need flexibility in the time they take to implement the system’s agreements.


Article VIII Status of the WTO  The WTO shall have legal personality, and shall be accorded by each of its Members such legal capacity as may be necessary for the exercise of its functions.  The WTO shall be accorded by each of its Members such privileges and immunities as are necessary for the exercise of its functions.  The officials of the WTO and the representatives of the Members shall similarly be accorded by each of its Members such privileges and immunities as are necessary for the independent exercise of their functions in connection with the WTO.  The privileges and immunities to be accorded by a Member to the WTO, its officials, and the representatives of its Members shall be similar to the privileges and immunities stipulated in the Convention on the Privileges and Immunities of the Specialized Agencies, approved by the General Assembly of the United Nations on 21 November 1947.  The WTO may conclude a headquarters agreement. Article IX Decision-Making The WTO shall continue the practice of decision-making by consensus followed under GATT 1947. Except as otherwise provided, where a decision cannot be arrived at by consensus, the matter at issue shall be decided by voting. At meetings of the Ministerial Conference and the General Council, each Member of the WTO shall have one vote. Where the European Communities exercise their right to vote, they shall have a number of votes equal to the number of their member States which are Members of the WTO. Decisions of the Ministerial Conference and the General Council shall be taken by a majority of the votes cast, unless otherwise provided in this Agreement or in the relevant Multilateral Trade Agreement. 1. The Ministerial Conference and the General Council shall have the exclusive authority to adopt interpretations of this Agreement and of the Multilateral Trade Agreements. The decision to adopt an interpretation shall be taken by a three-fourths majority of the Members. This paragraph shall not be used in a manner that would undermine the amendment provisions in Article X. 2. In exceptional circumstances, the Ministerial Conference may decide to waive an obligation imposed on a Member by this Agreement or any of the Multilateral Trade Agreements, provided that any such decision shall be taken by three fourths of the Members unless otherwise provided for in this paragraph. * A request for a waiver concerning this Agreement shall be submitted to the Ministerial Conference for consideration pursuant to the practice of decision-making by consensus. The

Ministerial Conference shall establish a time-period, which shall not exceed 90 days, to consider the request. If consensus is not reached during the time-period, any decision to grant a waiver shall be taken by three fourths4 of the Members. * A request for a waiver concerning the Multilateral Trade Agreements and their annexes shall be submitted initially to the Council for Trade in Goods, the Council for Trade in Services or the Council for TRIPS, respectively, for consideration during a time-period which shall not exceed 90 days. At the end of the time-period, the relevant Council shall submit a report to the Ministerial Conference. 3. A decision by the Ministerial Conference granting a waiver shall state the exceptional circumstances justifying the decision, the terms and conditions governing the application of the waiver, and the date on which the waiver shall terminate. Any waiver granted for a period of more than one year shall be reviewed by the Ministerial Conference not later than one year after it is granted, and thereafter annually until the waiver terminates. In each review, the Ministerial Conference shall examine whether the exceptional circumstances justifying the waiver still exist and whether the terms and conditions attached to the waiver have been met. The Ministerial Conference, on the basis of the annual review, may extend, modify or terminate the waiver. 4. Decisions under a Plurilateral Trade Agreement, including any decisions on interpretations and waivers, shall be governed by the provisions of that Agreement.


GLOBAL TRADE AND INVESTMENT Globalization – including technological innovations and the dismantling of trade barriers – presents numerous opportunities and challenges with regard to the international flow of capital, investment, goods, technology and services. Led by emerging market giant China – the world’s fastest growing exporter – global business continues to be an important engine for expansion. Greenberg Traurig helps clients promote global trade and lower trade barriers. Our Global Trade & Investment Practice Group works throughout numerous countries on trade policies, remedies, negotiations, disputes and other commercial issues as part of our International Practice. Our team is led by James Bacchus, who returned to the firm after eight years of service as a member (including two years as chairman) of the Appellate Body of the World Trade Organization. We bring a combination of experience and insight to our work in strategic trade consulting and representation on issues relating to the World Trade Organization’s global trade rules. Our attorneys offer strategic advice to assist clients in both sustaining and enhancing their competitiveness in the ever-changing world economy. Strategic Consulting
• • •

Counsel on WTO, NAFTA and other trade rules and rulings . Advice on the impact of WTO obligations on day-to-day decision making by multinational and other companies engaged in, or affected by, international trade . Counsel on how such rules and rulings impact other global trade and investment decisions.

Trade Policy
• •

Regional and global negotiations on international trade agreements, including the “Doha Development Round” of WTO global trade negotiations Representation regarding trade policy matters before the U.S. Congress, the Office of the U.S. Trade Representative, the Commerce Department, the Treasury Department and other U.S. government agencies Counsel on trade policy matters before other governments and trade negotiations conducted by governments worldwide

Trade Remedies
• • •

Advice on trade restrictions arising from anti-dumping, subsidy and safeguard cases Challenges to such restrictions under NAFTA and in WTO dispute settlement Revisions to prices and business practices to minimize exposure to anti-dumping or countervailing duties

• • • • • •

Interpretation of anti-circumvention provisions regarding assembly operations in the U.S. and other countries Anti-dumping and countervailing duty administrative proceedings Section 301 investigations Section 337 proceedings Safeguard investigations Appeals before the U.S. Court of International Trade, U.S. Court of Appeals for the Federal Circuit, NAFTA dispute panels, dispute panels before the WTO, and the European Court of Justice

Trade Regulations and Transactions
• • • • •

Counsel on export licensing and other export controls Guidance on anti-bribery laws, international trade sanctions and foreign investment regulations Representation regarding import and export transactions and acquisitions of all kinds Guidance on Committee on Foreign Investment in the United States regulations Compliance training

Export Controls License and agreement preparation and submission before the Departments of State, Commerce, Treasury, Justice and Energy
• • • •

Internal compliance policy and procedure reviews Internal training, audits and investigations Counsel on administrative settlements and criminal investigations surrounding alleged violations of U.S. export control laws See Export Controls

• • • • • •

Advice on customs valuation and import compliance initiatives Drafting of compliance manuals and preparation of prior disclosures Cancellation or mitigation of penalties and expediting of the release of goods Guidance on country of origin marking and labeling requirements Advice on binding rulings, protests and judicial proceedings Guidance on special compliance programs, including the Customs-Trade Partnership Against Terrorism (C-TPAT), Focused Assessments and the Importer Self-Assessment Program Counsel on Department of Homeland Security regulations and policies

• • •

Guidance on NAFTA, GSP, CBI, CBTPA, AGOA, ATPA, ATPDEA and other international trade agreements Assistance with duty management strategies Advice on Maquila/PITEX, industrial and free zones and WTO/WCO issues relating to the cross-border movement of goods

EU Customs and VAT
• •

Guidance on customs matters (saving customs duties, optimizing customs structures, etc.) Advice on VAT issues (the VAT consequences of distribution in Europe, consequences of EU expansion, etc.)

Dispute Settlement
• • • •

WTO dispute settlement NAFTA litigation International commercial arbitration Special governmental and intergovernmental proceedings relating to international commerce

Intellectual Property

• • •

Counsel on the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights Provisions for protecting IP rights in numerous other international regional and bilateral agreements Country-to-country negotiations and WTO dispute settlement to achieve full implementation of these rules by U.S. trading partners Management of IP issues within the multilateral trading system Section 337 investigations

Tax and Trade
• •

Counsel to importers on restructuring their transactions to take advantage of opportunities for saving duties on the first sale (multi-tiered) doctrine and “cost shifting” Advice in connection with IRS, CPB, foreign tax, and transfer pricing and related party customs regulations


Textiles and Apparel
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Advice on import strategies, customs compliance, global sourcing and access to foreign markets Guidance on consumer and product labeling issues, international trade agreements and preference programs

Food and Drugs
• • • •

Compliance programs and internal audits regarding FDA regulations implemented under the Bioterrorism Act of 2002 Guidance on products excluded from entry into the U.S. for food safety reasons — and assistance in working with the FDA to reopen the U.S. market to these goods Advice on regulatory requirements governing product labeling and advertising Counsel on all aspects of FDA enforcement issues, including penalties, product seizures and countrywide detentions

• • • • • • • •

Representation in disputes alleging unfair pricing (“dumping”) Litigation of patent infringement claims and claims related to food labeling and other countries’ access to U.S. agricultural markets Advice on SPS issues under WTO agreements and treaties Work on behalf of foreign governments with food safety regulators on issues including BSE (“mad cow disease”) and the trace-back of food borne illnesses Participation in rule-making on issues ranging from country of origin labeling to bioterrorism Advice to international producers of agricultural exports on tariff preferences and other market access issues in the U.S. and E.U. Advocacy in the U.S. Congress on agricultural legislation Advice on agricultural issues in bilateral and multilateral trade negotiations

• • •

International teaming agreements and joint ventures for selling high-end defense and aerospace products to foreign customers, both private and governmental Guidance on the U.S. Foreign Military Sales Program Counsel on commercial and civilian space programs

THEORIES OF INTERNATIONAL TRADE AND INVESTMENT International Trade Trade: voluntary exchange of goods, services, assets, or money between one person or organization and another International trade: trade between residents of two countries  Mercantilism o A country’s wealth is measured by its holdings of gold and silver o A country’s goal should be to enlarge holdings of gold and silver by o Promoting exports o Discouraging imports Disadvantages of Mercantilism   Confuses the acquisition of treasure with the acquisition of wealth Weakens the country because it robs individuals of the ability – –  To trade freely To benefit from voluntary exchanges

Forces countries to produce products it would otherwise not in order to minimize imports

Absolute Advantage

o Export those goods and services for which a country is more productive than other countries

Import those goods and services for which other countries are more productive than it is. Comparative Advantage Produce and export those goods and services for which it is relatively more productive than other countries.



Import those goods and services for which other countries are relatively more productive than it is. Comparative Advantage with Money

o One is better off specializing in what one does relatively best o Produce and export those goods and services one is relatively best able to produce o Buy other goods and services from people who are better at producing them

Relative Factor Endowments A country will have a comparative advantage in producing products that intensively use resources (factors of production) it has in abundance

o China: labor o Saudi Arabia: oil o Argentina: wheat NEED FOR GLOBAL COMPETITVENESS The need for global competitiveness is much important for any industry to sustain in this competitive world and this helps the company to retain its old customers as well to obtain new customers, maintaining the profit level and also to be a leader in the market. Aspiring to be a market leader or to be globally competitive helps a company to grow. It also helps the company in introducing new products to the world. Eg: Apple came up with the iPad and they were first to target the people with the new product and thus were able to get adventage, Similarly Google acquired Motorola mobility holdings to become strong in the cell phone segement too.When firm competes with each other it does not benefit them alone but a wide range of customers too. REGIONAL TRADE BLOCKS Meaning In general terms, regional trade blocks are associations of nations at a governmental level to promote trade within the block and defend its members against global competition. Defense against global competition is obtained through established tariffs on goods produced by member states, import quotas, government subsidies, onerous bureaucratic import processes, and technical and other non-tariff barriers. Since trade is not an isolated activity, member states

within regional blocks also cooperate in economic, political, security, climatic, and other issues affecting the region. In terms of their size and trade value, there are four major trade blocks and a larger number of blocks of regional importance. The four major regional trade blocks are, as follows:
 ASEAN (Association of southEast Asian Nations)

Established on August 8, 1967, in Bangkok/Thailand.

Member States:
 Brunei

Darussalam, Cambodia, Indonesia, Philippines, Singapore, Thailand, and Vietnam.




 Accelerate economic growth, social progress and cultural development in the region and  Promote regional peace and stability and adhere to United Nations Charter.

Important Indicators for 2009:
 Population approximately 591 million; GDP US$1.496 trillion; and Total Trade

US$1.536 trillion.  EU (European Union) Founded in 1951 by six neighboring states as the European Coal and Steel Community (ECSC). Over time evolved into the European Economic Community, then the European Community and, in 1992, was finally transformed into the European Union. Regional block with the largest number of members states (27). These include Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, The Netherlands, and the United Kingdom. Goals: Evolved from a regional free-trade association of states into a union of political, economic and executive connections.

 MERCOSUR (Mercado Comun del Cono Sul - Southern Cone Common Market)
 Established on 26 March 1991 with the Treaty of Assunción.  Full members include Argentina, Brazil, Paraguay, Uruguay, and Venezuela.  Associate members include Bolivia, Chile, Colombia, Ecuador, and Peru.  Associate members have access to preferential trade but not to tariff benefits of full

 Mexico, interested in becoming a member of the region, has an observer status.

 Integration of member states for acceleration of sustained economic development based

on social justice, environmental protection, and combating poverty.  NAFTA (North American Free Trade Agreement)
 Agreement signed on 1 January 1994.

 Canada, Mexico, and the United States of America.

 Eliminate trade barriers among member states, promote conditions for free trade,

increase investment opportunities, and protect intellectual property rights.

ADVANTAGES AND DISADVANTAGES OF REGIONAL TRADE BLOCK Advantages  Transaction costs will be eliminated For instance, UK firms currently spend about £1.5 billion a year buying and selling foreign currencies to do business in the EU. With the EMU this is eliminated, so increasing profitability of EU firms. Advice to young people: You can go on holiday and not have to worry about getting your money changed, therefore avoiding high conversion charges.  Price transparency

EU firms and households often find it difficult to accurately compare the prices of goods, services and resources across the EU because of the distorting effects of exchange rate differences. This discourages trade. According to economic theory, prices should act as a mechanism to allocate resources in an optimal way, so as to improve economic efficiency. There is a far greater chance of this happening across an area where E.M.U exists.  Uncertainty caused by Exchange rate fluctuations eliminated Many firms become wary when investing in other countries because of the uncertainty caused by the fluctuating currencies in the EU. Investment would rise in the EMU area as the currency is universal within the area, therefore the anxiety that was previously apparent is there no more.  Single currency in single market makes sense Trade and everything else should operate more effectively and efficiently with the Euro. Single currency in a single market seems to be the way forward.  Rival to the "Big Two" If we look out in the world today we can see strong currencies such as the Japanese Yen and The American $. America and Japan both have strong economies and have millions of inhabitants. A newly found monetary union and a new currency in Europe could be a rival to the "BIG TWO". EMU can be self-supporting and so they could survive without trading with anyone outside the EMU area.  Prevent war The EMU is, and will be a political project. It's founding is a step towards European integration, to prevent war in the union. It's a well known fact that countries who trade effectively together don't wage war on each other and if EMU means more happy trade, then this means, peace throughout Europe and beyond.  Increased Trade and reduced costs to firms Proponents of the move argue that it brings considerable economic trade through the wiping out of exchange rate fluctuations, but as well as this it helps to lower costs to industry because companies will not have to buy foreign exchange for use within the EU. For them, EU represents the completion of the Single European Market. It is vital if Europe is to compete with the other large trading blocs of the Far East and North America.  The Political agenda


There is also a political agenda to European bank (the European System of Central Banks -ESCB), the complete removal of national control over monetary policy and the partial removal of control over fiscal policy. Individual nation states will lose sovereignty (i.e. the ability to control their own affairs). It will be a considerble step down the road towards political union. There are many in the EU who faviour economica dn political union and they are very much in facour ot EMU. There are also many who wish to keep national sovereignty and are strugging to prevent EMU, whatever its merits might be, from going ahead. Disadvantages  The instability of the system Throughout most of the 1980s the UK refused to join the ERM (Exchange rate mechanism). It argued that it would be impossible to maintain exchange rate stability within the ERM, especially in the early 1980s when the pound was a petro-currency and when the UK inflation rate was consistently above that of Germany. When the UK joined the ERM in 1990 there had been three years of relative currency stability in Europe and it looked as though the system had become relatively robust. The events of Sept. 1992, when the UK and Italy were forced to leave the system, showed that the system was much less robust than had been thought.  Over estimation of Trade benefits Some economists argue that the trade and cost advantages of EMU have been grossly over estimated. There is little to be gained from moving from the present system which has some stability built into it, to the rigidities which EMU would bring.  Loss of Sovereignty On the political side, it is argued that an independent central bank is undemocratic. Governments must be able to control the actions of the central banks because Governments have been democratically elected by the people, whereas an independent central bank would be controlled by a non elected body. Moreover, there would be a considerable loss of sovereignty. Power would be transferred from London to Brussels. This would be highly undesirable because national governments would lose the ability to control policy. It would be one more step down the road towards a Europe where Brussels was akin to Westminster and Westminster akin to a local authority.


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