International Economic Cooperation among Nations

International Business. Authored by: anonymous. Provided by: Lardbucket. Located at: http://2012books.lardbucket.org/books/challenges-and-opportunities-in-international-business/. License: CC BY-NC- SA: Attribution-NonCommercial-ShareAlike

LEARNING OBJECTIVES

By the end of this section, you will be able to:

• Understand the global trading system.
• Explain how and why the GATT was created and what its historical role in international trade is.
• Know what the WTO is and what its current impact on international trade is.

In the post–World War II environment, countries came to realize that a major component of achieving any level of global peace was global cooperation—politically, economically, and socially. The intent was to level the trade playing field and reduce economic areas of disagreement, since inequality in these areas could lead to more serious conflicts. Among the initiatives, nations agreed to work together to promote free trade, entering into bilateral and multilateral agreements. The General Agreement on Tariffs and Trade (GATT) resulted from these agreements. In this section, you’ll review GATT—why it was created and what its
historical successes and challenges are. You’ll then look at the World Trade Organization (WTO), which replaced GATT in 1995, and study the impact of both these organizations on international trade. While GATT started as a set of rules between countries, the WTO has become an institution overseeing international trade.

General Agreement on Tariffs and Trade (GATT)

The General Agreement on Tariffs and Trade (GATT) is a series of rules governing trade that were first created in 1947 by twenty-three countries. By the time it was replaced with the WTO, there were 125-member nations. GATT has been credited with substantially expanding global trade, primarily through the reduction of tariffs.

The basic underlying principle of GATT was that trade should be free and equal. In other words, countries should open their markets equally to member nations, and there should be neither discrimination nor preferential treatment. One of GATT’s key provisions was the most-favored- nation clause (MFN). It required that once a benefit, usually a tariff reduction, was agreed on between two or more countries, it was automatically extended to all other member countries. GATT’s initial focus was on tariffs, which are taxes placed on imports or exports.

Did You Know?

MFN Is Everywhere

As a concept, MFN can be seen in many aspects of business; it’s an important provision. Companies require MFN of their trading partners for pricing, access, and other provisions. Corporate or government customers require it of the company from which they purchase goods or services. Venture capitalists (VC) require it of the companies in which they invest. For example, a VC wants to make sure that it has negotiated the best price for equity and will ask for this provision in case another financier negotiates a cheaper purchase price for the equity.
The idea behind the concept of MFN is that the country, company, or entity that has MFN status shouldn’t be disadvantaged in comparison with others in similar roles as a trading partner, buyer, or investor. In practice, the result is that the signing party given MFN status
benefits from any better negotiation and receives the cheaper price point or better term. This terminology is also used in sales contracts or other business legal agreements.

Gradually, the GATT member countries turned their attention to other nontariff trade barriers. These included government procurement and bidding, industrial standards, subsidies, duties and customs, taxes, and licensing. GATT countries agreed to limit or remove trade barriers in these areas. The only agreed-on export subsidies were for agricultural products. Countries agreed to permit a wider range of imported products to enter their home markets by simplifying licensing guidelines and developing consistent product standards between imports and domestically produced goods. Duties had to result from uniform and consistent procedures for the same foreign and domestically produced items.

The initial successes in these categories led some countries to get more creative with developing barriers to trade as well as entering into bilateral agreements and providing more creative subsidies for select industries. The challenge for the member countries of GATT was enforcement. Other than complaining and retaliating, there was little else that a country could do to register disapproval of another country’s actions and trade barriers.

Gradually, trade became more complex, leading to the Uruguay Round beginning in 1986 and ending in 1994. These trade meetings were called rounds in reference to the series of meetings among global peers held at a “roundtable.” Prior to a round, each series of trade discussions began in one country. The round of discussions was then named after that country. It sometimes took several years to conclude the topic discussions for a round. The Uruguay Round took eight years and actually resulted in the end of GATT and the creation of the World Trade Organization (WTO). The current Doha Development Round began in 2001 and is actually considered part of the WTO.

World Trade Organization (WTO)

Brief History and Purpose

The World Trade Organization (WTO) developed as a result of the Uruguay Round of GATT. Formed officially on January 1, 1995, the concept of the WTO had been in development for several years. When the WTO replaced GATT, it absorbed all of GATT’s standing agreements. In contrast to GATT, which was a series of agreements, the WTO was designed to be an actual institution charged with the mission of promoting free and fair trade. As explained on its
website, the WTO “is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business.”

The global focus on multilateral trade agreements and cooperation has expanded trade exponentially. “The past 50 years have seen an exceptional growth in world trade. Merchandise exports grew on average by 6 percent annually. Total trade in 2000 was 22-times the level of 1950. GATT and the WTO have helped to create a strong and prosperous trading system
contributing to unprecedented growth.” Source: “The Multilateral Trading System—Past, Present and Future,” World Trade Organization, accessed December 29, 2010, http://www.wto.org/english/thewto_e/whatis_e/inbrief_e/inbr01_e.htm.

The WTO’s primary purpose is to serve as a negotiating forum for member nations to dispute, discuss, and debate trade-related matters. More than just a series of trade agreements, as it was under GATT, the WTO undertakes discussions on issues related to globalization and its impact on people and the environment, as well as trade-specific matters. It doesn’t necessarily establish formal agreements in all of these areas but does provide a forum to discuss how global trade impacts other aspects of the world.

Headquartered in Geneva, Switzerland, the current round is called the Doha Round and began in 2001. With 153-member nations, the WTO is the largest, global trade organization. Thirty nations have observer status, and many of these are seeking membership. With so many member nations, the concept of MFN has been eased into a new principle of normal trade relations (NTR). Advocates say that no nation really has a favored nation status; rather, all interact with each other as a normal part of global trade.

The biggest change from GATT to the WTO is the provision for the settlement of disputes. If a country finds another country’s trade practices unfair or discriminatory, it may bring the charges to the WTO, which will hear from both countries and mediate a solution.

The WTO has also undertaken the effort to focus on services rather than just goods. Resulting from the Uruguay Round, the General Agreement on Trade in Services (GATS) seeks to reduce the barriers to trade in services. Following the GATT commitment to nondiscrimination, GATS requires member nations to treat foreign service companies as they would domestic ones. For example, if a country requires banks to maintain 10 percent of deposits as reserves, then this

percentage should be the same for foreign and domestic banks. Services have proven to be more complex to both define and regulate, and the member nations are continuing the discussions.

Similar to GATS is the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Intellectual property refers to just about anything that a person or entity creates with the mind. It includes inventions, music, art, and writing, as well as words, phrases, sayings, and graphics—to name a few. The basic premise of intellectual property rights (IPR) law is that the creator of the property has the right to financially benefit from his or her creation. This is particularly important for protecting the development for the creation, known as the research and development (R&D) costs. Companies can also own the intellectual property that their employees generate. This section focuses on the protection that countries agree to give to intellectual property created in another country.

Over the past few decades, companies have become increasingly diligent in protecting their intellectual property and pursuing abusers. Whether it’s the knock-off designer handbag from China that lands on the sidewalks of New York or the writer protecting her thoughts in the written words of a book (commonly understood as content), or the global software company combating piracy of its technical know-how, IPR is now formally a part of the WTO agreements and ongoing dialogue.

Current Challenges and Opportunities

Agriculture and textiles are two key sectors in which the WTO faces challenges. Trade in agriculture has been impacted by export-country subsidies, import-country tariffs and restrictions, and nontariff barriers. Whether the United States provides low-cost loans and subsidies to its farmers or Japan restricts the beef imports, agriculture trade barriers are an ongoing challenge for the WTO. Global companies and trade groups that support private-sector firms seek to have their governments raise critical trade issues on their behalf through the WTO.

For example, Japan’s ban of beef imports in response to mad cow disease had a heavy impact on the US beef industry during the first decade of the 21st century. Japan was the largest foreign buyer of U.S. beef before it banned all imports when the first case of the brain-wasting disease, also known bovine spongiform encephalopathy [i.e., mad cow disease], was discovered in the U.S.

Japanese restrictions on U.S. beef created distance between Japan and the U.S. Japan Agriculture Minister Hirotaka Akamatsu told reporters in 2010 after meeting [US Agriculture
Secretary Tom] Vilsack in Tokyo. “For us, food safety based on Japan’s scientific standards is the priority. The OIE standards are different from the Japanese scientific ones.”
During the beef export ban, the U.S. beef industry lost about $1 billion a year in sales because
of the restrictions, according to the National Cattlemen’s Beef Association, [a trade group

supporting the interests of American beef producers].

The ban was eased in 2005 to allow meat from cattle aged 20 months or less, which scientists
say are less likely to have contracted the fatal illness. … Japan was the third-largest destination for U.S. beef [in 2009], with trade totaling $470 million, up from $383 million in 2008, according to the U.S. Meat Export Federation. That compares with $1.39 billion in 2003.
Mexico and Canada were the biggest buyers of U.S. beef [in 2009]. Source: Jae Hur and Ichiro Suzuki, “Japan, U.S. to Continue Dialogue on Beef Import Curbs (Update 1),” BusinessWeek, April 7, 2010, accessed December 29, 2010, http://www.businessweek.com/news/2010-04-07/japan- u-s-to-continue-dialogue-on-beef-import-curbs-update1-.html. Restrictions were further eased in 2013.

The role of the WTO is to facilitate agreements in difficult bilateral and multilateral trade disputes, but this certainly isn’t easy. Japan’s reluctance for American beef may have appeared to be the result of mad cow disease, but business observers note Japan’s historical cultural preference for Japanese goods, which the country often claims are superior. A similar trade conflict was triggered in the 1980s when Japan discouraged the import of rice from other countries. The prevailing Japanese thought was that its local rice was easier for the Japanese to digest. After extensive discussions in the Uruguay Round of trade talks, on “December 14, 1993 the Japanese government accepted a limited opening of the rice market under the GATT plan.” Source: “Japan Rice Trade,” case study on American University website, accessed January 2, 2010, http://www1.american.edu/ted/japrice.htm.

Antidumping is another area on which the WTO has focused its attention. Dumping occurs when a company exports to a foreign market at a price that is either lower than the domestic prices in that country or less than the cost of production. Antidumping charges can be harder to settle, as the charge is against a company and not a country. One example is in India, which has, in the past, accused Japan and Thailand of dumping acetone, a chemical used in drugs and explosives, in the Indian market. In an effort to protect domestic manufacturers, India has raised the issue with the WTO. In fact, India was second only to Argentina among the G-20 (or Group of Twenty) nations in initiating antidumping investigations during 2009, according to a WTO report.

Future Outlook

The future for the WTO and any related organizations remains strong. With companies and countries facing a broader array of trade issues than ever before, the WTO plays a critical role in promoting and ensuring free and fair trade. Many observers expect that the WTO will have to emphasize the impact of the Internet on trade. In most cases, the WTO provides companies and countries with the best options to dispute, discuss, and settle unfair business and trade practices.

KEY TAKEAWAYs

• The General Agreement on Tariffs and Trade (GATT) is a series of rules governing trade that were first created in 1947 by twenty-three countries. It remained in force until 1995, when it was replaced by the WTO.
• The World Trade Organization (WTO) is the only global, international organization dealing with the rules of trade between nations. The WTO agreements that have been negotiated and signed by the organization’s 153-member nations and ratified in their parliaments are the heart of the organization. Its goal is to help the producers, exporters, and importers of goods and services conduct business. The latest round of the WTO trade negotiations is called the Doha Round.

International Trade Barriers

International Business. Authored by: Boundless. Provided by: Boundless. Located at: https://www.boundless.com/business/. License: CC BY-SA: Attribution-ShareAlike

Trade barriers are government-induced restrictions on international trade, which generally decrease overall economic efficiency.

KEY points

• Trade barriers cause a limited choice of products and, therefore, would force customers to pay higher prices and accept inferior quality.
• Trade barriers generally favor rich countries because these countries tend to set international trade policies and standards.
• Economists generally agree that trade barriers are detrimental and decrease overall economic efficiency, which can be explained by the theory of comparative advantage.

Terms

• Tariff: A system of government-imposed duties levied on imported or exported goods; a list of such duties, or the duties themselves.
• Quota: A restriction on the import of something to a specific quantity.

Examples

Trade barriers are government-induced restrictions on international trade. Man-made trade barriers come in several forms, including:

• Tariffs
• Non-tariff barriers to trade
• Import licenses
• Export licenses
• Import quotas
• Subsidies
• Voluntary Export Restraints
• Local content requirements
• Embargo
• Currency devaluation
• Trade restriction

Most trade barriers work on the same principle–the imposition of some sort of cost on trade that raises the price of the traded products. If two or more nations repeatedly use trade barriers against each other, then a trade war result.

Economists generally agree that trade barriers are detrimental and decrease overall economic efficiency. This can be explained by the theory of comparative advantage. In theory, free trade involves the removal of all such barriers, except perhaps those considered necessary for health or national security. In practice, however, even those countries promoting free trade heavily subsidize certain industries, such as agriculture and steel. Trade barriers are often criticized for the effect they have on the developing world. Because rich-country players set trade policies, goods, such as agricultural products that developing countries are best at producing, face high barriers. Trade barriers, such as taxes on food imports or subsidies for farmers in developed economies, lead to overproduction and dumping on world markets, thus lowering prices and hurting poor-country farmers. Tariffs also tend to be anti-poor, with low rates for raw commodities and high rates for labor-intensive processed goods. The Commitment to Development Index measures the effect that rich country trade policies actually have on the developing world. Another negative aspect of trade barriers is that it would cause a limited choice of products and, therefore, would force customers to pay higher prices and accept inferior quality.

In general, for a given level of protection, quota-like restrictions carry a greater potential for reducing welfare than do tariffs. Tariffs, quotas, and non-tariff barriers lead too few of
the economy’s resources being used to produce tradeable goods. An export subsidy can also be used to give an advantage to a domestic producer over a foreign producer. Export subsidies tend to have a particularly strong negative effect because in addition to
distorting resource allocation, they reduce the economy’s terms of trade. In contrast to tariffs, export subsidies lead to an over allocation of the economy’s resources to the production of tradeable goods.

Singapore
The Port of Singapore is one of the busiest in the world because Singapore must import most of its foodstuffs and consumer goods.

International trade barriers can take many forms for any number of reasons. Generally, governments impose barriers to protect domestic industry or to “punish” a trading partner.

GLOSSARY

Agriculture

The art or science of cultivating the ground, including the harvesting of crops, and the rearing and management of livestock; tillage; husbandry; farming.

Comparative advantage

The ability of a party to produce a particular good or service at a lower marginal and opportunity cost over another. The concept that a certain good can be produced more efficiently than others due to a number of factors, including productive skills, climate, natural resource availability, and so forth.

Currency

Money or other items used to facilitate transactions. In economics, currency is a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation’s money supply. Paper money.

Developing

Of a country: becoming economically more mature or advanced; becoming industrialized.

Economy

Collective focus of the study of money, currency and trade, and the efficient use of resources. The system of production and distribution and consumption. The overall measure of a currency system; as the national economy.

Efficiency

The extent to which a resource, such as electricity, is used for the intended purpose; the ratio of useful work to energy expended. The extent to which time is well used for the intended task. Improved efficiency was a principle goal of progressives, one they thought attainable by the application of scientific and rational thought to social problems.

Export

This term export is derived from the conceptual meaning to ship the goods and services out of the port of a country. To sell (goods) to a foreign country. Any good or commodity, transported from one country to another country in a legitimate fashion, typically for use in trade.

Free trade

Free trade is a policy by which a government does not discriminate against imports or interfere with exports by applying tariffs (to imports) or subsidies (to exports) or quotas. International trade free from government interference, especially trade free from tariffs or duties on imports. International trade free from government interference, especially trade free from tariffs or duties on imports

Good

An object produced for market.

Import

Something brought in from an exterior source, especially for sale or trade. To bring (something) in from a foreign country, especially for sale or trade.

Industry

The sector of the economy consisting of large-scale enterprises.

Lead

Potential opportunity for a sale or transaction, a potential customer.

License

The legal terms under which a person is allowed to use a product.

Market

A group of potential customers for one’s product. One of the many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange.

Potential

Currently unrealized ability. A curve describing the situation where the difference in the potential energies of an object in two different positions depends only on those positions.

Price

The price is the amount a customer pays for the product. The quantity of payment or compensation given by one party to another in return for goods or services. The cost required to gain possession of something.

Product

Any tangible or intangible good or service that is a result of a process and that is intended for delivery to a customer or end user. Anything, either tangible or intangible, offered by the firm as a solution to the needs and wants of the consumer; something that is profitable or potentially profitable; goods or a service that meets the requirements of the various governing offices or society.

Resource

Something that one uses to achieve an objective. An example of a resource could be a raw material or an employee. Something that one uses to achieve an objective, e.g. raw materials or personnel.

Resource allocation

Resource allocation is used to assign the available resources in an economic way. It is part of resource management. In project management, resource allocation is the scheduling of activities and the resources required by those activities while taking into consideration both the resource availability and the project time.

Security

The condition of not being threatened, especially physically, psychologically, emotionally, or financially. proof of ownership of stocks, bonds, or other investment instruments.

Standard

Something used as a measure for comparative evaluations. A level of quality or attainment.

Trade war

The practice of nations creating mutual tariffs or similar barriers to trade.