INTERNATIONAL TRADETRADE BARRIERSTRADING BLOCS

What is TRADE?

• The voluntary exchange of goods and services among people and countries.

• Trade and voluntary exchange occur when buyers & sellers freely and willingly engage in market transactions.

• When trade is voluntary and non-fraudulent, both parties benefit and are better off after the trade than they were before the trade.

INTERNATIONAL TRADE

• Is exchange of capital, goods, and services across international borders or territories. In most countries, it represents a significant share of gross domestic product. (GDP). While international trade has been present throughout much of history its economic, social, and political importance has been on the rise in recent centuries.

IMPORTANCE OF INTERNATIONAL TRADE

• Without International trade, nations would be limited to the goods and services produced within their own borders.

• International trade is the backbone of our modern, commercial world, as producers in various nations try to profit from an expanded market, rather than be limited to selling within their own borders.

• There are many reasons that trade across national borders occurs, including lower production costs in one region versus another, specialized industries, lack or surplus of natural resources and consumer tastes.

RISKS IN INTERNATIONAL TRADE

• Buyer insolvency (purchaser cannot pay)• Non-acceptance (buyer rejects goods as different from the agreed

upon specifications)• Credit risk ( allowing the buyer to take possession of goods prior to

payment)• Regulatory risk (e.g. a change in rules that prevents the transaction)• Intervention (governmental action to prevent a transaction being

completed)• Political risk (change in leadership interfering with transactions or

prices); and • War and other uncontrollable events.In addition, international trade also faces the risk of unfavorable

exchange rate movements.

TRADE IN INDIA

• Trade and commerce have been the backbone of the Indian economy right from ancient times. Textiles and spices were the first products to be exported by India. The Indian trade scenario evolved gradually after the country’s independence in 1947. From the 1950s to the late 1980s, the country followed socialist policies, resulting in protectionism and heavy regulations on foreign companies conducting trade in India.

INDIA TRADE: IMPORTS

• India’s major imports comprise of crude oil, machinery, military products, fertilizers, chemicals, gums, antiques and artworks. Imports are divided into following categories:

• Freely importable goods: For these items, no import license is required. They can be freely imported by an individual or a firm.

• Canalized items: These items can only be imported by a public sector firms. For example petroleum products fall under this category.

• Prohibited items: Items such as unprocessed ivory, animal rennet (cheese made out of animal product) and tallow fat (animal product used for cooking as well as in soaps, candles, etc) cannot be exported to India.

INDIA’s IMPORT PERFORMANCE (1999-2000 TO 2003-04)

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INDIA TRADE: EXPORTS

• Indian exports comprise mainly of engineering and textile products, precious stones, petroleum products, jewelry, sugar, steel, chemicals, zinc and leather products. Most of the exported goods are exempt from export duties.

• India also exports services to several countries, primarily to the US. In fact, India is among the world’s largest exporters of services related to information and communication technology (ICT). It is also the key destination for business process.

INDIA’s EXPORT PERFORMANCE (1999-2000 TO 2003-04)

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Where does India stand globally?International Trade of select countries in 2003

Country Exports (US$ bn.)

Imports (US$ bn.)

GDP (US$ bn.)

Trade as % of GDP

Korea 197.6 175.5 605.0 61.7

China 438.3 393.6 1446.9 57.5

Mexico 165.4 171.0 626.1 53.7

Russia 135.9 75.4 433.5 48.7

South Africa 38.7 35.0 160.1 46.0

Argentina 29.4 13.1 129.7 32.8

Brazil 73.1 48.3 492.1 24.7

India 57.0 74.3 588.8 22.3

TRADE BARRIERS

Free Trade vs. Trade Barriers

• Nations can trade freely with each other or there are trade barriers. – Free Trade : Nothing hinders or gets in the

way from two nations trading with each other. – Trade Barriers : Trade is difficult because

things get in the way.

• There are costs and benefits related to free trade as well as trade barriers.

Free Trade - Benefits

• When nations specialize and trade, total world output or sales is increased.

• Companies can produce for foreign markets as well as domestic markets (markets in the home country).

• This means there is potential for making more money as there are more markets to sell goods or services in.

• More variety of goods are available from a world market than just a domestic market.

• Prices of goods are decreased through increased competition.

Free Trade - Costs

• The domestic (home) country can lose money because the foreign goods allowed into the market increase competition and make it less likely people will buy domestic products. – Example: In the U.S., people might want to buy a

foreign automobile like a Honda or Toyota instead of an American made car.

• Increased competition means lower prices. • Less money will go into the domestic market

place and this can cause factories to be closed and jobs to be eliminated.

Should Countries Create Trade Barriers That Limit Trade?

• It is true that some workers in certain industries may be hurt by trade. – For example, some US clothing workers have had to

change jobs during the past 30 years because many clothes are now imported from other countries

• However, this trade allows people in the US to buy quality clothing imports at good prices, which results in a higher standard of living for people in the US and for our trading partners.

• For this reason, most economists agree that it is good to let countries trade as much as possible.

Trade Barriers – Three Types

• Barriers to trade are things that hinder or get in the way of trading.

• They can be cultural, physical , or economic. – Cultural barriers : language, currency, belief system. – Physical barriers : mountains, rivers, etc.

• Example: The Alps Mountains in Europe

– Economic barriers : government rules that restrict, block or discourage international trade between countries.

Economic Trade Barriers

• The most common types of trade barriers are tariffs and quotas . – A tariff is a tax on imports (imports are goods

purchased from other countries and exports are goods sold to other countries).

– A quota is a specific limit placed on the number of imports that may enter a country.

• Another type of trade barrier is an embargo . – A complete trade block for a political purpose

Tariffs

• A tariff is a tax put on goods imported from abroad

• The effect of a tariff is to raise the price of the imported product. – It makes imported goods more expensive so that

people are more likely to purchase domestic products. – EXAMPLE: The European Union removes tariffs

between member nations, and imposes tariffs on nonmembers.

Quotas

• A quota is a limit on the amount of goods that can be imported.

• Putting a quota on a good creates a shortage, which causes the price of the good to rise and makes the imported goods less attractive for buyers. This encourages people to buy domestic products, rather than foreign goods. – EXAMPLE: Brazil could put a quota on foreign made

shoes to 10,000,000 pairs a year. If Brazilians buy 200,000,000 pairs of shoes each year, this would leave most of the market to Brazilian producers.

Embargos

• Embargos are government orders which completely prohibits trade with another country.

• If necessary, the military actually sets up a blockade to prevent movement of merchant ships into and out of shipping ports.

US-Cuban Trade Embargo

• The embargo is the harshest type of trade barrier and is usually enacted for political purposes to hurt a country economically and thus undermine the political leaders in charge. – EXAMPLE: The United States placed an

embargo on Cuba after the Cuban Missile Crisis. We do not refuse with Cuba—this is still in effect today.

ASSIGNMENT IITHINK ABOUT THIS…..

• WHAT WOULD YOU MISS IF ALL FOREIGN GOODS AND SERVICES WERE KEPT OUT OF INDIA?

• WHAT WOULD YOUR LIFE BE LIKE WITHOUT INTERNATIONAL TRADE?

• WHAT GOODS MADE IN FOREIGN COUNTRIES DO YOU USUALLY ENJOY?

Benefits of Trade Barriers

• Most barriers to trade are designed to prevent imports from entering a country.

• Trade barriers provide many benefits: – protect homeland industries from competition – protect jobs – help provide extra income for the government. – Increases the number of goods people can choose

from.

– Decreases the costs of these goods through increased competition

Costs of Trade Barriers

• Tariffs increase the price of imported goods.

• Less competition from world markets means there is an increase in the price.

• The tax on imported goods is passed along to the consumer so the price of imported goods is higher.

TRADING BLOCKS

TRADING BLOCKS

• Definition : Regional trade blocks are intergovernmental associations that manage and promote trade activities for specific regions of the world They have political as well as political implications for example the European union , the worlds largest trading block has harbored political ambitions. The Maastricht treaty which gave birth to EU calls for joint policies in regard to military , defense, and citizenship

DEBATE ON TRADING BLOCKS

• There are two views:

• Some analysts argue that trade blocs are desirable because they compliment global trade.

• Other analysts argue that trade blocs are not desirable because they are threat to free trade and need to protectionism.

WHY TRADE BLOCKS ARE DESIRABLE?

• Trade blocs compliment global trade.

• They protect intra regional trade from outside forces.

• They establish regional security.

WHY TRADE BLOCKS ARE UNDESIRABLE?

• Import quotas (limiting the amount of imports into the country so that domestic consumers buy products made by their countries in their region)

• Custom delays (establishing bureaucratic formalities that slow down trade from the other regions)

• Subsidies barrier (giving heavy subsidies to protect regional trade)

• Voluntary boycotts and technical barriers.

MAJOR TRADE BLOCKS

• European Union (EU)• North American Free Trade Agreement (NAFTA)• Singapore – American Free Trade Agreement

(SAFTA)• Organization of Petroleum Exporting Countries

(OPEC)• Association of South East Asian Nation

(ASEAN)• South Asian Association of Regional Co-

operation (SAARC)

• What is the EU?• 27 member states• The Economic and

Monetary Union (EMU):

15 member states, soon to be 16 on January 1, 2009 with the addition of Slovakia

-10th Year of the Euro

Origins of the euro: Early days of the European Union  

• 19 September 1950: European Payments Union (EPU)

• 18 April 1951: European Coal and Steel Community established

• 25 March 1957: Treaty of Rome

• 29 December 1958: European Monetary Agreement

EU

• IT IS A FAMILY OF DEMOCRATRIC EUROPEAN COUNTRIES.

• COMMITED TO WORKING TOGETHER FOR PEACE AND PROSPERITY.

• ITS HISTORICAL ROOTSLIE IN THE SECOND WORLD WAR.

• IDEA OF EUROPEAN INTEGRATION WAS CONCEIVED TO PREVENT SUCH KILLING AND DESTRUCTION FROM EVER HAPPENING AGAIN.

FIVE EU INSTITUTIONS

• EUROPEAN PARLIAMENT.(ELECTED BY PEOPLES OF MEMBER STATES)

• COUNCIL OF EUROPEAN UNION(REPRESENTING THE GOVERNMENTS OF MEMBER STATES).

• EUROPEAN COMMISION(DRIVING FORCE AND THE EXECUTIVE BODY).

• COURT OF JUSTICE. • COURT OF AUDITORS.

Member states of the EU :

• Austria , Belgium , Bulgaria , Cyprus , Czech Republic , Denmark , Estonia , Finland , France , Germany , Greece , Hungary , Ireland , Italy , Latvia , Lithuania , Luxembourg , Malta , Netherlands , Poland , Portugal , Romania , Slovakia , Slovenia , Spain , Sweden , United Kingdom

The Euro: Our Currency

• The euro is the currency of 13 European Union countries: Belgium, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal, Slovenia and Finland.

• Euro banknotes and coins have been in circulation since 1 January 2002 and are now a part of daily life for 315 million Europeans living in the euro area

The Euro system

• The Euro system , which consist of the  European Central Bank (ECB) and the national central banks of the 13 countries belonging to the euro area, has the exclusive right to issue euro banknotes. All decisions on the designs, the denominations, etc. of the euro banknotes are taken by the ECB.

The conduct of monetary policy

• The Eurosystem is in charge of defining and implementing the monetary policy of the euro area. Its primary objective in this respect is to maintain price stability in the euro area. It furthermore conducts foreign-exchange operations (consistent with the exchange-rate policy defined by the Council), holds and manages the official foreign reserves of the euro-area Member States and promotes the smooth operation of payment systems

• THE RULE OF LAW IS FUNDAMENTAL TO THE EUROPERAN UNION.ALL EU DECISIONS ARE BASED ON TREATIES.,WHICH ARE AGREED BY ALL EU CONTRIES.

• EU CONSISTED OF JUST 6 COUNTRIES: BELGIUM,GERMANY,FRANCE,ITALY,LUXEMBOURG & NETHERLANDS.

• FURTHER ADDITIONS HAVE BEEN REAPEATEDLY TAKEN PLACE.

• LAST INCREASE TOOK PLACE IN 2004,WITH 10 NEW COUNTRIES JOINING IN.

ACHIEVEMENTS

• IT HAS ENSURE FREEDOM,SECURITY & JUSTICE. • JOB CREATION. • REGIONAL DEVELOPMENT & ENVIRONMENTAL

PROTECTION. • IT HAS HELPED RAISED LIVING STANDARDS,BUILT

A SINGLE EUROPE WIDE MARKET. • LAUNCHED THE SINGLE EUROPEAN CURRENCY-

THE EURO. • IT HAS STRENGTHNED EUROPES VOICE IN THE

WORLD.

• What is NAFTA?

• Began on January 1, 1994

• Between Canada the United States and Mexico

• NAFTA pros and cons

NAFTA

• BORN IN JANUARY 1994. • MEMBER NATIONS:US,CANADA AND

MEXICO. • it’s the WORLD LARGEST FREE TRADE

AREA. • UNDER NAFTA, ALL NON TARIFF BARRIERS

TO AGRICULTURE WERE ELIMINATED. • MANY TARRIFFS ARE BEING ELIMINATED

OVER A PEROID OF 5-15 YRS.

• The North American Free Trade Area is the trade bloc in North America created by the North American Free Trade Agreement (NAFTA) and its two supplements, the North American Agreement on Environmental Cooperation (NAAEC) and the The North American Agreement on Labor Cooperation (NAALC), whose members are Canada , Mexico and the United States . It came into effect on 1 January 1994 .

• NAFTA Initialing Ceremony, October 1992. From left to right: (Standing) Mexican President Salinas , US President Bush , Canadian Prime Minister Mulroney (Seated) Jaime Serra Puche , Carla Hills , Michael Wilson .

History of the implementation

• The agreement was initially pursued by conservative governments in the United States and Canada supportive of free trade, led by Canadian Prime Minister Brian Mulroney , U.S. President George H. W. Bush , and the Mexican President Carlos Salinas de Gortari .

• The three-nation NAFTA was signed on 17 December 1992, pending its ratification by the legislatures of the three countries.

• There was considerable opposition in all three countries, but in the United States it was able to secure passage after Bill Clinton made its passage a major legislative initiative in 1993.

Objectives

– a) eliminate barriers to trade in, and facilitate the cross-border movement of, goods and services between the territories of the Parties;

– b) promote conditions of fair competition in the free trade area;

– c) increase substantially investment opportunities in the territories of the Parties;

– d) provide adequate and effective protection and enforcement of intellectual property rights in each Party territory;

Objectives (contd..)

– e) create effective procedures for the implementation and application of this Agreement, for its joint administration and for the resolution of disputes; and

– f) establish a framework for further trilateral, regional and multilateral cooperation to expand and enhance the benefits of this Agreement.

• TWO WAY TRADE BETWEEN US & MEXICO HAS INCREASED BY MORE THAN 55%.($11.6 BILLION).

• TWO WAY TRADE BETWEEN US &CANADA INCREASED MORE THAN 50%(16.3 BILLION.)

• HUGE BENEFITS HAVE ACCRUED TO THE NAFTA MEMBER COUNTRIES.

• NAFTA HAS BEEN A ROARING SUCCESSS.

The Organization of the Petroleum Exporting Countries (OPEC)

• History: – The Organization of the Petroleum Exporting

Countries (OPEC) is a permanent, intergovernmental Organization, created at the Baghdad Conference on September 10–14, 1960.

• Functions: – The OPEC MCs coordinate their oil production

policies in order to help stabilise the oil market and to help oil producers achieve a reasonable rate of return on their investments. This policy is also designed to ensure that oil consumers continue to receive stable supplies of oil.

• OPEC FUND: The OPEC Fund for International Development is a multilateral development finance institution. It was established in January 1976, by the member countries of the Organization of the Petroleum Exporting Countries.

• OPEC Secretariat • The Secretariat carries out the executive

functions of the Organization in accordance with the provisions of the OPEC Statute and under the direction of the Board of Governors

• Members: Algeria, Angola, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, UAE, Venezuela.

• IT’S A PERMANENT ORGANIZATION ESTABLISHED IN 1960 AT THE BAGHDAD CONFERENCE BY IRAN IRAQ, KUWAIT, SAUDI ARABIA, AND VENEZUELA.

• IT WAS LATER JOINED 8 OTHER MEMBERS. • ITS HEAD QUARTER IS IN VIENNA. • ITS OBJECTIVE IS TO COORDINATE AND

UNIFY PETROLEUM POLICIES AMONGS THE MEMBER COUNTRIES

• TO SECURE FAIR AND STABLE PRICES FOR PETROLEUM PRODUCERS.

• PROPER PRICE AND REGULAR SUPPLY OF PETROLEUM FOR CONSUMING NATIONS.

• What is ASEAN?• Established on August

8th, 1967• 10 member countries

-Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippians, Singapore, Thailand, and Vietnam

• ASEAN BEYOND TRADE HAS POLITICAL ROLE AS VISIBLE BY THE FORMATION OF ASEAN REGIONAL FORUM OF WHICH CHINA, INDIA AND USA ARE MEMBERS.

• ASEAN AS A TRADING BLOC HAS BEEN A HUGE SUCCESS LEADING TO PROSPERITY AND ELIMINATION OF POVERTY IN THE MEMBER COUNTRY

• BORN IN 1985 • 7 MEMBERS COUNTRIES :BANGLADESH, BHUTAN,

INDIA,MALDIVES,NEPAL,PAKISTAN AND SRI LANKA • IT HAS 1.3 BILLION INHABITANTS • REPRESENTS 22% OF THE WORLD POPULATION

BUT ONLY 1.9% OF THE WORLD GNP. • SAARC HAS BEEN A SHEER FAILURE. • THE TOTAL EXTERNAL TRADE OF THE REGION –

0.8% OF WORLD EXPORTS AND 1.3% OF WORLD IMPORTS

• THE REASON BEING POLITICAL DISPUTE BETWEEN MEMBER COUNTRIES

SAARC (SOUTH ASIAN ASSOCIATION FOR REGIONAL COOPERATION)

• The South Asian Association for Regional Cooperation (SAARC) was established when its Charter was formally adopted on December 8, 1985 by the Heads of State or Government of Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.

• SAARC provides a platform for the peoples of South Asia to work together in a spirit of friendship, trust and understanding. It aims to accelerate the process of economic and social development in Member States.

AREAS OF COOPERATION

• Agriculture and Rural Development; • Health and Population Activities; • Women, Youth and Children; • Environment and Forestry; • Science and Technology and Meteorology; • Human Resources Development; and • Transport. • Recently, high level Working Groups have also been

established to strengthen cooperation in the areas of Information and Communications Technology, Biotechnology, Intellectual Property Rights, Tourism, and Energy.

• The Heads of State or Government welcomed the entry of the Islamic Republic of Afghanistan into SAARC. This was a historic moment as Afghanistan assumed its rightful place as a valued member of the SAARC fraternity

CASE STUDY

• WHY ASEAN IS SUCCESSFUL AND SAARC HAS BEEN UNSUCCESSFUL.

• ASEAN IS ONE OF THE MAJOR TRADING BLOCS IN THE WORLD

• IT REPRESENTS 420 MILLION PEOPLE. • It is a LARGER TRADE BLOCK THAN NORTH

AMERICA AND WESTERN EUROPE. • SAARC REPRESENTS 22% OF HUMANITY. • THERE IS A CONTRADICTION, AN IRONY BETWEEN

ASEAN & SAARC. • WHILE ASEAN HAS BEEN A ROARING SUCCESS &

CALLED ASIAN TIGERS ,SAARC HAS BEEN A SHEER FAILURE.

REASONS

• IN ASEAN ALL COUNTRIES ARE OF EQUAL GEOGRAPHIC SIZE.

• LEVEL OF ECONOMIC DEVELOPMENT IS THE SAME IN ALL COUNTRIES.

• COMMON FEAR OF COMMUNIST CHINA • ALL OF THEM HAD SIMILAR ECONOMIC

POLICIES.THEY ALL INTRODUCED ECONOMIC LIBERALIZATION IN 1960s WHICH FURTHER ACCLERATED ECONOMIC GROWTH.

• WAY OF FUNCTIONING OF ASEAN BASED ON TWO PRINCIPLES:

• 1.MUSYAURARAH(CONSENSUS). • 2.MUFAKAT(CONSULTATIONS).

ASSIGNMENT III

• PREPARE A PRESENTATION ON:

• SAARC

• ASEAN

• NAFTA

• EU

• SAFTA

• OPEC

• INDIA’s TRADE WITH ASEAN IS MORE THAN 20 TIMES THAN IN CASE OF SAARC.

• IN SOUTH ASIA INDIA IS THE LARGEST COUNTRY.IT OCCUPIES MORE THAN 70% OF GEOGRAPHICAL AREA.

• SO OTHER NATIONS FEEL THAT STRENGTHENING SAARC MEANS EMPOWERING INDIA.

• SERIOUS BILATERAL DISPUTES BETWEEN TWO MAJOR SOUTH ASIAN POWERS i.e INDIA & PAKISTAN.

BILATERAL DISPUTES AND DIFFERENCES BETWEEN OTHER MEMBER COUNTRIES.

• INDIA,BANGLADESH DISPUTE.

• INDIA ,NEPAL DISPUTE.

• NEPAL MYNMAR DISPUTE.

• PAKISTAN BANGLADESH DISPUTE.

• VAST DIFFERENCE IN ECONOMIC DEVELOPMENT..

• INDIA IS A DEVELOPED ECONOMY OF SOUTH ASIA .OTHER CONTRIES ARE LESS DEVELOPED.

• PURCHASING POWER OF T HESE CONTRIES IS VERY LOW.THEY CANNOT ACT EVEN AS A MARKET OF INDIAN GOODS.

INDIA'S TRADE AGREEMENTS AT A GLANCE

• Existing:• Bankok Agreement • Global System of Trade Preferences (GSTP) • SAARC Preferential Trading Agreement (SAPTA) • India-Sri Lanka FTA • India - Thailand FTA • India Singapore Comprehensive Economic

Cooperation (CECA) • Indo-Nepal Trade Treaty • India-Mauritius PTA • India-Chile PTA

• Ongoing:

• Indo-ASEAN CECA

• South Asian Free Trade Agreement (SAFTA)

• BIMSTEC (Bay of Bengal Initiative for Multi-Sectoral Technical & Economic Cooperation)

• India - MERCOSUR PTA

• FTAs /PTAs under Study and Consideration:• Gulf Cooperation Council (GCC) • China • South Korea • Japan • Malaysia • Pakistan • Southern African Customs Union (SACU) • Egypt • Israel • Russia • Australia