International Trade

INTERNATIONAL BUSINESS

and CULTURE

Part III: International Trade

1 Foreign Direct Investments 2 International Trade Policies3 International Trade Barriers

International Trade EnvironmentTrade Barriers:

To protect domestic industries from foreign competition , to promote indigenous R&D , to conserve precious foreign exchange.

Tariffs: Duties or Taxes imposed on imposed on internationally traded goods when they cross national borders.

Non Tariff Barriers (NTBs):

Used by developing countries to prevent foreign exchange outflow = import quotas, import licensing, foreign exchange regulations used by developed countries to protect domestic industries

International Trade Environment

Quotas:Export Quota = If Govt feels export in excess may affect domestic market.

Import Quota = to restrict the quantity of imports.

Tariff Quota = combination of tariff & quota.


Quotas:

Unilateral Quota = A country, unilaterally, fixes upper limit of quantity of a particular commodity.

Bilateral Quota = after negotiations betn importing & supplier countries.

Mixing Quota = The producers are obliged to utilize domestic raw materials up to certain proportion in production of a finished product.

Licensing:Licensing authority issue import license to prospective importer to obtain foreign currency to pay for imports.

Administered Protection:Safeguards = A common form of administered protection to restrict temporarily against surges threatening viability of domestic industries.


Customs Procedures: Consular Formalities: Cumbersome , expensive. Export documents to be certified by consular of importing country , in exporting country.

Monetary Controls: Restrictions on opening of L/Cs.

Environmental Protection Laws : Use of child labour , sweat shops.


Commodity Agreements:

Inter Governmental agreements regarding the production & trading of certain primary products to stabilize the prices.

Quota Agreements = To prevent a fall in commodity prices by regulating their supply.


Commodity Agreements:

Buffer Stock Agreement = To stabilize commodity prices by maintaining demand-supply balance.

Bilateral Contracts = To purchase & sell certain quantities of a commodity at agreed prices between a major importer & exporter .


Cartels :Agreements betn producers located in different countries or different govts to restrict competition , to control prices.

Common in Oligopoly markets where relatively small no. of producers.

Organization of Petroleum Exporting Countries (OPEC), Automobiles manufacturers, International Air Transport Assn ( IATA)


State Trading:

Import & export transactions of a state owned agency involving purchase of goods for commercial resale. STC , MMTC


Intra Regional Trading Blocs based on economic integration:

Free Trade Area = Grouping of countries to bring about free trade betn them. Each member is free to decide its policy with non members.

Customs Union = Eliminates all trading restrictions among members & adopts a uniform commercial policy against non members.

Common Market = Allows free movement of labor & capital within market besides Customs Union characteristics.

Economic Union = Besides Common Market conditions, it achieve some degree of harmonization of economic policies.

Economic Integration = Ultimate form of full economic integration where all members are bound by decisions of super authority.

Intra Regional Trading Blocs based on economic integration:

European Union :By far the most successful regional economic integration.

Euro , the common currency. Bring single interest rate , eliminate currency risk , could bring big investors to equity & bond markets.

Equal price thro out Euro area.

Saves on cost of hedging against exchange rate risks.

Govts can now hold their foreign exchange reserves in Euro besides USD.

Other Regional GroupingsThe North American Trade Agreement (US, Canada, Mexico) NAFTA

Gulf Cooperation Council (GCC)

The Association of South East Asian Countries (ASEAN) : Indo , Malaysia , Philippines, Sing., Thai, Brunei

The Caribbean Common Market ( CARICOM )

South Asian Association for Regional Cooperation (SAARC) ; India , Bangladesh, Pakistan , Nepal , Bhutan , SL , Maldives, ISFTA

GATT / WTO :

GATT was converted from a provisional agreement into a formal international organization called WTO on 1 Jan 1995 as a result of Uruguay round. WTO will serve as a single institutional framework encompassing GATT & all results of Uruguay Round.

Uruguay Round Agreement :Expanded the scope of multilateral trade negotiation by including services, intellectual property rights , copyrights, trade marks ,Patents, Industrial designs (TRIPs) , trade related investment measures ( TRIMs ), as against only goods in past.

GATT replaced by WTO.

Under WTO, there are agreements related to 3 major areas GATT , GATS ( General Agreement on Trade in Services incl. financial services, telecommunication , transport, professional services ) , TRIPs.

Uruguay Round Agreement :WTO has more effective dispute settlement mechanism.

Liberalized trade in agriculture particularly in developed countries.

All members countries are required to adopt product patent. The patent period for all products is 20 years.

Complaint : Developed countries will appropriate about 70% of additional income generated by implementation of UR because of their high level of participation in trade & main part of liberalization has been in goods interest to them.

Anti Dumping Measures :

A product is regarded as dumped when its export price is less than the normal price in the exporting country or its cost of production plus reasonable amt of other costs. These measures can be employed only if dumped imports cause serious damage to domestic industry in importing country.

International Trade Centre (ITC):For technical cooperation with developing countries in trade promotion. Directly responsible for implementing financial projects in developing countries related to trade promotion.

Advise developing countries on marketing communications, publicity activities. Planning & executing trade missions. Improve import operations & techniques to optimize foreign exchange reserves.

Indian Laws regulating Foreign Trade :

Foreign Trade (Development & Regulation ) Act 1992

Foreign Exchange Management Act

Antiquities & Art Treasures Act

Tea Act

Indian Coffee Act

Customs Act

Export ( Quality Control & Inspection ) Act

Indian Laws regulating Foreign Trade :

Multi Fibre Arrangement ( MFA ) It restricted international trade in Textiles betn importing developed economies & exporting developing economies. The main objective was to safeguard domestic industry. Increased productivity reduced employment in developed world in addition to low cost imports,

MFA was against the principle of non-discrimination. Consumers had to pay high price due to restrictions. It was faced out in 1995.

International Marketing EnvironmentWhat makes a successful business strategy in one market a failure in another , is different business environment.

Reason = different regions, culture , preferences , beliefs , customs ,climatic conditions. Successful companies are those who adapt to these differences.

The root cause of most International business problems is Self Reference Criterion , an unconscious reference to ones own cultural values, experience, knowledge as basis for decisions.( Ex : American companies failure in Japan with American market strategies )

Economic Environment : Business in a foreign country depends upon its level of development of economy ,economic resources , size of economy, economic policies, economic conditions.Social Environment : Religious aspects , language , traditions , values & beliefs , tastes & preferences , buying & consumption habits. ( Ex. Mac in India , Colors in various countries )

Demographic Environment : Size of population , population growth rates , age composition , income levels. Ex : Declining birth rate , a boon to tourism industry.Political Environment : Is winning over top brass of a party or Govt. a strategy to obtain business ?

Are important industries reserved for Public Sector ?

Any restriction on foreign equity participation ?

Enmity: Arab countries do not do business with companies dealing with Israel . India and Pak

Any restrictions on advertising of a product , product comparison , use of children in ads.?Technological Environment : Labour abundant countries opt for labour intensive technology.

Future of International Business :

Globalization of supply chain & operations.

International Investments

Information available to consumers on global brands

Growth of world economy BRIC, Africa, ME

Rise of Internet & Information Technology

Information for Global Marketing Decisions

Effective marketing strategies can only be developed through achieving adequate information about international markets.

Information is critical, whether a firm is only entering Intl markets, expanding Intl operations, or rationalizing its global activities

Ignoring the need for research - Case: 1

A US company learned that ketchup was not available in Japan -> shipped a large amount of its ketchup, looking for first mover advantage.

Japanese consumers prefer soy-based condiments rather than tomato-based.

The ketchup was not purchased. Some market research before market entry would have saved from this loss.


Insufficient research - Case: 2

Kentucky Fried Chicken entered Brazilian market with hopes of eventually opening 100 stores. Initial sales of the operation in Sao Paulo were disappointing.

Street corner vendors sold low-priced charcoal-broiled chicken almost everywhere. This chicken appealed to local tastes.

In making the decision to enter the market, KFC had not adequately researched possible competition.


Misdirected market research - case: 3

A soft drink company conducted research in Indonesia to determine market potential. Rather than conduct research throughout the entire country, it focused on the major urban areas.

These results were projected to the entire population.Based on the research, the company established large bottling and distribution facilities.

Between rural and urban Indonesia, there are however major differences.

The company sales were disappointing; the product was mostly bought by tourists and foreign visitors.


Failure to appreciate market differences - Case: 4

Cummins Engine Company experienced sluggish sales of its diesel engines in the European market. Unlike the U.S. market, the European market was highly integrated with truck manufacturers making their own engines.

This created a much more difficult competitive environment to do business in.

Research on the European market structure would have been better prepared the firm for the challenges.


Inadequate market research - Case: 5

CPC International wanted to introduce Knorr soups to the US markets. It conducted test markets serving passersby a portion of Knorr soup made from a Knorr mix.

The taste tests showed remarkable interest in purchasing the soup. However, sales were a disappointment.

The research should have been conducted not only to examine reactions to the taste but also on how receptive the consumers were to preparing the soup from a dry mix.

This kind of research would have revealed the US consumers strong preference for canned soups.


Failure to appreciate cultural differences - Case: 6

In the French household, coffee and its preparation have an important role.

Chase and Sanborn met heavy resistance when they attempted to enter the French market with their instant coffee.

French consumers, to whom the ritual of preparing the coffee was so important, rejected the instant coffee concept.

Marketing research would have helped the company to appreciate these ceremonial aspects of coffee making, and understand how deeply ingrained the coffee preparation was in the French culture.


Global Information Needs

Systematic collection on information is crucial to successful strategy

development in international markets.

Uses of InformationAssessing new and continuing

opportunities and threats that emerge in markets.

Global Information NeedsLack of familiarity in markets and the

business environment in other countries, and also the pace of change in the markets

and opportunities, make it essential that these are investigated before plans for a global market entry and expansion are

made.Monitoring trends in market demand,

competition, government policies, and other environmental factors

Information is needed to assess performance globally and in specific

countries or geographic areas, and also business and marketing functions, etc.

As in domestic data collection, two major types of data can be collected:

primary data secondary data.

Information can also be collected from external sources, outside the company, or from internal company sources.

Secondary data are important i.e. in market entry and expansion decisions:

government, economic, and social statistics reports by trade associations, industry reports other commercial publications

Global Information types

Computerized Intl Data banks, like PC Globe and TSM Global Economic Data Base are valuable sources of information.

Primary data are often expensive and difficult to collect, especially in developing countries with no well-developed research infrastructure. I.e. Large scale surveys

This is why often greater reliance is placed on expert opinion, qualitative research, or small-scale studies, using convenience of judgement samples. (There is, yet, a risk of false results in these)

Global Information types

SamplesApproval

Proforma Invoice

Expression of Interest in Product

Quotation, unit price

Order Confirmation

Inquiry

Order

Negotiations

Payment / LC Start of Production

Pre ordering Process

Pre ordering Process

Overview of Exports DocumentationPre Shipment

Pre shipment Document to Movement of CargoCHA

Loading at Port Stuffing of Cargo

Obtaining B/L Insurance Policy

Copies of Documents Back to Exporters

Preparation of Documents for Bank

Post Shipment

Submission of E.P.Copy of shipping bill

documents to bank A.R.E. / Bank Certificate

Negotiation Claiming different Benefits

Realisation

Obtaining Bank Certificate Maintenance of statutory records

Overview of Exports Documentation

Documentation For Export Benefits

Pre Shipment

Jt. DGFT Customs Excise Appln for To be done Bond / ARE 1 Advance By CHA Formalities

Authorisation/ (StuffingDFIA Permission

Appln for Etc. on the basis EPCG Autho. of Shipping Bill)

Post Shipment

Jt. DGFT Customs Excise Adv. Autho. Obtaining DBK Submission of Completion (All Ind. Rate or Proof of Exports

Brand Rate) against BondClosure of file

Release of Bond OREH Appln + BG incase of

Adv. Autho. Rebate of ExcisePost Export Duty (Post Exports)DEPB Verification of

DEPB

Documentation For Export Benefits

Signed invoice Packing list Bill of Lading or Delivery Order/Airway

Bill GATT declaration form duly filled in Importers/CHAs declaration Licence/Authorisations in original

wherever necessary Letter of Credit/Bank Draft/wherever

necessary Insurance document Import license

Important DocumentsImports

Industrial License, if required Test report in case of chemicals Adhoc exemption order Catalogue, Technical write up,

Literature in case of machineries, spares or chemicals as may be applicable

Separately split up value of spares, components, machineries

Certificate of Origin, if preferential rate of duty is claimed under PTAs/FTAs etc.

No Commission declaration

Important DocumentsImports

Signed invoice Packing list Bill of Lading or Delivery Order/Airway

Bill Importers/ CHAs declaration Licence/Authorisations in original

wherever necessary Letter of Credit/Bank Draft/wherever

necessary Insurance document

Important Documents Exports

Test / Inspection reports in case required

Catalogue, Technical write up, Literature in case of machineries, spares or chemicals as may be applicable

Separately split up value of spares, components, machineries

Certificate of Origin, if preferential rate of duty is claimed under PTAs/FTAs etc.

No Commission declaration

Important Documents Exports

Group E Departure - The E-Term is the term in which the sellers obligation is minimum EXW- Ex works ( named place)

Group F Main carriage unpaid -The F terms require the seller to deliver the goods for carriage to deliver the goods for carriage as instructed by the buyer. FCA Free Carrier ( named place)FAS - Free alongside ship ( named port of shipment) FOB - Free on Board ( named port of shipment)

Group C Main Carriage Paid -The C term requires the seller to contract for carriage on usual terms at his own expenses

CFR Cost and Freight ( named port of destination) CIF - Cost Insurance and Freight ( named port of destination) CPT- Carriage paid to ( named port of destination) CIP - Carriage and Insurance paid to (named port of destination)

INCOTERMS

Group D

Arrival - Seller according to D terms is responsible for the arrival of the goods at the agreed place of point of destination DAF Delivered at frontier ( named place)DES Delivered Ex ship ( named port of destination )DEQ- Delivered Ex Quay ( named port of destination )DDU Delivered Duty unpaid ( named port of destination )DDP Delivered Duty Paid ( named port of destination )

INCOTERMS

Agreed point of delivery-frontier-terminal-quay Loading

Port of shipmentShips rail

On board On board

Ships railPort of destination

discharge

Named destination

Seller BuyerEXW

FCA

FAS

FOB

CFR

CIF

CPT

CIP

DAF

DES

DEQ

DDU

DDPSellers risk Sellers cost Buyers risk Buyers cost

Marine insurance

Compulsory insurance

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