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Marketing 470 Chapter 2

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Pax Romana
(Classical History)
The "Roman Peace" ensured that merchants were able to travel safely and rapidly on roads built, protected, and maintained by the roman legions- If they cooperated and lived peacefully.
Cross-border Trade prospered...
"All roads lead to rome"
European feudalism (Middle Ages)
By delivering a portion of their "earnings" to a protector, medieval farmers were shielded from the depredations of outsiders.
Colonialism and Mercantilism (17th-19th centuries)
England, Holland, Portugal, Spain, France...British East Indies Company, Dutch East Indies Company, the first Multi-national corporations...
The British "Empire"....
"Manifest Destiny" and The Monroe Doctrine in the U.S.
Manifest Destiny - The premise behind territorial expansion of the U.S in the 19th century.
The Monroe Doctrine - U.S. abstention from European affairs and opposition to any further European colonization of "The New World".
WWI changed this!
Industrialism of the 19th century leading to the 20th Century and the rise of America as a global trading power.
Global War (WWI) in 1914, the instability of the Versailles Treaty after 1918, the rise of Fascism/Hitler/Mussolini from 1920-1939, and WWII from 1939-1945.
Global Depression and Financial Turmoil along with U.S. Protectionism in the 1930's
The Smoot Hawley Act
"Protectionist" Reaction to financial crash of 1929. Raised import duties to reduce the volume of imports into the united states. The intent was to increase domestic employment. Retaliation contributed to worldwide depression, the collapse of the worldwide financial system, and ultimately set the scene for World War II.
Concurrent rise of communism as a political system in opposition of democratic capitalism (1917-1989 - Soviet Union, 1949-today)
Fascism
Fascism
Marxism
Rise of Lenin and Communist Russia
Mao Zedong and Communist China...
Global Division post WWII along Political Ideological Lines (1945-1989)
The post-war east and west ideological split. (i.e. The Iron Curtain...)
Socialist Marxist - Josef Stalin, the Soviet Union and the Eastern Bloc:
Council for mutual economic assistance (CMEA or COMECON).
Democratic capitalist -
53 western countries.
The International Trade Organization (ITO) - 1948.
The Pax Americana : "American peace" ensuring safety in the western world from 1945 to 1990 helped world trade grow dramatically.
NATO (North Atlantic Treaty Organization), etc...
"The Marshall Plan" post WWII,
financed the rapid growth of war-torn economies and previously underdeveloped countries, especially Germany and Japan.
End of the Cold War (1989)
the fall of the Berlin Wall and the entrance of The Eastern Bloc into global capitalism.
1990's development of large-scale economic cooperation.
Regional and global trading institutions such as The European Community, GATT, and the WTO.
"GLOBALIZATION"
World Trade Organization (WTO)
The pre-cursor to the WTO was The General Agreement on Tariffs and Trade (GATT)
GATT arose out of the ITO
International Monetary Fund (IMF)
World Bank
Regional trade institutions such as The European Community and NAFTA.
Globalized technology, communication and transportation
"Boston to Bangalore in two seconds".
Globalization
Term originally used by Theodore Levitt, a Harvard Business School Economist:
"as if the entire world (or major regions of it) were a single entity; [such an organization] sells the same things in the same way everywhere".
Pros:
Free trade advances economic development
Reduces poverty, improves education, health and life expectancy
Expanded trade creates more and better jobs.
Must manage the costs and transition of workers
Encourages Peaceful Trade...
Historically true...Pax Romana, Pax Americana, US-China trade.
Potential solution for Middle East?? Debatable...
Cons:
The rich get richer...
Produces uneven results across nations and people
Increases gap between rich and poor
Creates a supra-national industrial/political elite class...
Has negative effects on labor and labor standards
Jobs migrate to developing nations
Contributes to decline in environment and health conditions
Creates Culture Conflict / Encourages War...
Beyond the First Decade of the 21st Century
U.S. economy has slowed dramatically.
U.S. economy is increasingly service based and not manufacturing based.
World growth (except China) also slowed
Developing countries will grow faster
Share of world output will range from one-sixth to one-third
The Emergence of "Chindia" and re-emergence of Russia as global economic and political powers....
A changing face of global finance...
U.S. is now a net debtor.
Who do you think is buying all the Treasury bills utilized to finance our economic stimulus package(s)...?
Beyond the First Decade of the 21st Century
Level of intensity of competition will change as companies focus on gaining entry or maintaining their position
Emerging markets
Regional trade areas
Established markets in Europe, Japan, and the U.S.
Smaller companies forced to seek new markets or struggle....
Novel approaches
Technological expertise
World Trade and U.S. Multinationals Today
American MNCs confronted by a resurgence of competition from all over the world
NIC (Newly Industrialized Countries)
SOE (State-Owned Enterprises)
The balance of merchandise trade
Balooning U.S. trade deficit ...
U.S. dilemma of how to encourage trading partners to reciprocate with open access to their markets without provoking increased protectionism
WTO (World Trade Organization)
NAFTA
AFTA (American Free Trade Area)
APEC (Asia-Pacific Economic Cooperation Conference)
Balance of Trade
The balance of merchandise trade also reflected the changing role of the United States in world trade
Between 1888 and 1971, the United States had a favorable balance of trade
By 1971, the United States had a trade deficit of $2 billion that grew to at $160 billion in 1987
Trade deficit peaked in 2007, with the continued weakness in the U.S. dollar
The positive consequence of the global financial crisis in 2008 in the United States was the halving of the U.S. trade deficit during 2009 from its high in 2007
Balance of Payments
1.When countries trade there are financial transactions among businesses or consumers of different nations

2.Money constantly flows into and out of a country

3.The system of accounts that records a nation's international financial transactions is called its balance of payments (BP)

4.It records all financial transactions between a country's firms, and residents, and the rest of the world usually over a year

5.The BP is maintained on a double-entry bookkeeping system
Balance of Payments (cont'd)
A balance-of-payments statement includes three accounts
the current account, a record of all merchandise exports, imports, and services plus unilateral transfers of funds
the capital account, a record of direct investment, portfolio investment, and short-term capital movements to and from countries; and
the official reserves account, a record of exports and imports of gold, increases or decreases in foreign exchange, and increases or decreases in liabilities to foreign central banks.
Of the three, the current account is of primary interest to international business.
Global Perspective Trade Barriers
-Barriers to trade are one of the major issues confronting international marketers.

-They can be tariff or non-tariff barriers.

-Countries continue to use non-tariff barriers for a variety of reasons.

-Tariff barriers have reduced considerably in recent years.
Protectionism
-The reality of trade is this is a world of tariffs, quotas, and nontariff barriers designed to protect a country's markets from foreign investment

-Although the World Trade Organization has been effective to some extent in reducing tariffs, countries still resort to measures of protectionism

-Countries use legal barriers, exchange barriers, and psychological barriers to restrict the entry of unwanted goods
Arguments for Protectionism
-maintain employment and reduce unemployment

-increase of business size, and

-retaliation and bargaining

-protection of the home market


-need to keep money at home

-encouragement of capital accumulation

-maintenance of the standard of living and real wages

-conservation of natural resources

-protection of an infant industry

-industrialization of a low-wage nation

-national defense
The Impact of Tariff (Tax) Barriers
Tariff Barriers tend to increase:
1.Inflationary pressures

2.Special interests' privileges

3.Government control and political
considerations in economic matters

4.The number of tariffs they beget via reciprocity

Tariff Barriers tend to weaken:
Balance-of-payments positions
Supply-and-demand patterns
International relations (they can start trade wars)

Tariff Barriers tend to restrict:
Manufacturer' supply sources
Choices available to consumers
Competition
Three Types of Monetary Barriers
1.Blocked currency: Blockage is accomplished by refusing to allow importers to exchange its national currency for the sellers' currency.

2.Differential exchange rates: It encourages the importation of goods the government deems desirable and discourages importation of goods the government does not want by adjusting the exchange rate. The exchange rate for importation of a desirable product is favorable and vice-versa

3.Government approval: In countries where there is a severe shortage of foreign exchange, an exchange permit to import foreign goods is required from the government
The Omnibus Trade and Competitiveness Act (OTCA) 1988
Many countries are allowed to trade freely with the United States but do not grant equal access to U.S. products in their countries.

To ease trade restrictions, the OTCA focused on correcting perceived injustice in trade practices.

It dealt with trade deficits, protectionism, and the overall fairness of our trading partners.

Covers three areas for improving U.S. trade:
1.market access,
2.export expansion, and
3.import relief
Global Trade Organizations
Four ongoing activities to support the growth of international trade:
1.GATT
2.The World Trade Organization (WTO)
3.International Monetary Fund (IMF)
4.The World Bank Group
General Agreement on Tariffs and Trade
GATT was a "Multi-lateral" Agreement that paved way for first effective worldwide tariff agreement.
Negotiations conducted in "rounds".
What is the difference between Multi-lateral and bi-lateral?
Basic elements of the GATT
1.Non-discriminatory trade.

2.Protection shall be afforded domestic industries through customs tariffs, not through such commercial measures as import quotas

3.Consultation shall be the primary method used to solve global trade problems
Most-Favored Nation (MFN) clause:
"Each member country of The GATT must grant every member country the most favorable treatment it accords to any other country with respect to imports and exports".
General Agreement on Tariffs and Trade (GATT)
Covers three basic areas:
1.trade shall be conducted on a nondiscriminatory basis;

2.protection shall be afforded domestic industries through customs tariffs, not through such commercial measures as import quotas; and

3.consultation shall be the primary method used to solve global trade problems.
The WTO
The Uruguay Round of GATT and the creation of the WTO...
-Eliminating international trade barriers -
The General Agreement on Trade in Services (GATS)

-Trade-Related Investment Measures (TRIMs)

-Trade-Related aspects of Intellectual Property Rights (TRIPs)

-The World Trade Organization (WTO) formed in 1995 with finalization of the "Uruguay Round", effectively taking the place of GATT.
China's formal designation as permanent MFN in 2000 dramatically increased cross-border trade and globalization activities.

-Current round of negotiations is called the "Doha" round (started in Quatar), which was expected to be finalized by 2006, but is currently stalled.
World Trade Organization
The WTO is an institution with membership - not an agreement
1.Sets many rules governing trade between its 148 members
2.Provides a panel experts to hear and rule on trade disputes between members
3.Issues binding decisions
4.All member countries will have equal representation
5.Member countries have open their markets and to be bound by the rules of the multilateral trading system

Ongoing U.S. concerns
1.Possible loss of sovereignty over its trade laws to WTO
2.Lack of veto power
3.Role U.S. assumes when a conflict arises over an individual state's laws that might be challenged by a WTO member
World Trade Organization (WTO
Unlike GATT, WTO is an institution, not an agreement

It sets many rules governing trade between its 132 members
WTO provides a panel of experts to hear and rule on trade disputes between members, and, unlike GATT, issues binding decisions
The International Monetary Fund
The IMF was developed out of the Bretton Woods (New Hampshire) Agreement in 1944.

Objectives:
Assist nations in becoming and remaining economically viable
Originally formed to offer gold and constituent currencies available to members for currency stabilization.
Its original goal was to maintain stability for the international monetary framework by providing fixed exchange rates between countries.
Created Special Drawing Rights (SDRs) -- "Paper gold", or "The Gold Standard".

Under Nixon and the strains of paying for the war in Vietnam, the US abandoned the "Gold Standard" provided by Breton Woods in 1971 by ceasing convertibility of the USD to Gold except in open markets.

The IMF survives as an institution today providing international currency liquidity and facilitating international trade.
The World Bank Group
Formed in 1944, it provides economic assistance for the reconstruction of war-torn countries.

More recently, it provides development loans to developing countries (i.e. bridges, roads, schools) with the goal of reducing poverty.

The World Bank has five institutions which perform the following services:

1.Lending money to the governments of developing countries

2.Providing assistance to governments for developmental projects to the poorest developing countries

3.Lending directly to the private sector

4.Providing investors with guarantees against "noncommercial risk"

5.Promoting increased flows of international investment
Protests against Global Institutions
The basic complaint against the WTO, IMF and others is the amalgam of unintended consequences of globalizing
1.Environmental concerns

2.Worker exploitation and domestic job losses
3.Cultural extinction

4.Higher oil prices

5.Diminished sovereignty of nations

6.Increased Supranational authority of multinational corporations...
"Antisweatshop" campaigns.
Cheating the Spirit of GATT and WTO
1.Loopholes/Non-tariff barriers
Reducing tariffs while at the same time increasing number and scope of technical standards and inspection requirements

2.Imposing antidumping duties

3.Negotiating bilateral trade agreements
May lead to multinational concessions
Not necessarily consistent with WTO goals and aspirations