International Business Dynamics by Nagarjun Reddy module 3
- 2. WTO “The World Trade Organization is ‘member-driven, with decisions taken by General agreement among all member of governments and it deals with the rules of trade between nations at a global or near-global level.
- 3. WTO The World Trade Organization (WTO) is the only international organization that deals with global rules of trade between nations. It provides a framework for conduct of international trade in goods and services. It lays down the rights and obligations of governments in the set of multilateral agreements.
- 4. History The World Trade Organization (WTO) came into being on January 1st 1995. The WTO was essentially an extension of GATT. It extended GATT in two major ways. GATT became only one of the three major trade agreements that went into the WTO (the other two being the General Agreement on Trade in Services (GATS) and the agreements on Trade Related Aspects of Intellectual Property Rights (TRIPS)).
- 5. The WTO was put on a much sounder institutional footing than GATT. With GATT the support services that helped maintain the agreement had come into being in an ad hoc manner as the need arose. The WTO by contrast is a fully fledged institution (GATT was only an agreement between contracting parties and had no independent existence of its own while the WTO is a corporate body recognized under international law).
- 6. Objectives To ensure the reduction of tariffs and other barriers to trade. To eliminate discriminatory treatment in international trade relations. To facilitate higher standards of living, full employment, a growing volume of real income and effective demand, and an increase in production and trade in goods and services of the member nations. To make positive effect, which ensures developing countries, especially the least developed secure a level of share in the growth of international trade that reflects the needs of their economic development. To facilitate the optimal use of the world’s resources for sustainable development. To promote an integrated, more viable and durable trading system incorporating all the resolutions of the Uruguay Round’s multilateral trade negotiations.
- 7. WTO vs. GATT GATT remained a ‘provisional’ agreement and organization whereas WTO commitments are permanent. GATT rules mainly applied to trade in goods whereas the WTO covers other areas, such as services, intellectual property, etc. GATT had contracting parties whereas the WTO has members. GATT was essentially a set of rules of the multilateral treaty with no institutional foundation whereas the WTO is a permanent institution with its own Secretariat.
- 8. FUNCTIONS OF WTO Administering WTO trade agreements Forum for trade negotiations Handling trade disputes Monitoring national trade policies Technical assistance and training for developing Countries Cooperation with other international organizations
- 9. PRINCIPLES OF WTO Trade Without Discrimination 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. The same should apply to foreign and domestic services, and to foreign and local trademarks, copyrights and patents.
- 10. 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 Predictability: through binding and transparency Sometimes, promising not to raise a trade barrier can be as important as lowering one, because the promise gives businesses a clearer view of their future opportunities. 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.
- 11. 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. 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. And the agreements themselves inherit the earlier provisions of GATT that allow for special assistance and trade concessions for developing countries.
- 12. WTO and India India is a founder member of World Trade Organization, and also treated as the part of developing countries group for accessing the concessions granted by the organization. As a result, there are several implications for India for the various agreements that are signed under WTO. Let us understand each agreement in general, what it means and its implications for India in specific. India was a signatory of the General Agreement on Tariffs & Trade (GATT), and as a part of the commitment had to change several laws and policies; the major changes that were incorporated were as a follows
- 13. WTO and India Reduction of peak and average tariffs on manufactured products Commitments to phase out the quantitative restrictions over a period as these were considered non-transparent measure in any countries policy structure. The result of this agreement as mentioned earlier was limited as, GATT was only an agreement and there was no enforcing agency to strictly implement the clauses and punish the country which breaks the clauses. Thus the impact was partial. However, with WTO coming into effect, the competition from imports for the domestic firms has increased. WTO had the deadline till 2005, for the domestic policy was supposed to phase out the QR's; for those countries which face severe balance of payments problems special concession period was given. Thus it is very clear that only those firms that have competitive advantage would be able to survive in the long run, and those firms which are weak would fade into history in the process.
- 14. Structure of WTO
- 15. The Ministerial Conference (MC) is at the top of the structural organisation of the WTO. It is the supreme governing body which takes ultimate decisions on all matters. It is constituted by representatives of (usually, Ministers of Trade) all the member countries. The General Council (GC) is composed of the representatives of all the members. It is the real engine of the WTO which acts on behalf of the MC. It also acts as the Dispute Settlement Body as well as the Trade Policy Review Body. There are three councils, viz.: the Council for Trade in Services and the Council for Trade-Related Aspects of Intellectual Property Rights (TRIPS) operating under the GC. These councils with their subsidiary bodies carry out their specific responsibilities
- 16. LPG Policies July 1991,India has taken a series of measures to structure the economy and improve the Business position. The new economic policy introduced changes in several areas. The policy have salient feature which are: - 1.Liberlisation (internal and external) 2.Extending Privatization 3.Globalisation of the economy Which are known as “LPG”. (liberalisation privatisation globalisation)
- 17. Reasons for implementing LPG Excess of consumption and expenditure over revenue resulting in heavy govt. borrowings. Growing inefficiency on the use of resources. Over protection to industries. Mismanagement of the firm and the economy. Increase in losses for public sector enterprises. Various distortion like poor technological development, shortage of foreign exchange and borrowing from abroad. Low foreign exchange reserves. Inflation
- 18. Liberalization Liberalization is a very broad term that usually refers to fewer government regulations and restrictions in the economy. Liberalization refers to the relaxation of the previous government restriction usually in area of social and economic policies. When government liberalized trade , it means it has removed the tariff ,subsidies and other restriction on the flow of goods and services between the countries.
- 19. The Path of liberalization Relief for foreign investors Devaluation of Indian rupees New industrial Policy New trade policy Removal of import Restrictions Liberalization of NRI remittances Freedom to import technology Encouraging foreign tie-ups Privatization of public sector
- 20. Advantages of Liberalization Industrial licensing Increase the foreign investment. Increase the foreign exchange reserve. Increase in consumption and Control over price. Check on corruption. Reduction in dependence on external commercial borrowings
- 21. Disadvantages of Liberalization Increase in unemployment. Loss to domestic units. Increase dependence on foreign nations Unbalanced development
- 22. Privatization Privatization means transfer of ownership and/or management of an enterprise from the public sector to the private sector . It also means the withdrawal of the state from an industry or sector partially or fully. Privatization is opening up of an industry that has been reserved for public sector to the private sector. Privatization means replacing government monopolies with the competitive pressures of the marketplace to encourage efficiency, quality and innovation in the delivery of goods and services.
- 23. Need for Privatisation. Though the PSUs have contributed heavily to develop the industrial base of the country, they continue, even today, to suffer from a number of shortcomings which are identified A sizable number of PSUs have been incurring and reporting losses on a continual basis. Consequently, a large number of PSUs have already been referred of loss giving units; Multiplicity of authorities to whom the PSUs are Accountable Delay in implementation of projects leading to cost escalation and other consequences;
- 24. Need for Privatisation. Ineffective and widespread inefficiency on management; With a view to provide opportunities for more and more unemployed youths, more number of people, than required, were recruited and therefore, many PSUs are over-staffed resulting in lower labour productivity, bad industrial relations, etc.; A number of sick companies (40 companies) which were in the private sector was taken over by public sector mainly to protect the employees. These sick units are causing a big drain on the resources of the state; etc.
- 25. Advantages of Privatization Privatization helps to reduce the burden on Govt. It will help profit making public sector unit to modernize and diversify their business. It will help in making public sector unit more competitive. It will help to improving the quality of decision making, because the decisions are free from any political interference. Privatization may help in reviving sick units which are the liability of the public sector. Industrial growth. Increase the foreign investment. Increase in efficiency.
- 26. Disadvantages of Privatization Industrial sickness. Lack of welfare. Class struggle. Increase in inequality Opposition by employees. Problem of financing. Increase in unemployment. Ignores the weaker sections. Ignores the national importance
- 27. Examples of privatization in India Lagan Jute Machinery Company Limited (LJMC) Videsh Sanchar Nigam Limited (VSNL) Hindustan Zinc Limited (HZL) Hotel Corporation Limited of India (HCL) Bharat Aluminium Company limited (BALCO)
- 28. Lagan Jute Machinery Company Limited (LJMC) https://dipam.gov.in/lagan-jute-machinery-co-ltd-ljmc-subsidiary- bharat-bhari-udyog-nigam-ltd-hereinafter-referred-bbunl
- 29. Videsh Sanchar Nigam Limited (VSNL) https://dipam.gov.in/videsh-sanchar-nigam-ltd-vsnl
- 30. Globalization Globalization implies integration of the economy of the country with the rest of the world economy and opening up of the economy for foreign direct investment by liberalizing the rules and regulations and by creating favourable socio-economic and political climate for global business.
- 31. Features of Globalization Opening and planning to expand business throughout the world. Erasing the difference between domestic market and foreign market. Buying and selling goods and services from/to any countries in the world. Locating the production and other physical facilities on a consideration of the global business dynamics ,irrespective of national consideration.
- 32. Advantages of Globalization Free flow of capital and increase in the total capital employed. Free flow of technology. Increase in industrialization. Spread of production facilities throughout the globe. Balanced development of world economies. Increase in production and consumption. Commodities at lower price with high quality. Increase in jobs and income. Higher Standard of living. Balanced human development
- 33. Disadvantages of Globalization Loss of domestic industries Exploits Human resource Decline in income Unemployment Transfer of natural resources Lead to commercial and political colonism Widening gap between rich and poor Dominance of foreign institutions
- 34. Regional Trade Blocks Regional Trade Blocks or Regional Trade Agreements (or Free Trade Agreements) are a type of regional intergovernmental arrangement, where the participating countries agree to reduce or eliminate barriers to trade like tariffs and non-tariff barriers. The RTBs are thus historically known for promoting trade within a region by reducing or eliminating tariff among the member countries. Over the last few decades, international trade liberalisations are taking place in a serious manner through the formation of RTBs.
- 35. Integration Between Countries Free trade area. This is the most basic form of economic cooperation. Member countries remove all barriers to trade between themselves but are free to independently determine trade policies with non-member nations. An example is the North American Free Trade Agreement (NAFTA). Customs union. This type provides for economic cooperation as in a free-trade zone. Barriers to trade are removed between member countries. The primary difference from the free trade area is that members agree to treat trade with non member countries in a similar manner.
- 36. Integration Between Countries Common market. This type allows for the creation of economically integrated markets between member countries. Trade barriers are removed. Like customs unions, there is a common trade policy for trade with non member nations. The primary advantage to workers is that they no longer need a visa or work permit to work in another member country of a common market. Economic union. This type is created when countries enter into an economic agreement to remove barriers to trade and adopt common economic policies. An example is the European Union (EU).
- 37. Strategic alliance A strategic alliance is an agreement between two or more parties to pursue a set of agreed upon objectives needed while remaining independent organizations. Typically, two companies form a strategic alliance when each possesses one or more business assets or have expertise that will help the other by enhancing their businesses. Strategic alliances can develop in outsourcing relationships where the parties desire to achieve long-term win-win benefits and innovation based on mutually desired outcomes.
- 38. Advantages Shared risk: The partnerships allow the involved companies or countries to offset their market exposure. Shared knowledge: Sharing skills (distribution, marketing, management), brands, market knowledge, technical know-how and assets leads to synergistic effects, which result in pool of resources which is more valuable than the separated single resources in the particular company or country
- 39. Advantages Opportunities for growth: Using the partner´s distribution networks in combination with taking advantage of a good brand image can help a company to grow faster than it would on its own. Speed to market: Speed to market is an essential success factor In nowadays competitive markets and the right partner can help to distinctly improve this.
- 40. Advantages Complexity: As complexity increases, it is more and more difficult to manage all requirements and challenges a company has to face, so pooling of expertise and knowledge can help to best serve customers. Innovation: The parties in an alliance can jointly determine their mutual desired outcomes and craft a collaborative contract that features incentives designed to spur investments in innovation. Costs: Partnerships can help to lower costs, especially in non-profit areas like research & development.
- 41. Advantages Access to resources: Partners in a Strategic Alliance can help each other by giving access to resources, (personnel, finances, technology) which enable the partner to produce its products in a higher quality or more cost efficient way. Access to target markets: Sometimes, collaboration with a local partner is the only way to enter a specific market. Especially developing countries want to avoid that their resources are exploited, which makes it hard for foreign companies to enter these markets alone. Economies of scale: When companies pool their resources and enable each other to access manufacturing capabilities, economies of scale can be achieved. Cooperating with appropriate strategies also allows smaller enterprises to work together and to compete against large competitors.
- 42. Disadvantages Sharing: In a strategic alliance the partners must share resources and profits and often skills and know-how. This can be critical if business secrets are included in this knowledge. Agreements can protect these secrets but the partner might not be willing to stick to such an agreement. Creating a competitor: The partner in a strategic alliance might become a competitor one day, if it profited enough from the alliance and grew enough to end the partnership and then is able to operate on its own in the same market segment. Opportunity costs: Focusing and committing is necessary to run a Strategic Alliance successfully but might discourage from taking other opportunities, which might be beneficial as well.
- 43. Disadvantages Uneven alliances: When the decision powers are distributed unevenly, the weaker partner might be forced to act according to the will of the more powerful partner(s), even if he or she is actually not willing to do so. Foreign confiscation: If a company is engaged in a foreign country, there is the risk that the government of this country might try to seize this local business so that the domestic company can have all the market on its own. Risk of losing control over proprietary information, especially regarding complex transactions requiring extensive coordination and intensive information sharing. Coordination difficulties due to informal cooperation settings and highly costly dispute resolution.
- 44. How to make Alliances work The success of any alliance very much depends on how effective the capabilities of the involved enterprises are matched and whether the full commitment of each partner to the alliance is achieved. Understanding: The cooperating companies need a clear understanding of the potential partner´s resources and interests and this understanding should be the base of set the alliance goals. No time pressure: During negotiations time pressure must not have an influence on the outcome of the process. Managers need time to establish a working relationship with each other, develop a time plan, set milestones, and design communication channels.
- 45. How to make Alliances work Limited alliances: Some incompatibilities between enterprises might not be avoidable, so the number of alliances should be limited to a necessary amount, which enables the companies to achieve their goals. Good connection: Negotiations need experienced managers. The managers from large firms need to be connected very well so they have the possibility to integrate different departments and business areas over internal borders, and they need legitimations and support from the top management.
- 46. How to make Alliances work Creation of trust and goodwill: The best basis for a profit-yielding cooperation between enterprises is the creation of trust and goodwill, because it increases tolerance, intensity and openness of communication and makes the common work easier. Further it leads to equal and satisfied partners. Intense relationship: Intensifying the partnership leads to the fact that partners get to know each other better, each other's interests and operating styles and increases trust.