Introduction to International Trade

What is international trade?

Import and export activities carried out by any nation with another nation; by any company in one country with a company in another country The exchange of services or goods between different national sovereignties or countries

Factors that can facilitate trade between countries:

Government policies that promote competition and encourage efficiency Industries that are competitive Labour force and workers who are able to enter and leave occupations without difficulties An open society and economy.

Reasons for IT
Comparative advantages The tendency of a country to specialize in the production and export of things that it can produce best and relatively cheaper that other countries of the world Removing protective framework Technology Refers to the method of producing goods and services that are efficient

Advantages

Enable country to obtain goods which are not available locally and to export surplus goods. Increase standard of living and the economics of the country concerned Competition Increase productivity, efficiency and quality of goods and services Economies of scale because of the enlarge markets Closer political link between countries

Disadvantages
Globalization kills domestic business Exploits human resources Decline in demand for domestic products Decline in income Widening gap between rich and poor Transfer of natural resources.

Risks in International trade

Credit risk (exporter) Can the buyer pay for the imported goods To reduce the risk the seller should carry a status enquiry or getting a copy of the audited account

Performance risk (importer)

The goods or services that are imported do not meet the provisions laid down in the contract Can be reduced making trade enquiry on the supplier to ascertain whether the supplier supplies goods of high quality

Documentary risk A possibility that documents presented by an exporter are forged Bank is paying to the wrong person

Foreign exchange risk The fluctuation in exchange rate Can minimized it by entering into a forward contract

Transit risk Goods may be damaged between the transit form suppliers factory to the buyers warehouse Should be insured

Protections
Tariffs Taxes and duties on imported goods It will increase the price of the imported goods The demand for imported goods will decreased and increase the supply of local goods Import quotas Restriction on the quantity to be imported Will reduce the quantity of imported goods in the country

Subsidies
Granting of subsidies and financial assistance to make the local goods cheaper Local producers will have a cost advantage over foreign producers

Currency depreciation Imports will be more expensive Will reduced the demand for imported goods

Non-tariff barrier

Various safety and performance requirement on imported good Procedures for importing goods Exchange control regulation Health and pollution standards Labeling and packaging regulations

Trade Bloc

Trade bloc
AFTA NAFTA EAEC

Trade Bloc

A trade bloc can be defined as a preferential trade agreement (PTA) between a subset of countries, designed to significantly reduce or remove trade barriers within member countries.

When a trade bloc comprises neighbouring or geographically close countries, it is referred to as a regional trade (or integration) agreement.
It is sometimes also referred to as a natural trade bloc to underline that the preferential trade is between countries that have presumably low transport costs or trade intensively with one another.

The two principal characteristics of a trade bloc are that:

(1) it implies a reduction or elimination of barriers to trade, and

(2) it applies only to the member countries of the trade bloc, outside countries being discriminated against in their trade relations with trade bloc members.

AFTA ASEAN FREE TRADE AREA

Trade bloc agreement by the Association of Southeast Asian Nations that support local manufacturing in all ASEAN countries. Signed on 28 January 1992 in Singapore. Originally with 6 members Now 10 members 4 latecomers required to sign the AFTA agreement in order to join ASEAN but given longer time frames to meet AFTAs tariff reduction obligation.

ASEAN member countries

Originally (1992) Brunei Indonesia Malaysia Philippines Singapore Thailand Latecomers Myanmar (1997) Cambodia (1999) Laos (1997) Vietnam (1995)

AFTA ASEAN FREE TRADE AREA

Primary goals of AFTA:
1.

2.

Increase ASEANs competitive edge as a production base in the world market through the elimination, within ASEAN of tariffs and non-tariff barriers Attract more foreign direct investment to ASEAN.

Primary mechanism
Common Effective Preferential Tariffs (CEPT)

AFTA does not apply a common external tariff on imported goods. Each ASEAN member may impose tariffs on goods entering from outside ASEAN based on its national schedules.
However, goods originating within ASEAN members are to apply tariff rate of 0 -5%. (known as CEPT scheme). Besides that, it also eliminate the quantitative restrictions (import permit, quota) and other nontariff barriers among ASEAN member countries.

Products under CEPT Scheme

ASEAN members have option of excluding products from the CEPT in 3 cases:

1.
2. 3.

Temporary exclusions; Sensitive agricultural products; General exceptions.

Products under CEPT Scheme

Temporary exclusions Refer to products for which tariffs will ultimately be lowered to 0-5% BUT which are being protected temporarily by a delay in tariff reductions. Sensitive agricultural products Include commodities such as rice

General exceptions

Refer to products which an ASEAN member deems necessary for the protection of national security, public morals, the protection of human, animal or plant life and health and protection of articles of artistic, historic or archaeological value. Year 2010 all member have agreed enact 0 tariff rate on all imports (for original 6 members) and 2015 (for the 4 Latecomers countries).

Benefits AFTA to Malaysia

Develop greater trade and industrial linkages Help entrepreneurs market their products globally Enjoy cheaper importer raw materials

NAFTA NORTH AMERICAN FREE TRADE AGREEMENT

Implemented on 1st January 1994. Signed by the government of Canada, Mexico and United States Creating a trilateral trade bloc in North America. The worlds largest free trade area in terms of GDP. As of January 2008 all tariffs between the 3 countries were eliminated.

Purposes of NAFTA
1.

2.
3. 4. 5. 6.

Eliminate barriers to trade and facilitate the cross- border movement of goods and services. Promote conditions of fair competition Increase investment opportunities Provide protection and enforcement of intellectual property rights. Create procedures for the resolution of trade disputes Establish a framework for further trilateral, regional and multilateral cooperation to expand NAFTAs benefits.

Advantages of NAFTA
Benefit to Mexico poverty rates and real income rise (in the form of lower prices) Benefit to Canada improves Canada access for their goods & services to Mexico and US. Benefit to the exports activities of the 3 countries US agriculture exports to Mexico and Canada increase and US farm & food exports to Mexico also increase

Advantages of NAFTA

Positive impacts on imports activities For example US import products from NAFTA countries like fresh fruit, red meats, fresh vegetables, wine and beer. Eliminate trade barriers immediate tariff eliminations applied to a broad range of agriculture products. More than one half of US imports from Mexico and more than one third of US exports to Mexico.

Disadvantages

Rising level of inequality US and Mexico Canada too dependent on US as Canadas source if economy Canadian industries and companies are becoming less competitive increase employment in those profit companies but reduce those little small companies because US overpower them.

Disadvantages

US jobs were lost Labor in Mexico is cheaper so many manufacturing industries moved part of their production there. Unemployment rate is increasing in US. Effect to Mexicos environment because of competition, Mexico agriculture business used more fertilizers and other chemicals that lead to pollution.

Disadvantages

Mexicos farmers were put out of business Mexico lost 1.3 million farm jobs. NAFTA removed tariffs corn and other grains were exported to Mexico below cost. Rural Mexican farmers could not compete Mexicos reduce its subsidies to farmers.

Disadvantages

Maquiladora workers were exploited US owned companies employed Mexican workers near the border to cheaply assemble products for export to the US. Workers have no labor rights/health protections Workdays stretch out 12 or more hours If woman forced to take a pregnancy test when applying for a job.

EAEC EAST ASIA ECONOMIC CAUCUS

Also known as East Asia Economics Group (EAEG). Regional free trade zone proposed in 1990 by ex-Prime Minister Tun Dr. Mahathir bin Mohamad. EAEC was a reaction to ASEANs integration into the Asia-Pacific Economic Cooperation (APEC) EAEC was never put into action officially.

EAEC EAST ASIA ECONOMIC CAUCUS

Recently, the ASEAN + 3 rounds might be called the successor of EAEC. In 2005, due to Japans support of the agreement, ASEAN + 3 or APT agreed to include Australia, New Zealand and India.

The countries that were supposed to compose the EAEC

The 6 members of ASEAN Indonesia Malaysia China Philippines plus Japan Singapore South Korea Thailand Brunei

Objectives of EAEC
To establish a regional trade arrangement for the group To establish a political balance against the US and Japan in APEC To establish an economic balance against China and Japan in Asia A counter to emerging economic blocs in the west.

END OF CHAPTER 1