International Marketing

Unit 3

Unit 3

International Trade Environment

Structure: 3.1 Introduction Objectives 3.2 Classical Trade Theories Theory of mercantilism (1500-1700) Adam Smith theory (1800) Classical economic theory Theory of absolute advantage Theory of comparative advantage Factor endowment theory 3.3 Modern Trade Theories Modern investment theory International product life cycle theory 3.4 Trade Barriers Tariff barriers Non-tariff barriers 3.5 Quotas 3.6 Implications of Tariffs 3.7 Types of Agreements 3.8 General Agreement on Tariffs and Trade (GATT) 3.9 Functions and Objectives of WTO Functions of WTO Objectives of WTO 3.10 Implication of WTO on International Marketing 3.11 Indias Role in International Trade Theories Driving the economy Avoiding taxes Willing client Black bonds Voluntary Disclosure of Income Scheme (VDIS) 3.12 Summary 3.13 Terminal Questions 3.14 Answers

Sikkim Manipal University

Page No. 42

International Marketing

Unit 3

3.1 Introduction
Business is all about reaping profits from the opportunities available in the environment. Opportunity can manifest themselves in the form of short supply, excess demand, latent need or new, better and economical sources of supply or manufacturing. After learning the factors that affect the international marketing environment, in this unit you are going to learn the basic issues and aspects that concern the international trade. The international environment consists of all factors that operate at the transnational, cross-cultural level and across the border. The world is a global village today and it is getting closer and closer as far as business is concerned. For the sake of business, countries are burying their grievances and forging economic relationships. Erstwhile adversaries like America and Russia are today good friends and China and India are coming closer. India has signed a bilateral treaty with Sri Lanka, it is developing close economic relationship with South Africa and Brazil, and is planning to develop a road network in South East Asia. India is also a close ally of ASEAN, and is also a signatory of WTO which has a multilateral trade agreement among more than 100 nations. Objectives After studying this unit, you should be able to: Discuss the classical and modern trade theories Examine the effect of trade barriers and quotas List the implications of tariffs and types of agreements State the functions and objectives of WTO List the implications of WTO on international marketing Examine the role of India in international trade theories

3.2 Classical Trade Theories

Some important classical trade theories are discussed in following subsections. 3.2.1 Theory of mercantilism (1500-1700) Mercantilism was based on the notion that governments (not individuals who were deemed untrustworthy) should become involved in the transfer of
Sikkim Manipal University Page No. 43

International Marketing

Unit 3

goods between nations in order to increase the wealth of each national entity. Wealth was defined, however, as an accumulation of precious metals, especially gold. 3.2.2 Adam Smith theory (1800) Being influenced by individualism around the beginning of the nineteenth century and by the industrial revolution, Adam Smith emphasised the importance of individual freedom. He believed that if the individual was permitted to pursue his or her own interest without interference from the state, he or she would promote the well-being of all by the invisible hand. In his famous book The Wealth of Nations (published in 1776), Adam Smith put forward the theory that international trade would occur in situations where nations had absolute advantages over rival states, i.e. they could produce, with a given amount of labour and capital, larger outputs of certain items than any other country. 3.2.3 Classical economic theory This theory was based on the economic theory of free trade and enterprise that was evolving at the time. In 1776, in The Wealth of Nations, Adam Smith rejected as foolish the concept of gold being synonymous with wealth. The crux of the argument was that costs of production should dictate what should be produced by each nation or trading partner. Classical theory holds that expanding the labour pool leads to decline in the accumulation of capital per worker, lower worker productivity and lower incomes per person, eventually, causing stagnation or economic decline. 3.2.4 Theory of absolute advantage Principle of absolute advantage Adam Smith was the first economist to investigate, formally, the rationale behind foreign trade. In his book Wealth of Nations, Smith used the principle of absolute advantage as the justification for international trade. According to this principle, a country should export a commodity that can be produced at a lower cost than can other nations. Conversely, it should import a commodity that can only be produced at a higher cost than other nations. Principle of relative advantage One problem with the principle of absolute advantage is that it fails to explain whether trade will take place if one nation has absolute advantage for all products under consideration.
Sikkim Manipal University Page No. 44

International Marketing

Unit 3

According to Ricardos Principle of Relative (or Comparative) Advantage, a country may be better than other countries in producing many products but should only produce what it produces the best. 3.2.5 Theory of comparative advantage David Ricardo developed the important concept of comparative advantage in considering a nations relative production efficiencies as they apply to international trade. In Ricardos view, the exporting country should look at the relative efficiencies of production for both commodities and make only those goods it could produce most efficiently. 3.2.6 Factor endowment theory The Eli Heckscher and Bertil Ohlin theory of factor endowment addressed the question of the basis of cost differentials in the production of trading nations. They posited that each country allocates its production according to the relative proportions of all its production factor endowments land, labour and capital on a basic level, and, on a more complex level, such factors as management and technological skills, specialised production facilities, and established distribution networks. Self Assessment Questions 1. Adam Smith wrote the book Wealth of Nations, wherein he mentioned about the invisible hand. (True/False) 2. As per the Relative Advantage Theory, the country should produce wheat if it is the best thing it can do. (True/False)

3.3 Modern Trade Theories

In the last two decades, a new set of models has come into being, using he perspectives of game theory and theories of industrial organisation. While there is no one overarching model, this broad collection of theories and ideas has come to be known as strategic trade theories. Some important modern trade theories are discussed in following subsections. 3.3.1 Modern investment theory Other theories explain investing overseas by firms as a response to the availability of opportunities not shared by their competitors, that is, they take advantage of imperfections in markets and only enter foreign spheres of
Sikkim Manipal University Page No. 45

International Marketing

Unit 3

production when their comparative advantages outweigh the costs of going overseas. These advantages may be production, brand awareness, product identification, economies of scale, or access to favourable capital markets. These firms may make horizontal investments, producing the same goods abroad as they do at home, or they may make vertical investments, in order to take advantage of sources of supplies or inputs. Going a step further, some believe that firms within an oligopoly enter foreign markets merely as a competitive response to the actions of an industry leader and to equalise relative advantages. 3.3.2 International product life cycle theory This theory looks at the potential export possibilities of a product in four discrete stages in its life cycle. In the first stage, innovation, a new product is manufactured in the domestic arena of the innovating country and sold primarily in that domestic market. In the second stage the growth of the product sales tend to increase. Unfortunately, so does competition as other firms enter the arena and the product becomes increasingly standardised. As the product enters the third stage, maturity, exports from the home country decrease because of increased production in overseas locations. In the final stage of the product life cycle, the product enters a period of decline. This decline is often because new competitors have achieved levels of production high enough to affect scale economies in the production that are equivalent to those of the original manufacturing country. Activity 1: Explain the comparative advantage theory by taking practical figures from India and China. Self Assessment Questions 3. Many believe that firms within oligopoly enter foreign markets so as to equalize absolute advantages. (True/False) 4. The final stage in the product life cycle is the stage of downfall. (True/False)

Sikkim Manipal University

Page No. 46

International Marketing

Unit 3

3.4 Trade Barriers

Trade barriers are any of a number of government-placed restrictions on trade between nations. The most common sorts of trade barriers are things like subsidies, tariffs, quotas, duties, and embargos. Trade barriers may be: (i) Tariff barriers and (ii) Non-tariff or protective barriers. 3.4.1 Tariff barriers Tariffs have been one of the classical methods of regulating international trade. Tariffs may be referred to as taxes levied on the imports. Kinds of tariffs: Tariffs may be classified according to (i) the purpose of taxes, and (ii) how they are levied. 1. As far as the purpose of taxes is concerned, tariffs may be classified into two categories: (a) Revenue tariffs are basically intended to raise the Government revenue without intending to protect any industry of the country. It is levied at a fairly low rate and does not obstruct the free flow of imports. (b) Protective tariffs, on the other hand, aim at protecting the domestic industries and are generally levied at a very high rate and, therefore, obstruct the free flow of imports. Its main purpose is not to increase revenue but to provide a safeguard to the domestic industries against foreign competitions in the local market. 2. On the basis of method how tariffs are computed: Tariffs may be put into two categories: (a) Specific duties or tariffs are imposed on the basis of per unit of any identifiable characteristics of merchandise (b) Ad valorem tariffs are based on the value of imports and are charged in the form of a specific percentage of the value of goods. 3. Other tariffs: In order to protect the domestic industries, against competition, some other tariffs also imposed among them are important: (a) Anti-dumping duties: The Government of the importing country imposes customs duty on some goods at a very high rate to counteract this unfair competition. This duty is known as

Sikkim Manipal University

Page No. 47

International Marketing

Unit 3

anti-dumping duties. Such duties are charged in addition to the normal customs duty on the products. (b) Counteracting duties: These are similar to the anti-dumping duties, and are charged on goods imported from countries where the manufacturer exporter is paid, directly or indirectly, a subsidy as an incentive for export. 3.4.2 Non-tariff barriers Non-tariff barriers are a form of restrictive trade where barriers to trade are set up and take a form other than a tariff. Some of these non-tariff measures are: 1. Quantity restrictions, quotas and licensing procedures: Under quantity restrictions, the maximum quantity of different commodities, which would be allowed to be imported over a period of time from various countries, is fixed in advance. Quotas are very often combined with licensing system to regulate the flow of imports over the quota period as also to allocate them between various importers and supplying countries. Under this system a licence of a permit is to be obtained from the Government to import the goods specifying the quantity and the country from which to import, before concluding the contract with the supplier. 2. Foreign exchange restrictions: Under this system, the importer must be sure that adequate foreign exchange would be made available to him for the imports of goods by obtaining a clearance from the exchange control authorities of the country before concluding the contract with the supplier 3. Technical and administrative regulations: Another measure to regulate the imports is the imposition of certain standards of technical production, technical specifications etc. to which an importing commodity must conform. Such types of technical restrictions are impressed in case of pharmaceutical products, etc. Besides technical restrictions, administrative restrictions such as adherence to certain documentary procedure are adopted to regulate imports. 4. Consular formalities: A number of countries demand that shipping documents must accompany the consular documents such as certificate of origin, certified invoices, import certificates etc. Sometimes, it is also
Sikkim Manipal University Page No. 48

International Marketing

Unit 3

insisted that such documents should be drawn in the language of importing countries. In case the documentation is faulty or not drawn in the language of importing country, heavy penalties are imposed. Fees charged for such documentation are quite heavy. 5. State Trading: In most of the socialistic countries, foreign trade, i.e., import and export transactions, is exclusively handled or canalized by certain state agencies. Separate state agencies are set up for each class of products. These agencies carry on the international trade strictly according to the Government policies. 6. Preferential arrangements: With due devolvement of multilateral trading system, a few member countries agree to a small advantageous group for their mutual benefit. The member countries of the group negotiate and arrive at a settlement of preferential tariff rate to carry on trade amongst them. These rates are much lower than ordinary tariff rates and applicable only to the member nations of the small group. Such type of preferential arrangements is outside the purview of the GATT. Some of the small groups are EEC, ASEAN, LAFTA, etc. Self Assessment Questions 5. Revenue tariffs imposed are very high and tend to disrupt the flow of imports into country. (True/False) 6. SAFTA, ASEAN, SAARC etc are preferential agreements formed to regulate trade and are under the control of GATT. (True/False) 7. Tariffs that are imposed to benefit the domestic industries are called protective tariffs. (True/False)

3.5 Quotas
A quota may be defined as the imposition of an absolute limit on the physical quantity of value of goods or services that may be traded over a set period of time. Quotas can be imposed on imports as well as exports. Import and export quotas may be global (universal, non-discriminatory) if they apply to all countries in respect of any commodity or group of commodities; or they may be selective (discriminatory), if the restrictions imposed relate to some of the exporting countries and not to others.

Sikkim Manipal University

Page No. 49

International Marketing

Unit 3

Again, there may be a tariff quota wherein the rate of tariff imposed increases when the total quantity imported exceeds a certain amount and at some later point, further imports may be completely prohibited. If the supply and demand curves of a country are not inelastic, and if the quota is set at the volume of imports which would result from a given tariff duty, the protective, consumption and redistribution effects of the quota will be similar to those of the tariff. The Figures 3.1 and 3.2 illustrate the quota effects.

Figure 3.1

In Figures (3.1, 3.2) P is the equilibrium price line for both countries A and B. At this price, demand is OA and supply is OC, in country A. Thus, it exports AC amount of the commodity traded, to country B, whose imports, ad, just equal to it, and make up the gap between its supply Oak and demand Do then, for whatever reason, country B, decides to limit its imports of the commodity to a smaller quantity equal to be and so imposes a quota restriction, which may be global. This has the effect of raising the equilibrium
Sikkim Manipal University Page No. 50

International Marketing

Unit 3

price from P to P1 domestic production (supply) from Oa to Ob, and domestic demand is reduced from Od to Oc. In the exporting country A, as may be expected, production (supply) decreases from OC to OB. There is no change in price because supply is elastic.

Figure 3.2

Thus, it can be seen from Figure 3.2 (relating to country B) that, like tariffs, quotas raise the domestic price of the commodity reduce imports and the quantity demanded, increase, domestic production (supply) and redistribute real incomes from consumers to producers. But the revenue effect of a quota may be different. In the case of a tariff, a revenue equal to the area of gh will accrue to the government. What are the costs associated with quotas? Firstly, quotas are more arbitrary than tariffs, in-as-much as they do violence to the market mechanism and the price mechanism. The danger is greater when non-economic motives induce quota policy and insufficient and/or dishonest administration implements it. This may not only distort the price
Sikkim Manipal University Page No. 51

International Marketing

Unit 3

and market mechanisms but also open the floodgates of graft, which may introduce irrationality in economic decision-making in unpredictable ways. Secondly, being an administered system of allocation of imported resources, the quota systems might lead to collusion among importers, which may spread to other related areas of economic power. This, however, is a drawback quotas have in common with tariffs. Finally, exchange control measures may be used to influence trade. Since, generally, importers have to pay in foreign currencies, this requires conversion of domestic currency into foreign currency, e.g. Indian rupees into British pounds or U.S. dollars. Governments strictly regulate conversion of currencies. Activity 2: Name the regional organisations that act as non-tariff barriers. Also name the member countries of those organisations. Self Assessment Questions 8. Quota is a kind of non-tariff barrier, levied to regulate the quantity of imports. (True/False) 9. Quotas are generally imposed on imports of goods whose supply is elastic. (True/False)

3.6 Implications of Tariffs

A tariff may be defined as a charge levied on goods as they enter a country by crossing the national customs frontier. Tariffs are thus intended to regulate imports.

Sikkim Manipal University

Page No. 52

International Marketing

Unit 3

Y P R I C E D S

E ......................................................................................... P11 F P1 P A B C D G D

S O Q Q1 QUANTITY Q2 Q3

Figure 3.3: Effect of a Tariff on Production

We can assess the effect of a tariff by examining its implication for a product or the effect of a general duty on all (or most) imports. Figure 3.3 analyses the effects of a tariff in partial equilibrium context. Dd and Ss represent the demand the supply curves. OP represents the pre-tariff price level, at which OQ is produced domestically and quantity QQ3 is imported from abroad to meet the total demand (consumption), which is OQ3. Then a tariff is levied which raised price level from to P. This has the effect of raising domestic output from OQ to OQ1. But this output is raised by diverting resources from other forms of the area A represents gain to the industry due to protection (redistribution effect), the area B represents a dead loss due to transference of resources at a higher cost and perhaps decreasing return. It is known as the protective effect. If, however, the tariff is raised as high as OP, it will prove to be prohibitive for imports. The domestic supply will equal domestic demand but the cost in terms of consumption and protective effects will increase and the revenue to the state from imports will fall to zero.
Sikkim Manipal University Page No. 53

International Marketing

Unit 3

Consumption effects The consumption effect of a tariff is invariably to reduce aggregate consumption, except when the intent of the tariff is to protect a nascent industry, which has the potential to grow but would not otherwise, due to market imperfections, lack of external economies or difficulties, lack of natural resources endowment. Revenue effects Government raises revenue in a variety of ways for a variety of purposes. Even in economically advanced countries import duties play an even more significant role in fiscal policy and planning. It is necessary for these countries to regulate imports according to a certain order of planned priorities to correct imbalance in their balance of payments accounts, to curb certain undesirable types of consumption and to raise revenue for financing development and other expenditure. Redistributive effect In Figure 3.3 DPG represents consumers surplus in the pre-tariff period, when price is OP. After tariff price rises to OP1, and consumers surplus is reduced to DPF. The consumers surplus represented by the area PP1 PG is redistributed among producers, and as such, indicates the magnitude of redistribution effect in the economy. However, Figure 3.3 shows the redistribution of consumers surplus among the producers of a single commodity in the economy. Terms of trade effect The effect of a tariff on the terms of trade depends on whether its burden falls wholly on the exporting/importing country or is shared by both. If the exporting country pays whole or a part of a tariff, the importing country will be able to get its supply cheaper. Figures 3.4 and 3.5 illustrate how it works:

Sikkim Manipal University

Page No. 54

International Marketing

Unit 3

PRICE S

S P P1

P1

}
Tariff QUANTITY

D D COUNTRY A COUNTRY B

Figure 3.4: Elastic Supply in Exporting Country

S COUNTRY A COUNTRY B

P1 P P1 D Tariff D P

QUANTITY

Figure 3.5: Inelastic Supply in Exporting Country

In the above figures, line PP represents price before tariff and P1P1 after tariff has been imposed. The elasticities of demand and supply in the two countries are such that the impact of tariff is shared by both the countries, but in different proportions. The distance between the town portions of the
Sikkim Manipal University Page No. 55

International Marketing

Unit 3

dotted line P1P1 indicated the total impact on the price while in which the two countries share the change in price. In Figure 3.4, the supply in the exporting country-A is elastic relatively to demand in importing country-B. So the major proportion of the tariff is absorbed by the higher price. But, a portion of the tariff is also absorbed by the exporting country-A, which lowers its export price, in order o achieve a higher level of exports than would be possible at an even higher price which would prevail if the entire tariff duty is absorbed by the importing country-B. The burden of higher price, which the consumers have to pay in country-B, is mitigated to the extent of the revenue effect, part of which is also borne by the exporting country. Employment/income effect In general, tariff duties reduce imports by raising their price. This obliges consumers to transfer their demand to domestic substitutes for import goods. This will raise employment and incomes in the domestic economy. This, however, assumes that exporting countries do not retaliate. But retaliation can take place, because increase in national income and employment is achieved at the expense of those countries whose exports are reduced. Balance of payment effect The relationship between balance of payments and tariffs is neither simple nor direct. The simplest statement is that raising tariffs improves the balance of payments by reducing imports but leaving the exports unaffected. By the same reasoning, if tariffs are reduced by encourage imports. This is why less developed countries argue for a reduction of tariffs by the more developed countries. Competition effect The competitive effect of a tariff is really an anticompetitive effect; competition is stimulated by tariff removal. Formation of ECM (European Common Market) is said to have enlarged markets and economies of scale, some say that its most significant result was breaking of monopolies.

Sikkim Manipal University

Page No. 56

International Marketing

Unit 3

Self Assessment Questions 10. The ____________ effect of a tariff is invariably to reduce aggregate consumption. 11. The export control measures will effect the export of a home country only if they are ______________. 12. The most significant achievement of European Common Market is breaking of _______________.

3.7 Types of Agreements

There are mainly three types of agreements. They are: Commodity agreement Commodity agreements are international agreements designed to stabilise commodity prices in the interest of producers and consumers. They can include mechanisms to influence market prices by adjusting export quotas and production when market prices reach certain trigger price levels. OPEC, Association of Natural Rubber Producing Countries and International Coffee Organisation are few international commodity agreements. Bilateral agreement Bilateral Trade Agreements are between on two nations at a time. They are fairly easy to negotiate, and give those two nations favored trading status between each. International trade of communist bloc countries is organised almost entirely on the basis of bilateral agreements with other countries because of the requirements of centralized planning.. Multilateral agreements Multilateral trade agreements are between many nations at one time. For this reason, they are very complicated to negotiate, but are very powerful once all parties sign the agreement. The primary benefit of multilateral agreements is that all nations get treated equally, and so it levels the playing field, especially for poorer nations that are less competitive by nature. Self Assessment Questions 13. Many countries have resorted to _____________ agreements to deal with the problem of regulation of foreign currency. 14. ____________ trade agreements are formed between more than two countries at a time.

Sikkim Manipal University

Page No. 57

International Marketing

Unit 3

3.8 General Agreement on Tariffs and Trade (GATT)

GATT is a multilateral treaty among the member countries that lays down certain agreed rules for conducting international trade. The member countries contribute together to four-fifth of the total world trade. It is interesting to note that underdeveloped countries form a sizable majority in GATT. The basic aim of GATT is to liberalise world trade negotiations among members countries and, for the last forty seven years, it has been concerned with negotiations on the reduction, even the elimination of trade barriers tariff and non-tariff between countries and improving trade relations so that the international trade flows freely and swiftly. It also provides a forum to member countries to discuss their trade problems and negotiate to enlarge their trading opportunities. Activity 3: Find out more about GATT and the Uruguay Round. Self Assessment Questions 15. The member countries of ___________ contribute together to four-fifth of the total world trade. 16. The basic aim of GATT is to relax the ___________ among members countries.

3.9 Functions and Objectives of WTO

The World Trade Organisation (WTO) was established on 1st January 1995. The functions and objectives of WTO are given in following subsections. 3.9.1 Functions of WTO The agreement establishing WTO provides that it should perform the following four functions: First, it shall facilitate the implementation, administration and operation of the Uruguay Round legal instruments and of any new agreements that may be negotiated in the future. Second, it shall provide a forum for further negotiations among member countries on matters covered by the agreements as well as on new issues falling within its mandate.
Sikkim Manipal University Page No. 58

International Marketing

Unit 3

Third, it shall be responsible for the settlement of differences and disputes among its member countries. Fourth, it shall be responsible for carrying out periodic reviews of the trade policies of its member countries.

3.9.2 Objectives of WTO In its preamble, the agreement establishing the World Trade Organisation reiterates the objectives of GATT. These are: raising standards of living and incomes, ensuring full employment, expanding production and trade and optimal use of the worlds resources. The preamble extends these objectives to services and makes them more precise. It introduces the idea of sustainable development in relation to the optimal use of the worlds resources, and the need to protect and preserve the environment in a manner consistent with various levels of national economic development. It recognises that there is a need for positive efforts to ensure that developing countries, and especially the least developed among them, secure a better share of the growth in international trade. Self Assessment Questions 17. WTO was established on 1st of January _______________. 18. _____________ introduced the concept of sustainable development in order to preserve environment along with economic development.

3.10 Implication of WTO on International Marketing

The implications are as follows: 1. The System Helps to Keep the Peace: helping trade to flow smoothly and providing countries with a constructive and fair outlet for dealing with disputes over trade issues. It is also an outcome of the international confidence and cooperation that the system creates and reinforces. The WTO system helps resolve these disputes peacefully and constructively. 2. Freer Trade Cuts the Cost of Living: The WTOs global system lowers trade barriers through negotiation and applies the principle of nondiscrimination. The result is reduced costs of production (because imports used in production are cheaper) and reduced prices of finished goods and services and ultimately a lower cost of living.

Sikkim Manipal University

Page No. 59

International Marketing

Unit 3

3. Trade Raises Incomes: Lowering trade barriers allows trade to increase, which adds to incomes national incomes and personal incomes. But some adjustment is necessary. The fact that there is additional income means that resources are available for governments to redistribute. 4. Trade Stimulates Economic Growth and that can be Good News for Employment: Trade clearly has the potential to create jobs. In practice there is often factual evidence that lower trade barriers have been good for employment. But the picture is complicated by a number of factors. Nevertheless, alternative protectionism is not the way to tackle employment problems. 5. The Basic Principles make the System Economically more Efficient and they Cut Costs: Many of the benefits of the trading system are more difficult to summarise in numbers but they are still important. They are the result of essential principles at the heart of the system and they make life simpler for the enterprises directly involved in trade and for the producers of goods and services. Self Assessment Questions 19. The WTOs ___________ lowers trade barriers through negotiation and applies the principle of non-discrimination. 20. As per evidence, lower trade barriers are __________ for employment.

3.11 Indias Role in International Trade Theories

India is one of the countries where some of its corrupt people convert their black money into white money. India has enormous underground or black economy built on the twin foundations of high taxes and the states intricate system of economic regulations and controls cemented together with a large, underpaid and, therefore, bribable army of civil servants. It grows every time a businessman evades a tax, pays a bribe or edges around government regulations. Let us learn some more about these in the following subsections. 3.11.1 Driving the economy Indians who indulge in black economy, those with incomes to hide or the means to bribe, probably account for less than 10 per cent of the population. But it is those 10% Indians who make the entire economy work. Few business transactions in India are totally above board.
Sikkim Manipal University Page No. 60

International Marketing

Unit 3

Black money can be the undeclared fortune won on the stock market and the interest that fortune earns in black. It can be the money that buys an apartment or a dinner at a fancy hotel. It is the soiled bill that a bureaucrat collects as bribe and the businessman and industrialist gets in return for the bribe. 3.11.2 Avoiding taxes The government admits that, in total, Indians hide more income than they declare but on an average the authorities convict only sixteen people a year out of 4.5 million Indians eligible to pay income tax. The black economy also feeds on the maze of government rules and restrictions. When a businessman has black money, but needs white for an above board investment, the stockbroker does the reverse. He creates a portfolio of fictitious, money-winning transactions. 3.11.3 Willing client The businessman can go to another kind of broker who matches him up with a willing corporate client. For a fee, the broker composes a portfolio of correspondence, sometimes going back years that document the commissions paid to the individuals. The corporation issues cheques to the businessman equal to those commissions: the businessman repays the corporation in black cash. The corporation gets a small commission and reduces the tax liability. The individual, at a price, turns his black cash to white. 3.11.4 Black bonds The government even issues bonds to soak up black cash, promising that no one will ask where from money came. Despite meagre interest rates, $ 770 million of the bonds have been sold since 1981 (Source: Anthony Spaeth, Wall Street Journal, 1989). 3.11.5 Voluntary Disclosure of Income Scheme (VDIS) In 1998, the government declared a scheme known as Voluntary Disclosure of Income Scheme (VDIS) under which individuals declared their black income and paid income tax at the rate of 30 per cent to convert it into white. The source of this income need not be given and nobody would be prosecuted for amassing such huge black wealth.

Sikkim Manipal University

Page No. 61

International Marketing

Unit 3

Activity 4: Find out the cases where WTO played an important role in promoting peace and stimulating economic growth. Self Assessment Questions 21. In a ___________ economy, there is an attempt to save taxes by hiding income. 22. Under __________ scheme, people came out themselves to disclose their black income and pay taxes.

3.12 Summary
In classical trade theory, the factors of production are assumed to remain constant for each country because of the assumed mobility of such resources between countries. Every country has to regulate its own international trade mainly due to: (i) Improving its balance of trade and balance of payment position; (ii) Protecting its own industries against competition in the international markets or in domestic markets from foreign products; and (iii) Exploiting its manpower and natural resources to the maximum extent possible so that the countrys economic development may proceed at a faster speed. For the purpose of taxes tariffs may be classified into two categories, Revenue tariffs and Protective tariffs. Based on the method of computation, tariffs may be put into two categories, Specific tariffs, Ad valorem tariffs; and Anti-dumping duties. International trade of communist bloc countries is organised almost entirely on the basis of bilateral agreements with other countries because of the requirements of centralised planning. It can restrict the use of an imported article by raising its domestic market price the difference between its import price and domestic market price, being the states revenue. Likewise, the state can reduce the domestic price even lower than the import price the difference being a subsidy to encourage its consumption. Glossary Trade Barriers: they are any of a number of government-placed restrictions on trade between nations
Sikkim Manipal University Page No. 62

International Marketing

Unit 3

Anti-dumping Duties: government of the importing country imposes these duties on some goods at a very high rate to counteract unfair competition Counteracting Duties: they are charged on goods imported from countries where the manufacturer exporter is paid, directly or indirectly, a subsidy as an incentive for export. Quotas: absolute limit on the physical quantity of value of goods or services that may be traded over a set period of time Commodity Agreements: agreements designed to stabilise commodity prices in the interest of producers and consumers Bilateral Agreements: agreements between on two nations at a time that give those two nations favored trading status between each

3.13 Terminal Questions

1. Differentiate between absolute advantage, relative advantage and comparative advantage. 2. Discuss the Modern Investment theory and International Product Life Cycle theory. 3. What are trade barriers? Compare tariff and non-tariff barriers. 4. What do you mean by Quotas? How do they affect international trade? 5. What implications does the WTO hold for the international marketer?

3.14 Answers
Answers to Self Assessment Questions 1. True 2. True 3. False 4. True 5. False 6. False 7. True 8. True 9. False 10. Consumption 11. Discriminatory 12. Monopolies
Sikkim Manipal University Page No. 63

International Marketing

Unit 3

13. 14. 15. 16. 17. 18. 19. 20. 21. 22.

Bilateral Multilateral GATT Trade negotiations 1995 WTO Global system Good Black Voluntary Disclosure of Income

Answers to Terminal Questions 1. Refer to 3.2 All these principles relate to production problem but have different point of views. 2. Refer to 3.3 Both these theories are modern strategic theories that we can relate to the current business scene. 3. Refer to 3.4 Trade barriers are government placed restrictions on trade between two nations. 4. Refer to 3.5 Quotas are absolute restrictions on physical quantity of goods over a period. 5. Refer to 3.10 WTO helps in promoting peace in trading environment and also follows the policy of non-discrimination. Mini-Case International Coffee Organisation The International Coffee Organisation (ICO) is the main intergovernmental organization for coffee, bringing together producing and consuming countries to tackle the challenges facing the world coffee sector through international cooperation. It was set up in London in 1963 under the auspices of the United Nations because of the great economic importance of coffee. It makes a practical contribution to the world coffee economy and to improving standards of living in developing countries by enabling government representatives to exchange views and coordinate coffee policies and priorities at regular high level meetings for: improving coffee quality through the coffee quality improvement programme and specific projects, increasing world coffee consumption
Sikkim Manipal University Page No. 64

International Marketing

Unit 3

through innovative market development activities, initiating coffee development projects to improve quality and marketing, encouraging a sustainable world coffee economy, working closely with the private sector through a 16 strong Private Sector Consultative Board which tackles issues such as food safety, providing objective and comprehensive information on the world coffee market, and ensuring transparency in the coffee market through statistics.

Question Do you think such agreements, like this one, are effective and solve the purpose for which they are created? Justify Hint Answer: These agreements focus on a particular commodity and hence, useful in promoting that commodity. Source: http://www.ico.org/

Sikkim Manipal University

Page No. 65