Q6.

Discuss NAFTA/ EU/ ASEAN/ SAARC/ MERCUSOR Mercosur Mercosur is a regional trade agreement among Argentina, Brazil ,Paraguay & Uruguay founded in 1991 by the Treaty of Asuncin, which was later amended and updated by the 1994 Treaty of Ouro Preto. Its purpose is to promote free trade and the fluid movement of goods, people, and currency. Bolivia, Chile, Colombia, Ecuador and Peru currently have associate member status. Venezuela signed a membership agreement on 17 June 2006, but before becoming a full member its entry has to be ratified by the Paraguayan and the Brazilian parliaments. The bloc comprises a population of more than 263 million people, and the combined Gross Domestic Product of the full-member nations is in excess of US$2.78 trillion a year (Purchasing power parity, PPP) according to International Monetary Fund (IMF) numbers, making Mercosur the fifth largest economy in the World. Objectives of MERCOSUR Free transit of production goods, services and factors between the member states with inter alia, the elimination of customs rights and lifting of nontariff restrictions on the transit of goods or any other measures with similar effects; Fixing of a common external tariff (TEC) and adopting of a common trade policy with regard to nonmember states or groups of states, and the coordination of positions in regional and international commercial and economic meetings; Coordination of macroeconomic and sectorial policies of member states relating to foreign trade, agriculture, industry, taxes, monetary system, exchange and capital, services, customs, transport and communications, and any others they may agree on, in order to ensure free competition between member states; and The commitment by the member states to make the necessary adjustments to their laws in pertinent areas to allow for the strengthening of the integration process. The Asuncion Treaty is based on the doctrine of the reciprocal rights and obligations of the member states. MERCOSUR initially targeted free-trade zones, then customs unification and, finally, a common market, where in addition to customs unification the free movement of manpower and capital across the member nations' international frontiers is possible, and depends on equal rights and duties being granted to all signatory countries. During the transition period, as a result of the chronological differences in actual implementation of trade liberalization by the member states, the rights and obligations of each party will initially be equivalent but not necessarily equal. In addition to the reciprocity doctrine, the Asuncion Treaty also contains provisions regarding the most-favored nation concept, according to which the member

nations undertake to automatically extend--after actual formation of the common market--to the other Treaty signatories any advantage, favor, entitlement, immunity or privilege granted to a product originating from or intended for countries that are not party to ALADI. SAARC The South Asian Association for Regional Cooperation (SAARC) is an economic and political organization of eight countries in Southern Asia. It was established on December 8, 1985 by India, Pakistan, Bangladesh, Sri Lanka, Nepal, Maldives and Bhutan. In April 2007, at the Association's 14th summit, Afghanistan became its eighth member.Sheelkant Sharma is the current secretary & Mahinda Rajapaksa is the current chairman of SAARC which is headquartered at Kathmandu. Objectives of SAARC:

to promote the welfare of the peoples of South Asia and to improve their quality of life; to accelerate economic growth, social progress and cultural development in the region and to provide all individuals the opportunity to live in dignity and to realize their full potential;

to promote and strengthen collective self-reliance among the countries of South Asia; to contribute to mutual trust, understanding and appreciation of one another's problems; to promote active collaboration and mutual assistance in the economic, social, cultural, technical and scientific fields; to strengthen cooperation with other developing countries; to strengthen cooperation among themselves in international forums on matters of common interest; and to cooperate with international and regional organizations with similar aims and purposes.

Free Trade Agreement Over the years, the SAARC members have expressed their unwillingness on signing a free trade agreement. Though India has several trade pacts with Maldives, Nepal, Bhutan and Sri Lanka, similar trade agreements with Pakistan and Bangladesh have been stalled due to political and economic concerns on both sides. India has been constructing a barrier across its borders with Bangladesh and Pakistan. In 1993, SAARC countries signed an agreement to gradually lower tariffs within the region, in Dhaka. Eleven years later, at the 12th SAARC Summit at Islamabad, SAARC countries devised the South Asia Free Trade Agreement which created a framework for the establishment of a free trade area covering 1.4 billion people.

This agreement went into force on January 1, 2006. Under this agreement, SAARC members will bring their duties down to 20 per cent by 2007. The last summit (15th) was held in Colombo where four major agreements - the SAARC development fund, the establishment of a SAARC standard organization, the SAARC convention on mutual legal assistance in criminal matters, and the protocol on Afghanistan's admission to the South Asia Free Trade Agreement (SAFTA) were adopted with emphasis on region-wide food security. NAFTA The North American Free Trade Agreement (NAFTA) is a trilateral trade bloc in North America created by the governments of the United States, Canada, and Mexico. In terms of combined purchasing power parity GDP of its members, as of 2007 the trade bloc is the largest in the world and second largest by nominal GDP comparison. It also is one of the most powerful, wide-reaching treaties in the world. The North American Free Trade Agreement (NAFTA) has two supplements, the North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC). Implementation of the North American Free Trade Agreement (NAFTA) began on January 1, 1994. This agreement will remove most barriers to trade and investment among the United States, Canada, and Mexico. Under the NAFTA, all non-tariff barriers to agricultural trade between the United States and Mexico were eliminated. In addition, many tariffs were eliminated immediately, with others being phased out over periods of 5 to 15 years. This allowed for an orderly adjustment to free trade with Mexico, with full implementation beginning January 1, 2008. The agricultural provisions of the U.S.-Canada Free Trade Agreement, in effect since 1989, were incorporated into the NAFTA. Under these provisions, all tariffs affecting agricultural trade between the United States and Canada, with a few exceptions for items covered by tariff-rate quotas, were removed by January 1, 1998. Mexico and Canada reached a separate bilateral NAFTA agreement on market access for agricultural products. The Mexican-Canadian agreement eliminated most tariffs either immediately or over 5, 10, or 15 years. U.S. trade with Mexico and Canada has grown more rapidly than total U.S. trade since 1994. The automotive, textile, and apparel industries have experienced the most significant changes in trade flows, which may also have affected employment levels in these industries. The five major U.S. industries that have high volumes of trade with Mexico and Canada are automotive industry, chemicals and allied products, computer equipment, textiles and apparel, and microelectronics.

The effects of NAFTA, both positive and negative, have been quantified by several economists. Some argue that NAFTA has been positive for Mexico, which has seen its poverty rates fall and real income rise (in the form of lower prices, especially food), even after accounting for the 19941995 economic crisis. Others argue that NAFTA has been beneficial to business owners and elites in all three countries, but has had negative impacts on farmers in Mexico who saw food prices fall based on cheap imports from U.S. agribusiness, and negative impacts on U.S. workers in manufacturing and assembly industries who lost jobs. Critics also argue that NAFTA has contributed to the rising levels of inequality in both the U.S. and Mexico. EU The European Union (EU) is a political and economic union of 27 member states, located primarily in Europe. The EU generates an estimated 30% share of the world's nominal gross domestic product (US$16.8 trillion in 2007). Thus EU presents an enormous export and investor market that is both mature and sophisticated. The EU has developed a single market through a standardised system of laws which apply in all member states, guaranteeing the freedom of movement of people, goods, services and capital. It maintains a common trade policy. Fifteen member states have adopted a common currency, the euro. Objectives of the EU: Its principal goal is to promote and expand cooperation among members states in economics, trade, social issues, foreign policies, security, defense, and judicial matters. Another major goal of the EU is to implement the Economic and Monetary Union, which introduced a single currency, the Euro for the EU members. The single market refers to the creation of a fully integrated market within the EU, which allows for free movement of goods, services and factors of production. The EU, in conjunction with Member States, has a number of policies designed to assist the functioning of the market. Some of the policies are given below: Competition Policy: The main competition lied in energy and transport sector. The union designed this strategy to prevent price fixing, collusion (secret agreement), and abuse of monopoly. Free movement of goods: A custom union covering all trade in goods was established and a common customs tariff was adopted with respect to countries outside the union. Services: Any member nation has a right to provide services in other Member States. Free movement of persons: Any citizen of EU member state can live work in any other EU member state Capital: There are no restrictions on the movement of capital and on payments with the EU and between member states and third countries.

Trade between the European Union and India India was one of the first Asian nations to accord recognition to the European Community in 1962. The EU is Indias largest trading partner and biggest source of FDI. It is a major contributor of developmental aid and an important source of technology. Over the years, EU India trade has grown from 4.4 bn to 28.4 bn US$. Top items of trade between India and EU Indias exports to EU Textile and clothing Leather and leather products Gemstones and jewelery Agriculture products Chemical products % 35 25 12 10 9 Indias Imports from EU Gemstones and jewellery Power generating equipment Chemical products Office machinery Transport equipment % 31 28 15 10 6

India is EUs 17th largest supplier and 20th largest destination for exports. Tariff and non-tariffs have been reduced, but compared to International standards they are still high. Under the Bilateral trade between India and EU, it accounts for 26% of I ndias exports and 25% of its imports. The European Union (EU) and India agreed on September 29,2008 at the EU-India summit in Marseille, France's largest commercial port, to expand their cooperation in the fields of nuclear energy and environmental protection and deepen their strategic partnership.

Trade between India and the 27-nation EU has more than doubled from 25.6 billion euros ($36.7 billion) in 2000 to 55.6 billion euros last year, with further expansion to be seen.

ASEAN The Association of Southeast Asian Nations or ASEAN was established on 8 August 1967 in Bangkok by the five original Member Countries, namely, Indonesia, Malaysia, Philippines, Singapore, and Thailand. Brunei Darussalam joined on 8 January 1984, Vietnam on 28 July 1995, Laos and Myanmar on 23 July 1997, and Cambodia on 30 April 1999. OBJECTIVES The ASEAN Declaration states that the aims and purposes of the Association are: (i) To accelerate the economic growth, social progress and cultural development in the region through joint endeavors.

(ii)

To promote regional peace and stability through abiding respect for justice and the rule of law in the relationship among countries in the region and adherence to the principles of the United Nations Charter.

(iii)

To maintain close cooperation with the existing international and regional organizations with similar aims.

WORKING OF ASEAN The member countries of ASEAN have Preferential Trading Arrangements (PTA), which reduces tariffs on products traded among member countries. In 1992, ASEAN developed a Common Effective Preferential Tariffs (CEPT) plan to reduce tariffs systematically for manufactured and processed products. The members have also established a series of co-operative efforts to encourage joint participation in industrial, agricultural and technical development projects and to increase foreign investments in their economies. These efforts include an ASEAN finance corporation, the ASEAN Industrial Joint Ventures Programme (AJIV) etc. ASEAN nations have introduced some programmes for greater diversification in their economies. India and ASEAN India is interested in maintaining close economic relations with the members of ASEAN, as these countries are closer to India. The ASEAN countries are offering co-operation to India in the field of trade, investment, science and technology and training of personnel. Also, Indias trade with ASEAN countries is satisfactory in recent years.

Q7. Effect of Current Economic Meltdown on International Business 1. Slower global growth: Global growth stood at 5 percent in 2007, but the IMF expects world growth to slow to 3 percent in 2009 - 0.9 percentage points lower than forecasted in July 2008. 2. Economic contraction in some countries: In G7 countries except for the United States and Canada, GDP growth was slower in Q2 of 2008 compared to Q1. Three major European economies (Italy, France and Germany) experienced negative GDP growth in Q2, and forecasts are for a continued decline in Q3. The IMF forecasts around 0 percent growth for advanced economies in 2009. 3. Depth of slowdown: It is observed that economic slowdowns, preceded by financial stress tend to be more severe. Although employment has contracted in several countries in recent months, it has not been as severe as that during 1990-91. 4. Financing challenges for governments: State and local governments may be faced with financial crisis. Even administrative costs may be difficult to come by. The governments would be hard pressed for funds for guarantees and development work. For e.g. In the

case of Iceland the banking sector has assets of around 300% of GDP, something no government could ever guarantee, at least not on a short-term basis. 5. Rising unemployment: According to IMF, unemployment in the advanced economies will rise from 5.7 percent in 2008 to 6.5 percent in 2009. 6. Large employment losses in sectors: Some sectors like construction, real estate services will experience disproportionate employment declines. In addition there will be significant job losses in the financial sector. 7. Reduced world trade volume: According to the IMF, the world trade will grow only at the rate of 1.9% as against the earlier estimate of 4.1% for 2009. A drop in exports, as well as capital inflow, may trigger a falloff in investments. 8. Rising income insecurity and disproportionate impact on low-income groups: As stock markets around the world have eroded trillions of dollars in wealth and rolled back some of the investment gains of the past 5 years, the investment and retirement savings of many individuals have lost significant value. There is a risk that low-income countries and lower-income groups within countries will bear the brunt of challenges, as the most poor are the most defenseless, says World Bank President Robert Zoellick. 9. Return to Tariff and Non-Tariff Barriers: Developed economies in order to ward off unemployment and financial crisis may erect barriers to free trade. This might start a local business environment. For e.g. President-elect Barrack Obama has already announced his intention to reduce outsourcing from US by 30%. 10. Surplus Production Capacities: In line with demand destruction, many branded products may face surplus capacities. For e.g. Car, Steel & Aircrafts manufacturers are already staring at excess capacity. 11. Increase in Government Controls: In order to bail out sinking Corporates the governments, would buy out or control the operations of large companies. For e.g. AIG and Citibank 12. Impact on India: a. BPO Operations: India is likely to face a severe crunch on the IT and ITes services, rendered by Indian BPO Companies. b. Increase in Trade Deficit: Already in the last quarter, Indias trade deficit has grown where exports are not meeting the set targets while imports continue to grow. c. Falling Currency: as the demand for dollars increases the Indian rupee is likely to weaken. The rupee has already depreciated to Rs. 50 a dollar. Pressure on Services Sector: As the demand for services is destroyed, these sunshine industries such as BPOs, Airlines, and Telecommunication etc. will face salary and employment cutbacks.

Q2. Influence of PEST Factors on International Business Any business is affected by its external environment. The major macroeconomic factors in the external environment that affect the business are political, environmental, social and technological. A. Political Environment The political environment of a country greatly influences the business operating in those countries or business trading with those countries. The success and growth of international business depends on the stable, collaborative, conducive and secure political system in the country. The following factors affect the political environment in a country. 1. Tax Policy: The tax policy of a country affects the profitability of the business there. The Corporate Taxation laws affect the profitability directly. The direct taxation laws also affect the business because it influences consumer spending. The structure of indirect taxation in a country like its excise duty structure, customs and sales tax greatly affects the input costs of a business. For e.g. Countries like UAE have very low direct taxation levels inducing great spending and hence trading and marketing based business are successful. But due to very high indirect taxation levels the manufacturing business is not very successful. 2. Government support: One of the most important political factor is the Government support to international businesses. Business can be successful only if the local government provides support in terms o infrastructure, license clearing if required, transparent policy and quick dispute resolution mechanism. Also the nature of the political system i.e. democracy, communism etc. in the country influences the Government support. For e.g. the RBI has provided single window clearance for FDI and hence has greatly increased the FDI levels in our country. 3. Labor Laws: the labor laws in a country affect the viability of a business in that country. The pension laws also play a critical role especially in cross border acquisitions. Many businesses had to be withdrawn or closed because of the labor unrest in the country. For e.g.: Withdrawal of Premier Automobiles due to union strikes in our country. The problems faced by doctors and nurses in UK due to the restrictive laws in that country. 4. Environmental policy: The countries environmental policy (under the Kyoto Protocol or otherwise) affects many business like chemicals, refineries and heavy engineering. 5. Tariffs and duty structure: The level of duties and tariffs that are imposed by the country influence its imports and exports greatly. Some countries follow a

protectionist policy to the domestic industry by raising import barriers For e.g. India in the pre liberalization era, Russia. 6. Political stability and political milieu: Political stability greatly affects the longevity of the businesses in a country. Political risk assessment should be done to determine the country risk on the basis of following parameters : a. Confiscation: the nationalization of businesses without compensation. For e.g. India during the nationalist wave during Indira Gandhis tenure. b. Nationalization: Resource nationalization is a major risk for businesses involving local resources like oil, minerals etc. For e.g. the resource nationalization in Columbia. c. Instability risk: The possibility of military takeovers or huge government changes. For e.g. the coups in Thailand or in Fiji has affected the profits of businesses there by as much as 60% due to work stoppage and property destruction. d. Domestication: The global company relinquishing control in favor of domestic investors. For e.g. Barclays bank in South Africa B. Economic factors The economic factors in a country greatly influence the business in that country. The following factors are important in the macroeconomic environment. 1. Economic system: the economic system in a country i.e. capitalism/ communism/ mixed economy (India) is important for deciding the nature of the businesses. The nature of the system decides the allocation of resources. Due to globalization there is a gradual shift toward market forces to allocate resources even in the communist countries like China. 2. Interest rates: The interest rates in the country affect the cost of capital (if raised locally) and the operational costs. Interest rates also determine the confidence of the Government in the economy and consumer spending. 3. Exchange rates: The exchange rates affect international trade and capital inflows in the country. 4. Income levels and spending pattern: Though it is more of a demographic parameter has is very important bearing on the sell side of all international businesses. For e.g. In a country like India, with rising aspirer population there is a market opportunity for products like IPod (considered luxury items till now) C. Social factors Businesses are driven by people both as human capital and as consumers. It is necessary for an international businessman to understand the social and cultural aspects of the country they operate in. The following are the important social factors.

1. Age distribution: the age distribution of the population is important to consider the consumption patterns in the markets. Age distribution also determines the mindset of the market and helps segmentation of the market accordingly. It also has a bearing on the employee quality. A young population also determines a workforce. 2. Family system: the family system has a bearing on the decision makers in consumption. For e.g. in Islamic countries women have a less say in making consumption decisions. In emerging economies like India children are gaining important role in consumption. This helps in positioning of products. 3. Cultural aspects: The cultural aspects influence the way the business is conducted in countries. In Japan there is a different way in which contracts are signed and executed. In Russia being a communist oriented mindset the business is conducted in a closed manner. Italians have a seemingly lazy way of doing business and hence it is very difficult to conduct business in the pacy US way. 4. Career attitudes: the career attitude of the workforce is important social aspect. D. Technological Factors Technology has a very important role to play in determining the success of international businesses because technology has made international business possible. The following are the technological factors that influence the business. 1. R&D: the support that the Government gives to R&D encourages setting up R&D business levels. Also the ease of a qualified local workforce influence business. For e.g. the semiconductor industry in Taiwan 2. Technology transfer: The ease of technology transfer influences the business climate. The environment where the technology transfer is not viable gradually loses out on business from emerging countries that seek technology transfers. For e.g. in the early 40s countries like Czechoslovakia (the Czech Republic) was a very technologically advanced country but had very low business interest due to the less chances of technology transfers. For e.g. GE withdrew operations from a JV as there as they could not access local expertise)