International Trade Environment, Country Risk Analysis, Opportunities and Threats for International Business, BRIC Economies

International Business Management

Mrs. Charu Rastogi, Asst. Prof.

Agenda
Case Study on Anti-Dumping Analysis of Global Environment Political, Economic, Social, Cultural, Legal Technological, Natural environment Country Risk Analysis Opportunities and threats for Intl. business Rise of new economies like Brazil, Russia, India, China (BRIC) and Asian

Mrs. Charu Rastogi, Asst. Prof.

Dumping on Trade Complaints

CASE STUDY

Mrs. Charu Rastogi, Asst. Prof.

One of the biggest problems in international trade is the ability of domestic producers to lobby their home governments to erect barriers to trade. In the past, the textile, apparel, and shoe industries were able to obtain protection from cheaper imports through tariffs, quotas, and special measures. Now multilateral trade agreements under the GATT and WTO (and also regional and bilateral agreements such as NAFTA and the emerging Asian Pacific Economic Cooperation forum) outlaw such blatant instruments of protection. However, these agreements have been replaced by more subtle ones.

Mrs. Charu Rastogi, Asst. Prof.

Prominent as a new type of protectionist device is the use of unfair trade laws, especially antidumping (AD) and countervailing duty actions (CVD). The economic logic of AD and CVD makes some sense. It is unfair for a foreign producer to dump a product in your country below its price in the home country, or below the cost of producing it. Similarly, subsidized foreign products should be offset by a countervailing duty of equivalent effect. The problem, however, lies with the administration of the trade laws, which is subject to political lobbying.

Mrs. Charu Rastogi, Asst. Prof.

A variety of studies have found that the bureaucrats who administer AD and CVD laws are subject to capture by the home industries, who then use AD and CVD cases as harassment tools against often economically efficient foreign rival producers. For example, Rugman and Anderson (1987) found that the US administration of AD and CVD was used in a biased manner against Canadian producers, especially in resource-based industries such as soft-wood lumber, fishing, and agriculture. Thus in the Canadian-US Free Trade Agreement of 1989, and again in NAFTA, five-person binational panels of trade law experts were set up to review the decision of the US (and Canadian) trade law agencies.
Mrs. Charu Rastogi, Asst. Prof.

In a subsequent study, Rugman and Anderson (1997) found that these bi-national panels were able to remand back (i.e., successfully challenge) the decision of the US agencies twice as often in cases involving Canada as in AD and CVD cases involving the rest of the world. In related work it has been found that the EU is just as bad as the US in that the EU brings in questionable AD measures, especially against Asian countries. Indeed, one of the unresolved problems is how smaller countries can secure access to the protected markets of triad economies (USA, Japan, Western Europe) such as the US and the EU. In Japans case there are similar arguments (including those from its triad rivals) that there are entry barriers in place preventing market access.
Mrs. Charu Rastogi, Asst. Prof.

Questions:

Why are anti-dumping and countervailing duty measures brought and imposed? What is the impact on a firm from a non-triad country if it faces an AD or CVD case in its major market? What is the solution to the abusive use of AD and CVD measures by triad economies?

Mrs. Charu Rastogi, Asst. Prof.

Countervailing Duty

GATT Article VI (1994) allows the use of CVD to offset public subsidies for the manufacture, production or export of any merchandise. CVD use requires
proving the existence of subsidy proving that the subsidized import causes or threatens to cause injury to domestic industry.

Mrs. Charu Rastogi, Asst. Prof.

Anti-dumping Duty

Dumping: the introduction of a product of one country into the commerce of another country at less than its fair or normal value. Normal value: comparable price for the product, in the ordinary course of trade, when destined for domestic consumption. AD duties can be used if it is proven that
Dumping exists Causes or threatens to cause material injury.

Mrs. Charu Rastogi, Asst. Prof.

Impact
Many of the export products in developing countries are produced by labour intensive, small and medium enterprises. Imposition of countervailing duties or even the threat of imposition of such duties has a serious adverse impact on the functioning of such units including fall in production, large unemployment, decline in incomes and increase in poverty levels. The high cost of capital, low level of infrastructure development, inadequate integration and organization of the economy, poorly developed information networks are characteristics of industry in developing and least developed countries. It has been recognized that the state has to assume a more active and positive role in assisting its industry.

Mrs. Charu Rastogi, Asst. Prof.

Recourse against unfair use of CVD / AD Duty

WTO Countries lodge complaint / petition to one another diplomatically Industry groups file petitions with their governments to launch investigations against the country making unfair use of CVD / AD. Eg. Companies in the U.S. will file petition in U.S. Department of Commerce and United States International Trade Commission while those in Europe will file it in the European Commission.

Mrs. Charu Rastogi, Asst. Prof.

GLOBAL ENVIRONMENT

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Trading Environment of International Trade

Mrs. Charu Rastogi, Asst. Prof.

Trading Environment of International Trade

Foreign Environment (Uncontrollables)

7. Structure of Distribution 1. Competition Domestic environment (Uncontrollables) Environmental uncontrollables country market A

(Controllables) 1. Competition 2. Technology Price Product 5. PoliticalEnvironmental Target 7 Market uncontrollables 6. Geography and Legal country Promotion Place 2 .Technology Infrastructure market B 4. Culture Environmental 3. Economy uncontrollables 5. Political3. ECONOMY country Legal market C 4. Culture
Mrs. Charu Rastogi, Asst. Prof.

Economic Environment

Economic development Infrastructure Resource and product markets Per capita Income Exchange rates Economic conditions

Mrs. Charu Rastogi, Asst. Prof.

Politico-Legal Environment

Political risk
Arises due to events or actions by host governments
Loss of assets Loss of earning power Loss of managerial control Government takeovers Acts of violence

Government takeovers Tariffs, quotas, taxes

Terrorism, political instability

Laws, regulations
Mrs. Charu Rastogi, Asst. Prof.

Socio-Cultural Environment

Culture shared knowledge, beliefs, values, common modes of behavior, and ways of thinking among members of a society
Intangible Pervasive Difficult for outsider to learn

Managers need to understand difference in social values to comprehend local cultures and deal with them effectively Dimensions:

Socio values, beliefs Language Religion (objects, taboos, holidays) Kinship patterns Formal education, literary Time orientation
Mrs. Charu Rastogi, Asst. Prof.

Physical and Technological Environment

Physical Factors, such as geographical factors, weather and climatic conditions may call for modifications in the product. Physical facilities

Some products, like many consumer durables, have certain use facility characteristics. The sale of television sets, for example, is limited by the extent of the coverage of the telecasting Similarly, the demand for refrigerators and other electrical appliances is affected by the extent of electrification and the reliability of power supply

Technological factors
Differing technological environment of different markets or countries may call for product modifications For example, many appliances and instruments in the U.S.A. are designed for 110 volts but this needs to be converted into 240 volts in countries which have that power system
Mrs. Charu Rastogi, Asst. Prof.

Natural Environment

Geographical and ecological factors, such as natural resource endowments, weather and climatic conditions, topographical factors, locational aspects in the global context, port facilities, etc., are all relevant to business.
Climatic and weather conditions affect the location of certain industries like the cotton textile industry. Topographical factors may, affect the demand pattern. For example, in hilly areas with a difficult terrain, jeeps may be in greater demand than car

Ecological factors have recently assumed great importance. The depletion of natural resources, environmental pollution and the disturbance of the ecological balance has caused great concern
Mrs. Charu Rastogi, Asst. Prof.

Trading Environment of International Trade

Mrs. Charu Rastogi, Asst. Prof.

Country Risk Analysis

A collection of risks associated with investing in a foreign country. These risks include

political risk, exchange rate risk, economic risk, sovereign risk and Transfer and convertibility risk, which is the risk of capital being locked up or frozen by government action.

Country risk can reduce the expected return on an investment and must be taken into consideration whenever investing abroad. Some country risk does not have an effective hedge. Other risk, such as exchange rate risk, can be protected against with a marginal loss of profit potential. The United States is generally considered the benchmark for low country risk and most nations can have their risk measured as compared to the U.S. Country risk is higher with longer term investments and direct investments, which are investments not made through a regulated market or exchange.

Mrs. Charu Rastogi, Asst. Prof.

Country Risk: Political Risk

Political risk covers cultural and ethnic risk, socioeconomic risk or changes in political institutions. Political risk pertains to the risk of exposure stemming from the political environment. The factors in this category relate to the threat of war, social unrest, disorderly transfers of power, political violence, international disputes, regime changes, institutional ineffectiveness, but also include the quality of the bureaucracy, the transparency and fairness of the political system, and levels of corruption and crime in the country in question. Factors: Government Stability, Socioeconomic Conditions, Investment Profile, Internal Conflict, External Conflict, Corruption

Mrs. Charu Rastogi, Asst. Prof.

Country Risk: Exchange Rate Risk

The risk that a business' operations or an investment's value will be affected by changes in exchange rates Investors and multinational businesses exporting or importing goods and services or making foreign investments throughout the global economy are faced with an exchange rate risk which can have severe financial consequences if not managed appropriately Management: Hedging, forward, future contracts, options , swaps.

Mrs. Charu Rastogi, Asst. Prof.

Country Risk: Economic Risk

The likelihood that economic developments in one country may negatively impact international transactions. Suppose Country A and Country B enjoy a free trade agreement, which greatly increased trade between the two nations. A protectionist party may be elected to office in Country B and immediately revoke the FTA. Not only will this affect business, perhaps both positively and negatively, within Country B, but exporters from Country A will suddenly find that their investments have evaporated. Factors: GDP per head, Real GDP growth, Inflation rate
Mrs. Charu Rastogi, Asst. Prof.

Country Risk: Sovereign Risk

Sovereign risk comes from the governments inability or unwillingness to fulfill its loan obligations. It also includes the risk that a countrys central bank will alter its foreign-exchange regulations thereby significantly reducing or completely nulling the value of foreign-exchange contracts

Mrs. Charu Rastogi, Asst. Prof.

Country Risk: Transfer Risk

The risk a government imposes capital or exchange controls that prevent an entity from converting local currency into foreign currency and/or transferring funds to creditors located outside the country Transfer risk arises from foreign governments restrictions on capital movements and may be a political response to a permanent growing current account deficit Transfer risks can occur when a buyer has received the goods promised and is ready to make payment. The government of the buyers country sees its foreign reserves rapidly leaving the country. The law or central bank institutes regulations to stop all movement of funds out of the country without specific approval. This program halts the transfer out of the country of the buyers currency as well as the currency of any other country. The buyer is willing and able to make the payment to the seller; however, by government intervention, the payment is blocked from taking place.

Mrs. Charu Rastogi, Asst. Prof.

Opportunities for International Business

Global Sourcing of raw material Outsourcing of services Growth of information technology tools, including the Internet and electronic commerce (ecommerce) make business transactions are faster and more global. Opportunity to become broad-based. Firms find it easier to manage downturns as they can enter markets in emerging economies

Mrs. Charu Rastogi, Asst. Prof.

Threats for International Business

Risks related to international business:

Political-Legal Socio-Cultural Transfer risk/Exchange rate risk

Lax regulation in international financial markets leading to financial crisis Increased global integration leading to risk of contagion (spread of crisis)

Mrs. Charu Rastogi, Asst. Prof.

Rise of New Economies

Emerging markets are nations with social or business activity in the process of rapid growth and industrialization. The economies of China and India are considered to be the largest The eight largest emerging and developing economies by either nominal GDP or GDP (PPP) are Brazil, Russia, India, China, Mexico, South Korea, Indonesia, and Turkey Positive expectations about emerging economies at The Atlantic and here.

Mrs. Charu Rastogi, Asst. Prof.

Dream Decade for Emerging Economies may be over

As per articles in The Economist: Refer to your notes on Emerging Economies.

Mrs. Charu Rastogi, Asst. Prof.

Possible Questions

Explain the concept of country risk analysis. Discuss political risk and socioeconomic risk and management of these risks. What is country risk analysis? Comment on cultural environment and ethical practices. Explain the concept of country risk analysis. Comment on socioeconomic risk and its management. Explain the meaning of country risk analysis. What are the socio-economic and political factors that may be considered before going international?

Mrs. Charu Rastogi, Asst. Prof.