Department of Accounting and Information Systems

BBA 1st Year 1st Semester

AIS: 1104 Introduction to Business
Course Teacher: Md. Shahbub Alam, Lecturer, Dept. of AIS, I.U, Kushtia.

Chapter-07: International Business

1. International Trade

International Business is all business transactions that involve two or more countries.

Foreign trade or international trade is the cross-border transaction in the form of the flow of
goods and services, flow of investment, and flow of regular trading.

Prof. J.L. Hanson, “An exchange of various specialized commodities and services rendered
among the corresponding countries is known as international trade.”

The exchange of goods or services along international borders. This type of trade allows for a
greater competition and more competitive pricing in the market.

2. Reasons Behind International Trade

The fundamental reason behind international business is that the countries cannot produce
equally well or cheaply all that they need. This is because of the unequal distribution of natural
resources among them or differences in their productivity levels.

TO EXPAND THEIR SALES: The first and foremost reason for any multinational to set up
industries in different countries would be because they like to expand their sales and acquire
newer markets so that they can record impressive growth rates for the company.

TO EXPAND THE MARKET: Everyone wants to expand their market share and so they are
able to sell more and more products and reach more audience. The importance of International
business lies in the fact that you get a new market to enter and to expand in which is also a
crucial fact and sometimes may not work as planned and can also lead the company into huge
losses.

REDUCED DEPENDENCE ON LOCAL MARKET: Your home market may be struggling

due to economic pressures, but if you go global, you will have immediate access to a practically
unlimited range of customers in areas where there is more money available to spend, and
because different cultures have different wants and needs, you can diversify your product range
to take advantage of these differences.

TO ACQUIRE RESOURCES: This is one of the most important reasons for companies to
expand internationally. Many developing and new emerging countries have large deposits of
minerals, metals, and land for agricultural production which is why the western multinationals
eye markets of the developing countries in order to get access to the resources.

INCREASED EFFICIENCY: Benefit from the economies of scale that the export of your
goods can bring – go global and profitably use up any excess capacity in your business,
smoothing the load and avoiding the seasonal peaks and troughs that are the bane of the
production manager’s life.

MINIMIZING RISK: Businesses expand internationally to offset the risks of stagnating

growth in their home country as well as in other countries where they are operating and setting
up their industries. Firms exist to make profits and grow their bottom line, it is natural for them
to expand internationally into countries that have better growth rates than their home country.

CAPACITY OF PRODUCTION: One reason for large companies to look towards

international business is to utilize the excess production capacity of their manufacturing plants
in other countries and gain more profit. Companies like Ultratech, Blue Star, Garment
manufacturers, Chocolate manufacturers have huge production capacity.

INNOVATION: Because you are exporting to a wider range of customers, you will also gain
a wider range of feedback about your products, and this can lead to real benefits.

PURCHASING POWER: The last reason and one of the more Important one of doing
International business is the purchasing power rising in targeted markets. The best example of
this is Dubai which as a country has grown exponentially in the last several years and today is
a huge tourist market.
3. Barriers of International Trade

International trade is the most important and most profitable business nowadays but there are
some barriers to international trade. For desiring to enter into international trade, we face some
obstacles and those are discussed below:

Cultural and social barriers: A nation’s cultural and social forces can restrict international
business. Culture consists of a country’s general concept and values and tangible items such as
food, clothing, building etc. Social forces include family, education, religion and custom.
Selling products from one country to another country is sometimes difficult when the culture
of two countries differ significantly.

Political barriers: The political climate of a country plays a major impact on international
trade. Political violence may change the attitudes towards the foreign firms at any time. And
this impact can create an unfavorable atmosphere for international business.

Tariffs and trade restrictions: Tariffs and trade restrictions are also the barriers to
international trade. They are discussed below:

• Tariffs: A duty or tax, levied on goods brought into a country. Tariffs can be
used to discourage foreign competitors from entering a digestive market. Import
tariffs are two types-protective tariffs and revenue Tariffs.

• Quotas: A limit on the amount of a product that can leave or enter a country.

• Embargoes: A total ban on certain imports or exports.

Boycotts: A government boycott is an absolute prohibition on the purchase and importation of

certain goods from other countries. For example, Nestle products were boycotted by a certain
group that considered the way nestle promoted baby milk formula to be misleading to mothers
and harmful to their babies in fewer development countries.

Standards: Non-tariff barriers of this category include standards to protect health, safety and
product quality. The standards are sometimes used in an unduly stringent or discriminating way
to restrict trade.

Anti-dumping Penalties: It is one kind of practice whereby a producer intentionally sells its
products for less than the cost of the product in order to undermine the competition and take
control of the market.
Monetary Barriers: There are three such barriers to consider:

• Blocked currency: Blocked currency is used as a political weapon is response

to difficult balance payments situation. The blockage is accomplished by
refusing to allow importers to exchange their national currency for the seller’s
currency.

• Differential exchange rate: The differential exchange rate is a particularly

ingenious method of controlling imports. It encourages the importance of goods
the government deems desirable and discourage importation of goods the
government does not want. The essential mechanism requires the importer to
pay the varying amount of domestic currency for foreign currency with which
to purchase products in different categories. Such as desirable and less desirable
products.

• Government approval for securing foreign exchange: Countries

experiencing severe shortages of foreign exchange often use it. At one time or
another, most Latin American and East European countries have required all
foreign exchange transactions to be approved by the central bank. Thus
importers who want to buy foreign goods must apply of ran exchange permit
that is permission to exchange an amount of local currency for foreign currency.

4. ARGUMENTS IN FAVOR OF TRADE RESTRICTIONS

A trade restriction is an artificial restriction on the trade of goods and/or services between two
countries. It is the byproduct of protectionism. Arguments in favor of trade restrictions
include:

i. The Infant Industry Argument. There are many industries in a country that are in their infancy,
but have a potential to grow. In the short-term, these industries may be too small to gain
economies of scale. Without protection, these infant industries will not survive competition
from abroad. Protection will allow such industries to grow and become more efficient.

ii. Protection is required to prevent the establishment of a foreign- based monopoly so as to

prevent mis-utilisation of resources.
iii. Protection is required to prevent dumping and other unfair trade practices by foreign
producers.

iv. Trade restrictions are imposed to reduce the influence of trade on consumer tastes. Some
restrictions on trade may be justified in order to reduce ‘producer sovereignty’ of the MNCs.

v. Protection helps to reduce reliance on goods with little dynamic potential. Many countries
have traditionally exported primary commodities. The world demand for these commodities is
income inelastic and thus grows relatively slowly. In such cases, free trade is not an engine of
growth.

vi. Protection is required to spread the risks of fluctuating markets. Greater diversity and greater
self-sufficiency can reduce these risks.

vii. Trade restrictions also help a country to improve its terms of trade by exploiting its market
power.

viii. Protection is required to take account of externalities. Free trade tends to reflect private
costs ignoring the associated externalities. Trade restrictions could be designed to deflect these
externalities.

ix. Restrictions are required to prevent the import of harmful goods.

5. ARGUMENTS AGANIST TRADE RESTRICTIONS

i. Protection to achieve some objective may be at a very high opportunity cost. Other things
being equal, there will be a net loss in welfare from restricting trade. Due to this reason, any
gain in government revenue or profits to firms would be outweighed by a loss in consumer’s
surplus.

ii. Restricting trade is unlikely to be a first-bed solution to the problem, since it involves costs
of side-effect.

iii. Restricting trade may have adverse world multiplier effects.

iv. Protection may encourage retaliation.

v. Protection may allow inefficient firms to remain inefficient.

vi. Restrictions may involve considerable bureaucracy and possibly even corruption.

6. The Benefits of Reducing Barriers to International Trad (Self Study)

7. General Agreement on Tariffs and Trade

After the Great Depression and World War II, most countries focused on protecting home
industries, so international trade was hindered by rigid trade restrictions. To rectify this
situation, twenty-three nations joined together in 1947 and signed the General Agreement on
Tariffs and Trade (GATT) International trade agreement that encourages free trade by
regulating and reducing tariffs and provides a forum for resolving trade disputes., which
encouraged free trade by regulating and reducing tariffs and by providing a forum for resolving
trade disputes. The highly successful initiative achieved substantial reductions in tariffs and
quotas, and in 1995 its members founded the World Trade Organization to continue the work
of GATT in overseeing global trade.

8. World Trade Organization

Based in Geneva, Switzerland, with nearly 150 members, the World Trade Organization (WTO)
International organization that monitors trade policies and whose members work together to
enforce rules of trade and resolve trade disputes. encourages global commerce and lower trade
barriers, enforces international rules of trade, and provides a forum for resolving disputes. It is
empowered, for instance, to determine whether a member nation’s trade policies have violated
the organization’s rules, and it can direct “guilty” countries to remove disputed barriers (though
it has no legal power to force any country to do anything it doesn’t want to do). If the guilty
party refuses to comply, the WTO may authorize the plaintiff nation to erect trade barriers of
its own, generally in the form of tariffs. Affected members aren’t always happy with WTO
actions. In 2002, for example, the Bush administration imposed a three-year tariff on imported
steel. In ruling against this tariff, the WTO allowed the aggrieved nations to impose counter-
tariffs on some politically sensitive American products, such as Florida oranges, Texas
grapefruits and computers, and Wisconsin cheese.

9. The European Union

The forty-plus countries of Europe have long shown an interest in integrating their economies.
The first organized effort to integrate a segment of Europe’s economic entities began in the late
1950s, when six countries joined together to form the European Economic Community (EEC).
Over the next four decades, membership grew, and in the late 1990s, the EEC became the
European Union. Today, the European Union (EU)Association of European countries that
joined together to eliminate trade barriers among themselves. is a group of twenty-seven
countries that have eliminated trade barriers among themselves. At first glance, the EU looks
similar to NAFTA. Both, for instance, allow unrestricted trade among member nations. But the
provisions of the EU go beyond those of NAFTA in several important ways. Most importantly,
the EU is more than a trading organization: it also enhances political and social cooperation
and binds its members into a single entity with authority to require them to follow common
rules and regulations. It is much like a federation of states with a weak central government,
with the effect not only of eliminating internal barriers but also of enforcing common tariffs on
trade from outside the EU. In addition, while NAFTA allows goods and services as well as
capital to pass between borders, the EU also allows people to come and go freely: if you possess
an EU passport, you can work in any EU nation.

10. NAFTA

The North American Free Trade Association (NAFTA)Agreement among the governments of
the United States, Canada, and Mexico to open their borders to unrestricted trade. The effect
of this agreement is that three very different economies are combined into one economic zone
with almost no trade barriers. From the northern tip of Canada to the southern tip of Mexico,
each country benefits from the comparative advantages of its partners: each nation is free to
produce what it does best and to trade its goods and services without restrictions.

When the agreement was ratified in 1994, it had no shortage of skeptics. Many people feared,
for example, that without tariffs on Mexican goods, more U.S. manufacturing jobs would be
lost to Mexico, where labor is cheaper. Almost two decades later, most such fears have not been
realized, and, by and large, NAFTA has been a success. Since it went into effect, the value of
trade between the United States and Mexico has grown substantially, and Canada and Mexico
are now the United States’ top trading partners.

11. CAFTA

The Dominican Republic–Central America Free Trade Agreement (CAFTA-DR) is a free trade
agreement (legally a treaty under international law, but not under U.S. law). Originally, the
agreement encompassed the United States and the Central American countries of Costa Rica,
El Salvador, Guatemala, Honduras, and Nicaragua, and was called CAFTA. In 2004, the
Dominican Republic joined the negotiations, and the agreement was renamed CAFTA-DR.

CAFTA-DR, the North American Free Trade Agreement (NAFTA), and active bilateral free
trade agreements such as the Canada-Costa Rica Free Trade Agreement are seen as bloc
agreements instead of a Free Trade Area of the Americas (FTAA) agreement. Panama has
completed negotiations with the United States for a bilateral free trade agreement known as the
Panama–U.S. Trade Promotion Agreement, and has been in effect since October 2012.

12. SAFTA

The South Asian Free Trade Area is an agreement reached on 6 January 2004 at the 12th
SAARC summit in Islamabad, Pakistan. It created a free trade area of 1.6 billion people in
Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka (as of 2011, the combined
population is 1.8 billion people). The seven foreign ministers of the region signed a framework
agreement on SAFTA to reduce customs duties of all traded goods to zero by the year 2016.

The SAFTA agreement came into force on 1 January 2006 and is operational following the
ratification of the agreement by the seven governments. SAFTA requires the developing
countries in South Asia (India, Pakistan and Sri Lanka) to bring their duties down to 20 percent
in the first phase of the two-year period ending in 2007.

In the final five-year phase ending 2012, the 20 percent duty will be reduced to zero in a series
of annual cuts. The least developed nations in South Asia (Nepal, Bhutan, Bangladesh,
Afghanistan and Maldives) have an additional three years to reduce tariffs to zero. India and
Pakistan ratified the treaty in 2009, whereas Afghanistan as the 8th member state of the SAARC
ratified the SAFTA protocol on the 4th of May 2011.

13. ASEAN

The Association of Southeast Asian Nations (ASEAN) is a regional intergovernmental

organization comprising ten countries in Southeast Asia, which promotes intergovernmental
cooperation and facilitates economic, political, security, military, educational, and
sociocultural integration among its members and other countries in Asia. It also regularly
engages other countries in the Asia-Pacific region and beyond. A major partner of Shanghai
Cooperation Organisation, ASEAN maintains a global network of alliances and dialogue
partners and is considered by many as a global powerhouse, the central union for cooperation
in Asia-Pacific, and a prominent and influential organization . It is involved in numerous
international affairs, and hosts diplomatic missions throughout the world.

14. Organization Of Petroleum Exporting Countries - OPEC

TThe Organization of the Petroleum Exporting Countries (OPEC) is an intergovernmental

organisation of 14 nations, founded in 1960 in Baghdad by the first five members (Iran, Iraq,
Kuwait, Saudi Arabia, and Venezuela), and headquartered since 1965 in Vienna, Austria. As of
September 2018,the then 17 member countries accounted for an estimated 44 percent of global
oil production and 81.5 percent of the world's "proven" oil reserves, giving OPEC a major
influence on global oil prices that were previously determined by the so called "Seven Sisters”
grouping of multinational oil companies.

The stated mission of the organisation is to "coordinate and unify the petroleum policies of its
member countries and ensure the stabilization of oil markets, in order to secure an efficient,
economic and regular supply of petroleum to consumers, a steady income to producers, and a
fair return on capital for those investing in the petroleum industry."

The organization is also a significant provider of information about the international oil market.
The current OPEC members are the following: Algeria, Angola, Austria, Cameroon, Congo,
Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia (the de
facto leader), Syria, United Arab Emirates, and Venezuela. Indonesia and Qatar are former
members.

The formation of OPEC marked a turning point toward national sovereignty over natural
resources, and OPEC decisions have come to play a prominent role in the global oil market and
international relations. The effect can be particularly strong when wars or civil disorders lead
to extended interruptions in supply. In the 1970s, restrictions in oil production led to a dramatic
rise in oil prices and in the revenue and wealth of OPEC, with long-lasting and far-reaching
consequences for the global economy.

[Link] for Economic Co-operation and Development (OECD)

The Organisation for Economic Co-operation and Development (OECD) is an

intergovernmental economic organisation with 36 member countries, founded in 1961 to
stimulate economic progress and world trade. It is a forum of countries describing themselves
as committed to democracy and the market economy, providing a platform to compare policy
experiences, seek answers to common problems, identify good practices and coordinate
domestic and international policies of its members. Most OECD members are high-income
economies with a very high Human Development Index (HDI) and are regarded as developed
countries. As of 2017, the OECD member states collectively comprised 62.2% of global
nominal GDP (US$49.6 trillion) and 42.8% of global GDP (Int$54.2 trillion) at purchasing
power parity. OECD is an official United Nations observer.
In 1948, the OECD originated as the Organisation for European Economic Co-operation
(OEEC), led by Robert Marjolin of France, to help administer the Marshall Plan (which was
rejected by the Soviet Union and its satellite states).This would be achieved by allocating
United States financial aid and implementing economic programs for the reconstruction of
Europe after World War II. (Similar reconstruction aid was sent to the war-torn Republic of
China and post-war Korea, but not under the name "Marshall Plan".)

In 1961, the OEEC was reformed into the Organisation for Economic Co-operation and
Development by the Convention on the Organisation for Economic Co-operation and
Development and membership was extended to non-European states. The OECD's
headquarters are at the Château de la Muette in Paris, France. The OECD is funded by
contributions from member states at varying rates and had a total budget of €374 million in
2017.

[N.B: All case studies are available in text book]