Export import theory, practices, and procedures (second edition) part 1

Growth and Direction of International Trade 7 Importance of International Trade to the Global Economy 7 Case 1.1.. Import Regulations, Trade Intermediaries, Import Restrictions in the Un

Export-Import Theory, Practices, and Procedures Second Edition

Pre-publication

REVIEWS,

COMMENTARIES,

EVALUATIONS

“This book covers a number of

sig-nificant gaps that are not

ad-dressed elsewhere By focusing

specifi-cally on trade rather than other forms

of international expansion, Dr Seyoum

has achieved the

near-impossible—in-depth and thorough coverage of both

the theory and the practice of

export-ing, and significantly broader coverage

of importing than is the norm, thus

of-fering the most complete coverage of

all facets of trade that I have seen It

ex-cels by integrating theory with practice

and exports with imports The fact that

this book starts with a brief history of international trade and concludes with

a sample distributorship agreement, speaks to the singular achievement of this book: true cover-to-cover, and top- to-bottom, coverage of all relevant is- sues in exporting and importing.”

Dr Nicolas Papadopoulos, PhD

Professor of Marketing and International Business; Associate Dean (Research); Director, International Business Study Group, Eric Sprott School of Business, Carleton University, Ottawa, Canada

REVIEWS, COMMENTARIES, EVALUATIONS

“International Trade has always been

a hands-on subject and the few

books that are out there do not address

anywhere near the width and depth

that Export-Import Theory, Practices, and

Procedures: Second Edition, does Each of

the twenty chapters in this book closes

with a great summary The student

here is also provided with enough

ref-erences, case studies, and international

perspectives on the subject matter

cov-ered within the chapter There are even

review questions for further self-study.

The chapters on import regulations is

especially valuable to the student of

in-ternational trade and the section on

ex-port licensing and regulations of the

Commerce Department is a boon to any new or seasoned export manager The useful presentation of typical im- port and export transactions as well as samples of distributor agreements and business plans put this book way above any other in its class.”

Ashok Sadhwani, BCom, GDMM, CHB

President and CEO, ASMARA USA INC.; Instructor, Business and Legal Programs, UCLA Extension, Los Angeles;

Associate Professor, International Trade, Chulalongkorn University,

Bangkok, Thailand;

Consultant for the Government

of The Philippines, Airport Cargo Operations

Export-Import Theory, Practices, and Procedures

Second Edition

Export-Import Theory, Practices, and Procedures

Second Edition

Belay Seyoum, PhD

This edition published 2009

by Routledge

270 Madison Ave, New York, NY 10016

Simultaneously published in the UK

by Routledge

2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN

Routledge is an imprint of the Taylor & Francis Group, an informa business

© 2000 The Haworth Press

© 2009 Taylor & Francis

All rights reserved No part of this book may be reprinted or reproduced

or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording,

or in any information storage or retrieval system, without permission in writing from the publishers.

Trademark Notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identi fication and explanation without intent to infringe.

Cover design by Jennifer M Gaska

Library of Congress Cataloging in Publication Data

Seyoum, Belay, 1953 –

Export-import theory, practices, and procedures / Belay Seyoum, editor —2nd ed.

p cm.

ISBN: 978-0-7890-3419-9 (hard : alk paper)

ISBN: 978-0-7890-3420-5 (soft : alk paper)

1 Exports 2 Imports 3 Export marketing 4 International trade I Title.

HF1414.4.S49 2007

382 —dc22

2007034264 ISBN10: 0-7890-3419-0 (hbk)

This edition published in the Taylor & Francis e-Library, 2008.

“To purchase your own copy of this or any of Taylor & Francis or Routledge’s

collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.”

ISBN 0-203-88930-4 Master e-book ISBN

Preface xv

Strengths and Features of this Book xv

SECTION I: OVERVIEW OF INTERNATIONAL TRADE

Chapter 1 Growth and Direction of International Trade 7

Importance of International Trade to the Global Economy 7

Case 1.1 The Limitations of Export-Led Growth 15

Chapter 2 International and Regional Agreements

Regional Integration Agreements (RIAs) 22 The North American Free Trade Agreement (NAFTA) 25

Case 2.1 The Benefits and Costs of Free Trade 37

Chapter 3 Setting Up the Business 41

Bank Accounts, Permits, and Licenses 49 Location and Use of Professional Services 49 Organizing for Export: Industry Approach 50

Taxation of Export-Import Transactions 54

Case 3.1 Globalization and the Shrinking Tax Base 66

Chapter 4 Planning and Preparations for Export 69

Assessing and Selecting the Product 69

Developing an International Business Plan 77 Export Counseling and Assistance 78

Case 4.1 Developing Export Markets 92

Chapter 5 Export Channels of Distribution 95

Case 5.1 Export Channel Decisions of Two U.S.

Case 6.2 Marine Insurance: Inchmaree Clause 148

SECTION III: EXECUTING THE TRANSACTIONS Chapter 7 Pricing in International Trade 153

Pertinent Clauses in Export Contracts 185

Case 8.1 CISG 195 Case 8.2 China National Products versus Apex Digital Inc 195

Chapter 9 Trade Documents and Transportation 197

Documentation in Export-Import Trade 197

Protection against Exchange Rate Risks 229

Documentary Collection (Documentary Draft) 242

Origins of Countertrade 271

Countertrade and the International Monetary Fund 285 Governments’ Attitudes Toward Countertrade 286

FINANCING TECHNIQUES AND VEHICLES

Chapter 13 Capital Requirements and Private Sources

Case 13.1 Tadoo’s Sales to Belgium 316

Chapter 14 Government Export Financing Programs 319

Export-Import Bank of the United States (Ex-Im Bank) 320

Overseas Private Investment Corporation (OPIC) 334 Private Export Funding Corporation 337

Case 14.1 Trade Finance for Small and Medium-Sized

Enterprises in Transition Economies 341 Case 14.2 Ex-Im Bank Financing: Selected Cases 342

EXPORT REGULATIONS AND TAX INCENTIVES Chapter 15 Regulations and Policies Affecting Exports 347

Export Licensing and Administration 347

Antitrust Laws and Trade Regulation 368

IMPORT PROCEDURES AND TECHNIQUES

Chapter 16 Import Regulations, Trade Intermediaries,

Import Restrictions in the United States 389

Trade Intermediaries and Services 398

Case 16.1 Tax Deduction for Processing in Maquilas:

Chapter 17 Selecting Import Products and Suppliers 407

Types of Products for Importation 407

Chapter Summary 420

Case 17.1 The ATA Carnet: Unlocking Customs

Case 17.2 Maytag’s Triad Strategy 423

Chapter 18 The Entry Process for Imports 425

The Harmonized Tariff Schedule of the United States 432

Chapter 19 Import Relief to Domestic Industry 447

Antidumping and Countervailing Duties 447 Antidumping and Countervailing Duty Proceedings 453

Case 19.1 Similar Products and Dumping 463

Chapter 20 Intellectual Property Rights 465

International/Regional Protection 473

Case 20.1 Patents and Access to Lifesaving Drugs 477

Appendix A: Trading Opportunities in Selected Countries 479 Appendix B: Importing into the United States 521

(Million U.S Dollars) 531 Appendix D: Average Tariff Rates of Selected Countries

Belay Seyoum, PhD, is Associate Professor of International Business

Studies at Nova Southeastern University in Fort Lauderdale, Florida, where

he teaches a variety of courses in international business and economics.Prior to coming to Nova Southeastern, Dr Seyoum taught internationalbusiness at Concordia University and McGill University in Montreal, Can-ada Dr Seyoum has published four books as well as numerous articles inthe area of international trade in several prestigious academic journals such

as the International Business Review, the Journal of World Trade, Multina tional Business Review, the International Trade Journal, the Columbia Journal of World Business, and the Journal of Global Business He is recip-

-ient of the Fulbright Scholar award for 2007 and lives in Florida

This book resulted from the author’s realization of the inadequacy ofexisting books to serve the needs of the academic/professional audience.Most of the books published in this area lack substance and provide onlysoft coverage of international trade operations Another problem is that theyhardly discuss theoretical issues such as the role of exports/imports in theglobal economy or pertinent regulatory and policy issues Current booksare almost exclusively devoted to export activities and provide only cursorytreatment of import processes Furthermore, most offer no discussion ofcurrent research information in the area

STRENGTHS AND FEATURES OF THIS BOOK

1 Conceptual and theoretical approach: The book develops a

concep-tual/theoretical framework to explain international trade operations.Important scholarly studies are adequately treated in each chapter Suf-ficient attention is also given to important legal and policy issues affect-ing export/import trade

2 Depth and breadth: The book provides a comprehensive and

analyti-cal treatment of pertinent topics in the area In addition to exports, thebook provides an in-depth examination of import trade Adequatecoverage is also given to emerging areas such as intellectual property,countertrade, the role of logistics and transportation, regional tradearrangements, and so forth No book on the market comes close interms of scholarly substance

3 Presentation: The book is written in a pedagogically sound manner by

including end-of-chapter summaries, a reference section, and Internetsources, as well as learning aids such as vignettes, figures, and tables

CHANGES IN THE SECOND EDITION

1 Current coverage: Important developments in the area of

interna-tional trade since the publication of the first edition are discussed

Export-Import Theory, Practices, and Procedures, Second Edition

xv

This includes, but is not limited to, trends in regional integrationagreements, international transfer pricing, terms of sale, U.S exportregulations, and export financing programs.

2 Expanded coverage: The book has expanded the coverage of certain

topics, such as taxation of international trade operations, export seling, export channels of distribution, export sales contracts, trans-portation, and import procedures and techniques

coun-3 Review questions and cases: Every chapter summary is followed by

review questions and cases, many of which were written for this book

4 Learning package: The text is accompanied by instructor’s manual,

test bank, and answers to review questions

It would have been impossible to produce this book without the tance of many people I would like to thank the leadership team: Dr RandyPohlman, dean; Dr Preston Jones, executive associate dean; and Dr Rus-sell Abratt, associate dean at the Huizenga School of Business, Nova South-eastern University, for creating a supportive intellectual environment.Many thanks to the librarians at the Alvin Sherman library, especially LiaHemphill, for opening up their resources I would like to acknowledge thevaluable research assistance of Bina Patel I thank her for assisting me incompleting the book and instructor’s manual in time for publication I alsothank the following people for their helpful feedback on the book: RalphJagodka, San Antionio College, California; Ron Mesia, Microsoft, Florida;Hoon Park, University of Central Florida; Ashok Sadhwani, ChulalongkornUniversity, Thailand; Habte Selassie, University of Bedforshire, UK; andRandi Sims, Nova Southeastern University, Florida

assis-This book could not have been written without the help, support, andencouragement of my wife, Muwen Seyoum

Writing a book is a major undertaking However, the reward comes notonly from its publication but from its useful contribution to those in thefield (students, professors, professionals, researchers, etc.), not only in un-derstanding international trade policies and practices, but also in encourag-ing additional research and dialogue

Export-Import Theory, Practices, and Procedures, Second Edition

xvii

A Brief History of International Trade

ANCIENT PERIOD

International trade based on the free exchange of goods started as early

as 2500 BC Archaeological discoveries indicate that the Sumerians ofNorthern Mesopotamia enjoyed great prosperity based on trade by sea intextiles and metals The Greeks profited by the exchange of olive oil andwine for grain and metal somewhere before 2000 BC

By around 340 BC, many devices of modern commerce had made theirappearance in Greece and its distant settlements: banking and credit, insur-ance, trade treaties, and special diplomatic and other privileges

With the decline of Greece, Rome became powerful and began to expand

to the East In the first century AD, the Romans traded with the Chinesealong the Silk Road and developed many trade routes and complex tradingpatterns by sea However, the absence of peace made traveling unsafe anddiscouraged the movement of goods, resulting in the loss of distant markets

By the time of the breakup of the Roman Empire in the fifth century, thepapacy (papal supremacy) had emerged as a strong institution in a new andunstable world The church’s support (sponsorship) for the crusades in theeleventh century revived international trade in the West through the latter’sdiscovery and introduction of new ideas, customs, and products from theEast New products such as carpets, furniture, sugar, and spices broughtfrom Egypt, Syria, India, and China stimulated the markets and the growingcommercial life of the West This helped Italian cities such as Venice andGenoa to prosper and to replace Constantinople as the leading center of in-ternational commerce Letters of credit, bills of exchange, and insurance ofgoods in transit were extensively used to accommodate the growing commer-cial and financial needs of merchants and travelers

By the end of the fifteenth century, the center of international commercehad moved from the Mediterranean to Western Europe Spain, Portugal, andlater Holland became the focal points of international commercial activity

Export-Import Theory, Practices, and Procedures, Second Edition

1

The more developed areas of Europe were changing from a subsistence omy to one relying heavily on imports paid by money or letters of credit.

econ-COLONIAL PERIOD (1500-1900)

With the discovery of America in 1492, and sea routes to India in 1498,trade flourished and luxury goods and food products such as sugar, tobacco,and coffee became readily available in the markets of Europe

The principal motivations behind global expansion (colonization) in thefifteenth century had been to enhance national economic power (mercantilistpolicy) by exploiting the colonies for the exclusive benefit of the mothercountry Colonies were regarded as outposts of the home economy thatwould reduce trade dependence on rival nations and augment national trea-sure through exports as well as discoveries of precious metals This firstphase of colonization, which lasted until the advent of the Industrial Revo-lution in England in 1750, was characterized by the following general ele-ments with respect to commerce:

1 All commerce between the colonies and the mother country was a tional monopoly, meaning all merchandise exports/imports had to becarried by ships of the mother country and pass through specified ports

na-2 Little encouragement was provided toward the development or sification of indigenous exports For example, in 1600, precious metalsconstituted 90 percent of colonial exports to Spain In the mid-1650s,British imports from its colonies were mainly concentrated in threeprimary products: sugar, tobacco, and furs To protect domestic pro-ducers, competing colonial exports were restricted or subject to spe-cial duties The patterns of economic relations were fashioned on thebasis of dissimilarity, that is, noncompetitiveness of colonial and met-ropolitan production

diver-3 Certain enumerated products could be exported only to the mothercountry or another colony The policy ensured a supply of strategicfoodstuffs and raw materials

4 Private companies in the metropolis received a charter from the ernment that granted them (i.e., the companies) a monopoly of trade

gov-in the colonies In most cases, the charter also granted complete localadministrative authority, ranging from the making of laws and admin-istration of justice to imposition of taxes Examples of this include theBritish East India Company (1600), the Dutch West India Company(1621), and Hudson’s Bay Company (1670)

The second historical phase of overseas expansion (1765-1900) was tated more by commercial considerations than by mere territorial gains.Britain emerged as the dominant colonial power, and by 1815 it had trans-formed its empire into a worldwide business concern By the 1860s, the In-dustrial Revolution had transformed the social and economic structure ofEngland, and mass production dictated an expansion of the market forgoods on an international scale The political economy of mercantilism thathad proliferated over the preceding century was gradually replaced by that

dic-of free trade By 1860, Britain had unilaterally repealed the Corn Laws,abolished the Navigation Act restrictions (foreign ships were permitted totake colonial goods anywhere) and the commercial monopolies given toparticular companies Preferential duties on empire goods were graduallyabolished In trade, as in foreign policy, Britain led the free trade ideologybased on nondiscrimination At the time, Britain was most likely to benefitfrom free trade because of its industrial and commercial lead over othernations

1900 TO THE PRESENT

The major characteristics of economic relations from 1900 until the break of World War I were the further development of trade and the emer-gence of a world economy These were also the result of the internationalmigration of people and capital from Europe, particularly Britain, since the1850s, to other countries such as the United States, Australia, Argentina,Brazil, and Canada This pattern of world economy provided the industrialeconomies with new sources of food and raw materials and new markets forexports of manufactures For example, by 1913, Brazil was the source of two-thirds of German coffee imports, whereas North Africa supplied over half

out-of French imports out-of wine However, much out-of the import trade in Europe wassubject to trade restrictions, such as tariffs, to secure home markets for localproducers Even within Britain there were mounting pressures for the aboli-tion of free trade

The post–World War I recovery was further delayed by the disruption oftrading links, as new nations were created and borders were redrawn Stateintervention and restrictive economic policies had been consolidated inEurope and other countries by the end of the war The U.S government in-troduced the Fordney-McCumber Tariff in 1922, which imposed high tariffs

on agricultural imports, and later the Smoot-Hawley Tariff in 1930, whichprovoked widespread retaliation Britain imposed high duties on variousindustrial products, such as precision instruments and synthetic organic

chemicals, to encourage domestic production under the Safeguarding ofIndustries Act, 1921 The volume of world trade in manufactures fell by

35 percent between 1929 and 1932, and prices also fell by a similar amount.The volume of trade in primary products fell by 15 percent, but prices fell byabout 50 percent To alleviate the worst effects of the Depression, countriesresorted to more protectionism This wave of protectionism produced a mas-sive contraction of international trade and further aggravated the Depres-sion Many of the barriers placed on trade included tariffs and quotas, avariety of price maintenance schemes, as well as arbitrary currency manip-ulation and foreign exchange controls and management

To avoid a repetition of the economic situation of the previous two cades, Allied countries met even before the war to discuss the internationalfinancial arrangements that should govern trade and capital movements inthe postwar world In 1944, they established the International MonetaryFund (IMF) and the International Bank for Reconstruction and Develop-ment (IBRD) The IMF was to be concerned with facilitating the growthand expansion of global trade through the system of fixed exchange rates,while IBRD was established to promote long-term investment This wasfollowed by an agreement (the General Agreement on Tariffs and Trade, orthe GATT) in 1948 to permit the free flow of goods among nations

de-SECTION I:

OVERVIEW OF INTERNATIONAL

TRADE

Growth and Direction of International TradeGrowth and Direction

of International Trade

International trade is the exchange of goods and services across nationalboundaries It is the most traditional form of international business activityand has played a major role in shaping world history It is also the first type

of foreign business operation undertaken by most companies because porting or exporting requires the least commitment of, and risk to, the com-pany’s resources For example, a company could produce for export by usingits excess production capacity This is an inexpensive way of testing a prod-uct’s acceptance in the market before investing in local production facilities

im-A company could also use intermediaries, who will take on import-exportfunctions for a fee, thus eliminating the need to commit additional resources

to hire personnel or maintain a department to carry out foreign sales or chases (Daniels and Radebaugh, 2004)

pur-International trade in services has grown over the past decade at anannual rate of about 18 percent compared to that of approximately 9 percentfor merchandise trade Trade in services constitutes 25 percent of overallworld trade in 2004 (WTO, 2004a) In some countries, such as Panama andthe Netherlands, services account for about 40 percent or more of total mer-chandise trade Typical service exports include transportation, tourism,banking, advertising, construction, retailing, and mass communication

IMPORTANCE OF INTERNATIONAL TRADE

TO THE GLOBAL ECONOMY

International trade allows manufacturers and distributors to seek out ucts, services, and components produced in foreign countries Companies

prod-Export-Import Theory, Practices, and Procedures, Second Edition

7

acquire them because of cost advantages or in order to learn about advancedtechnical methods used abroad; for example, methods that help reduce thecost of production lower prices and in turn, induce more consumption thusproducing increased profit Trade also enables firms to acquire resources thatare not available at home Besides providing consumers with a variety ofgoods and services, international trade increases incomes and employment.

In 1990, the number of U.S jobs supported by merchandise exports to allforeign markets reached 7.2 million U.S merchandise exports to all for-eign markets contributed to 25 percent of the growth in U.S civilian jobsbetween 1986 and 1990 (Davies, 1992) It is estimated that each billion dol-lars of merchandise exports supports about 25,000 jobs A survey of 3,032small- and medium-sized manufacturing enterprises in Canada over a three-year period (1994-1997) strongly indicates that growth in exports is associ-ated with an increase in jobs (Lefebvre and Lefebvre, 2000) Even thoughimports are associated with loss of jobs due to plant closings or productioncutbacks of domestic industries, the export job-generation effect is about7.5 percent larger than the import job-loss effect (Belous and Wyckoff,1987) During the 1979-1999 periods, about 6.4 million U.S jobs were dis-placed due to import competition Such losses are largely concentrated inelectrical/nonelectrical machinery, apparel, motor vehicles, and blast fur-naces A quarter of displaced workers reported earning losses of about 30percent, while 36 percent indicated comparable or higher earnings than fromtheir previous job (Kletzer, 2001) Most occupations show a net job gain from

an equal amount of exports and imports except for blue-collar occupations,which are shrinking in most developed countries due to increasing pressurefrom low-wage imports

Exports create high-wage employment In a study of recent wage tics, the U.S Trade Representative’s Office found that U.S workers em-ployed in export-related jobs earn 17 percent more than the average worker

statis-in the United States Export-related wages are higher for manufacturstatis-ing andservice sector jobs While service-related jobs generally pay less than man-ufacturing jobs, service jobs in the export sector were found to pay more onaverage than manufacturing jobs in the overall economy (U.S Department

of Commerce, 1994) A recent study on wages and trade finds a strong tive correlation between export intensity and wages This could be partlyexplained by the fact that export intensive sectors tend to show higher levels

posi-of productivity than other firms It is also consistent with economic theory,

as industries in which a nation enjoys comparative advantage are likely to bethose in which workers are more productive and therefore receive higher wages

It also shows that greater import penetration is associated with greater mand elasticity, which reduces workers’ bargaining power (Harless, 2006)

de-DETERMINANTS OF TRADE

Why do some countries export or import more than others? Several studieshave been conducted to establish major factors that influence exports Thetrade and exchange rate regime (import tariffs, quotas, and exchange rates),presence of an entrepreneurial class, efficiency enhancing government pol-icy, and secure access to transport (and transport costs) and marketing ser-vices are considered to be important influential factors of export behavior(Kaynak and Kothavi, 1984; Fugazza, 2004) A study on the nature, compo-sition, and determinants of Singapore’s technology exports suggests thatthe country’s open trade and investment regime and development-orientedeconomic policy have been the key factors in enhancing the country’s ex-ports Singapore’s economy has shown continued and remarkable growth inexports for over thirty years with only two brief and mild recessions in themid-1970s and mid-1980s Its total trade as a proportion of GDP remainsone of the highest in the world, over 300 percent of GDP in 2003 (Fong andHill, 1991; WTO, 2004b) A recent study on the determinants of export per-formance underlines the importance of foreign direct investment (FDI) andthe general quality of the institutional framework Foreign direct investmentcontributes to capital formation and helps promote the development andexport of knowledge-based industries (Fugazza, 2004)

Much of the research literature on imports underlines the importance ofhigh per capita incomes, price of imports, and the exchange rate in determin-ing import levels (Lutz, 1994) For developing countries, however, determi-nants of import demand also include factors such as government restrictions

on imports and availability of foreign exchange A study examining the tors influencing import demand in Pakistan from 1959 to 1986 found thatthe policy of devaluation or the policy of raising tariffs was not significant

fac-in reducfac-ing imports except fac-in the case of imports of machfac-inery and ment (Sarmand, 1989)

equip-VOLUME AND DIRECTION OF TRADE

The growth in the volume of world merchandise trade has always ceeded the growth of output (1870-2004) except for the period 1913-1950,which was marked by global political and economic instability Since 1950,while world economic output has shown steady growth, world exports in-creased at an average annual rate of more than ten times the estimated ratefor 1913-1950 (Rostow, 1978, 1992) The volume of world trade in 2004was about three times what it was in 1990 and approached eleven trillion

ex-U.S dollars (WTO, 2004a) The dollar value of total world trade in 2004 wasgreater than the gross national product of every nation in the world exceptthe United States Another measure of the significance of world trade is thatone-fourth of everything grown or made in the world is now exported.The rapid increase in the growth of world trade after World War II can betraced to increased consumption of goods and services as more people joinedthe middle class in many countries of the world Trade liberalization, both

at the regional and international level, has created a global environment that

is conducive to the growth and expansion of world trade New technologiessuch as computers, telecommunications, and other media also assisted inthe physical integration of world markets

Small countries tend to be more dependent on international trade thanlarger ones because they are less able to produce all that they need Largercountries (in terms of population) import less manufactured goods on a percapita basis because such countries tend to have a diversified economy thatenables them to produce most of their own needs The previous statementcan be exemplified by the case of the United States, Japan, India, andChina, which have low import propensities compared to countries such asBelgium or the Netherlands

Merchandise trade currently accounts for about four-fifths of world trade.The top seven exporters accounted for just over one-half of world merchan-dise exports (United States, Germany, Japan, France, United Kingdom, Italy,and Canada) Merchandise trade includes three major sectors: agriculture,mining, and manufactures Trade in manufactured goods has been the mostdynamic component of world merchandise trade In 2004, the value of worldmerchandise exports was estimated at $8.91 trillion (U.S.) compared to that

of $2.12 trillion (U.S.) for services Growth in service exports has laggedbehind that of merchandise trade for the past few years However, during2000-2004, both merchandise and service exports rose at an average of

9 percent (WTO, 2004a)

Industrial market economies account for the largest part of world trade.Trade among these countries is estimated to be greater than 67 percent ofglobal trade In view of their role in world trade, Western countries also ac-count for major shares of trade with developing countries and an increasingshare of trade with transition economies

IMPORTANT DEVELOPMENTS IN TRADE

• In 1994, the World Trade Organization (WTO) was established ing the GATT under the Final Act of the Uruguay Round Member

replac-countries of the GATT as of the enforcement date of the WTO ment became original members of the WTO World Trade Organiza-tion became the principal agency of the United Nations (UN) withresponsibility for international trade.

agree-• The Final Act of the Uruguay Round was signed in 1994 by 124 ernments providing for a global reduction in trade barriers, establish-ment of a multilateral framework of discipline for trade in services, andprotection of trade-related intellectual property rights The agreementalso strengthened existing multilateral rules in agriculture, textiles, andclothing and provided for a more effective and reliable dispute-settle-ment mechanism After the implementation of the Uruguay Round,WTO members launched a subsequent round in Doha, Qatar, in 2001

gov-to further reduce trade barriers The focus of this round has been thereduction of trade distorting agricultural subsidies provided by devel-oped countries and the introduction of equitable trade rules for devel-oping nations

• There has been a steady growth in the role of developing countries inworld trade In 2004, developing countries accounted for over a third

of the world’s top twenty-five exporters and importers Since the 1980s,

a number of newly industrializing countries (NICs), particularly thefour in the Pacific Rim (Hong Kong, Singapore, South Korea, andTaiwan), and China have greatly increased their roles in world trade.Another significant development is the opening up of China andEastern Europe for trade and investment

• China joined the WTO in 2001 Within three years its exports doubledand the country is now the world’s third largest exporter/importer ofgoods and services

• Over the past few decades, the major emphasis of many developingcountries had been on the liberalization of world markets for theirexports Their focus has now shifted from demanding tariff cuts bywealthy countries for their exports to requesting technical assistance

to increase production and exports In 2004, thirty-six countries depend

on a single commodity and fifty-two on two commodities for over

50 percent of their export revenue In view of their domestic economicconditions, the emphasis is on increasing supply/productive capacityand exports

• There has been a marked increase in the establishment of common kets and free trade areas, thus further increasing economic linkagesamong nations through trade, investment, and the operation of multina-tional companies The most notable examples are the North AmericanFree Trade Agreement (NAFTA), the Asian Free Trade Area, the

mar-Preferential Trade Area for Eastern and Southern American CommonMarket (MERCOSUR), U.S.–Central America–Dominican RepublicFree Trade Agreement (CAFTA-DR), and so on Many scholars be-lieve that such agreements are inferior to the multilateral, nondiscrim-inatory approach of the WTO Bilateral/regional trade arrangementsdiscriminate against nonmembers and create a maze of trade barriersthat vary for every exporting country: rules of origin, tariff schedules,nontariff barriers such as quotas, etc There are concerns that suchagreements also work in favor of powerful nations that will sneak inreverse preferences such as protection of intellectual property rights

or labor standards

• Export trade is no longer limited to the big multinational firms Smalland medium-sized businesses are increasing their share of exports andalready account for almost a quarter of all exports in the United States.Such firms still represent the largest pool of potential exporters andcan play a significant role in improving the U.S balance of trade,while at the same time enhancing their competitiveness and increas-ing their profits These firms also have the advantage of developingmuch more flexible structures than the big multinational enterprises

• Given the dynamic role of services in today’s economy, trade in vices has shown continued growth in most countries Even thoughservices trade takes place mainly among the industrialized nations,some developing countries have established strong service sectors thatare competitive on a global scale in areas such as engineering, con-struction, tourism, or financial services The liberalization of servicestrade (under NAFTA, EU, and WTO), in tandem with the advent ofcommunication and information technology, will inevitably induce

ser-an upsurge in services trade Among the developed countries, theUnited States has had a healthy surplus in service trade for someyears In 2005, for example, U.S service exports exceeded imports by

$66 billion, offsetting 8 percent of the deficit in merchandise trade Afew developing nations such as Egypt, India, and Pakistan also have asurplus in their service account, largely resulting from tourism andworkers’ remittances

• Today’s integration of the world economy is driven by advances incommunications and information technology as well as governmentpolicies to reduce obstacles to the flow of trade and capital flows Thisgrowing integration of nations has intensified competitive pressurespartly because countries have access to similar pools of knowledgeand technology Traditional notions of comparative advantage do notsquarely fit with present patterns of production and trade For example,

even though U.S comparative advantage lies in high-skilled, highvalue–added activities, many developing countries such as China andIndia (with high-skilled, low-cost workforce) are competing in the veryproducts for which the United States has had a global competitive ad-vantage Such competitive pressures have resulted in the reorganiza-tion and relocation of the firm’s basic activities overseas, either toaffiliate firms or independent contractors With the reduction of tradebarriers and transportation costs, many U.S firms have outsourced la-bor intensive work to overseas firms and reimport for final assemblyand sale A number of Western service industries have also started tomigrate to low cost locations overseas This process of outsourcing islikely to have major implications for employment and the structure ofinternational trade flows.

• The U.S current account deficit reached 7 percent of GDP in the lastquarter of 2005 Imports are 60 percent higher than exports At thesame time, the East Asian economies (including Japan) held about

$2.4 trillion (U.S.) in official foreign exchange reserves out of aglobal total of $4 trillion China’s foreign currency reserves alonereached $1 trillion (U.S.) by the end of 2006 The Southeast Asiancountries’ heavy reliance on exports as a way of sustaining domesticeconomic growth, weak currencies, and high savings has resulted inunsustainable global imbalances Global imbalances cannot diminishwithout, inter alia, reducing such excess savings through currency ad-justments and/or increased imports in the surplus countries

• About 60 percent (by value) of total world trade in goods is carried bysea and a substantial increase in fuel costs could act as a disincentive

to exports by raising transportation cost In air transportation (morefuel sensitive than shipping), rising oil prices could severely damagetrade in time-sensitive products such as fruits and vegetables, or parts

in just-in-time production, etc Faster economic growth in emergingeconomies is also putting pressure on the limited supply of other rawmaterials such as copper, coal, etc

• After the terrorist attacks of 9/11, there was a marked decline in pacific freight container rates for 2001 and 2002 Since 2002, how-ever, demand for container shipping has grown by over 10 percent peryear compared to the thirty-year average of 8 percent Programs wereintroduced at domestic and foreign ports to screen the containers Ex-tra security costs are estimated at about $18 per typical container Thevolume of trade has since grown and traders appear to have coped withnew guidelines without sacrificing efficiency or market share

trans-CHAPTER SUMMARY Major Benefits of International Trade

To acquire a variety of goods and services, to reduce cost of production,

to increase incomes and employment, to learn about advanced technicalmethods used abroad, and to secure raw materials

Determinants of Trade

Major determinants of exports Presence of an entrepreneurial class;

ac-cess to transportation, marketing, and other services; exchange rates; andgovernment trade and exchange rate policies

Major determinants of imports Per capita income, price of imports,

ex-change rates, government trade and exex-change rate policies, and availability

of foreign exchange

Volume of Trade

1 World trade approached eleven trillion (U.S.) in 2004 and was triplewhat it was in 1990

2 Services trade accounts for about 25 percent of total trade

3 Since 1970, average annual growth in world merchandise exports isestimated at about 12 percent

4 The industrial market economies account for 70 percent of global trade

Major Developments in Trade

1 The establishment of the World Trade Organization (WTO) as a manent trade organization

per-2 The introduction of rules under the WTO to govern trade in services,trade-related intellectual property, and investment measures

3 The marked increase in the establishment of regional trading ments such as NAFTA, MERCOSUR, etc

arrange-4 Growing role of developing countries in world trade

5 Increasing participation of small and medium-sized businesses inexport trade

6 The dynamic role of services in today’s economy and continued growth

in trade in services

7 Globalization, competitive pressures and the reorganization/relocation

of value-added activities

8 The increasing U.S current account deficit and global imbalances.

9 Fast economic growth in many countries and pressure on limitedresources Business adjustment to security costs after 9/11

REVIEW QUESTIONS

1 Discuss the importance of international trade to national economies

2 What are the major determinants of exports? Why do some countriestrade more than others?

3 What is the volume of trade?

4 What are some of the major developments in trade over the past twodecades?

5 What are the implications of the increasing U.S trade deficit for globalproduction and exports?

6 What is the reason behind the increase in common markets and freetrade areas over the past few decades?

7 What are the limitations of export-led growth?

8 Why are small countries more dependent on international trade thanlarger ones?

CASE 1.1 THE LIMITATIONS OF EXPORT-LED GROWTH

International trade played an important role in the economic development

of North America and Australia in the nineteenth century and that of EastAsian economies in the second half of the twentieth century East Asia’sgrowth contributed to improve living standards and reduced inequality asthe new prosperity was widely shared among its population In Malaysiaand Thailand, for example, the level of poverty was reduced from almost 50percent in the 1960s to less than 20 percent by 2000

Central to the success of these countries is the promotion of exports.Governments provided credits, restricted competing imports, and developedexport marketing institutions As they increased their exports to wealthycountries, their economies grew at 7 to 8 percent per year

The export-led model may have worked for a few countries during thetime when most developing countries pursued import substitution policies—substituting domestic production of manufactured goods with the exporta-tion of raw materials There are a number of limitations to export-led growth

when many countries including China begin to use it Here are some of itspotential limitations:

• It is difficult for all countries to increase exports by 8 to 10 percent peryear when the world economy grows at 2 or 3 percent per year It isnot possible for every country to have a trade surplus

• The major importing nation, the United States, cannot continue to runlarge trade deficits U.S current account deficit set a record of $790billion in 2005 (nearly 6.5 percent of GDP) Other potential destina-tions for global exports, Japan and the European Union, also rely on

an export promotion policy to sustain economic growth and are notwilling to run large deficits

• China and other East Asian economies have not taken measures toopen their markets in order to absorb increasing exports from the rest

of the world Foreign currency reserves of China, Japan, South Korea,Taiwan, Malaysia, Singapore, and Indonesia were estimated at $2.22trillion in 2005 In the absence of other sources of economic growth,focusing on the U.S market is unsustainable in the long run

• Many multinational corporations are already experiencing flat orshrinking revenue growth due to reduced demand reflecting the natu-ral limitations of export growth (see Table 1.1)

TABLE 1.1 Average Rate of Revenue Growth for Selected Sectors in the 1990s and 2000s (%)

Sectors Industries

Average Rate of Growth, 1990s

Average Rate of Growth, 2000s

Consumer

goods

Beverages, tobacco, food items, personal care products

hardware, semiconductors

equipment, cellular/wireless, long distance

pharmaceuticals, medical products

brokerages

Average Rate of Growth, 2000s

airlines

aerospace, manufacturing

aluminum

Source: Adapted from SEC Fillings, Moody’s Industrial manuals, 2004.

International and Regional Agreements Affecting Trade

International and Regional Agreements

Affecting Trade

THE GATT AND WTO

The General Agreement on Tariffs and Trade (GATT) was established in

1945 as a provisional agreement pending the creation of an InternationalTrade Organization (ITO) The ITO draft charter, which was the result oftrade negotiations at the Havana Conference of 1948, never came into beingdue to the failure of the U.S Congress to approve it Other countries alsodeclined to proceed with the ITO without the participation of the UnitedStates Thus, the GATT continued to fill the vacuum as a de facto tradeorganization, with codes of conduct for international trade but with almost

no basic constitution designed to regulate its international activities andprocedures The GATT, in theory, was not an “organization,” and participat-ing nations were called “contracting parties” and not members (Jackson,1992; Hoekman and Kostecki, 1995)

Since its inception, the GATT has used certain policies to reduce tradebarriers between contracting parties (CPs):

• Nondiscrimination: All CPs must be treated in the same way with

respect to import-export duties and charges According to the mostfavored nation treatment, each CP must grant to every other CP themost-favorable tariff treatment that it grants to any country with re-spect to imports and exports of products Certain exceptions, how-ever, are allowed, such as free trade areas, customs unions, or otherpreferential arrangements in favor of developing nations Once im-ports have cleared customs, a CP is required to treat foreign importsthe same way as it treats similar domestic products (the national treat-ment standard)

Export-Import Theory, Practices, and Procedures, Second Edition

19