13-Feb-18

What is your position?

দশীয়!! পন িকেন
হান ধন
International Trade

Mohammad Anisur Rahman

আহা!! Quality !! Foreign
Assistant Professor
Departement of MIS
Goods

5-2

Globalization 1.0

 1492—when Columbus set sail, opening trade between the Old

World and the New World—until around 1800.
 It shrank the world from a size large to a size medium. It was about
countries and muscles.
 The key agent of change, the dynamic force driving the process of

Globalization global integration, was how much brawn—how much muscle, how
much horsepower, wind power, or, later, steam power—one country
had and how creatively it could deploy these.
 In this era, countries and governments (often inspired by religion or
The World is Flat imperialism or a combination of both) led the way in breaking down
walls and knitting the world together, driving global integration.
- Thomas Friedman
 The primary questions were:
 Where does my country fit into global competition and
opportunities?
 How can I go global and collaborate with others through my
country?

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Globalization 2.0
 Roughly from 1800 to 2000, interrupted by the Great
Depression and World Wars I and II.
 This era shrank the world from a size medium to a size
small.
 The key agent of change, the dynamic force driving global
integration, was multinational companies. These
multinationals went global for markets and labor,
spearheaded first by the expansion of the Dutch and English
joint-stock companies and the Industrial Revolution.
 In the first half of this era, global integration was powered by
falling transportation costs, thanks to the steam engine and
the railroad, and
 in the second half by falling telecommunication costs—thanks
to the diffusion of the telegraph, telephones, the PC,
satellites, fiber-optic cable, and the early version of the World
Wide Web. It was during this era that we really
Globalization 3.0
 Around the year 2000 we entered a whole new era: Globalization3.0.
 Globalization 3.0 is shrinking the world from a size small to a size tiny and flattening the
playing field at the same time.
 The dynamic the newfound power for individuals to collaborate and compete globally. And
the phenomenon that is enabling, empowering, and enjoining individuals and small groups to
go global so easily and so seamlessly is the flat-world platform.
 The flat-world platform is the product of a convergence of the personal computer (which
allowed every individual suddenly to become the author of his or her own content in digital
form) with fiber-optic cable (which suddenly allowed all those individuals to access more and
more digital content around the world for next to nothing) with the rise of work flow software
(which enabled individuals all over the world to collaborate on that same digital content from
anywhere, regardless of the distances between them).
 people all over the world started waking up and realizing that they had more power than ever
to go global as individuals, they needed more than ever to think of themselves as individuals
competing
 against other individuals all over the planet, and they had more opportunities to work with
those other individuals, not just compete with them.
 As a result, every person now must, and can, ask:
Where do I as an individual fit into the global competition and opportunities of the day?

And
 how can I, on my own, collaborate with others globally?
13-Feb-18
Globalization 2.0
 We observed the birth and maturation of a global economy,
in the sense that there was enough movement of goods and
information from continent to continent for there to be a
global market, with global arbitrage in products and labor.
 The dynamic forces behind this era of globalization were
breakthroughs in hardware—from steamships and railroads
in the beginning to telephones and mainframe computers
toward the end.
 The big questions in this era were:
 Where does my company fit into the global economy?
 How does it take advantage of the opportunities?
 How can I go global and collaborate with others through my
company?
Summary
 While the dynamic force in Globalization 1.0 was countries globalizing and the dynamic force
in Globalization 2.0 was companies globalizing, the dynamic force in Globalization 3.0 is the
newfound power for individuals to collaborate and compete globally.
 Globalization 3.0 differs from the previous eras not only in how it is shrinking and flattening
the world and in how it is empowering individuals.
 It also is different in that Globalization 1.0 and 2.0 were driven primarily by European and
American individuals and businesses. Even though China actually had the biggest economy
in the world in the eighteenth century, it was Western countries, companies, and explorers
who were doing most of the globalizing and shaping of the system.
 Globalization 3.0 is going to be more and more driven not only by individuals but also by a
much more diverse—non-Western, nonwhite—group of individuals. Individuals from every
corner of the flat world are being empowered.
 Globalization 3.0 makes it possible for so many more people to plug in and play, and you
are going to see every color of the human rainbow take part.
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 13-Feb-18

How Does Globalization How Does Globalization Affect

Labor Policies And The
Affect Jobs And Income?
Environment?
 Critics argue that falling barriers to trade are destroying  Critics argue that firms avoid costly
manufacturing jobs in advanced countries efforts to adhere to labor and
 Supporters contend that the benefits of this trend environmental regulations by moving
outweigh the costs production to countries where such
regulations do not exist, or are not
 countries will specialize in what they do most efficiently
and trade for other goods—and all countries will benefit
enforced
 Supporters claim that tougher
environmental and labor standards are
associated with economic progress
 as countries get richer from free trade, they
implement tougher environmental and labor
regulations

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How Does Globalization How Is Globalization

Affect National Sovereignty?
 Is today’s interdependent global economy shifting economic
power away from national governments toward supranational
organizations like the WTO, the EU, and the UN?
 Critics argue that unelected bureaucrats have the power to
impose policies on the democratically elected governments of
nation-states
 Supporters claim that the power of these organizations is limited
to what nation-states agree to grant
 the power of the organizations lies in their ability to get countries to
agree to follow certain actions
Affecting The World’s Poor?
 Is the gap between rich nations and poor nations is getting
wider?
 Critics believe that if globalization was beneficial there
should not be a divergence between rich and poor nations
 Supporters claim that the best way for the poor nations to
improve their situation is to
 reduce barriers to trade and investment
 implement economic policies based on free market economies
 receive debt forgiveness for debts incurred under totalitarian
regimes

Discussion: Indian EID VISA in 2016

1-11 1-12 Could barriers to trade help?

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 13-Feb-18

How Does The Global Approches to International

Marketplace Affect Trade
Managers? • Export
 Managing an international business differs from managing a domestic • Licencing
business because
• Joint Ventures
 countries are different
 the range of problems confronted in an international business is wider and • Green Field / FDI
the problems more complex than those in a domestic business
 firms have to find ways to work within the limits imposed by government
intervention in the international trade and investment system
 international transactions involve converting money into different currencies

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Doing Business Doing Business: Bangladesh

http://www.doingbusiness.org/rankings
http://www.doingbusiness.org/rankings

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What Is Mercantilism? What Is Smith’s Theory

 Mercantilism suggests that it is in a country’s best
interest to maintain a trade surplus -to export more
than it imports
 advocates government intervention to achieve a surplus in
the balance of trade
 Mercantilism views trade as a zero-sum game - one in
which a gain by one country results in a loss by another
Of Absolute Advantage?
 Adam Smith argued that a country has an absolute
advantage in the production of a product when it is
more efficient than any other country in producing it
 countries should specialize in the production of goods for
which they have an absolute advantage and then trade
these goods for the goods produced by other countries

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How Does The Theory What Is Ricardo’s Theory

Of Absolute Advantage Work?
Absolute Advantage and the Gains from Trade
Of Comparative Advantage?
 David Ricardo asked what might happen
when one country has an absolute
advantage in the production of all goods
 Ricardo’s theory of comparative
advantage suggests that countries should
specialize in the production of those
goods they produce most efficiently and
buy goods that they produce less
efficiently from other countries, even if
this means buying goods from other
countries that they could produce more
efficiently at home

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What Is New Trade Theory? What Are The Implications Of

New Trade Theory For Nations?
2. In those industries when output  Nations may benefit from trade even
required to attain economies of scale when they do not differ in resource
represents a significant proportion of endowments or technology
total world demand, the global  a country may dominate in the export of a
market may only be able to support good simply because it was lucky enough to
a small number of enterprises have one or more firms among the first to
 first mover advantages - the economic produce that good
and strategic advantages that accrue to  Governments should consider strategic
early entrants into an industry
trade policies that nurture and protect
 economies of scale firms and industries where first mover
 first movers can gain a scale based cost advantages and economies of scale are
advantage that later entrants find important
difficult to match

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What Is The Is A Current

Balance Of Payments? Account Deficit Bad?
 A country’s balance of payments accounts keep track of the  Does current account deficit in the United
payments to and receipts from other countries for a particular time
period States matter?
 Balance of payments accounting uses double entry bookkeeping
 so, the sum of the current account balance, the capital account and the  a current account deficit implies a net debtor
financial account should always add up to zero
 There are three main accounts
 so, a persistent deficit could limit future economic
growth
1. The current account records transactions that pertain to goods,
services, and income, receipts and payments  But, even though capital is flowing out of the
 current account deficit - a country imports more than it exports United States as payments to foreigners, much
 current account surplus – a country exports more than it imports of it flows back in as investments in assets
2. The capital account records one time changes in the stock of
assets  Yet, suppose foreigners stop buying U.S. assets
3. The financial account records transactions that involve the
purchase or sale of assets
and sell their dollars for another currency
 net change in U.S. assets owned abroad  A dollar crisis could occur
 foreign owned assets in the United States

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What Is FDI? How Does FDI Benefit

 Foreign direct investment (FDI) occurs when a firm
invests directly in new facilities to produce and/or market
in a foreign country
 the firm becomes a multinational enterprise
 FDI can be in the form of
 greenfield investments - the establishment of a wholly new
operation in a foreign country
 acquisitions or mergers with existing firms in the foreign
country
 The flow of FDI refers to the amount of FDI undertaken
over a given time period
 Outflows of FDI are the flows of FDI out of a country
 Inflows of FDI are the flows of FDI into a country
 The stock of FDI refers to the total accumulated value of
foreign-owned assets at a given time
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The Host Country?
 There are four main benefits of inward FDI for a host
country
1. Resource transfer effects - FDI brings capital,
technology, and management resources
2. Employment effects - FDI can bring jobs
3. Spillover Effect
4. Balance of payments effects - FDI can help a country
to achieve a current account surplus
5. Effects on competition and economic growth -
greenfield investments increase the level of
competition in a market, driving down prices and
improving the welfare of consumers
 can lead to increased productivity growth,
product and process innovation, and greater
economic growth
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What Are The Costs Of How Does FDI Benefit

FDI To The Host Country? The Home Country?
 Inward FDI has three main costs:  The benefits of FDI for the home country
1. Adverse effects of FDI on competition within the include
host nation
 subsidiaries of foreign MNEs may have greater
economic power than indigenous competitors
1. The effect on the capital account of the
because they may be part of a larger international home country’s balance of payments
organization
from the inward flow of foreign earnings
2. Adverse effects on the balance of payments
 when a foreign subsidiary imports a substantial 2. The employment effects that arise from
number of its inputs from abroad, there is a debit on outward FDI
the current account of the host country’s balance of
payments
3. Perceived loss of national sovereignty and 3. The gains from learning valuable skills
autonomy from foreign markets that can
 decisions that affect the host country will be made
by a foreign parent that has no real commitment to
subsequently be transferred back to the
the host country, and over which the host country’s home country
government has no real control

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What Are The Costs Of
FDI To The Home Country?
1. The home country’s balance of payments can
suffer
 from the initial capital outflow required to finance
the FDI
 if the purpose of the FDI is to serve the home market
from a low cost labor location
 if the FDI is a substitute for direct exports
2. Employment may also be negatively affected if
the FDI is a substitute for domestic production
 But, international trade theory suggests that
home country concerns about the negative
economic effects of offshore production (FDI
undertaken to serve the home market) may not
be valid
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International Trade Barrier
2. Subsidies - government payments to domestic producers
 Subsidies help domestic producers
 compete against low-cost foreign imports
 gain export markets
 Consumers typically absorb the costs of subsidies
3. Import Quotas - restrict the quantity of some good that
may be imported into a country
 Tariff rate quotas - a hybrid of a quota and a tariff
where a lower tariff is applied to imports within the
quota than to those over the quota
 A quota rent - the extra profit that producers make
when supply is artificially limited by an import quota
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13-Feb-18
International Trade Barrier
 Governments use various methods to intervene in
markets including
1. Tariffs - taxes levied on imports that effectively raise
the cost of imported products relative to domestic
products
 Specific tariffs - levied as a fixed charge for each unit of a
good imported
 Ad valorem tariffs - levied as a proportion of the value of
the imported good
 Tariffs
 increase government revenues
 force consumers to pay more for certain imports
 are pro-producer and anti-consumer
 reduce the overall efficiency of the world economy
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International Trade Barrier
4. Voluntary Export Restraints - quotas on
trade imposed by the exporting country,
typically at the request of the importing
country’s government
 Import quotas and voluntary export restraints
 benefit domestic producers
 raise the prices of imported goods
5. Local Content Requirements - demand
that some specific fraction of a good be
produced domestically
 benefit domestic producers
 consumers face higher prices
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International Trade Barrier
6. Administrative Polices - bureaucratic rules designed
to make it difficult for imports to enter a country
 polices hurt consumers by limiting choice
7. Antidumping Policies – aka countervailing duties -
designed to punish foreign firms that engage in
dumping and protect domestic producers from
“unfair” foreign competition
 dumping - selling goods in a foreign market below their
costs of production, or selling goods in a foreign market
below their “fair” market value
 enables firms to unload excess production in foreign
markets
 may be predatory behavior - producers use profits from
their home markets to subsidize prices in a foreign
market to drive competitors out of that market, and
later raise prices
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How Can Firms Hedge Against
Foreign Exchange Risk?
 The foreign exchange market provides insurance
to protect against foreign exchange risk - the
possibility that unpredicted changes in future
exchange rates will have adverse consequences
for the firm
 A firm that insures itself against foreign exchange
risk is hedging
 To insure or hedge against a possible adverse
foreign exchange rate movement, firms engage in
forward exchanges - two parties agree to
exchange currency and execute the deal at some
specific date in the future
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13-Feb-18
Why Is The Foreign
Exchange Market Important?
 The foreign exchange market
1. is used to convert the currency of one country into
the currency of another
2. provides some insurance against foreign exchange
risk - the adverse consequences of unpredictable
changes in exchange rates
 The exchange rate is the rate at which one
currency is converted into another
 Events in the foreign exchange market affect
firm sales, profits, and strategy
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What Is The Difference Between
Spot Rates And Forward Rates?
 The spot exchange rate is the rate at which
a foreign exchange dealer converts one
currency into another currency on a
particular day
 spot rates change continually depending on the
supply and demand for that currency and other
currencies
 A forward exchange rate is the rate used for
hedging in the forward market
 rates for currency exchange are typically quoted
for 30, 90, or 180 days into the future
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Forward Exchange Rate

Formula

Consider U.S. and Canadian rates as an illustration. Suppose that the spot rate for the
Canadian dollar is presently 1 USD = 1.0650 CAD (ignoring bid-ask spreads for the
moment). One-year interest rates (priced off the zero-coupon yield curve) are at 3.15%
for the U.S. dollar and 3.64% for the Canadian dollar.

Read more: Using Interest Rate Parity To Trade Forex |

Investopedia http://www.investopedia.com/articles/forex/08/interes-rate-
parity.asp#ixzz4OrDgxuuq
Follow us: Investopedia on Facebook
9-37 9-38

Do Exchange Rates Differ Between How Are Exchange Rates

Markets? Determined?
 High-speed computer linkages between trading  Exchange rates are determined by the demand and supply for different
centers mean there is no significant difference currencies
between exchange rates in the differing trading  Three factors impact future exchange rate movements
centers 1. A country’s price inflation
 If exchange rates quoted in different markets 2. A country’s interest rate
were not essentially the same, there would be 3. Market psychology
an opportunity for arbitrage - the process of
buying a currency low and selling it high
 Most transactions involve dollars on one side—it
is a vehicle currency along with the euro, the
Japanese yen, and the British pound

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Are All Currencies What Do Exchange Rates

Freely Convertible?
 A currency is freely convertible when a government of
a country allows both residents and non-residents to
purchase unlimited amounts of foreign currency with
the domestic currency
 A currency is externally convertible when non-
residents can convert their holdings of domestic
currency into a foreign currency, but when the ability of
residents to convert currency is limited in some way
 A currency is nonconvertible when both residents and
non-residents are prohibited from converting their
holdings of domestic currency into a foreign currency
Mean For Managers?
 Managers need to consider three types of foreign exchange risk
1. Transaction exposure - the extent to which the income from
individual transactions is affected by fluctuations in foreign
exchange values
 includes obligations for the purchase or sale of goods and services at
previously agreed prices and the borrowing or lending of funds in
foreign currencies
2. Translation exposure - the impact of currency exchange rate
changes on the reported financial statements of a company
 concerned with the present measurement of past events
 gains or losses are “paper losses” –they are unrealized
3. Economic exposure - the extent to which a firm’s future
international earning power is affected by changes in exchange
rates
 concerned with the long-term effect of changes in exchange rates on
future prices, sales, and costs

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Regulatory Bodies

 World Bank
 IMF
 OPEC
 EC
 SAARC
 NAFTA

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