International Trade

Opening

FBE, Brno, Winter semester, Patrik Kubát 27/09/19

 Lecturers
 Associate professor Lea Kubíčková (supervisor)

 Ing. Patrik Kubát (examiner, instructor, lecturer)

 Q3.65, xkubat@mendelu.cz
 Dr. Marek Záboj (examiner, instructor, lecturer)
 Q3.83, marek.zaboj@mendelu.cz
 Dr. Marcel Ševela (examiner, lecturer)

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 Requirements and Evaluation in the
Course International Trade
 The Credit – total maximum 50 points (min. 26)
 Assignment: 15 (min. 9); 3-4 students, deadline for electronic form in the coursework
submission on 15th December
 Presentation: 5
 Credit test: 20 (min. 12); 13th December
 Additional points for activity: 10
 Exam – total maximum 50 points (min. 30), consists of open questions

Total number of points 100-90 89-85 84-75 74-70 69-60

Final mark A B C D E

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 Literature
 KRUGMAN, P. R. and OBSTFELD, M. International economics: theory and policy,
Boston: Pearson Addison-Wesley, 2009. ISBN 978-0-321-49304-0
 GRIFFIN, R. W. and PUSTAY, M. W. International business: A Managerial Perspective,
Reading Addison Wesley, 1998. ISBN 0-201-85767-7
 PALÁT, M., PEPRNÝ, A. and TWEREFOU, D. K. International trade, Brno: Mendel
University in Brno, 2013. ISBN 978-80-7375-814-1

 Internet sources
 Articles
 Lectures (not obligatory), seminars (obligatory)

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 Topics of the course, 13 weeks/lectures
 1st week 27.09.2019 - conditions, basic (economic) terms, introduction to the topic of international trade, globalization (for /
against, influence, tendencies)
 2nd week 04.10.2019 - a new dynamic world, developed and developing countries, world economy and its historical
development, foreign trade
 3rd week 11.10.2019 - classical theory of IT
 4th week 18.10.2019 - new theories of IT, external economic equilibrium - balance of payments
 5th week 25.10.2019 - economic aspects of IT, determinants of trade, foreign trade policy instruments
 6th week 02.11.2019 - customs duties, barriers and barriers to IT, global trade flows
 7th week 08.11.2019 - importance and position of international institutions for trade, regional integration groupings,
contractual relations
 8th week 15.11.2019 - risk (types) and financial aspects of IT
 9th week 22.11.2019 - introduction to international public and private law, international organization in IT
 10th week 29.12.2019 - Vienna Convention on IT law, operations in IT
 11th week 06.12.2019 - operations in the Ministry of Defense (contractual relations, satisfaction, transport, documents,
incoterms, intraterms, deadlines, accent, payment of insurance, etc.), Transport
 12th week 13.12.2019 - customs procedures and forms of entry to foreign markets
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 13th week 20.12.2019 - pre-term exam
 Basic terms of economy and trade
Concepts that form the basis of all economic theory:
 Rare and selection
 no society can provide everything its people want
 resources are limited
 our needs generally exceed the resources available
 rarity is the necessity of choice
 Opportunity Costs (OC)
 This is the value of what these resources could bring if they were used in the best
alternative way.
 For example, growing cotton in New York makes no sense, because sacrificing valuable
land to produce something of limited value compared to other more profitable land use
areas. The amount of this “victim” affects the value of the products produced. If cotton
was grown in NewYork, the price would be enormously high.
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 Basic terms of economy and trade
 Distribution and incentives
 Our needs exceed the available supply of goods and services, we have to decide
how to redistribute this limited quantity.
 In centrally planned economies, the authorities try to make decisions and
(re)divide.
 In market economies, price is a mechanism, dollars are the key stimulus. If the
reward (price) not offered for a particular product increases, that reward provides
an incentive to produce more of that product.
 Example: Australian wool growers who pulled wool from the market in an attempt
to raise prices.

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 Basic terms of economy and trade
 Laws of supply and demand
 The law of supply
 The relationship between the quantity that sellers want to sell over a certain
period of time (the quantity offered) and the price
 The offer can be expressed mathematically in functional form as
Qs = f (price, other factors constant)
 The law of demand
 The relationship between price and the amount of product that people want to
buy.
 Mathematically, the demanded quantity of price functions, other factors are
considered constant:
Qd = f (price, other factors constant)
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 Basic terms of economy and trade
 Equilibrium price
 Price at which the demand corresponds to the quantity offered
 Rising product prices usually cause a decline in demand
 Rising prices are a signal for manufacturers to deliver more and for consumers
to demand less
 Falling prices signal to producers to deliver less and to consumers to demand
more

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 Basic terms of economy and trade
 GDP, GNP – economic growth, measure of world output
 HDI
 Economic development = economic growth+ structural changes
 Development = economic development+ non-economic changes in
society
 World Economy

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 International trade
 International trade leads to the interconnection of the world
economy as a whole.
 The reason for international trade:
 differences in production conditions
 differences in production costs
 differences in consumer taste

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 Main outline of the theme
 Why is it beneficial for countries to engage in international
trade?
 Who controls international trade?
 Why is global trade important?
 What is a trade war?
 What is the contribution of global trade to GDP? link

 Importance of international trade in the world economy

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 Sources
 Web
 https://insightsunboxed.com/international-trade-questions-answers-ziv-baida/
 https://data.worldbank.org/
 Further literature
 SHERLOCK, Jim a Jonathan REUVID, ed. The handbook of international trade: a guide to the
principles and practice of export. 2. ed. London [u.a.]: GMB Publ. [u.a.], 2008. Global market
briefings. ISBN 978-1-84673-034-4. pages 3-36
 KRUGMAN, P. R. and OBSTFELD, M. International economics: theory and policy, Boston:
Pearson Addison-Wesley, 2009. ISBN 978-0-321-49304-0. Introduction
 REINERT, Kenneth A. An introduction to international economics: new perspectives on the world
economy. New York, N.Y.: Cambridge University Press, 2012. ISBN 978-0-521-17710-8.
pages 1-15
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Theories of International Trade (IT)

Brno, Mendelu FBE, Patrik Kubát 11.10.2019

Theories of International Trade (IT)
Their development corresponds to contemporary (economic)
thinking. These theories seek answers to 3 basic questions:

1) What is the point of involvement in IT?

2) What will be the structure of the IT with the impact
on specialization?
3) What will be the prices (exchange terms) in the IT?

Theories of International Trade

explanation of causes and impacts of business

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Division of theories

I. Pure theories of IT the main subject is IT

 a) liberalist theories
 b) protectionist theories - they require a constraint on IT

II. Monetary theories of IT balancing processes of

balance of payments

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Theories of IT – crucial changers
 dynamic development in the 1970s
 shocks to decolonization processes in the world
 increasing competitiveness
 oil crisis
 the collapse of the Bretton Woods system - USD is no longer
tied to gold
 economic slowdown in the world
 issues of economic and policy interconnection

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Classical country-based theories,
liberalist theories
 Mercantilism - a view of the trade "we against them", the profit
of another country is a loss for our country

 Free Trade Theory - Specialization in production and free

movement of goods has positive impacts for all stakeholders
 Absolute Advantage (Adam Smith, 1776)
 Comparative Advantage (David Ricardo, 1817)

 Another theories based on free trade

 Factor-proportions theory - Heckscher-Ohlin, 1919
 Product life cycle theory - Ray Vernon, 1966

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Mercantilism: 16th - 18th Century
 The first purely economic approach, policy
 Colonial expansion, mining, international trade
 GB, France, also Netherland, Central Europe and Scandinavia
 Thomas Mun the English merchant (1571–1641)
 J.B. Colbert French minister of finance Louis XIV, colbertism
 The wealth of a nation depends on the accumulation of
precious metals in the economy

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Mercantilism: 16th - 18th Century
 The theory says that a country should have a trade surplus
 Maximize exports through subsidies
 Minimize imports through customs and quota
 David Hume (1752): a sustained trade surplus will have an
impact on money supply and this trade surplus will disappear
in the long run.

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Mercantilism
 Maximizing exports and minimizing imports sees no advantage
in the increased volume of trade
 Such wealth, according to its proponents, gives the country
economic and political power
 The government intervenes to achieve a surplus in exports.
 To get more wealth through:
 Limiting imports through trade barriers
 Promoting exports through government subsidies
 In the long term, mercantilism weakens the country and
enriches only a few layers:
 The king, exporters, domestic producers wealth growth
 Other entities (households) decline in wealth as domestic products
remain expensive
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Mercantilism
 Favorable trade balance required (more exports than imports)
 Government policies emphasize export
 Continuous influx of gold
 Unfair and unbalanced trade

 Today's neomercantilists = protectionists

 Today it could be called economic nationalism (emphasis on
building domestic industry and economy)

 Again, the economic crisis has raised protectionist sentiment.

Mercantilism explained, 4 min https://www.youtube.com/watch?v=gMYo07DESRs
Trade Theory Mercantilism, 6 min https://www.youtube.com/watch?v=cVJrt33cE4w

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Absolute advantage (classical economics)
 Adam Smith: The Wealth of Nations, 1776
 Founder of (political) economics
 Father of free trade

 Countries are similar to individuals. They differ in talents and

abilities in production.

 The country should specialize and export products for which

it has an absolute advantage and import others.
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Absolute advantage
 A country has the absolute advantage of being more
productive in the production of a product than another
country.
 A country has an absolute advantage when it is the sole
producer of certain goods or when it is able to produce those
goods cheaper.
 Or: A country has the absolute advantage of producing certain
goods when using the same amount of resources as another
country, it is able to produce more of those goods.
 Or: A country has the absolute advantage of producing goods
when, with fewer resources, it is able to produce the same
amount of goods as another country.

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Absolute advantage
It benefits both countries in engaging in mutual trade.
Product output increases as a result of specialization and trade.

 Free trade
 International division of labor
 Specialization where there is an absolute advantage.

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Example 1, absolute advantage
Why trade between countries is useful?

Two countries: USA and China

Two goods: cotton, silk
Production factor: work
Difference in skills, qualification
Full employment and labor immobility.

hours needed per unit of work

cotton silk
USA 25 80
China 50 40

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Example 1, absolute advantage -
explanation
 Cotton and silk are produced in both countries.
 Producing unit quantities of cotton in the US requires 25 hours of
work, but China requires 50 hours of work. Thus, cotton production
is more expensive in China.
 Production of silk unit costs 80 US working hours and only 40
hours in China.
 China has an absolute advantage over the US in silk production, but
the United States has an absolute advantage in cotton production.
 Thus, the United States will prefer to import silk rather than
produce it and export cotton to China.
 China has a cost disadvantage in cotton production and a cost
advantage in silk production. So China will trade silk for cotton.

= Useful and effective for both parties.

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Scenario 2: What if the following
conditions exist?
• Lower cost in Australia
• Does Australia produce both products?
• The absolute advantage does not give an
explanation of how trade would have
occurred under these conditions.

hours needed per unit of work

cotton wool
Australia 90 80
USA 100 120

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Scenario 2: What if the following
conditions exist?
The cost of both products is lower in Australia than in the US.
One country, Australia, has an absolute cost advantage in the
production of both cotton and wool. The US has nothing to offer
Australia,Australia sees nothing cheaper in the US than it would
be at home. At least that's what it looks like.

?: If a country has an absolute advantage in all areas, then that

country does not need to trade, right?

?: Why should Australia not focus on producing both products?

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Comparative advantage
A country has a comparative advantage when it produces goods with
lower alternative costs (compared to the best possible other
alternative) than another country.

View from Australia:

Although Australia has a clear superiority over the US in both cotton and
wool production, it has a greater advantage - a comparative cost
advantage - with wool. The area in which Australia has the greatest
advantage can be found by cost comparison.
The cotton cost ratio of 9:10 (9/10) is higher than the cost ratio of 8:12 (2/3).
The cost of cotton production in Australia is therefore 90% of the US price.
But for wool production, the Australian cost is only 67% of the cost of the
United States.

Australia therefore has a comparative cost advantage in wool

production, so it is more efficient for Australia to produce wool.
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Comparative advantage
 One country has a comparative advantage over another in the
production of certain goods if its alternative cost (opportunity
cost) to produce that commodity is lower.
 A country with a comparative advantage can produce goods at
lower alternative costs than other countries.

?: What about nations that have no outstanding production

benefits? No trade?
 No, trade can be profitable even if there is no absolute
advantage.

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Comparative advantage: US view
 US labor cost per unit is higher than in Australia for both cotton
and wool.
 The cost ratio for the US is the inverse cost ratio of Australia, so it
would be 10: 9 or 10/9 for cotton production and 12: 8 or 12/8 for
wool production.
 If we divide by 10: 9, we get 1.1, which suggests that cotton
production costs the United States about 1.1 times as much as
Australia. Then by dividing 12: 8 we get the number 1.5, which
suggests that the United States producing wool costs about 1.5
times what Australia.
 It follows that the US has the least cost disadvantage in cotton
production.

= Australia has an absolute advantage for cotton and wool, and

production costs are higher in the US for both products. Yet, when
comparing cost ratios, we find that Australia has a greater comparative
advantage for wool and the US has the least cost disadvantage in
cotton production.
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Comparative vs. Competitive advantage
 A comparative advantage is a concept based on the relative
costs of production (and alternative costs) between
countries.

 A competitive advantage is a concept used to compare the

ability of two companies to compete with each other in a
given industry.

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View of the real world business
?: What is the fundamental reason for trade, which is given
by the theories of absolute and comparative advantage?

 Differences in technology and skills of people in two countries

Does it makes sense?

Is this the only economic reason for countries to trade?

International trade: Absolute and comparative advantage, 6 min

https://www.youtube.com/watch?v=Vvfzaq72wd0
International Trade Theory, 14 min https://www.youtube.com/watch?v=W_upI5crUXc

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View of the real world business
 Obviously, government officials do not sit over cost data to
decide what their country should specialize in production and
then trade.
 Instead, it is the very desire of individuals to make money that
determines the structure of international trade.
 It is the desire to make a profit that determines which
countries specialize in the production of what goods and then
trades with other countries.

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Example
Suzanne from the US visits England and finds that wool is relatively
cheap compared to US prices, while cotton is relatively high in England.
 What will she do?
She decides to buy some cotton in the US, sends it to England and
sells it at relatively higher English prices.
With his profits from the cotton transaction, he buys wool in England,
takes it to the US and sells it at relatively higher US prices.
It buys cheap and sells expensive, buys in a country where goods are
cheap, and sells in a country where goods are more expensive.

And what are the consequences of their activities?

 First, generates profit.
 Secondly, each country is heading towards its comparative
advantage. The US ends at cotton exports to England and England at
wool exports to the US.
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Factor-Proportions Theory
Heckscher-Ohlin Theory (H-O Theory)
 Heckscher (1919), Ohlin (1933) - Stockholm School of Economics
 Production factors: labor, land and capital

Assumptions of the model:

 Availability of production factors varies between countries.
 The mobility of factors of production between countries is considerably limited.
 Products are capital-intensive and labor-intensive
 Production technologies are fixed for all countries
 The nature of IT depends on the differences in the equipping of production
factors, not the differences in productivity.
 The production of products varies according to the type of production factors
they require as inputs.
 The country should specialize and export products that have a sufficient
supply of resources to produce, which are cheaper than others (use factors
that are redundant).

Cheese: soil-intensive (farming, cows-milk-cheese)

Clothes: labor-intensive (fabrics-seamstresses-clothes)
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The refutation of H-O Theory
 Disproved by Leontief's Paradox (1954)
 He attempted an empirical test of H-O Theory (input-output
analysis) and came to contradictory results. He found that the
US:
 They tended to export labor-intensive goods even though they had a
surplus of capital
 Imported capital-intensive goods
 The H-O Theory assumes that US exports of goods should
have more capital per worker than US imports. However,
Leontief was surprised to find that importing goods into the
US was 30% more capital intensive than US exports.

Trade Theory Heckscher Ohlin Theory plus the Leonteif Paradox, 7 min
https://www.youtube.com/watch?v=bpKACOG_t_Q

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Criticism and extension of H-O Theory
 This model offers poor real world predictions and
international trade
 Capitalization is not given naturally. Capital consists of goods
produced in production (often imported from abroad)
 In this sense, capital is internationally mobile and is the result of past
economic activity.
 Other unrealistic assumptions
 Naturally equipped with capital, homogeneous capital, identical
production function (countries have the same technology, the same
production, etc.)
 Samuelson extension: Samuelson has added various other real-
world factors (customs…) to increase the model's predictive
power.
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Limitations of classical theory
 Free trade expands the world “cake” for
products/services
Limitations
 Simple world (two countries, two products)
 No transport costs
 No price differences at sources
 Resources are immobile among countries
 Constant range returns
 Each country has a fixed supply of resources
 Full employment

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Limitations of Classical Theory vs.
The real world
 Many countries and many goods
 Shipping costs may decrease with specialization
 Prices in individual countries are affected by exchange
rates
 Resources can move from country to country:
 labor (Mexico to US),
 capital (FDI)
 Full employment assumes a fully efficient use of resources

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Post-war theories of international
trade/New trade theories
 It discusses the benefits of specialization where significant
economies of scale occur.
 Specialization increases output, the possibility of increasing economies of
scale
 In many sectors, there are often few profitable firms

 Therefore, first mover advantage companies will develop economies
of scale and create barriers to market entry for other firms.
 Japan and microchip production
 Commercial aerospace industry is another excellent example (Boieng,
Airbus)
 The new trade theory does not contradict the comparative
advantage theory, but instead identifies the source of the
comparative advantage.
 Human capital is essential - a comparative advantage arises from
differences in human capital between countries.
Post-war theories of international
trade
a) Stage of technological approaches (1960s–1980s)
 Theory of similarity in the demand structure (Linden,
1961)
 The structure of domestic demand is similar to that of international
demand
 Companies behave accordingly and will export products that are
successful in the domestic market
 Not only address the state as a whole, but also takes into account
individual companies – microeconomy
 Technology gap theory (Posner, 1961)
 Export of the most sophisticated products (have a technological
edge over other countries) keep this edge thanks to profit from
export (they re-invest the profit back to the development) and can
be hardly caught up with.
 Innovation plays a key role for exports
Product Life-Cycle Theory (PLC)
 Raymond Vernon, 1960´s
 Products undergo a cycle:
 Implementation: probably in developed countries
 Growth: sales growth, production slowly starting abroad
 Maturity: standardized product, price is more competitive. Changes in
the comparative advantage encourage the transfer of production to
developing countries.
 Decrease: most production in developing countries.

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45
46
PLC
 It deals with the life cycle of a typical “new product” and its impact
on international trade
 Developed in response to H-O model failure in the US
 It focuses on industrial goods

Development of a new product in the USA

Two main product features:
a) It will meet the demand of high-income groups, as the US is a high-
income country
b) The production process will be labor-saving and capital-efficient. It is
also possible that the product itself - such as durable goods such as
microwave ovens - will create time savings for consumers.
 The reason for including potential labor savings in the production
process is that in the United States the labor factor is generally
considered to be scarce. Thus, technological change will enhance
production processes that have the potential to retain this rare
factor of production.
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Stage: New product
 In the first stage, the product is produced and consumed only
in the United States.
 Firms produced it in the United States because it is where
demand is located and these companies want to stay close to
the market and discover consumer reactions to the product.
 At this stage, the product characteristics and the production
process are in a state of change as they try to become familiar
with the product and the market.
 There is no international trade.

48
Stage: Maturation of the product
 At this stage, some general standards for a given product and
its characteristics begin to emerge, and a mass production
technique is introduced.
 With further standardization in the production process,
economies of scale begin to be realized.
 This characteristic contradicts the H-O model and Ricardo, whose
theories assume constant returns from the range
 In addition, foreign demand for the product is increasing, but it
is mainly associated with other developed countries because
the product satisfies the demand in high-income countries.
 This increase in external demand (coupled with economies of
scale) leads to a business model where the United States
exports the product to other high-income countries.
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Stage: Maturation of the product
 Once US companies sell to other high-income countries, they
can begin to evaluate the opportunities to produce abroad (in
addition to production in the United States)
 If cost conditions are favorable (ie, that production abroad
costs less than production at home plus shipping costs), then
US firms will tend to invest in production facilities in other
developed countries.
 If this happens, there will be a reduction in the export of US-
produced products. The plant in France will then supply goods
not only to France but also to other European countries.
 Therefore, the initial increase in US exports is followed by a
decline in US exports and a likely decrease in US production
of the goods in question.
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A note on aspects of PCT relocation
 Unlike H-O Theory or Ricardo, he recognizes that capital is
mobile internationally
 This feature is in line with the very high amount of foreign
income earned by US firms in Western Europe during the
1960s and 1970s
 Later, Japanese companies investing in the rapidly developing
countries of Asia (China, South Korea, Taiwan)

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Maturation of the product
 Vernon also states that at this stage of maturation, the product
may eventually start to flow from Western Europe to the
United States.
Why?
 If capital is more internationally mobile than labor, then the
price of capital in individual countries is unlikely to differ as
much as the price of labor.
 Thus, if the relative prices of products are significantly
influenced by labor costs, and these are lower in Europe than
in the United States, Europe may be able to get below the cost
of production in the United States.
 Comments: Remember that Vernon's theory was written in
1966, today it is less true that European labor costs would be
lower than in the United States.
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Stage: Product standardization
 At this time, the characteristics of the product itself and the
manufacturing process are generally well known, the product is
known to consumers and the manufacturing process is known
to producers.
 Production can move to developing countries.
Why?
 Labor costs
 Developed countries engaged in the introduction of other products
 Thus, trade develops so that the United States and other
developed countries can import product from developing
countries.

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Phases overview
 Most new products in the 20th Century were originally designed for
and produced in the US.
 US firms kept production close to the market
 To minimize the risk of introducing new products
 Demand is not yet based on price (new product), the cost of production is
not yet a question
 Limited initial demand in other developed countries
 Initially, exports are more profitable than production abroad.
 With the growth of demand in developed countries
 Production is moving here
 With the expansion of demand everywhere else in the world
 The product becomes standardized
 Production moves to areas with low production costs (developing
countries)
 The product is now imported to the US and developed countries
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PLC: summary
 Thus, PCT assumes a dynamic comparative advantage, since
the production and export of a product is shifting from one
country to another throughout the product life cycle.
 First, the product is exported by the innovative country, but
then production is transferred to other developed countries
and finally settled in developing countries.
 The above-mentioned look at the product history describes
this development in general.

Product Life cycle - Stages of PLC explained with examples, 4 min

https://www.youtube.com/watch?v=pq3e1b_7uho

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PLC: practical examples
 Electronics, such as televisions, have been an important export item
in the United States for many years, but Europe, and especially Japan, has
emerged as competitors over time, which has dramatically reduced US
market share.
 In a less distant time, Japan became threatened by South Korea and other
Asian manufacturers
 The textile and clothing industry is another example where developing
countries (notably China, Taiwan, South Korea and Singapore) have become
major suppliers on the world market and have started to replace the
United States and Japan.
 The automotive industry and its exports have also relatively moved from
the United States and Europe to Japan and later to countries such as South
Korea and Malaysia
 This dynamic comparative advantage, together with mobility factor and
economies of scale, make life cycle theory an attractive alternative to the
H-O model.

56
Post-war theories of international
trade
b) The second half of 1980s
 The economies of scale concept
 The element first in production of a particular good or specialization in
a particular field may acquire a competitive scope – a competitive
advantage through increased experience and advancement in the field
 the competitive scope may be maintained in long term
 Differences in human capital (Peter Kenen)
 Human qualities and knowledge - hardly transferable
 Cannot be traded
 Countries with the most human capital - countries with the highest gains
 Geographic concept (Paul Krugman)
 Natural concentrations occur in an economy in international trade, in
other words, a high-tech industry is attracted by another high-tech
industry. Highly developed and underdeveloped areas will arise.
Post-war theories of international
trade - Alternative theory of
international trade, before WWII
a) Theory of children's branches (Friedrich List,
Germany); Friedrich List, The National System of Political
Economy [1841]
 In the early stages they experience difficulty or are totally
unable to compete with established foreign competitors
 Governments sometimes have the urge to support the
development of these sectors, ie to protect the domestic
sectors at their stages - usually through tariffs and quotas
 Problem: when to stop supporting; lower pressure on
efficiency (companies get used to support); moral hazard -
even those who are not entitled may require subsidies
 USA, Germany (before and after the WWII)
Post-war theories of international
trade - Alternative theory of
international trade, before WWII
b) Disproportionality theory (Werner Sombart,
Germany)
 Which stated that the downswing of the economy is
explained by the growing disproportionality between the
organic and the anorganic sector of the economy.
 IT as weak side of the economy
 self-sufficiency – strong economy (Germany, 1930´s)
 Coming to the level of the theory of autarchy
Post-war theories of international
trade - Alternative theory of
international trade, after WWII
c) Poor Growth Theory (Jagdish Bhagwati, India)
 Economic growth may result in a worse situation than before
growth
 Companies in developing countries do not respond to the
decline in world prices according to neoclassical rational
behavior.
 It seeks to compensate for the fall in world prices by
increasing production and increasing exports, leading to a
further fall in prices (poverty circle)
Post-war theories of international
trade - Alternative theory of
international trade, after WWII
d) Theory of peripheral economy (Raul Prebish,
Argentina)
 Center vs. periphery (developed vs. developing countries)
 Industrial product prices (with higher added value) are rising
faster than prices of raw materials and staple foods
 This leads to worsening terms of trade
 Decolonization just in political way

World-Systems Theory, Dependency Theory and Global Inequality, 14 min

https://www.youtube.com/watch?v=79gCqjl6ihQ
Sources
Further literature
 PALÁT, M., PEPRNÝ, A. and TWEREFOU, D. K. International
trade, Brno: Mendel University in Brno, 2013. ISBN 978-80-
7375-814-1.
 KRUGMAN, P. R. and OBSTFELD, M. International economics:
theory and policy, Boston: Pearson Addison-Wesley, 2009. ISBN
978-0-321-49304-0. Part 1 International Trade Theory

 GRIFFIN, R. W. and PUSTAY, M. W. International business: A Managerial

Perspective, Reading Addison Wesley, 1998. ISBN 0-201-85767-7
 REINERT, Kenneth A. An introduction to international economics: new
perspectives on the world economy. New York, N.Y.: Cambridge University
Press, 2012. ISBN 978-0-521-17710-8.

62
63
 Economic aspects of
international trade
1) determinants of trade, 2) foreign trade policy instruments

1. 11. 2019, Brno

determinants of trade
Economic aspects of international trade
 Determinants of trade
Balance without trade
Assumptions:
• Country is isolated from the rest of the world and produces
steel
• The steel market consists of domestic buyers and sellers just
in the country
• No one can import or export steel
 Balance without international trad
Results:
• The domestic price is adjusted to match demand and supply
• The sum of the surplus of the consumer and the surplus of
the producer measures the total benefit received by the
buyer and the seller
 Importer or exporter?
• If a country decides to engage in international trade, will it
be an importer or exporter of steel?
• The effects of free trade can be monitored by comparing
the domestic price of goods without trade and the world
price of goods.
• The world price is the price that prevails on the world
market for the goods.
World price and comparative adva
• If a country has a comparative advantage, then the dom
be below world price and the country will be an exporte
• If a country does not have a comparative advantage, the
domestic price will be higher than the world price and t
will be an importer of goods.
International trade in an exporting
country
International trade in an importing c
 Winners and losers in the trade
Exporting country
The analysis of the exporting country brings two conclusions:
• Domestic producers of certain goods are better off and
domestic consumers are worse off
• Trade increases the economic well-being of the nation as a
whole
International trade in importing count
Gains and losses on international trade in the
importing country
• If the world price is lower than the domestic price, the
country will be a steel importer (if trade is allowed)
• Domestic consumers will want to buy steel at a lower world
price
• Domestic steel producers will have to reduce production
because the domestic price will move towards the world
price.
 Winners and losers in the trade
Importing country
• How does free trade affect welfare in the importing
country?
• The analysis of the importing country leads to two
conclusions:
• The domestic producers of the goods are worse off and the
domestic consumers are better off.
• Trade increases the economic well-being of the nation as a whole,
as consumers 'profits outweigh producers' losses
foreign trade policy
instruments
Economic aspects of international trade
 Foreign Trade Policy (FTP)

• a part of general economic policy; part of state regulation of

external economic relations
• set of instruments to regulate external economic relations
• 2 basic antagonistic approaches
 Liberal
 Protectionist

But usually a mix

• bilateral and multilateral
Example: foreign trade policy of the
Czech Republic
• highly liberal – relatively small economic power
– historical development

Since 1990, the Czech Republic has been implementing the

first concept of opening our economy to foreign competition.
Roles of foreign trade
• transformation
• pro-growth
• pro-slowing down
Classification of trade instruments
By purpose:
– Protectionist (of domestic market)
 tariff
 non-tariff - most widespread instruments
– Promoting (of export)

By way of implementation:
– autonomous
existence of interdependence
– contractual

Used in order to fulfill the objectives of the overall economic policy.

 Autonomous instruments
• implemented in trade policy into trade policy by a sovereign
state
• implemented only in the framework of already concluded
international agreements and treaties
• in the field of customs - only the general customs duty fixed
against non-WTO members and the fixing of "maximum"
customs duties
• independent, unilateral
Autonomous instruments
Tariffs, customs duty
A tax placed on goods when crossing the border

Roles of tariffs – income, protective, structural

(changing in history)
systematically applied duties:
◦ announced in advance
◦ due in the specified period of time
◦ set by the customs tariff
Autonomous instruments
Tariffs, customs duty
Tariffs types:
• Direction of movement – import, export, transit
• The purpose for which the duties are applied – fiscal,
protectionist
• Method of calculation – ad valorem, specific, compound
• Purpose of introduction – see roles + antidumping, prohibitive,
compensative, countervailing
Harmonised Tariff schedule – appropriate classification
Impact principle – primarily increases price of goods
 Other non-tariff instruments
a very large file that is constantly expanding
Industry:
• most often in engineering, agriculture and the chemical industry
• food trade is most affected by trade in food products, products, textiles and
raw materials

Regions:
• the most – Asia, Pacific, Europe, central Asia
• relatively less – North and South America, South Asia and Caribic
• minimal - Middle East, North and Sub-Saharan Africa
Quotas
Quota – quantitative limit

Quota types:
• Direction of movement – import, export
• Form – absolute, relative (tariff rate, …)

Often used to monitor Voluntary Export Restrain

Impact principle – primarily limits quantity, price change is secondary

 Other non-tariff instruments
• Licences – official authorization for conducting trade with foreign countries
• types – time permanent, one-shot
• Direction
• Export – necessary for exports of goods – non-renewable resources (coal, wood;
cultural monuments, agricultural products, chemical products)
• Import – a permission to import goods – gold, silver, textile etc. – where the state
wants to used them
• transit (monitored goods – weapons, military equipment etc.)
• by purpose – automatic, non-automatic, security
• Minimal import price – the price of the imported goods is lower than the minimum
set one; provides a minimum threshold to calculate th duty; helps to domestic
producers
 Other non-tariff instruments
• Import mark-up - the amount of money levied on importation of products and
determined as a percentage of customs value; make all imports more expensive
• Import deposit - a monetary amount which is interest-free on importation at a fixed
amount and for a specified period, after the specified time, the deposit is returned
to the importer
• Export/import monopoly under state control
• Hidden barrier – additional procedures and permissions (product standards a
testing, fyto-sanitary and veterinary regulations, access to distribution chains,
local-purchase limits, public sector procurement policy, duration o custom
procedures, bureuacracy, …)
 Contractual trade policy instrum
• they are based on international treaties obliging the country to
implement a trading system, including measures that a country can
take in the event of domestic market protection or sanctions resulting
from non-compliance with an agreed trading system
• bilateral, trilateral agreements
• preferential agreements (EU-ACP)
• agreements to create a free trade area
• agreements on the creation of a customs union (e.g. the Czech
Republic, Slovakia)
• WTO (GATT)

Contractual instruments of the Czech Republic: Europe Agreement, bilateral agreement

with CEFTA countries, WTO obligations
 Export promotion policy

No general system, highly individualized

– Instrument of competitiveness, thus maximums are set-up

Types:
Financial – direct subsidy, raw-material price subsidy, subsidized insurance and
interest rates, ….
Non-financial – trade diplomacy, export award, ….
 Bilateral contractual instruments
• Trade agreement (governmental)
preamble + merit + protocol (procedures) + annexes
Merit part is formalized to standard clauses (most-favoured nation, national
treatment, reciprocial)

• Trade pact, trade treaty

• Currency, payment agreements (clearing agreement)
– Barter agreements
– International commodity arrangements
 Multilateral contractual instrument
complex of members states liabilities, rights and obligations
• Integration groups – the aim is to perform some activites jointly and
promote cooperation in specific areas; the power is tranferred to
established institutions
(economic) integration stages/groups:
1. Free trade area/zone
2. Customs union
3. Single market
4. Economic and monetary union
5. Politic union
• International organizations – secondary subjects of international law
 Government and trade
• Governments often find political reasons for policies that
restrict trade.
• Government policy based on influencing international
trade flows is often referred to as international trade
policy
• Generally, domestic producers benefit from protection
from foreign competition to the detriment (loss) of
domestic consumers
 Market protection arguments
• Creating domestic jobs
• Creating a level playing field
• Create additional government revenue (from customs duties)
• National security
• Infant industries
• Unfair competition
• Conservation measures as a starting point for negotiations
with other countries
• Strategic trade policy
 Creating of domestic jobs
• It assumes that domestic producers will produce goods that
would otherwise be produced abroad, thus creating
domestic jobs instead of jobs abroad
• Unfortunately, this will only help the industry
• Domestic consumers will pay higher prices for the goods in
question and thus will be left less to purchase other goods
• This reduces spending in other sectors
• Decreases the standard of living of consumers
• As a result, jobs are not saved but simply redistributed between
sectors
 Equal conditions of the game
• Producers in the domestic industries argue that
governments should compensate them for the distinct
advantages that foreign producers have
• They claim that foreign producers have access to cheaper labor
• Lower taxes
• Are subject to less stringent regulation, etc.
• Voices calling for „fair trade“ typically aim to impose
restrictions to resemble those imposed by other countries
 Generation of government revenu
• The government is simply looking for another source of
income
• This is often the case in developing countries, where most
economic activities are trade-related
• Trade is therefore the largest tax base

National protection
• Some sectors are considered critical for national defense (eg
certain metals, food, transport)
• Industries that are really necessary for national security should
be protected from foreign competition, if this is the only way
to ensure their existence.
 Immature industries
• Countries sometimes justify protecting new industries
that need time to become competitive with the rest of the
world.
• An alternative is to subsidize these industries, allowing
them to demand lower prices due to their cost of
production.
• New industries need time to get started
• Build effective relationships with other companies
• Business learning curves
• Increase production volume until economies of scale appear
• It should be temporary but often difficult to remove.
 Strategic trade policy
• Utilizing trade restrictions or subsidies to enable lower-cost
domestic firms to achieve a greater share of the world market
• Increasing economies of scale: costs per unit of production
decrease as production increases

Trade agreements
• Unilateral: the country will remove its constraints on its own
• Multilateral: countries will reduce / remove trade restrictions
along with other countries
• NAFTA - multilateral trade agreement
• In 1993, it reduced trade barriers between the US, Mexico and Canada
 Effects of foreign trade policy
Two primary effects:
• “Trade creation” occurs when low-cost producers within the
FTA replace high-cost domestic producers
• Consumers in Member States can receive goods at lower prices than
would be available at home
• “Trade diversion” occurs when high-cost domestic producers
within the FTA replace low-cost external producers.
• Economic efficiency on a global scale is limited as production is
shifting to high-cost producers

• Is regional integration beneficial?

• Yes, but only if the amount of trade it creates is higher than
the amount it diverts
 Summary

• IT effects can be determined by comparing the domestic price

without trade and the world price.
• The low domestic price indicates that the country has a comparative
advantage in the production of the goods and will become an
exporter and vice versa.
• There are various arguments for restricting trade
• Protection of jobs, national security, protection of immature sectors,
prevention of unfair competition and reactions to restrictive policies
of other countries.

But economists believe that free trade is usually a much better policy!
 Video spot
• Trump's Trade War (full film) | FRONTLINE, 55 min. https://www.youtube.com/watch?v=4_xQ5JisFuo
• Exports and Imports | Protectionism, Tariffs and Who Benefits From Them, 9 min.
https://www.youtube.com/watch?v=Ny6kCk2Q6So
• How do tariffs work? | CNBC Explains, 5 min. https://www.youtube.com/watch?v=LKCMnCZyxiQ
• Explaining Economic Integration, 2 min. https://www.youtube.com/watch?v=e0ZBw9N6UBs
• Free trade defence instruments, 1 min. https://www.youtube.com/watch?v=zQ_Jf6HqWjc
• Trade wars, explained, 5 min. https://www.youtube.com/watch?v=Iwa3vLoeNmQ

• Application: International Trade, 6 min. https://slideplayer.com/slide/10621444/

(further) sources
• PALÁT, M., PEPRNÝ, A. and TWEREFOU, D. K. International trade, Brno: Mende
2013. ISBN 978-80-7375-814-1. Determinants of the trade
• KRUGMAN, P. R. and OBSTFELD, M. International economics: theory and policy
Addison-Wesley, 2009. ISBN 978-0-321-49304-0.
• GRIFFIN, R. W. and PUSTAY, M. W. International business: A Managerial Perspe
Addison Wesley, 1998. ISBN 0-201-85767-7
• REINERT, Kenneth A. An introduction to international economics: new perspect
economy. New York, N.Y.: Cambridge University Press, 2012. ISBN 978-0-521-1
Trade barriers
and
global trade flows
International trade

Patrik Kubát
https://www.weforum.org/agenda/2015/10/a-new-way-of-visualising-world-trade/
The most important centers of international trade?

▪ USA
▪ Japan
▪ EU
▪ China

▪ International trade in goods the oldest form of external economic

relations
▪ It is growing approximately 7 times faster than global economic growth
 Trading commodities: different focus
a) Developing countries - export of raw materials, primary products and agricul
production
b) Developed countries - export of industrial products and technologies
https://www.youtube.com/watch?v=WPLnMsAhrxg
▪ The changing structure of international trade in goods
▪ The global trend in terms of the structure of goods is the
transition from primary production to products with higher added
value (manufactured products)
Managing global trade flows

International trade barriers

1. Direct
▪ Customs duty
▪ Quotas
2. Indirect
▪ Regulatory measures
▪ Hygiene limits
▪ Conditions of origin and marking
▪ Protection against unfair competition
▪ Customs procedures
▪ Discrimination in tenders
 Managing global trade flows
Customs duty
Definition: duty is the amount in domestic currency that is collected by
the government from the owner of the goods when it crosses national
borders
Impact of duties:
▪ Protective effect, duties protect the domestic economy
▪ Fiscal effect, duties have impact on the state budget (less significant
today)
Developed countries: industrial duty is between 2.5 and 4%, developing
countries much more, e.g. China 10-50%, Mexico 17-35%
 Managing global trade flows

Quantitative import barriers

▪ Import quotas - contingents
▪ VER - voluntary export restraints (a plan whereby a country
voluntarily restricts its exports)
▪ Global and individual quotas
Comparison of quotas and tariffs (quotas are more efficient
because they can be easily changed, directly, restrict import, can
create a starting bargain, don't raise local prices ?!)
Other barriers that have the same effect as import quotas:
▪ Import licenses and authorizations
▪ Embargo
Managing global trade flows
Indirect trade barriers
▪ Strict customs procedures and their execution
▪ Country of origin labeling regulations
▪ Import control of animals and agricultural products
▪ Hygiene rules concerning the import of plant products
▪ Discrimination in tenders
▪ Other conservation measures (e.g. boycott)
What are the barriers to international trade?

Natural
Tariff
Nontariff
Barriers complicate the development of export

▪ Insufficient finances
▪ Insufficient knowledge
▪ Missing links on foreign market
▪ Unspecified export targets
▪ Lack of capital
▪ Lack of production capacity
▪ Lack of foreign distribution channels
▪ Focusing managers on emerging markets
 Economic sanctions
▪ commercial and financial penalties
▪ to accomplish some purpose of the initiator
▪ generally aim to change the behavior of elites in the target
country/territory
▪ may include various forms of trade barriers, tariffs, and restrictions on
financial transactions
Economic sanctions as embargo
▪ more severe sanction - no-fly zone and/or naval blockade
▪ the type of repression in international relations
▪ extreme means of diplomatic pressure
 Overview of EU legislation in the field of
international trade
1. Customs code of European community - The Union Customs Code (UCC)
2. Act of the European Community customs regulation execution
European Community Customs Code

▪ Import and export obligations and other measures of international trade

policy are based on: Customs duties of the European Communities

▪ The country of origin of the goods is particularly important - it is a tool for

implementing foreign trade policy

▪ European customs regulations describe two possible types of origin of

goods:
▪ Non-preferential origin (statistical, commercial) that offers no tariff advantages
▪ Preferential origin linked to a tariff advantage.
Within the regulatory framework defining preferential origin, we have to distinguish
between rules that define reciprocal preferential treatment of goods between the EU
and third countries and rules that only apply to unilateral preferential treatment by the
EU (eg for the least developed countries)
The EU classification system consists of three
integrated components
▪ The Harmonized System (HS) is a nomenclature developed by the World Customs
Organization (WCO) comprising about 5,000 commodity groups, organised in a
hierarchical structure by
▪ sections
▪ chapters (2 digits)
▪ headings (4 digits)
▪ sub-headings (6 digits)
and supported by implementation rules and explanatory notes. List of countries applying the
Harmonized System

▪ The Combined Nomenclature (CN) is the EU's eight-digit coding system, comprising
the HS codes with further EU subdivisions. It both serves the EU's common customs
tariff and provides statistics for trade inside the EU and between the EU and the rest
of the world.
▪ The Integrated Tariff (TARIC) provides information on all trade policy and tariff
measures applicable to specific goods in the EU (e.g. temporary suspension of
duties, antidumping duties, etc). It comprises the eight-digit code of the combined
nomenclature plus two additional digits (TARIC subheadings).

https://trade.ec.europa.eu/tradehelp/
TARIC - Tariff Integre de la Communautee
▪ It is an information database containing all the data and information a
company needs to make export / import decisions
▪ Available for free on the Internet
▪ https://ec.europa.eu/taxation_customs/business/calculation-customs-
duties/what-is-common-customs-tariff/taric_en
 EU product classification system
Tariff Codes
All products are classified under a tariff code that carries information on:
▪ duty rates and other levies on imports and exports
▪ any applicable protective measures (e.g. anti-dumping)
▪ external trade statistics
▪ import and export formalities and other non-tariff requirements
 Transit procedure
▪ NCTS (New Computerized Transit System)
▪ It is a system of electronic customs declaration and its processing,
which allows the declaration of transit within the Community
electronically.
▪ Used by all EU and EFTA members
▪ Trade facilitation between EU (or EFTA) countries and third countries
▪ Note: A paper declaration is only permitted when the transit declaration
cannot be made in the NCTS system or for travelers with goods above
duty-free limits.
 What is INTRASTAT?
▪ A system for collecting statistics on trade in goods between EU countries.
▪ Business must report trade data across EU borders:
▪ Goods dispatched: if the total annual value exceeds EUR 200 000
▪ Goods delivered: if the total value exceeds EUR 120 000

▪ At national level, responsibility for INTRASTAT lies with the national statistical
office, which cooperates with the national customs office.
Relevant sources of trade barriers (websites)
▪ Customs Administration of the Czech Republic
https://www.celnisprava.cz/en/Pages/default.aspx
▪ Czech Statistical Office https://www.czso.cz/csu/czso/home
▪ INTRASTAT www.czso.cz
▪ Market access database https://madb.europa.eu/madb/
▪ European legislation https://eur-lex.europa.eu/browse/summaries.html
▪ World's customs organization http://www.wcoomd.org/
▪ https://resourcetrade.earth/data?year=2016&importer=97&units=value
▪ https://comtrade.un.org/
Economic openness
International Trade, FBE Brno, 8/11/2019
Patrik Kubát
 The degree to which nondomestic transactions (imports
and exports) take place and affect the size and growth of
a national economy.
 The openness consists in involving the national economy
in international economic relations, which are
represented by the movement of goods between
residents of different national economies.
 The degree of openness is usually expressed as the ratio
of exports to GDP (%).

140
 2 basic options:
- low rate - large internal market (developed countries)
- high costs and low competitiveness on
world markets (underdeveloped countries)
- high rate - small internal market
- narrow production specialization, mainly due
to natural conditions
- newly industrialized countries, often through
government support
141
indicators to measure
 degree of openness = characterizes the intensity of the economy's
involvement in commercial transactions
- distinguished according to the country of destination and the origin
of goods
- per capita exports or exports converted to GDP
 shape of openness - differentiate between countries of destination and origin
of goods
- territorial structure - foreign business partners of the given
economy
- commodity structure - distinguished by the character of trade flows
- composition of exports and imports by groups of goods
and services
 affectiveness of openness

142
classification of trade in goods
a) SITC (Standard International Trade Clasification), 5-digit code
10 sections:
 0 food and live animals
 1 drinks and tobacco
 2 raw materials - excluding fuel
 3 fuel
 4 animal and vegetable fats
 5 chemicals
 6 industrial products of material abilities
 7 machinery and transport equipment
 8 different industrial products
 9 commodities and traded goods not elsewhere classified

143
classification of trade in goods
b) HS (Harmonised system)
- classification managed by the World Customs Organization (WCO)
- can classify 98% of traded goods into more than 5,000 commodity groups
- 10 classes and 6 subgroups = 6-digit code
- used by most countries when creating customs duty tariffs
c) CN (Combined Nomenclature)
- used by EU countries for foreign trade analysis and customs classification of goods
- Extended version of HS, code extended by two more digits
- 10 classes and 8 subgroups = 8-digit code

d) TARIC

144
classification of trade in services
a) ISIC (International Standard Industrial Classification)
 138 activities that have the character of a service
 it is not widely used in practice

b) Classification used by the WTO

 they divide services by type into 12 basic groups
 but only the breakdown into transport, tourism and other commercial services is
often used (the remaining 10 items)
 as the importance of other commercial services is increasingly more detailed
(commercial, communication distribution, educational, financial,…)

145
Another indicators
Affectiveness of openness - measures the expediency of engaging the
economy in international trade and seeks to quantify the benefits of
international cooperation
a) Terms of trade (TT)
 indicator of real terms of trade
 evaluation of the development of foreign trade results for the domestic
economy
 share of export and import price indices

146
Another indicators
b) Transformation effect
 the ability of the economy to appreciate imported raw materials, the calculated
figure means value added, reported in USD per capita
 imports include raw materials except fuels and fuels
 for export - chemicals, industrial products of a material nature, machinery and
transport equipment,
 various industrial products
c) Kilogram export price
 quality indicator of the market value of exports (imports) of products of a
particular sector (branch) of individual countries, is usually reported in
USD per 1 kg and the higher the price per kg, the better result

147
 Openness index
the ratio of country's total trade, the sum
of exports plus imports, to the country's gross domestic product
= (Exports + Imports)/(Gross Domestic Product)
https://www.theglobaleconomy.com/rankings/trade_openness/

“Without an open, competitive economy, however, it is very challenging to create lasting

social and economic wellbeing where individuals, communities, and businesses are
empowered to reach their full potential.“ Baroness Stroud, CEO, Legatum Institute
https://li.com/wp-content/uploads/2019/05/US-Case-Study_-2019.pdf

148
 The Global Index of Economic Openness, 2,5 min.
https://www.youtube.com/watch?v=BuR_u038ZrQ
 Xi Jinping: Openness is solution for global economic problems
https://www.youtube.com/watch?v=SFzYWuWXJRk
 Trade Liberalization and Development | Development Economics, 8 min.
https://www.youtube.com/watch?v=VJTwT0YvoEM
 America’s Exceptional Economy (Episode 1), 7 min.
https://www.youtube.com/watch?v=GTWHRNxFTMc
 What is an HS code?, 2 min. https://www.youtube.com/watch?v=2TIMhZd4ccw
 International Trade and Supply Chains, 3,5 min.
https://www.youtube.com/watch?v=Bblo8_B32Co
 Terms of Trade (2019 Update), 8 min. https://www.youtube.com/watch?v=KrGvEhMMTNE

149
Sources
 PALÁT, M., PEPRNÝ, A. and TWEREFOU, D. K. International trade, Brno:
Mendel University in Brno, 2013. ISBN 978-80-7375-814-1.
 Britannica. https://www.britannica.com/topic/economic-openness

150
Economic balance

Patr
  External and internal balance
 Int.: price stability, full employment in the
economic sense and equilibrium rate of GDP
growth
 Ext.: assessed primarily according to the state
Economic balance of payments
The internal and external balance of the country
balance are interrelated

 Payment balance = is a statistical record of

economic transactions of entities of a given
country (residents) with economic entities from
the rest of the world (non-residents) over a
certain period, usually one year.
Payment balance  A. Current account
 B. Capital account
Horizontal  C. Financial account

structure  D. Balance of errors and omissions, exchange

rate differences
 E. Change in foreign reserves
Payment balance

Horizontal  trade balance – import, export of goods

structure  balance of services - import, export of services

 income balance – owned production factors own
country and by foreign entities (involved in the d
A. Current economy)
account  current transfers - unilateral transfers (internatio
donations); EU transfers to the CZ
 example

Trade balance
Payment balance
export import balance
111 billion CZK 120 billion CZK –9 billion CZK
Horizontal
structure Trade balance = export – import

A. Current
account
  The capital account records, for example,
transactions related to trade in intangible assets
(trademarks, patents), forgiveness of
Payment balance receivables, etc.

Horizontal
structure

B. Capital
account
  direct investment – DDI, FDI
 portfolio investment - equity securities and equity
investment
Payment balance
 financial derivatives - forwards, futures and options
 other investments - borrowing and lending of credit
Horizontal
structure

C. Financial
account
Payment balance D. Balance of errors and omissions,
exchange rate differences
Horizontal  Balance of errors and omissions, exchange rate
structure differences include any inaccuracies in the
records, methodological problems, exchange
rate differences, etc.
DaE E. Change in foreign reserves
 Foreign reserves include gold, special drawing
rights, foreign exchange, etc.
  Each transaction is recorded twice in the
balance of payments as credit item (+)
and as a debit item (−)
Payment balance  a double entry book

Vertical
structure
RISKS AND FINANCIAL ASPECTS Intern
OF INTERNATIONAL TRADE
 International trade is more prone to
 Enterprises conduct business in a less-known
environment - more difficult to understand t
and effect in such an environment (e.g. cha
 Differences in language, culture and religio

WHY IS  More difficult collection of important data

the environment and potential partners

INTERNATIONAL  Additional political and economic factors su

exchange rates
 Geographical distances (different modes o
TRADING MORE  Higher transport costs

RISKY?  Another time window before something hap

 Usually larger transactions (both in size and
 More complex logistics and management

Thus, businesses must be aware of the

very different) sources and types of r
measures to minimize them.
BUT WHAT IS RISK?

Risk associated with uncertainty about future events that may

reduce the likelihood of achieving the company's planned
objectives
Potential problem connected with uncertainty and loss
TYPES OF RISK IN INTERNATIONAL TRADE

a) Country risk - political risk, economic and legal sources of risk

b) Financial risk - payment risk, market risk (currency, interest rate, price)

c) Business risk - risk associated with all business processes and activities
(innovation, product design, marketing, human resource management,
administration, documentation, transport
All economic, political, legal, financial and social aspects that affect business in
an international environment
Key questions:
- How to identify key risk factors for country risk?
- How to predict them in the future?
- Which country risk factors are important and which less?
- How to compare countries' riskiness?

Everything is relative!

a) COUNTRY RISK
 COUNTRY RISK ANALYSIS

Political risk analysis - wars and political conflicts, terrorism and

kidnappings, confiscation and expropriation and nationalization,
corruption, government policies, transfer risks
Macroeconomic risks - monetary policy, fiscal policy, exchange rate
influence, foreign trade policy, GDP growth, inflation, unemployment,
FDI…
Risks of legal environment - intellectual rights, ecology, customs and
trade regulation, taxes, regulation of products and services, legal
responsibility
 COUNTRY RISK ANALYSIS
2 approaches:
• Published country reports, e.g.:
BERI Index, Control Risk Group (CRG), Export Credit Agencies (ECAs), Euromoney, Economist
Intelligence (EIU), COFACE
Euromoney Country Rating:
Political risk 25%
Economic output 25%
Indebtedness 10%
Service Loans 10%
Credit rating 10%
Approaches to various sources of finance

• Own analysis - PEST, PESTEL, SWOT, Porter, C-analysis

 example: COFACE
World leader in credit insurance, 1946
It offers companies around the world a solution to protect them from the
financial crash of their clients, both domestically and for export
Quarterly publishes Country Risk Assessment for 161 countries (2019)
based on business solvency knowledge and expertise of its 150 insurers
 BERI INDEX
(BUSINESS ENVIRONMENT RISK INDEX )
Country Risk Index published by Business Environment Risk Intelligence (in
USA) since 1966, analyzes 140 countries.
has consistently refined the system developed by the firm to evaluate risks
faced by companies with international operations.
has over three decades of experience in identifying important trends that
affect business operations around the globe.
http://www.coface.cz/Novinky-Publikace/Publikace/Country-risk-
assessment-map-october-2019
http://www.coface.cz/Ekonomicke-analyzy
COFACE https://www.coface.com/Economic-Studies-and-Country-Risks
BERI-index: Business Environment Rankings Which country is best to do
business in? https://www.iberglobal.com/files/business_climate_eiu.pdf
https://www.credendo.com/country-risk
Why We Study Country Risk Analysis [Country Risk Final Examination], 4
min. https://www.youtube.com/watch?v=FpGCwSUMdIY
PROTECTING/MINIMIZING COUNTRY
RISK
•Insurance (ECAs, insurance companies, etc.)
•Integration with the host environment
•Building political support at home and abroad
•Counter-trades
INSURANCE

•Export Credit Agencies (ECAs)

Known as ECA
Private or quasi-governmental institutions
It acts as an intermediary between national governments and exporters on export finance
Funding can take the following forms:
Loans (financial support)
Credit insurance
Guarantees (full coverage)
(depends on the mandate ECA has received from the government)
ECAs currently fund or guarantee for 430 trillions dollars of business abroad
•Insurance companies
 EXPORT GUARANTEE AND INSURANCE
COMPANY (EGAP)
Part of the state export support system, owned by the state
State Credit Insurance Company focusing on export credit insurance against
territorial and market insurable commercial risks related to the export of goods
and services in the Czech Republic
It provides insurance services to exporters of Czech goods, services and
investments regardless of size, legal form and volume of insured exports
EGAP fulfills the role of ECA
- It is governed by a set of OECD and EU rules restricting State export support to products
and territories in which commercial credit insurance companies are not interested in
operating, in particular medium- and long-term export credits and territories with a higher
degree of political risk. These rules also ensure that exporters from individual countries
cannot compete with the extent of State aid, but solely with the quality and price of goods
and services.
ALTERNATIVE BUSINESS TRANSACT
Counter-trades
•Barter - exchange of goods or services directly for other goods or
services without using money
•Counterpurchase - parallel trade
= selling goods and services to a company in another country, with the
seller committing to make a future purchase from the other company that
sold the goods
In most cases, counter-purchases are characterized as two separate
contracts
One where the supplier sells goods for cash and another where the
supplier agrees to buy certain products from the buyer of the first
transaction
These products may not be related to the first transaction
ALTERNATIVE BUSINESS TRANSACTIONS

•Switch trade - A company sells another firm its commitment to make a purchase in a given
country
Exporter - may transfer its obligation to pay to the importer to a third party known as a switch
trader
Switch trade adds to a counter-buying trade a third party that agrees to accept the commitment
of one of the parties
e.g. when the exporter agrees with the counter-buyer to complete the original sale
•Buyback - The company builds a factory abroad and takes a certain percentage of its
production as a partial payment under the contract
•Compensation deal - means an agreement on reciprocal purchases of certain goods between
the exporter and the importer
Treated by a single contract, this exchange of goods can (but does not have to) take place
simultaneously
Etc.
 Any unexpected changes in
the value of the assets and
liabilities of an
internationally active
company

b) FINANCIAL RISKS
PROTECTION AGAINST THE
RISK OF NON-PAYMENT
Customer financial health control
Appropriate financial instruments
Liability insurance (insurance companies)
Monitoring and monitoring of commitments
Discount offers at early payment
Determining the maximum amount of debt for different types of customers
Compensation
Advanced forms of financing (factoring, forfeiting)
And also various simple procedures like:
Calling the customer or customers or suppliers of our customer
Studying customer annual report
Request to prove good financial health of the customer's business
 EXAMPLE OF MARKET RISKS
Ex. Exchange rate changes
A Japanese computer manufacturer will sell 1000 PCs to a German
retailer for 500 EUR/pc. The agreed payment currency is EUR and the
amount must be paid in 30 days

What happens if the EUR depreciates against the yen within 30 days?
What impact will this change have on a German buyer?
What impact will this change have on the Japanese seller?
 EXAMPLE OF MARKET RISKS
Answer
What impact will this change have on a German buyer?
The German buyer pays 500 EUR / pc to the Japanese seller as
agreed

What impact will this change have on the Japanese seller?

Japanese seller accepted payment in euros but earns less than
expected (because he gets less yen for depreciated euro)

Similarly, it would be for interest rate or price risks!

PROTECTION AGAINST
MARKET RISK
Use of special financial instruments: forwards and futures
Forward contract: a non-standardized contract between two parties to buy or
sell certain goods in the future at a price agreed now
Examples: A wheat grower is afraid that in the future (at harvest) its price will
fall and so concludes with the buyer a forward (the simplest type of
derivative) to sell a certain amount of wheat at a certain price at a certain
time (at harvest)
The entrepreneur exported the order to Germany, the invoice is due in 3
months. However, he is afraid that in 3 months the euro will fall and he will
receive less. The solution to this situation is to go to the bank and close the
currency forward.
Futures contract: a standardized contract between two parties for a certain
date and for a certain standardized quantity and quality at a price agreed
today
The main difference between futures and forward is that it is a stock
exchange derivative.
PROTECTION AGAINST
MARKET RISK
Option - a type of contract that protects the buyer from the seller's ability to
cancel the contract (the parties are not equal)
Who buys an option (is in a long position) ie has the right to choose whether
or not to exercise the option. Accordingly, the seller of the option (which is a
short option) must or may not exercise the performance.
The buyer pays the seller a so-called option premium (which is the price of
the option), which is a reward for the seller for his disadvantaged position.
Swaps - The two parties agree on mutual cash flows in different currencies
Foreign exchange swap - the aim is to exchange a certain amount into
another currency and then back again (in addition, interest rate and currency
swap)
Exchange rate insurance (costs money)
Legal instruments: contractual clauses concerning foreign currency
Market risk sharing agreements.
They can arise in all business processes in the operation of a company, ranging from
technological innovation errors, through product design, marketing errors to production errors
The most common trade risks in international trade:
•Risk associated with different types of documentation
•Risk associated with pricing and calculations
•Transport risks
•Handling risks
•Marketing "faux pas"

c) BUSINESS RISKS
 •Documentation: experienced staff
Systematic monitoring of possible risks
External assistance
•Pricing and calculation: Knowledge of cost

PROTECTION Know your Incoterms clauses

Negotiation not only price, but also rewa
AGAINST deadlines

BUSINESS •Transport and handling: Transport insuranc

Lloyd's insurance policy
RISKS Packing
Contractual penalties
•Marketing: Information is the key to every
Analysis and data
RISK OF PRODUCT
LIABILITY
•Related to consumer protection
•particularly USA, EU
•In developed countries, the producer
is liable for damage to persons or
property which may be suffered by
persons due to product defects.

Insurance as a necessary instrument

against this risk in export
 types of insurance in international
trade are:
•insurance of transport risks:
• cargo,
• vehicles against accident, natural
elements, etc. (hull);

•insurance of foreign loans and

payment instruments;
•liability insurance;

INSURANCE •insurance of fairs and exhibitions.

Reinsurance = distribution of the (exceptionally high) risk of insurance
event to more entities

Goods insured against:

•damage
•destruction
•missing a consignment due to an accident
The act introduces a set of formalities that every insurance contract shall
include, namely:
•identification of the insurer and the policyholder;
•identification of the beneficiary;
•determination whether it is a loss insurance or a fixed sum insurance;
•specification of insurance risk and insurance event;
•the amount of insurance, its maturity and an indication whether it is regular
or one-off insurance;
•definition of the term for which the insurance contract is concluded.
TWO EXCEPTIONS TO THE SCOPE OF
INSURANCE
1) Absolute exclusions - never insurable
poor packaging
negligence
2) Relative exclusions - are insurable
caused by the nature of the goods

damage caused by war conflict and war instability – only material losses
insured
TWO WAYS/SCHEMES OF INSURANCE
A) Continental insurance
principle of universality
1) Against All Risks (AAR)
2) Insurance including special accident WPA (With Particular Average)
3) FPA (Free of Particular Average) insurance

War and political risks are ruled out.

 TWO WAYS/SCHEMES OF INSURANCE
B) Anglo-Saxon Insurance Scheme
It is based on the traditions of the Loyds consortium and the Institute
of London Insurers. There are common insurance conditions - "Marine
insurance".
with custom insurance conditions - Institute Cargo Clauses
MAR insurance conditions designed by symbols A, B and C; (ICC or ITC
type covers)
None of the listed types of insurance (Institute Cargo Clauses),
however, includes war and political risks, and their insurance has to be
arranged separately.
 MARINE POLICY (MAR)
with custom insurance conditions - Institute Cargo Clauses
MAR insurance conditions designed by symbols A, B and C; (ICC or ITC type
covers)
None of the listed types of insurance (Institute Cargo Clauses), however,
includes war and political risks, and their insurance has to be arranged
separately.

Institute War Clauses and Institute Strike Clauses – special dealings

 MARINE POLICY (MAR), 3 PACKEGES
- INSTITUTE CARGO CLAUSES (ICC)
•Type A Institute Cargo Clauses - the principle of universality
•Type B Institute Cargo Clauses maximum
three groups:
•casualties where it is not necessary to prove that they were the
immediate cause of damage; medium
•casualties where the affected, on the contrary, must prove this fact;
•serious damage and loss of entire package pieces.
•Type C Institute Cargo Clauses - insures only the most serious risks minimum

https://www.tlclogistics.lt/en/cargo-insurance-on-the-basis-of-institute-cargo-clauses-i
conditions/
BUSINESS RISK, BLUNDERS
Examples of two major business mistakes

Worst Company Disasters! | Top 6 Blunders, 16 min.

https://www.youtube.com/watch?v=T0Z73Zbtlyg
SOURCES
http://www.beri.com/Publications/BRS.aspx
https://www.forbes.com/sites/greatspeculations/2017/01/17/why-for
its-mexico-production-expansion-plans/#70a726313163

PALÁT, M., PEPRNÝ, A. and TWEREFOU, D. K. International trade, Brno: M

University in Brno, 2013. ISBN 978-80-7375-814-1.
 IMPORTANCE AND POSITION OF
INTERNATIONAL INSTITUTIONS FOR
TRADE
AND
REGIONAL INTEGRATION
GROUPINGS

Patrik
WHAT IS NEW?
New Zealand ranked the second most peaceful country in the world
https://www.nzherald.co.nz/travel/news/article.cfm?c_id=7&objectid=12242095&fbclid=IwAR1STktemqJy6ww
64EhM0U_UrOUPiAIt1cmSoqracY

The Western Balkan states want to create a zone of free movement and
https://www.lidovky.cz/svet/staty-zapadniho-balkanu-chteji-vytvorit-zonu-volneho-pohybu-a-
obchodu.A191110_181759_ln_zahranici_ele

Slovaks turn moratorium into election polls for 50 days before elections
https://echo24.cz/a/SFPCk/slovaci-meni-moratorium-na-volebni-pruzkumy-na-50-dni-pred-
volbami?fbclid=IwAR2xOq1SWuyqBZ6yIPN9IoXuqQnB9pb_iBehywHOc0BWBeWFKKJDI05fj6I
 INTERNATIONAL ORGANIZATIONS AND
COOPERATION
•deepening integration processes
•today's integration processes are based on economic issues
•concept of integration - especially for forms and processes of connecting, merging
of originally isolated or separate units into a single and internally unified system,
which creates a new whole
•dynamic concept of integration
•static concept of integration
•informal integration
•formal integration
•disintegration

What are the integration processes of the past?

CLASSIFICATION OF INTERNATIONAL
ORGANIZATIONS
A) by membership type
•international governmental organizations (UN, NATO, OSCE)
•international NGOs (Greenpeace, Amnesty)
•mixed organizations-hybrid (ILO)
•transgovernmental organizations
•multinational corporations (Shell, Microsoft, BP, GM)
CLASSIFICATION OF INTERNATIONAL
ORGANIZATIONS
B) by the gaining of membership
•exclusive (NATO, OECD, EU)
•inclusive (BIPM)

•C) by geographic scope of membership

•regional (EU, Mercosur)
•universal (UN, OECD, IMF)
CLASSIFICATION OF INTERNATIONAL
ORGANIZATIONS
D) by objective and field of application
•thematically universalist (UN)
•thematically specialized (WHO)
•economic
•Security (NATO)
•human rights (AI)
•technical
•scientific
 CLASSIFICATION OF INTERNATIONAL
ORGANIZATIONS
E) according to the type of relationship between members and non-members
•building cooperative relationships (WTO, IMF)
•reduction of conflict potential (OSCE)
•Increasing conflict potential, deterrence (NATO)

•F) by membership category

•full members
•associate members
•observers
THEORETICAL CONCEPTS OF INTEGRATION
federalism
federation, which is a form of political organization that can be
characterized by a division of responsibility between central power and
components of a federation (usually states, regions or provinces) with
autonomy in certain spheres.

A federation is a state arrangement in which sovereignty and power in a

state is divided among the highest central ones
a sign of federations is a written constitution, which does not go unilaterally
level and individual constitutive units of this whole. Both the federal
government and the individual components of the federation have
sovereignty. Each part of a federal state has its own competences.
 THEORETICAL CONCEPTS OF INTEGRATION
Basic features of the federation:
•there are two forms of governance that are relatively independent of each other
•the emblem of a federation is a written constitution which cannot be changed
unilaterally
•bicameral system

two variants of federalism:

•symmetrical federation - the boundaries of the individual constitutive parts do not
overlap with the socio-cultural boundaries; USA, Germany, Austria
•asymmetric federation - the borders of federal countries overlap with socio-cultural
linguistic, religious or ethnic groups. The constitutive elements can differ significantly.
They are very homogeneous in themselves; Switzerland, Canada, Belgium
 THEORETICAL CONCEPTS OF INTEGRATION

functionalism
= allows for integration between member states that is practical for
cooperation in well-defined areas, with the participation of a minimal
institutional apparatus
•the states are first connected by economic ties, political integration can follow
•free market forces, space for market functioning
•„spill-over effect‟ - mutual cooperation expands a number of areas for
possible cooperation
 THEORETICAL CONCEPTS OF INTEGRATION
intergovernmentalism
•it allows governments to work together in different areas while maintaining their
sovereignty
•keeping transnational institutions to a minimum
•the opposite of the federalist approach
ECONOMIC INTEGRATION
The degree of economic integration can be categorized into seven stage
•Preferential trading area
•Free-trade area
•Customs union
•Single market
•Economic union
•Economic and monetary union
•Complete economic integration
ADVANTAGES OF INTERGOVERNMENTAL
AGREEMENT/ECONOMIC INTEGRATION
Competition
Economies of scale
Improved Market Efficiency
Increased foreign direct investment
Trade Effects
DISDVANTAGES OF INTERGOVERNMENTAL
AGREEMENT/ECONOMIC INTEGRATION
Concessions
Interdependence
Loss of Sovereignty
Regionalism vs. Multinationalism
 UNITED NATIONS (UN)
the largest international organizations
membership - 192 members (2008)
verifies agreements: international law, international security, economic
development, social progress, human rights, world peace
financing - according to the country's ability to pay (USA 22%, Japan
16%)
voluntary contributions
 UNITED NATIONS (UN)
administrative authorities:
General Assembly - hl. deciding authority (similar to Parliament)
the Security Council - Peace and Security Resolutions
Economic and Social Council - promoting international economic and social
cooperation and development
Secretariat (headed by the Secretary-General) - UN studies, information and
information services
International Court of Justice - an excellent judicial body

Criticism: huge bureaucracy, excess, inefficient institution

ECONOMIC INSTITUTIONS
WORLD BANK
financial and technical support to developing countries
one of two institutions created under the Bretton Woods agreements in
1944 (the other was the IMF)

Includes:
•International Bank for Reconstruction and Development (1945) -
Provided commercial loans to countries that were recovering their
economies after World War II, especially in Western Europe and
Eastern Europe. Asia (Japan, Korea, Taiwan). It assists moderate and
poor (but solvent) countries in economic growth.
WORLD BANK
•International Development Association (1960) - provides
grants or long-term interest-free loans to the poorest
countries:
•interest-free loans
•grants and programs that promote economic growth,
reduce inequalities and increase welfare
•the money was often used by other elites for other
purposes

the goal is poverty reduction

1960-1970 - commercial loans to low- and middle-income countries,
rates according to productivity of these economies
 WORLD BANK
debt management and structural change (1980-1990)
• expansion and regional specialization: Asian Development Bank, African
Development and Inter-American Development Bank.
• the misuse of borrowed capital has created a debt crisis: previous loans had no
conditions attached to them. The World Bank has been accused of overly
benevolent access to loans and financing activities with limited financial returns.
• gender issues, environment
WORLD BANK
- now more emphasis on standard
infrastructure building projects,
transport infrastructure (conditions for
industry, business) - WB often
criticized for favoring large projects
INTERNATIONAL MONETARY FUND
Objectives:
• to facilitate international monetary cooperation,
• promote exchange rate stability,
• support loans to countries experiencing economic difficulties through loans,
• correct negative balance of payments trends (shorten time and mitigate
imbalances in international balance of payments)
lender of last resort: the main initiator of structural change policies, the
debtor country must change economic policy before it is granted a loan,
loans always carry certain conditions (e.g. limiting fiscal expenditure)
structural change policies: balanced budget, inflation control, market
institutions (abandoning price and wage regulation), support for free
trade (exchange rate depreciation, tariff cuts), public sector reform
(privatization and outsourcing), financial sector reform
 WORLD TRADE ORGANIZATION (WTO)
GATT General Agreement on Tariffs and Trade
 sought, since 1948, to facilitate international trade after World War II
 enabling more free trade - mutual benefits
 importance grew with the onset and speed of Globalization - 1995, the agreement was
replaced by the WTO
•a forum for trade negotiations between countries and regions
•covers all dimensions of international trade (goods and services)
•a sophisticated dispute resolution system - countries can turn to the WTO
length of negotiations:
• is becoming very complex and cumbersome
• an agreement of more than 150 countries on different issues
• particularly agricultural products are very controversial
 ORGANISATION FOR ECONOMIC CO-
OPERATION AND DEVELOPMENT (OECD)

- founded 1961 to promote economic progress and world trade

- 34 members - countries with high GDP and are considered to be advanced
- promoting democracy and the market economy
- coordination of domestic and foreign policies of OECD members
- predecessor - Organization for European Economic Cooperation (OEEC)
- economic, environmental and social issues
REGIONAL INTEGRATION
GROUPINGS
 •Forms of regional groupings
– trading blocs
•Motivation of trading blocs
includes important non-
economic factors
•The emergence of trading
blocs is related to three
factors:
• Generating growth in prosperity
• Connection to become stronger
negotiating position
• Promotion of cooperation and
REGIONAL possible integration

INTEGRATION
GROUPINGS Explaining Econo
https://www.youtu
THE NORTH AMERICAN FREE TRADE
AGREEMENT (NAFTA)
a trilateral trade bloc in North America
1994
superseded Canada – United States
Free Trade Agreement (CUSFTA), 1987
one of the largest trade blocs by GDP
Trump, 2017 - sought to replace
NAFTA
September 2018 - USMCA
UNITED STATES–MEXICO–CANADA AGREEMENT
(USMCA)
renegotiation of the North American Free Trade Agreement (NAFTA); sometimes referred
as "New NAFTA" - it is meant to supersede
November 2018
side event of the 2018 G20 Summit
last 16 years
Mexico (June 19, 2019)

https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/agreement
between
FREE TRADE AREA
OF THE
AMERICAS (FTAA)
•began with the Summit of the
Americas in Miami, Florida, on
December 11, 1994; 34
countries
•2001, 2003, 2005, 2012
•the project is never realized
•instead of FTAA it offers a
number of bilateral agreements
between individual states on the
American continent.
Dominican Republic– Central America
Free Trade Agreement (CAFTA-DR)
Union of South American Nations
(UNASUR)
Andean Community (Comunidad
Andina, CAN)
Caribbean Community (CARICOM)
Bolivarian Alliance for the Peoples of
Our America (ALBA)
 PACIFIC ALLIANCE
•2012
•Chile, Colombia, Mexico, Peru
•Candidates Associate Members
(Australia, Canada, New Zealand, Singapore)
•Observers (60)

The Pacific Pumas (The Pacific Pumas: An Emerging Model for Emerging Markets)
MILA, 2010, stock exchange
 EL MERCADO COMÚN DEL SUR (MERCOSUR)

•1991 → FTA (1995)

•Treaty of Asuncion, 4 states: Argentina, Brazil, Paraguay, Uruguay
•Venezuela - 2006 confirmed entry, 2012 accepted as a member, 2016
suspended
•Associated members (7), observer countries (2)
•Affiliates:
• 1996 - Chile
• 1997 - Bolivia - accession member (2012), confirmed entry (2015), no ratification
• 2003 - Peru
• 2004 - Colombia, Ecuador
• Suriname, Guyana
MERCOSUR

What is Mercosur?
4 min
https://www.youtube.com/watch?v=IduHX7XNIYw
Economic Community of West African
States (ECOWAS)
1975, Lagos, 14 members

Common Market for Eastern and Southern

Africa (COMESA)
1994, Lusaka, 21 members
https://en.wikipedia.org/wiki/Common_Market_for_Easte
rn_and_Southern_Africa
AFRICAN UNION (AU)
2002, 55 members
was to replace to OAU (1963)
THE ASSOCIATION OF SOUTHEAST ASIAN
NATIONS (ASEAN)
1967
10 members
ASEAN explained in 5 minutes
https://www.youtube.com/watch?v=WAnfj8v5acM

“One Vision, One Identity, One Community”

https://aric.adb.org/integrationindicators/groupings
THE ASSOCIATION OF SOUTHEAST ASIAN
NATIONS (ASEAN)
 https://w
/tratop_e
e.htm#fa

FREE TRADE AGREEMENTS

WORLD
INFORMAL GROUPINGS
Mainly international economic cooperation topics
Political dialogues
Industrialized (Group Seven - G7; G8; G10)
x
developing countries (G15, G24, G77)
x
both together (G20)
 G7/G8
• it is not an international organization, but an assembly or forum of the
most developed countries in the world
• 1975: after the oil crisis, the G6 consisted of FR, NE, IT, JA, UK and USA
• 1976: Canada - G7 joined
• Finance Ministers meet 2-3 years a year - Summit of Heads of State:
once a year
• also called G8 after the addition of Russia
 G20
• a group of 20 finance ministers and central bank governors
• established in 1999 in response to the 1997 Asian financial crisis
• • 90% of world GDP, 80% of world trade and two thirds of the world
population
• no secretariat or staff
• presidency rotates annually (2012 Mexico, 2013 Russia, 2014 Australia,
2015 Turkey)
• the 2009 Pittsburgh Summit agreed to replace the original G8
• 2018 G20 Buenos Aires summit
Argentina, Australia, Brazil, Canada, China, France, Germany, India,
Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South
Korea, Turkey, United Kingdom, USA, EU (also represented by the Czech
Republic)
G-3
Free Trade Agreement
Colombia, Mexico, and Venezuela
1995 - 2006

EU big three
THATS ALL
international public a
private law
• a set of legal rules governing the relations of States
and other entities and establishing the legitimate
manner of their conduct within the international
community.
• a strong integrating element of the international
community
• the aim is to ensure the peaceful existence and
smooth development of the international community
• States - the supreme body of international law
 Private international law
• realized mainly within the state borders
• however, they may extend beyond the territorial and
functional area of ​the state - socio-legal relations with an
international element
• such a relationship has a specific national legal standard -
each state has its own private international law

• = a set of specific legal standards intended solely to

regulate private-law relations with an international
element
 applicable law of obligations
• bond (contractual relationship) the debtor is obliged to
fulfill the obligation of the creditor, that is to sell
something to him, to execute, etc.
• obligation to fulfill the obligation - debt
• right to performance - claim
• into international trade law - with an international
element
 international element:
• one of the entities is a foreigner
• a case where the subject has a relationship abroad
• a situation where a legal fact arose abroad
• a situation where the relationship is closely linked to another
relationship that has an international element
obligatory status (obligation status, applicable law)
• regulates the rights and obligations of the parties to the
contractual relationship
• direct standards (preferred applications) or national
legislation
The national legislation virtually allows all countries as
international trade participants to choose the law for
contractual obligations, the choice of law
• the choice of the law of a particular state or a specific law
 International trade law
• unified direct standards - eliminate differences in national legal
systems
• standards are strictly set
• legal standards - created only by states (according to regulations and
international treaties), possibly through the activities of international
organizations
• next to them - other international means:
international business practices, rules of interpretation, model
contracts and business terms
• they are more flexible to today's business needs
• the rule of law may accept international trade practices - generally
binding by incorporation into the law
 International business practices
• different from legal custom - customary norms, if any (states of the
Anglo-Saxon legal system), are a source of law and a binding legal
norm
• international business practices - not legal norms; they are applied
in a specific legal relationship, when appealed to them
• use according to the law of the conflict of laws
• The Czech Commercial Code: "shall take into account business
practices generally maintained in international trade in the relevant
business sector.„
 International business practices
• they have gained considerable importance over time
• eg: in trade of certain raw materials (oil), agricultural products
(hops), and other goods (military material), use of various
abbreviations, expressions, etc.
• used both in the contract and in legal relations
• Pursuant to Article 9 of the UN Convention on Contracts for the
International Sale of Goods, the parties to the contract of sale are
bound by any practice they have agreed upon and by the practices
which they have established between themselves
 International unloading rules
• in practice, certain clauses have been created
• govern different legal issues in the relationship between
the parties to the contract
• International Chamber of Commerce in Paris (ICC) - a set
of international rules to eliminate differences in
interpretation
 Model contracts and business
terms
• they are created by some traders
• they contain standard contractual provisions and only the
necessary details are added before the deal is concluded
• different sample contract texts - these are used to write a
specific contract
The United Nations Convention on
Contracts for the International
Sale of Goods (CISG)
• also known as the Vienna Convention
• multilateral treaty that establishes a uniform framework for
international commerce
• 1980, Vienna, Austria – 18 Signatories; 1988 - ratified by 11 countries
• September 2019 - 92 "Contracting States„
• direct international rule of law
• solves fundamental issues of concluding international sales contracts
• a uniform international sales law
• for movable things - if they conduct business in the territory of
different Contracting States
• https://treaties.un.org/Pages/ViewDetails.aspx?src=TREATY&mtdsg_no=X-
10&chapter=10&clang=_en
Vienna Convention
• Preamble
4 parts:
• subject matter and general provisions
• concluding a contract
• purchase of goods
• final provisions
• Annex - list of States that have ratified the Convention
• The Convention applies to contract of sale of goods
between parties whose places of business are in different
States:
1. when the States are Contracting States; or
2. when the rules of private international law lead to the
application of the law of a Contracting State.
• This Convention does not apply to sales:
1. of goods bought for personal, family or household use, unless
the seller, at any time before or at the conclusion of the
contract, neither knew nor ought to have known that the goods
were bought for any such use;
2. by auction;
3. on execution or otherwise by authority of law;
4. of stocks, shares, investment securities, negotiable instruments
or money;
5. of ships, vessels, hovercraft or aircraft;
6. of electricity.
• The Convention does not apply to agreements in which
the prevailing part of the supplier's obligations consists
in performing work or providing services – this would
not be a contract of sale of goods but a contract for
work.

• The Vienna Convention essentially governs the issues

of concluding a sales contract and the rights and
obligations of the seller and the buyer arising from
such a sales contract.
• obligations of the seller:
• deliver the goods that are the subject of the purchase contract
• to hand over the documents relating to the goods
• transfer title to the buyer
• obligations of the buyer:
• pay the purchase price for the goods delivered
• take delivery of the goods

limitation of rights under the purchase contract - the period is four years
 International Chamber of Comme
(ICC)
• „The World Business Organization“
• is the largest, most representative business organization in the w
• 1919, Atlantic City
• NGO
• has three main activities:
• rule setting
• dispute resolution
• policy advocacy
• supports – UN, WTO, intergovernmental bodies (G20)
https://iccwbo.org/
Motto:
We make business work for everyone, every day, everywhere.
 United Nations Commission on
International Trade Law
(UNCITRAL)
• responsible for helping to facilitate international trade and investment
• 1966, Vienna
• "promote the progressive harmonization and unification of
international trade law" through conventions, model laws, and other
instruments that address key areas of commerce, from dispute
resolution to the procurement and sale of goods
https://uncitral.un.org/
 Summary
• Any private relationship with an international element
must be governed by the law of a particular country.
• Possibility of choice of law for a trade
• All has to be led by some law, norms, standards, customs
etc. – included at the beginning or later in the agreement
• Law at any level is for assistance of the actitivities of the
participant
• What is INTERNATIONAL TRADE LAW? What does INTERNATIONA
mean?, 6 min https://www.youtube.com/watch?v=WhtpbJdXk6w
• What global trade deals are really about (hint: it's not trade) | Ha
TEDxMidAtlantic, 11 min https://www.youtube.com/watch?v=-v3

• https://www.imf.org/external/np/exr/st/eng/index.htm

• https://uncitral.un.org/en/lpdr-accedes-un-convention-contracts
sale-goods-cisg
International trade
operations
& financing them
 International contracts
• The most common type of contract is a sales contract
Attempts at legal harmonization:
• United Nations Commission on International Trade Law (UNCITRAL)
• International Chamber of Commerce (ICC) activities
• UNIDROIT = International Institute for the Unification of Private Law

• Vienna Agreement - a key agreement governing international

purchase and sale contracts, the UNInternational sales contracts
International sales contracts
Valid forms: • Pricing agreement (or
• Verbal pricing method)
• Telephone • Optional particulars:
• Telegraph • Terms of delivery
• Written • Payment Terms
Essential requirements: • Way of transportation
• Specifications of the
Contracting Parties
• Specification of the
subject of sale
International sales contracts
• Seller's responsibilities • Buyer's responsibility
• Deliver goods • Pay the contract price
• Provide and hand over all • Take over the goods
necessary documentation
• Provide transport (unless
otherwise specified)
• Ensure ownership
transfer The rules are laid down in
the Vienna Convention.
Transport companies
1. Public carriers
• It offers its services to all
• Have fixed links that are published
• It offers its services on a non-discriminatory basis
• This type of service is regulated by the state (e.g. railway
in most countries).
 Transport companies
2. Contract carriers
• Offer their services to a limited number of customers
under certain agreements
• Describe the specific services that will be provided and
the price for them.
• The tariffs are usually lower than the public carrier
because of the specialization in certain commodities and
the resulting savings (e.g. cattle transport)
 Transport companies
3. Special carriers
• Certain types of goods need special conditions - specific
regulations: agricultural production, but also newspaper
carriers often have a special position
• Transport tariffs are generally the lowest available.
4. Private carriers
• They mainly transport their own products.
• They can be hired, but transport is not their main activity.
International Trade Operations
• A number of forms of entering foreign markets - key decision
in international marketing.

A. Export and import operations

• The traditional and probably the simplest form of the
companies' entrance in foreign markets.
• Does not require any investment…but
• In export, companies may use various business methods,
based on contractual relations with the following business
partners: intermediaries, exclusive agents, sales
representatives, commission agents, mandatories and other
entities.
 Intermediary relations
• Entities that trade in their own name, at their own account
and undertake business at their own risk.
• Intermediaries resell purchased goods to other customers
and their reward is the difference between the purchase
and the selling price = the price margin
• May be beneficial for small and medium-sized enterprises.
• The advantages: lower circulation costs and elimination of
risks.
• The main disadvantage may be a loss of first-hand contact
with the customer.
 Contracts on exclusive sales
– exclusive distribution
• Specified area and kind of goods - concluded in writing.
• The advantage: a quick entrance in foreign markets, enter of
more distant markets.
• Serves as a test of the potential of the foreign market.
• The main disadvantage may be a loss of first-hand contact with
the customer – the exclusive agent is the only entity that has
the right to import the goods to the market.
• Usually contain a clause in which the exclusive agent commits
to minimum purchase, i. e. to an intake of at least minimum
quantity of the goods that will ensure a sufficient turnover in
that market.
Sales agency/Dealership

• Many entities operating on the agency basis in Inter.

trade. – building quality agency network
• The quality of this network - determines the success
on foreign markets.
• A special type of contract - exclusive dealership - the
represented entity shall not use any other agent in the
specified territory for a set range of shops and
vice versa.
Consignment and mandate relations
• The consignee undertakes to arrange a specific
business transaction in its own name for the
consignor, and the consignor undertakes to pay
consideration for it.

Direct export
• Used in industrial marketing in export of machinery,
production equipment and capital equipment.
• Very complicated deliveries - a range of professional
services.
 Piggyback
• Cooperation of several companies from the same sector in
the area of export; a large and known company usually
makes available its foreign distribution channels to smaller
companies for consideration.
• The advantage:
• SMEs - the possibility of using the name and experience of the
large company
• large company - offer a complete assortment
• The disadvantage:
• SMEs - stronger partners' pressure on low prices
• large company – if SMEs is not able to supply the required
quantities of goods duty and timely
 Association of small
exporters (export alliance)
• SMEs often do not have sufficient resources or
experience in international business, but they are
interested in exporting.
• Universal economic motivation and advantages.
• The advantages: cost saving, the opportunity to reduce
export risks, a better negotiating position, the use of
image of the association, etc.
• The disadvantage may imbalance of relationships
within the association.
B. Forms of entry into foreign markets with
low capital investment
• License operations
• Franchising
• Management contracts
• Processing operations
• Production cooperation
C. Companies' capital contributions in foreign markets
• Takeover
• Merger
• Greenfield investment
• Joint venture
• Strategic alliances
Factors and assumptions for the selection of banking
operations in the foreign country trade

• Type of goods, purchasing power (series,

investment unit)
• Places of trade (developed countries, developing
countries, cultures, etc.)
• Knowledge and character of the business
partner, frequency of contracts (information)
• Market situation (countries, commodities, etc.)
• Special features of the contract
PAYMENT INSTRUMENTS/
Methods of financing
(partial) prepayment

Documentary credits

Documentary collection

Supplier credit

Deliveries to an open account

Bills of exchange
I. Payment Instruments
(partial) prepayment -
payment in advance
• Rare to pay the full purchase price
• Only for certain goods or in high risk territories
• More often used to pay part of the purchase price in
advance so-called down payment
Objective: to reduce the risk of the supplier resulting
from a possible withdrawal of the buyer from the
contract
• Provide part of the funds to finance the production
of goods. Large contracts with longer delivery and
payment periods combined with delivery and loan
payment
• As a rule, custom made goods; according to
customer requirements (including investment units)
I. Payment Instruments
Documentary letter of credit
(= collateral by two banks)
• Favorite item with exporters
• Thanks to the letter of credit they get a bank obligation
to fulfill
• Banks are reputable entities and their liabilities are
more credit worthy than those of commercial
companies
• The bank (as a rule) issues a letter of credit on the
buyer's instruction (and according to its instructions),
sufficient exemption of payment for the exporter
• The exporter fulfills the contractually binding letter of
credit as soon as everything is fulfilled, the bank pays
the letter of credit (submission of all required documents during
the period of validity of the letter of credit, attestations, quality
certificates, insurance, acceptance by independent control.)
letter of credit scheme
I. Payment Instruments
Benefits of a documentary
letter of credit
• Advantages for the letter of credit (buyer): assurance that
the goods were shipped before payment, the possibility
to minimize commercial risk by setting up credit
conditions, the possibility to obtain better prices by
providing quality payment security, the seller's motivation
to deliver within the prescribed time and with conditions.
• Advantages for the letter of credit (seller): certainty of
payment for the delivery of goods or services when the
letter of credit is met; certainty that the payment of the
agreed amount is subject to compliance with conditions
known in advance; improved liquidity (the seller can
obtain cash immediately if he sells his claim to the bank -
in deferred trade); possibility of guaranteeing a quality
letter of credit to own suppliers.
I. Payment Instruments
Benefits of a documentary
letter of credit
It is characteristic that relations between
interested parties are considerably formalized:
• the letter of credit is independent of the
contract from which it originated;
• stakeholders deal with documents, not
goods;
• this baking instrument is technically
sophisticated and its use is governed by
internationally accepted rules.
I. Payment Instruments

Documentary collection
• One of the most commonly used payment instruments in
international trade, but it is also used in domestic trade
• Compared to the letter of credit - this is more advantageous
for the buyer (importer)
• Used when the seller has no doubts about the payment and
receipt of goods
• The seller hand over documents to the bank and authorizes
the bank to arrange for them to be handed over to the
buyer against payment of the purchase price.
• Beneficial especially for importers, does not tie funds in
advance
 I. Payment Instruments

Documentary collection
• The importer is assured that the goods have been shipped
• Assurance to the exporter that the bank will not issue the
documents until the buyer has issued a recovery order or has met
other recovery conditions
• The bank will not issue documents even if the payment is made as
a smooth payment until it has been authorized by the sending
bank
• Better payment security than smooth payments
• Lower bank fees (compared to documentary letters of credit)
• Ease of processing, safety
 I. Payment Instruments

Open account
• Open account deliveries are used in many countries, especially
advanced ones, for domestic payments.
• Technically, this is a very simple payment condition in which
the supplier sends the goods with the due date of the
purchase price on the invoice.
• It is practically an unsecured commercial loan with a relatively
very short maturity.
• Customers pay according to the customs of the given territory,
eg within thirty or sixty days from the date of issue of the
invoice.
• The payment by the buyer is made in the form of a smooth
payment according to the due date; the advantage of this
condition is low cost.
 I. Payment Instruments

Smooth payments
• The most widespread form of non-cash cross-border
payment operations
• Instrument for payment of a client's obligation or a
foreign currency claim
• A distinction is made: payments from abroad,
payments abroad and payments to the recipient in the
Czech Republic (in foreign currency)
• Advantages: the simplest, fastest and cheapest (non-
documentary) international payment instrument;
considerably shorter processing and delivery times for
smooth payments compared to check delivery
 I. Payment Instruments

Supplier credit
• Exporter credits are used in international trade for almost all types of goods.
• Short-term loans up to one year are required for supplies of consumer
goods, raw materials, foodstuffs as well as for serial engineering products.
• Interest on short-term loans is sometimes included in the price, sometimes
negotiated separately.
• A method of repayment of loans is always agreed.
• The most common principal repayments at certain intervals.
• For the importer advantageous - because for the goods taken usually pay
only when it is already processed, sold to another commercial intermediary,
etc.
• The exporter bears the full risk of the credit granted and therefore often tries
to hedge in an appropriate form.
 TRADE SECURITY
Bank Guarantee
• It is a fairly frequently used instrument to secure liabilities in
international trade.
• Its application is very broad, it can provide both buyer and seller
obligations and thus contribute to better balance of contract
performance
• Bank guarantees can also be used against other entities, eg carriers,
customs, courts, etc.
• Guarantees may also be provided by non-banking entities such as
insurance companies or commercial firms
• However, the guarantee fulfills its purpose only if it is provided by a
credit institution
• Therefore, company warranties do not apply. business only rarely,
especially for liabilities of companies that are part of transnational
corporations (corporate branches among themselves ...)
 Retention of title
• It is expressed by a special agreement in the relevant
contract.
• It is a convention under which the buyer acquires title
to the goods not by taking it over, but only by paying
the full purchase price.
• The possibility of negotiating a reservation of title until
the purchase price is paid is limited to certain types of
goods and only to those partner countries where the
law allows the negotiation of this condition.
II. Alternative methods of financing; Premature assignment of claims

Factoring
• One form of short-term financing, based on the purchase of
short-term trade receivables before their maturity
• The Factoring Company finances the receivables arising
from the supply of goods or services on a commercial credit
without any further security, based on an assessment of the
quality of the business relationship and the
creditworthiness of the customer, or suppliers
• The advantage is its great flexibility, there is no need to
complicate any approval, do extreme banking protection, it
is the assignment of a claim to a third party
 II. Alternative methods of financing; Premature assignment of claims

Factoring
• The Client undertakes to assign all receivables from its
customers to factoring companies, which leads to a
fundamental change in the creditor.
• Factoring company thus becomes the new and exclusive
owner of the receivable including its accessories in order to
ensure proper and timely collection and thus prevent
problem receivables
• In case of non-compliance with the due date, there are
reminders of the due date.
 II. Alternative methods of financing; Premature assignment of clai

Forfaiting
• Conclusion of an assignment agreement between the
forfaiter (bank) and the supplier
• Both parties define a specific receivable, determine the costs
associated with the purchase of the receivable, required
documentation and implementation date
• The supplier delivers his goods to a foreign customer, the
forfaiter asks the supplier for specific documentation,
verifies its validity, followed by payment of the given amount
• The bank pays a certain percentage of a certain amount and
on the due date of the receivable the bank collects the value
of the receivable directly from the customer
II. Alternative methods of financing; Premature assignment of claims

Forfaiting
• If it does not, it acts as a creditor and ensures the recovery process.
• Advantageous especially for companies supplying foreign customers
with higher value services - investment units e.g.
• Excludes risks associated with the territory, buyer, exchange rate, etc.
• Forfaiter does not directly assess the customer's risk, but rather the
risk of its bank issuing / confirming this agreement.
• After the purchase of the receivable, the bank either retains the
receivable, or sells it to someone else, to sell it on the secondary
market.
• Forfaiting costs: discount rate; fees.
• Importantly, it is a tradable subject in factoring.
 II. Alternative methods of financing; Premature assignment of clai

International leasing
• Involves entities from at least two countries – more risks and
factors than in the national one.
• Differences in national legal regulations, territorial and exchange
rate risk, customs and different tax factors, etc.
• Dynamically developing method of financing - spread from the
USA in the 1960s.
• Leasing may be characterized as a special type of lease in which
the lessee (user) obtains the right to use the investment goods
for fixed fees and for a predetermined period.
• The subject is usually machinery and equipment, means of
transportation or real estate/immovable property.