403 ib International Business Environment model Q&A
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The document comprises model question-answers for an MBA course on international business environment, addressing topics such as the significance of culture in business, tariff versus non-tariff barriers, movements in interest rates, foreign direct investment structures, and historical trade agreements like the Agreement on Textiles and Clothing (ATC). It elaborates on cultural influences in international business, the role of interest rates in currency value, and the framework for foreign investments in India. Lastly, it highlights the functions of the United Nations Conference on Trade and Development (UNCTAD) in promoting the integration of developing countries into the global economy.
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403 ib International Business Environment model Q&A
- 1. Sinhgad Institute of Business Administration & Computer Application (SIBACA) MODEL Question -Answers FOR MBA - Semester: IV (Specialization IB) Course Code: 403IB Type: Subject – Core Course Title: International Business Environment BY: Dr. Bhati Rakesh Kumar
- 2. MBA Semester – IV Subject: 403 (IB) International Business Environment MODEL Question -Answers Q1. Enumerate the main elements of culture and explain their significance in international business environment? Answer: Culture can be defined as “the sum total of the beliefs, rules, techniques, institutions, and artifacts that characterize human populations” or “the collective programming of the mind” Sociologists generally talk about the socialization process, referring to the influence of parents, friends, education, and the interaction with other members of a particular society as the basis for one’s culture. These influences result in learned patterns of behavior common to members of a given society. The definitions of culture vary according to the focus of interest, the unit of analysis, and the disciplinary approach (psychology, anthropology, sociology, geography, etc.). Culture was defined earlier as the symbols, language, beliefs, values, and artifacts that are part of any society. As this definition suggests, there are two basic components of culture: ideas and symbols on the one hand and artifacts (material objects) on the other. The first type, called nonmaterial culture, includes the values, beliefs, symbols, and language that define a society. The second type, called material culture, includes all the society’s physical objects, such as its tools and technology, clothing, eating utensils, and means of transportation. The cultural environment of a foreign nation remains a critical component of the international business environment, yet it is one of the most difficult to understand. The cultural environment of a foreign nation involves commonly shared beliefs and values, formed by factors such as language, religion, geographic location, government, history, and education. It is common for many international firms to conduct a cultural analysis of a foreign nation as to better understand these factors and how they affect international business efforts. Cross-cultural management issues arise in a range of business contexts. Within individual firms, for example, managers from a foreign parent company need to understand that local employees from the host country may require different organization structures and HRM procedures. In cross-border mergers and acquisitions (M&As), realizing the expected synergies very often depends on establishing structures and procedures that encompass both cultures in a balanced way. Cross-border joint ventures, alliances, or buyer–supplier relationships between two or more firms also require a cultural compromise. Finally, for firms to sell successfully to foreign customers requires culturally sensitive adaptations to products, services, marketing, and advertising. Despite the various patterns and processes of globalization, cultural differences still remain important. Even with greater common access, via various media and the Internet, to the same brands, rock icons, and sports stars, differences remain. Terms like cultural convergence or, simply, Americanization (the homogenization of global consumer preferences through the ubiquity of McDonald’s, Coca-Cola, and Ford) overstate the similarities between groups of people around the world. Cultures vary and these variations lead to real and significant differences in the ways that companies operate and people work.Moreover, because of globalization more and more firms are coming head to head with the added complexity of doing business globally, which stems from the huge amount of variety in the world that still exists Q1. Distinguish between tariff and non-tariff barriers. Answer: All countries are dependent on other countries for some products and services as no country can ever hope to be self reliant in all respects. There are countries having abundance of natural resources like minerals and oil but are deficient in having technology to process them into finished goods. Then there are countries that are facing shortage of manpower and services. All such shortcomings can be overcome through international trade. Though it seems easy, in reality, importing goods from foreign countries at cheap prices hits domestic producers badly. As such, countries impose taxes on goods coming from abroad to make their cost comparable with domestic goods. These are called tariff barriers. Then there are non tariff barriers also that serve as impediments in free international trade.
- 3. 1. With tariffs the Government receives the revenue whereas no revenue is received by the Government by applying non-tariff measures. However, it is favoured as an appropriate measure to meet the demand of the country and to protect the industry. 2. Non-tariff measures protect the procedures and make them feel more secure than under a tariff. But incentives are not there under tariffs. 3. In tariff customer’s classification and valuation procedures pose a problem before the customs authorities. Where-as under non-tariff measures no such problem arises. 4. Non-tariff barriers to trade induce the domestic producers to form monopolistic organisations with a view to keeping output low and prices high. This is not possible under import duty. Non-tariff barriers remain ineffective if monopolistic tendencies prevail in the country. 5. Non-tariff measures are flexible than tariff. Imposition of tariff and amendments are subject to legislative enactment. 6. In non-tariff the price differences will be greater in two countries because there is no free flow of imports; but in tariff—price differentiation will be equal to the cost of tariff and transportation between exporting and importing countries. 7. Tariffs are simple to operate. Tariff rates once fixed through legislation require no individual allocation of licensing quotas or exchange. For non-tariff measures numbers of authorities are there to administer. It may result in political interference or corruption. 8. Tariff favours particularly to efficient firms in the country but non-tariff measures benefit established firm because they get quotas or import licenses. 9. Non-tariffs discriminate against new-comers but tariff do not discriminate. Q2. Discuss Movements in interest rates and then impact on trade and investment flows. Answer: All other factors being equal, higher interest rates in a country increase the value of that country's currency relative to nations offering lower interest rates. However, such simple straight-line calculations rarely, if ever, exist in foreign exchange. Although interest rates can be a major factor influencing currency value and exchange rates, the final determination of a currency's exchange rate with other currencies is the result of a number of interrelated elements that reflect and impact the overall financial condition of a country in respect to that of other nations. Generally, higher interest rates increase the value of a given country's currency. The higher interest rates that can be earned tend to attract foreign investment, increasing the demand for and value of the home country's currency. Conversely, lower interest rates tend to be unattractive for foreign investment and decrease the currency's relative value. However, this simple occurrence is complicated by a host of other factors that impact currency value and exchange rates. One of the primary complicating factors is the interrelationship that exists between higher interest rates and inflation. If a country can manage to achieve a successful balance of increased interest rates without an accompanying increase in inflation, then the value and exchange rate for its currency is more likely to rise. Interest rates alone do not determine the value of a currency. Two other factors that are often of greater importance are political and economic stability and the demand for a country's goods and services. Factors such as a country's balance of trade between imports and exports can be a much more crucial determining factor for currency value. Greater demand for a country's products means greater demand for the country's currency as well. Favorable gross domestic product (GDP) and balance of trade numbers are key figures that analysts and investors consider in assessing the desirability of owning a given currency. Another important factor is a country's level of debt. While they can be managed for some period of time, high levels of debt eventually lead to higher inflation rates and may ultimately trigger an official devaluation of a country's currency. The recent history of the United States clearly illustrates the critical importance of a country's overall perceived political and economic stability. In recent years, U.S. government and consumer debt has exploded to new high levels. In an attempt to stimulate the U.S. economy, the Federal Reserve has maintained interest rates near zero. Despite these facts, the U.S. dollar has enjoyed favorable exchange rates in relation to the currencies of most other nations. This is partially due to the fact that the U.S. retains, at least to some extent, the position of being the reserve currency for much of the world. Also,
- 4. the U.S. dollar is still perceived as a safe haven in an economically uncertain world. This fact, more so than interest rates, inflation or other considerations, has proven to be the overriding and determining factor for the relative value of the U.S. dollar. For international investors, there are substantial gains to be made from moving money between different countries with different interest rates. Suppose the EU and UK both have an interest rate of 0.5%. At that time, it doesn’t make much difference whether you put savings in the US banks or EU banks. However, if the UK increased interest rates to 1.5% then you would get a substantially higher return from saving in a UK bank. Therefore, EU investors may sell Euros and buy Pound Sterling so that they can gain more interest from their savings. This increased demand for Pound Sterling will push up the value of the Pound against the Euro. Even small changes in interest rates can make a significant impact on exchange rates. Increased capital mobility means it is easier to transfer money across accounts. Money can be moved from one account to another with ease. Also, the commission from buying dollars will be quite limited making it more attractive to shift accounts. Q2. Discuss Structure of Foreign investments? Foreign Direct Investment (FDI) is a kind of cross-border investment made by a resident in one economy (the direct investor) with the objective of establishing an interest in an enterprise (the direct investment enterprise) i.e. resident in an economy other than that of the direct investor. The motivation of the direct investor is a strategic long term relationship with the direct investors. The motivation of the direct investor is a strategic long term relationship with the direct investment enterprise to assure the significant degree of influence by the direct investor in the management of the direct investment enterprise. The objectives of direct investment are different from those of portfolio investment whereby investor does not generally expect to influence the management of the enterprise. Foreign direct investment (FDI) in India is undertaken in accord with the FDI policy which is formulated and declared by the Government of India. The Department of Industrial Policy and Promotion, Ministry of Commerce and Industry and the Government of India issues a “Consolidated FDI Policy” on a yearly basis on March 31 of each year (since 2010) elaborating the policy and the process in respect of FDI in India. The latest Consolidation FDI policy governed by the provisions of the Foreign Exchange Management Act (FEMA) 1993. FDI is prohibited in the listed sectors; Any kind of lottery business Atomic energy Nidhi company Betting and gambling including casinos Real estate business Business of chit fund Routes for Investment The Indian economy was considered to be one of the weak and developing economies of the world, but with the changing time, India has witnessed a huge amount of change in its economy during the past years. The Government has taken many initiatives for its development and for the promotions so that foreign investors get more interest and invest in the domestic markets of India. There are basically two routes for the FDIs to invest in India. Namely; Automatic route Government approval The FDIs which are permitted through automatic route can make the investment in a hassle free procedure. They do not require any prior approval of the RBI or the Government before making any remittance. They only need to notify the regional officer of the RBI before 30 days of receipt of inward remittance and submit the necessary documents in that office before the completion of 30 days of issue of shares to foreign investors. Whereas; Under the FDIs which does not fall under the automatic route require prior Government approval. For this purpose, a body has been incorporated as the Foreign Investment Promotion Board (FIPB) who deals with FDIs which are not permitted under the automatic route. The Indian companies who
- 5. are permitted to have foreign investment through (FIPS) are not required to get any approval from the RBI. They only need to notify the Regional office of the RBI as being prescribed. 1. Incorporating a company in India: It can be a private or public limited company. Both wholly owned and joint ventures are allowed. Private limited company requires minimum of 2 shareholders. 2. Limited liability partnerships: Allowed under the Government route in Sectors where 100% FDI is allowed. 3. Sole proprietorship/partnership firm: Under Reserve Bank of India (RBI) approval-RBI decides the application in consultation with Government of India. 4. Extension of foreign entity: Liaison office, Branch office (BO) or Project Office (PO) -These offices can undertake only the activities specified by the RBI. Approvals are granted under the Government and RBI route. Automatic route is available to BO/PO meeting certain conditions. 5. Other structures: Foreign investment or contributions in other structures like not for profit companies etc. are also subject to provisions of Foreign Contribution Regulation Act (FCRA). Q3. Discuss the Agreement on Textiles and Clothing? The Agreement on Textiles and Clothing (ATC) was negotiated in the Uruguay Round of Trade Negotiations. It replaced the Arrangement Regarding International Trade in Textiles (MFA, or Multi- Fibre Arrangement) of 20 December 1973. The Multi Fibre Arrangement (MFA) governed the world trade in textiles and garments from 1974 through 2004, imposing quotas on the amount developing countries could export to developed countries. It expired on 1 January 2005. The MFA was introduced in 1974 as a short-term measure intended to allow developed countries to adjust to imports from the developing world. Developing countries have an absolute advantage in textile production because it is labor-intensive and they have low labor costs. The ATC provided for all then-existing textile and clothing trade restrictions to be notified and eliminated over a period of 10 years from the date of entry into force of the WTO Agreement. The ATC also provided that the ATC itself would be terminated at the beginning of the 12th year of the WTO, together with all of the remaining restrictions within its scope. As this termination duly took place on 1 January 2005, the ATC is no longer in effect. The Agreement on Textiles and Clothing (ATC) and all restrictions there under terminated on January 1, 2005. The expiry of the ten-year transition period of ATC implementation means that trade in textile and clothing products is no longer subject to quotas under a special regime outside normal WTO/GATT rules but is now governed by the general rules and disciplines embodied in the multilateral trading system. It also contains a specific transitional safeguard mechanism which could be applied to products not yet integrated into the GATT at any stage. Action under the safeguard mechanism could be taken against individual exporting countries if it were demonstrated by the importing country that overall imports of a product were entering the country in such increased quantities as to cause serious damage — or to threaten it — to the relevant domestic industry, and that there was a sharp and substantial increase of imports from the individual country concerned. The ATC calls for a progressive phasing out of all the MFA restrictions and other discriminatory measures in a period of 10 years. In contrast to the MFA, the ATC is applicable to all members of the WTO. Steps Percentage of products to be brought under GATT (including removal of quotas) How fast remaining quota should open up, if 1994 rate was 6% Step 1 1st Jan 1995 – 31st Dec 1997 16 percent (minimum taking 1990 imports as base) 6.96 percent annually Step 2 1st Jan 1998 – 31st Dec 2002 17 percent 8.70 percent annually Step 3 1st Jan 2002 – 31st Dec 2004 18 percent 11.05 percent annually Step 4 1st Jan 2005 Full integration into GATT and final elimination of quotas , ATC terminates 49 percent (maximum) No quotas left
- 6. Q3. What are the functions of UNCTAD? Answer: In the early 1960s, growing concerns about the place of developing countries in international trade led many of these countries to call for the convening of a full- fledged conference specifically devoted to tackling these problems and identifying appropriate international actions. The first United Nations Conference on Trade and Development (UNCTAD) was held in Geneva in 1964. Given the magnitude of the problems at stake and the need to address them, the conference was institutionalized to meet every four years, with intergovernmental bodies meeting between sessions and a permanent secretariat providing the necessary substantive and logistical support. The UNCTAD aims at creating development-friendly integration of developing countries into the world economy. Functions of United Nations Conference on Trade and Development (UNCTAD): i. To serve as the focal point within the UN for the integrated treatment of trade and development and interrelated issues in the areas of finance, technology, investment, and sustainable development ii. To serve as a forum for intergovernmental discussions and deliberations, supported by discussions with experts and exchanges of experience, aimed at consensus building iii. To undertake research, policy analysis, and data collection in order to provide substantive inputs for the discussions of experts and government representatives iv. To facilitate cooperation with other organizations and donor countries providing technical assistance tailored to the needs of the developing countries, with special attention being paid to the needs of least developed countries, and countries with economy in transition The UNCTAD secretariat works together with member governments and interacts with organizations of the UN system and regional commissions, as well as with governmental institutions, non-governmental organizations, and the private sector, including trade and industry research institutes, and universities worldwide. Q4. Discuss in details technology transfer Answer: Technology Transfer (also called Transfer of Technology (TOT) and Technology Commercialization) are the processes by which the information or knowledge related to the technological aspects travel within the group or between the organizations or entity. Taking this to the broader scenario, give rise to International technology transfer in which the knowledge travels in between the countries, which is not only limited to the Knowledge and information, rather includes skill transferring, methods of manufacturing, physical assets, know-how, and other technical aspects, and henceforth helps in further development of the technology and innovation, by effectively utilizing the technology transferred and finally incorporating it. Technology transfer has been used in the movements of technology from the laboratory to industry or from one application to another domain application or taking developing countries into consideration technology transfer helps in growing access to technologies which are related to other developed countries and henceforth helps in approaching towards the newer technologies and inventions i.e. from Developed to developing countries. FORMS OF TECHNOLOGY TRANSFER: Technology transfer can be classified into vertical and horizontal technology transfer Vertical transfer refers to transfer of technology where transmission of new technologies is done from the generation of new technology during the research and development programs into the science and technology organizations, for instance, to the application related to the industrial and agricultural sectors, or we can say that vertical transfer is the technology transfer commencing from basic research to applied research, from applied research to development followed by development to production. While the horizontal technology transfer is the movement of a well-known technology from one equipped environment to another (from one company to another) or say refers to the transfer and use of technology used in one place or organization to another place or organization. As discussed above generally developed countries follow the route:- Research -> Development -> Design -> Production While less advanced and developing countries follow the route:- Production -> Design -> Development -> Research Generally there are the reverse trends in the developing countries because the path to be followed depends upon the transfer, absorption, and adaptation of existing technology
- 7. ADVANTAGES The advantages related to technology transfer comprises of the essential gain to the public who benefits from the manufactured goods that get to the market and ultimately the availability of the jobs which results from the improvement and sale of the products so formed. Technology transfer strengthens industry by identifying new business opportunities which contributes to enhancing the know-how and competitiveness of the technology providers, which ultimately results in broadening the business area and re-focusing to the technologies and systems to serve several different fields. In addition, technology transfer promotes the wider use and awareness of technology and systems. Technology transfer brings economic benefits by increasing revenues for both technology donors and receiver's benefits with new and better products, processes, and services that lead to increased efficiency and effectiveness, greater market share and increased profits. Moreover technology transfer helps in earning rewards which is above and beyond the regular salary which is received through patents, licenses, and other technology transfer awards which help in benefiting intellectually and professionally through working collaboratively with their peers in the industrial sector. DISADVANTAGES As technology transfer is keen or meant for the business oriented activity, hence forth there can be the chances to have financial or commercial risk, as we are well aware that Licences can generate the income, but patent application which are not licensed will only cost money. Even when the transfer programme related to the technology transfer is successful or in particular after technology transfer institutional tensions may arise within the organization which may be in between the recipient of licensing income and those who know they will never make utilizable inventions. For the sake of remedy in those circumstances Institutional policies can be made aiming to have partial rearrangement of income received by license between all research groups but, using this strategy may not eradicate the problem rather in most of the cases discoverer will be frustrated or disappointed because the income that they have earned is given to other groups. Technology transfer activities may put researchers in conflict of interest situations, especially when the transfer involves the creation of the spin- off company, hence Institutions should be aware of these possible dangers. Moreover problem can be because of non performance of licensee. And may be the licensee has limited chances beyond the license scope unless future enhancements to patent included in initial agreement and Unrealistic expectations and demands from licensor. INDIAN SCENARIO : Technology in India is growing exponentially and has played an important role in all round development and growth of economy in the country, India has opted for a wise mix of original and imported technology. Henceforth "Technology transfer" plays a very important role and is generally covered by a technology transfer agreement. Developing countries like India generally not follow the usual path for development with regard to technologies but use their advantage in the cutting edge technology options which is now available and put the tools to use this modern technology. Technology transfer is assumed to get benefits from R&D which is shared with the developing and underdeveloped countries , so taking this to the point of consideration National research laboratories is been constructed by the Indian government for the purpose of R&D which is yet to be commenced by the private sectors. India generally comprises of Small and medium enterprises and is growing since liberalization, which has resulted in growth of The multinational enterprises, which in turn is competing with the international companies which has enhanced the confidence of India. Not only confined to the pharmaceuticals but is broadly categorized in other areas too such as agriculture, dairy and other technologies. Government of India is in the verge to open Technology Transfer Offices, Universities, institutions which will be funded by central government and will acts as mechanism for transferring or exporting the research conducted and its outcome to the desired place. Though some of the Indian Institutes have been already commercializing their research and are successful in technology transfer in which they have been licensed as technologies to industry. Moreover, numerous cases of technology transfer are seen in India by various well-known institutions. .
- 8. Q4. Discuss International collaborative arrangements and strategic alliances. International strategic alliance is typically defined as a collaborative arrangement between firms headquartered in different countries. Partnering firms remain legally independent after the formation of alliance and the alliance relationship is relatively enduring. International strategic alliances can be categorized along multiple dimensions. First, based on the type of activities of collaboration, international strategic alliances can be categorized into licensing, franchising, management service, supply, research and development, manufacturing, marketing, and others. An international strategic alliance can engage in one activity or a combination of activities. Second, based on the number of partners involved, an international strategic alliance can be bilateral or multilateral; the existing body of literature on international strategic alliances has largely focused on bilateral alliances. Third, based on the nationalities involved, an international strategic alliance can be broadly defined as a collaborative arrangement between firms one of which is headquartered outside the country of alliance; therefore an international strategic alliance can be categorized as home-home, home-host, or home-third country alliance. The majority of existing studies are about international strategic alliances formed between a foreign firm and a local firm (i.e., home-host). Fourth, based on the involvement of equity investment, international strategic alliances can be categorized into non-equity-based and equity-based alliances. Non-equity-based international strategic alliances are also called contract-based; equity-based international strategic alliances are often referred to as international joint ventures. Companies must choose an international operating mode, many of which are collaborative. Collaborative frequently lessens control. MNEs with fully global orientation use most of the operational modes available. Strategic alliance-collaborative is of strategic importance to one or more of the companies. Collaborations-provide different opportunities and problems than do trade or wholly owned direct investment. Motives for Collaborative Arrangements A. General Motives for Collaboration 1. Spread and reduce costs - sometimes it is cheaper to get another company to handle work, especially: - cooperative ventures may increase operating costs. 2. Specialize in competencies - Resource-based view of the firm-holds that each company has a unique combination of competencies. - Large, diversified companies realign to focus on their major strengths. - licensing can yield a return on a product that does not fit the company’s strategic priority based on its best competencies. 3. Avoid competition - Companies may combined resource to combat large competitors. -Companies may collude to raise everyone’s profits. 4. Secure vertical and horizontal links -Companies may lack competence or resources to become fully vertically integrated. -Secure horizontal links-may provide finished products and components. 5. Gain market knowledge -learn about a partner’s technology, operating methods, or home markets. International Motives for Collaboration 1. Gain location-specific assets - Foreign companies may gain operational assets when teaming with local companies. 2. Overcome legal constraints - country may require foreign companies to share ownership. - Collaboration a means of protecting assets. 3. Diversify geographically - can smooth its sales and earnings because business cycles differ. 4. Minimize exposure in risky environments -reduce base of assets located abroad. Strategic alliances are agreements between companies (partners) to reach objectives of common interest. Strategic alliances are among the various options which companies can use to achieve their goals; they are based on cooperation between companies The four potential benefits that international business may realize from strategic alliances 1. Ease of market entry: advances in telecommunications, computer technology and transportation have made entry into foreign markets by international firms easier. Entering foreign markets further confers benefits such as economies of scale and scope in marketing and distribution. the cost of entering an international market may be beyond the capabilities of a single firm but, by entering into a strategic alliance with an international firm, it will achieve the
- 9. benefit of rapid entry while keeping the cost down. Choosing a strategic partnership as the entry mode may overcome the remaining obstacles, which could include entrenched competition and hostile government regulations. 2. Shared risks: risk sharing is another common rationale for undertaking a cooperative arrangement when a market has just opened up, or when there is much uncertainty and instability in a particular market, sharing risks becomes particularly important. the competitive nature of business makes it difficult for business entering a new market or launching a new product, and forming a strategic alliance is one way to reduce or control a firm’s risks. 3. Shared knowledge and expertise: Most firms are competent in some areas and lack expertise in other areas; as such, forming a strategic alliance can allow ready access to knowledge and expertise in an area that a company lacks. the information, knowledge and expertise that a firm gains can be used, not just in the joint venture project, but for other projects and purposes. the expertise and knowledge can range from learning to deal with government regulations, production knowledge, or learning how to acquire resources. A learning organization is a growing organization. 4. Synergy and competitive advantage: achieving synergy and a competitive advantage may be another reason why firms enter into a strategic alliance. as compared to entering a market alone, forming a strategic alliance becomes a way to decrease the risk of market entry, international expansion, research and development etc. Competition becomes more effective when partners leverage off each other’s strengths, bringing synergy into the process that would be hard to achieve if attempting to enter a new market or industry alone. Strategic alliances developed and propagated as formalized inter organizational relationships, particularly among companies in international business systems. These cooperative arrangements seek to achieve organizational objectives better through collaboration than through competition, but alliances also generate problems at several levels of analysis. Strategic alliances are critical to organizations for a number of key reasons: 1. organic growth alone is insufficient for meeting most organizations’ required rate of growth. 2. Speed to market is essential, and partnerships greatly improve it. 3. Complexity is increasing, and no single organization has the required total expertise to best serve the customer. 4. Partnerships can defray rising research and development costs. 5. alliances facilitate access to global markets. Q5. What are the similarities and differences of EC and NAFTA Answer: The nature of the North American Free Trade Agreement (NAFTA) is specific that doesn’t comprise the standard antitrust strategies which are present in the European Union (EU) and these are the dissimilarities which have stretched since 1994. In expressions of the values, the dimensions and populations Mexico and Canada are not much advanced in worldwide status and economy as compared to The United States. NAFTA, as a council directive has endorsed the consistency of rivalry set of regulations in European Union (EU), though NAFTA has not been capable of improving its own contest strategies as originally considered. In addition to this, NAFTA doesn’t contain the common supranational traditions which are originated in the European Union (EU), for instance, they have no court of justice, no commission and this prohibits contest regulations from its argument conclusion practices that in converse split up in diversities on contest policies which are advanced to the World Trade Organization. The significance of this stipulation is that, at the present time, the European Union (EU) rivalry verdict is not only consistent at its greatness, however, also significant at the nationalized stage. The European Union (EU), on the other side, is a political and economic union in nature that was established in November 1993 and is considered the leading liberated trade mass in the whole world at the present day. Its monetary accomplishment is undeniable through countries which are in queue to develop into its members. Among all of the exclusive features of the EU, having a universal currency that is known as Euro is at the top and these days, it is used by 17 countries out of 27 members of the union. The popular countries which are not utilizing the Euro currency are UK, Sweden and Denmark. This is the EU which is well equipped with a common tariff that is applicable for
- 10. every member state. In contrast, the members of NAFTA are separated in the fields of rules of social and economic issues. This is the major cause that a lot of obstacles are present in this system imposing a strong impact on individual and business level. With the enhancement of the trade activities all over the world, the making of the trade agreements and unions has become a common phenomenon as from the use of this method; a number of specific advantages can be obtained for the member countries. The most famous trade unions which are working on the face of this planet at the present day are known as the NAFTA and EU and here their differences are elaborated in detail. NAFTA NAFTA stands for North American Free Trade Agreement which is among the generally prevailing and extensive agreements in the world of business. It was commenced on January 1, 1994 and directs every business in North American trades. NAFTA is an agreement amongst United States, Canada and Mexico which was premeditated to promote better dealings involving these states and the major objective was to eliminate trading barriers. Main purpose behind this was to enhance speculation amongst these countries that permitted for the elimination of duties between the member states which was acceptable for free and cheaper trade. EU European Union (EU) is a political and economic union that was established in November 1993 and is considered the leading liberated trade mass in the whole world. Its monetary accomplishment is undeniable through countries which are in queue to develop into its members. Initially only 6 countries (including Netherlands, West Germany, Belgium, Luxembourg, Italy and France) were its members and now it has 27 associate states. EU has a universal currency that is known as Euro and used by 17 countries out of 27. UK, Sweden and Denmark are famous countries not using Euro. EU has a distinct marketplace having ordinary regulations that concern in all member countries. Key Differences The major important difference is that EU has a common tariff which applies on all member states but members of NAFTA still separated in rules of social and economic issues and there are a lot of obstacles which have a strong impact on individuals as well as businesses EU People have a particular currency which is called Euro while in NAFTA the member states use their own currencies. EU is a separate opinionated body through European Parliament whereas NAFTA is presently a contract to promote trade amongst member countries. Numerous countries of EU have several clashes between them but members of NAFTA were not opponents with each other. EU has materialized as a business trading slab for the world and an amalgamation which commands world’s 20% GDP as NAFTA has no such influence as a trading block because its working is limited. Q5. What are the key features of Counter trade? Answer: Countertrade means exchanging goods or services which are paid for, in whole or part, with other goods or services, rather than with money. A monetary valuation can, however, be used in counter trade for accounting purposes. Any transaction involving exchange of goods or service for something of equal value. Main variants of countertrade are: 1. Barter: Exchange of goods or services directly for other goods or services without the use of money as means of purchase or payment. 2. Switch trading: Practice in which one company sells to another its obligation to make a purchase in a given country. 3. Counter purchase: Sale of goods and services to one company in aother country by a company that promises to make a future purchase of a specific product from the same company in that country. 4. Buyback: This occurs when a firm builds a plant in a country, or supplies technology, equipment, training, or other services to the country, and agrees to take a certain percentage of the plant’s output as partial payment for the contract. 5. Offset: Agreement that a company will offset a hard currency purchase of an unspecified product from that nation in the future. Agreement by one nation to buy a product from another, subject to the purchase of some or all of the components and raw materials from the buyer of the finished product, or the assembly of such product in the buyer nation.
- 11. Countertrade, as compared to monetary trade, may at first appear to be an outdated practice.Yet it offers a number of benefits to both trading parties as it moves inventory for both. It is obvious that countries that demand countertrade have reasons to do so. First, a country can gain access to raw materials, products, and technology that it needs. Second, the country is able to dispose of items that it produces. Third, countertrade allows the country to conserve its hard currencies. From a seller's perspective, countertrade allows the seller to gain access to a market that might otherwise be closed. Also the firm can largely ignore the costs of currency conversion as well as the movement of currency exchange rates. Furthermore, the firm can charge full price (or even more than that) because it gains leverage when goods are exchanged for other goods. The benefits derived from countertrade also lead to problems. First, countertrade is a cumbersome and complex process, and all parties must consider the additional risk, time, effort, and costs involved. Second, the additional expenses inevitably and ultimately reduce the parties' profits. Third, the products involved may not be internationally competitive in terms of pricing and quality. Both parties' inflated prices increase the cost of international transactions. Finally, countertrade may encourage "covert dumping." A country may offer its goods at a discount so as to induce its supplying partner to participate, while the supplying partner may hastily dump the goods it receives in order to receive cash. From the perspective of international trade, countertrade is a form of protectionism. A buyer, instead of buying from the most efficient producer, may end up buying from a manufacturer who is less efficient but more willin g to use countertrade. Therefore, the buyer has to absorb all or part of such costs, and such costs in the end must be borne by consumers. The International Monetary Fund discourages mandatory countertrade programs as it believes that appropriate fiscal, monetary, and exchange rate policy can provide better results at lower costs.