Mrs. Charu Rastogi, Asst. Prof.

International Trade Environment, Country Risk Analysis, Opportunities and Threats for International Business, BRIC Economies

International Business Management

Mrs. Charu Rastogi, Asst. Prof.

AgendaCase Study on Anti-DumpingAnalysis of Global Environment –

Political, Economic, Social, Cultural, Legal Technological, Natural environment

Country Risk AnalysisOpportunities and threats for Intl.

businessRise of new economies like Brazil,

Russia, India, China (BRIC) and Asian Countries

Mrs. Charu Rastogi, Asst. Prof.

CASE STUDYDumping on Trade Complaints

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One of the biggest problems in international trade is the ability of domestic producers to lobby their home governments to erect barriers to trade. In the past, the textile, apparel, and shoe industries were able to obtain protection from cheaper imports through tariffs, quotas, and special measures.

Now multilateral trade agreements under the GATT and WTO (and also regional and bilateral agreements such as NAFTA and the emerging Asian Pacific Economic Cooperation forum) outlaw such blatant instruments of protection. However, these agreements have been replaced by more subtle ones.

Mrs. Charu Rastogi, Asst. Prof.

Prominent as a new type of protectionist device is the use of “unfair trade laws”, especially antidumping (AD) and countervailing duty actions (CVD).

The economic logic of AD and CVD makes some sense. It is unfair for a foreign producer to “dump” a product in your country below its price in the home country, or below the cost of producing it.

Similarly, subsidized foreign products should be offset by a countervailing duty of equivalent effect. The problem, however, lies with the administration of the trade laws, which is subject to political lobbying.

Mrs. Charu Rastogi, Asst. Prof.

A variety of studies have found that the bureaucrats who administer AD and CVD laws are subject to capture by the home industries, who then use AD and CVD cases as harassment tools against often economically efficient foreign rival producers.

For example, Rugman and Anderson (1987) found that the US administration of AD and CVD was used in a biased manner against Canadian producers, especially in resource-based industries such as soft-wood lumber, fishing, and agriculture.

Thus in the Canadian-US Free Trade Agreement of 1989, and again in NAFTA, five-person bi-national panels of trade law experts were set up to review the decision of the US (and Canadian) trade law agencies.

Mrs. Charu Rastogi, Asst. Prof.

In a subsequent study, Rugman and Anderson (1997) found that these bi-national panels were able to remand back (i.e., successfully challenge) the decision of the US agencies twice as often in cases involving Canada as in AD and CVD cases involving the rest of the world.

In related work it has been found that the EU is just as bad as the US in that the EU brings in questionable AD measures, especially against Asian countries. Indeed, one of the unresolved problems is how smaller countries can secure access to the protected markets of triad economies (USA, Japan, Western Europe) such as the US and the EU.

In Japan’s case there are similar arguments (including those from its triad rivals) that there are entry barriers in place preventing market access.

Mrs. Charu Rastogi, Asst. Prof.

Questions:Why are anti-dumping and countervailing

duty measures brought and imposed?What is the impact on a firm from a non-triad

country if it faces an AD or CVD case in its major market?

What is the solution to the abusive use of AD and CVD measures by triad economies?

Mrs. Charu Rastogi, Asst. Prof.

Countervailing DutyGATT Article VI (1994) allows the use of CVD

to offset public subsidies for the manufacture, production or export of any merchandise.

CVD use requires ◦ proving the existence of subsidy

◦ proving that the subsidized import causes or threatens to cause injury to domestic industry.

Mrs. Charu Rastogi, Asst. Prof.

Anti-dumping DutyDumping: the introduction of a product of

one country into the commerce of another country at less than its fair or normal value.

Normal value: comparable price for the product, in the ordinary course of trade, when destined for domestic consumption.

AD duties can be used if it is proven that◦ Dumping exists◦ Causes or threatens to cause material injury.

Mrs. Charu Rastogi, Asst. Prof.

Impact Many of the export products in developing countries

are produced by labour intensive, small and medium enterprises. Imposition of countervailing duties or even the threat of imposition of such duties has a serious adverse impact on the functioning of such units including fall in production, large unemployment, decline in incomes and increase in poverty levels.

The high cost of capital, low level of infrastructure development, inadequate integration and organization of the economy, poorly developed information networks are characteristics of industry in developing and least developed countries. It has been recognized that the state has to assume a more active and positive role in assisting its industry.

Mrs. Charu Rastogi, Asst. Prof.

Recourse against unfair use of CVD / AD DutyWTOCountries lodge complaint / petition to one

another diplomatically Industry groups file petitions with their

governments to launch investigations against the country making unfair use of CVD / AD.

Eg. Companies in the U.S. will file petition in U.S. Department of Commerce and United States International Trade Commission while those in Europe will file it in the European Commission.

Mrs. Charu Rastogi, Asst. Prof.

GLOBAL ENVIRONMENT

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Trading Environment of International Trade

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Trading Environment of International Trade

7

3. ECONOMY

Environmentaluncontrollablescountry market A

Environmentaluncontrollablescountrymarket B

Environmentaluncontrollablescountrymarket C

1. Competition

1. Competition

2. TechnologyPrice Product

Promotion Place6. Geography and

Infrastructure

Foreign Environment(Uncontrollables)

7. Structure ofDistribution

3. Economy

5. Political-Legal

Domestic environment(Uncontrollables)

(Controllables)

2 .Technology

4. Culture

5. Political-Legal

4. Culture

Target Market

Mrs. Charu Rastogi, Asst. Prof.

Economic Environment• Economic development• Infrastructure• Resource and product markets• Per capita Income• Exchange rates• Economic conditions

Mrs. Charu Rastogi, Asst. Prof.

Politico-Legal Environment• Political risk

◦ Arises due to events or actions by host governments ● Loss of assets● Loss of earning power● Loss of managerial control● Government takeovers● Acts of violence

• Government takeovers

• Tariffs, quotas, taxes

• Terrorism, political instability

• Laws, regulations

Mrs. Charu Rastogi, Asst. Prof.

Socio-Cultural Environment Culture – shared knowledge, beliefs, values, common

modes of behavior, and ways of thinking among members of a society◦ Intangible◦ Pervasive◦ Difficult for outsider to learn

Managers need to understand difference in social values to comprehend local cultures and deal with them effectively

Dimensions:• Socio values, beliefs• Language• Religion (objects, taboos, holidays)• Kinship patterns• Formal education, literary• Time orientation

Mrs. Charu Rastogi, Asst. Prof.

Physical and Technological Environment Physical Factors, such as geographical factors, weather

and climatic conditions may call for modifications in the product.

Physical facilities◦ Some products, like many consumer durables, have certain

use facility characteristics. The sale of television sets, for example, is limited by the extent of the coverage of the telecasting

◦ Similarly, the demand for refrigerators and other electrical appliances is affected by the extent of electrification and the reliability of power supply

Technological factors◦ Differing technological environment of different markets or

countries may call for product modifications◦ For example, many appliances and instruments in the U.S.A.

are designed for 110 volts but this needs to be converted into 240 volts in countries which have that power system

Mrs. Charu Rastogi, Asst. Prof.

Natural EnvironmentGeographical and ecological factors, such as

natural resource endowments, weather and climatic conditions, topographical factors, locational aspects in the global context, port facilities, etc., are all relevant to business.◦ Climatic and weather conditions affect the location of

certain industries like the cotton textile industry.◦ Topographical factors may, affect the demand pattern.

For example, in hilly areas with a difficult terrain, jeeps may be in greater demand than car

Ecological factors have recently assumed great importance. The depletion of natural resources, environmental pollution and the disturbance of the ecological balance has caused great concern

Mrs. Charu Rastogi, Asst. Prof.

Trading Environment of International Trade

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Country Risk Analysis A collection of risks associated with investing in a foreign

country. These risks include

◦ political risk, ◦ exchange rate risk, ◦ economic risk, ◦ sovereign risk and ◦ Transfer and convertibility risk, which is the risk of capital being

locked up or frozen by government action. Country risk can reduce the expected return on an investment

and must be taken into consideration whenever investing abroad. Some country risk does not have an effective hedge. Other risk, such as exchange rate risk, can be protected against with a marginal loss of profit potential.

The United States is generally considered the benchmark for low country risk and most nations can have their risk measured as compared to the U.S. Country risk is higher with longer term investments and direct investments, which are investments not made through a regulated market or exchange.

Mrs. Charu Rastogi, Asst. Prof.

Country Risk: Political Risk Political risk covers cultural and ethnic risk, socio-

economic risk or changes in political institutions. Political risk pertains to the risk of exposure

stemming from the political environment. The factors in this category relate to the threat of war, social unrest, disorderly transfers of power, political violence, international disputes, regime changes, institutional ineffectiveness, but also include the quality of the bureaucracy, the transparency and fairness of the political system, and levels of corruption and crime in the country in question.

Factors: Government Stability, Socioeconomic Conditions, Investment Profile, Internal Conflict, External Conflict, Corruption

Mrs. Charu Rastogi, Asst. Prof.

Country Risk: Exchange Rate RiskThe risk that a business' operations or an

investment's value will be affected by changes in exchange rates

Investors and multinational businesses exporting or importing goods and services or making foreign investments throughout the global economy are faced with an exchange rate risk which can have severe financial consequences if not managed appropriately

Management: Hedging, forward, future contracts, options , swaps.

Mrs. Charu Rastogi, Asst. Prof.

Country Risk: Economic RiskThe likelihood that economic developments in

one country may negatively impact international transactions. Suppose Country A and Country B enjoy a free trade agreement, which greatly increased trade between the two nations.

A protectionist party may be elected to office in Country B and immediately revoke the FTA. Not only will this affect business, perhaps both positively and negatively, within Country B, but exporters from Country A will suddenly find that their investments have evaporated.

Factors: GDP per head, Real GDP growth, Inflation rate

Mrs. Charu Rastogi, Asst. Prof.

Country Risk: Sovereign RiskSovereign risk comes from the government’s

inability or unwillingness to fulfill its loan obligations.

It also includes the risk that a country’s central bank will alter its foreign-exchange regulations thereby significantly reducing or completely nulling the value of foreign-exchange contracts

Mrs. Charu Rastogi, Asst. Prof.

Country Risk: Transfer Risk The risk a government imposes capital or exchange controls

that prevent an entity from converting local currency into foreign currency and/or transferring funds to creditors located outside the country

Transfer risk arises from foreign government’s restrictions on capital movements and may be a political response to a permanent growing current account deficit

Transfer risks can occur when a buyer has received the goods promised and is ready to make payment. The government of the buyer’s country sees its foreign reserves rapidly leaving the country. The law or central bank institutes regulations to stop all movement of funds out of the country without specific approval. This program halts the transfer out of the country of the buyer’s currency as well as the currency of any other country. The buyer is willing and able to make the payment to the seller; however, by government intervention, the payment is blocked from taking place.

Mrs. Charu Rastogi, Asst. Prof.

Opportunities for International BusinessGlobal Sourcing of raw materialOutsourcing of servicesGrowth of information technology tools,

including the Internet and electronic commerce (e-commerce) make business transactions are faster and more global.

Opportunity to become broad-based. Firms find it easier to manage downturns as they can enter markets in emerging economies

Mrs. Charu Rastogi, Asst. Prof.

Threats for International BusinessRisks related to international business:

◦ Political-Legal◦ Socio-Cultural◦ Transfer risk/Exchange rate risk

Lax regulation in international financial markets leading to financial crisis

Increased global integration leading to risk of contagion (spread of crisis)

Mrs. Charu Rastogi, Asst. Prof.

Rise of New EconomiesEmerging markets are nations with social

or business activity in the process of rapid growth and industrialization. The economies of China and India are considered to be the largest

The eight largest emerging and developing economies by either nominal GDP or GDP (PPP) are Brazil, Russia, India, China, Mexico, South Korea, Indonesia, and Turkey

Positive expectations about emerging economies at The Atlantic and here.

Mrs. Charu Rastogi, Asst. Prof.

Dream Decade for Emerging Economies may be over… As per articles in The Economist:Refer to your notes on Emerging

Economies.

Mrs. Charu Rastogi, Asst. Prof.

Possible QuestionsExplain the concept of country risk analysis.

Discuss political risk and socioeconomic risk and management of these risks.

What is country risk analysis? Comment on cultural environment and ethical practices.

Explain the concept of country risk analysis. Comment on socioeconomic risk and its management.

Explain the meaning of country risk analysis. What are the socio-economic and political factors that may be considered before going international?