CHAPTER V.

INTERNATIONAL BUSINESS AND TRADE AND TRADE POLICY

Objectives: To be able to know the different forms of policies in international business and
trade. To understand the importance of business policies in connection to the
operation of our economy. To be able to identify the different trade blocks and
their country members.

A. TRADE POLICIES
International Business Trade and Policies is a policy related to trading across national
boundaries. A government establishes an international trade policy that encompasses actions they
will take to protect the best interests of their citizens and companies. A commercial policy is a
government's policy governing international trade. Commercial policy is an encompassing term
that is used to cover topics which involve international trade. Trade policy is often described in
terms of a scale between the extremes of free trade on one side and protectionism on the other.
Some international trade policy is made by transnational institutions such as the United
Nations and the World Trade Organization, which are not directly controlled by any particular
national government. Instead, member governments elect representatives to these transnational
bodies in much the same way that citizens elect representatives to legislatures. Only very basic
international trade policies are made this way.

TRADE POLICY
- refers to the regulations and agreements that control imports and exports to foreign
countries.

- defines standards, goals, rules and regulations that pertain to trade relations between
countries. These policies are specific to each country and are formulated by its public
officials. ... A country's trade policy includes taxes imposed on import and export,
inspection regulations, and tariffs and quotas.

- Laws related to the exchange of goods or services involved in international trade

including taxes, subsidies, and import/export regulations.

Why Are Trade Policy Important?

Trade is central to ending global poverty. Countries that are open to
international trade tend to grow faster, innovate, improve productivity and provide higher income
and more opportunities to their people. Open trade also benefits lower-income households by
offering consumers more affordable goods and services.
Objectives of trade policy
 General trade policy objectives have focused on reduced protection, achieving a more
outward- oriented trade regime, increased market access for exports, and greater global
integration, aimed at increasing economic efficiency, competitiveness, and export-led growth.
Different trade policies include Tariffs and Non-tariffs
Tariffs
 Tariff simplest and the oldest form of trade policy
 It is a tax levied when a good is imported
 Purposes - to provide revenue to the Govt. and also to protect particular domestic sector
 Specific Tariff - Fixed charge for each unit of good imported
 Ad Valorem Tariff-levied as a fraction of the value of the imported good

A. Costs and Benefits of Tariff

Effect of a Tariff:
 Prices - rise in the importing country and falls in the exporting country.
 Consumers - loss in the importing country and gain in the exporting country
 Producers – gain in the importing country and loss in the exporting country
 Government – gains revenue through tariff
 Assume an import tariff of $t per unit of Wheat at Home
 For trade to take place, Home price should exceed at least by $ from that of Foreign price
result - price in Home will rise Consumers demand less, so fewer import demand and that
in Foreign will fall Producers get lower prices, so smaller export supply
- It reduce the overall efficiency of the world economy
- By encouraging domestic firms to produce products at home which could have produced
more efficiently abroad
- Result in inefficient utilization of resources.

B. Measuring the Amount of Protection

 The principle objective of tariff is to protect domestic producers from the low prices due
to import competition
 How much protection a tariff actually provides?
- Usually expressed as a percentage of free trade prices
- If tariff is an ad valorem, tariff rate itself should measure the amount of protection.
C. The Effective Rate of Protection
The Effective Rate of Protection measures the percentage effect of the entire tariff
structure on the value added per unit of output in each industry.
 Tariff Structure. Tariff structure refers to the relationship among tariffs in related
industries
  Value Added. Value added is the difference between the selling price and the cost
of intermediate goods.
D. Export Tariffs
 Levied on exports of a product from a country
 Less common than import tariffs
 Objectives:
1. To raise revenue for the government
2. To reduce exports from a sector, usually due to some political reasons Ex: China's tariff
on textile exports.

* Non-tariff barriers
• Subsidies - Subsidy is a payment to a domestic producer - It can be in the
form of cash grants, low-interest loans, tax breaks, and govt. equity - Helps
domestic producers compete against foreign imports and gaining export markets.
Effects of a Subsidy
 Domestic producers gain: increase in their international competitiveness
 The home country government loss
 Consumers loss: Governments typically pay for subsidies by taxing individuals
 Advocates of Strategic Trade Policy (a section of New Trade Theory) favour subsidies
to help domestic firm to achieve economies of scale.
 Mostly subsidies protect the inefficient and promote excess production
 Ex: Agriculture subsidies:
a. Allow inefficient farmers to stay in business
b. Encourage countries to overproduce
c. Encourage countries to produce products that can be produced more cheaply elsewhere
and imported
d. Reduce international trade in agricultural products
Import Quotas
 A direct restriction on the quantity of some good that may be imported
 Restrictions are enforced through import licenses
 Import quotas are issued either to an individual or firm in the importing country or given
directly to the government of exporting countries.
Effects of an Import Quota
 Raises the domestic price of the imported good
 Have the same effects of a tariff
 Revenue for government under quota system is the import license fee collected
 Quota Rents: The profits received by the holder of import license
 The recipient of Quota rents depend on who gets the rights to sell in the domestic market
- whether domestic firm or government of exporting countries.
The Political Economy of Trade Policy

Free Trade and Efficiency

The Efficiency Case of Free Trade

- Free trade eliminates distortions due to tariff and increase national welfare
- Protected markets fragment production internationally and reduce competition
- Too many firms in a narrow domestic market leads to inefficient scale of production.

Political Arguments for Intervention

- Protecting jobs and industries
- Protecting industries deemed important for national security
- Retaliation
- use trade policy as a threat while bargaining for foreign market access or implement patent
laws, etc.
- Protecting human rights of individuals in exporting countries
- Protecting consumers from "unsafe" products

Economic Arguments for Intervention

- The infant industry argument
- New manufacturing industries of developing countries cannot initially compete with well-
developed industries in developed countries
- The New Trade Theory and Strategic Trade Policy
- New Trade Theory argues that firms engage in international trade because they enjoy
economies of scale mostly achieved through first-mover advantage
- Some New Trade Theorists argue for strategic trade policy

Import Policy

1. Import Restrictions: In the initial phases of development, India had to import capital
equipment, machinery, spare parts, industrial raw material, etc. From time to time it had to
import food grains too, but because of stagnant exports, government had to decide to import
curtail. Import was classified under the categories of: Banned items, restricted items,
canalized items and items under OGL (Open General License). Severe restrictions were
imposed on imports of not-essential goods. High import tariffs were used to control import.
 2. Import Substitution: Import substitution means reducing the dependability on imports,
i.e., to produce goods that we are importing. Two broad objectives of the programme of
import substitution in India were:
(i) To save scarce foreign currency for the import of more important goods,
(ii) To achieve self-reliance in the production of as many goods as possible.

New Trade Policy (1991)

1. Free Import and Export: The new trade policy made major changes in the import
licensing system by replacing a large part of administered licensing of imports by import
entitlements linked to export earnings. The system of advance license, designed to provide
exporters with duty free access to inputs, was strengthened further by simplifying and
speeding up the process of issuing these licenses.
2. Rationalization of Tariff Structure: On the recommendation of Chelliah Committee,
import duty was drastically reduced to establish parity in prices of goods produced
domestically and internationally.
3. Decanalization: The new trade policy aimed at progressive Decanalization. The
government decontrolled 116 items allowing their exports without any licensing
formalities. It also decanalized 16 export items and 20 import items including new print,
non-ferrous metals, natural rubber, intermediate and raw material for fertilizers. However,
eight items (petroleum products, fertilizers, etc.) remained canalized.
4. Exchange Rate Reforms: The government devalued the rupee in July 1991, which led
to depreciation in the value of the rupee against the five major international currencies by
roughly 22%. It also made the rupee convertible:
(i) Partial Convertibility of Rupee: In the Budget of 1992-93, the then finance
minister announced Liberalized Exchange Rate Management System (LERMS)
under which 40% of the foreign exchange receipts were to be exchanged through
the RBI at the official 47 exchange rate and rest was allowed to be converted at
market exchange rate. The official exchange rate was lower than the market
exchange rate.
(ii) Fully Convertible on Current Account: The rupee was made fully convertible.
Current account convertibility means the freedom to buy or sell foreign exchange
for the following international transactions: (a) all payment due in connection with
foreign trade, current business, and normal short-term banking and credit facilities,
(b) payment due as interest on loans and as net income from other investments, (c)
payments of moderate amount of amortization of loans or for depreciation of direct
investment, and (d) moderate remittances for family living expenses.
5. Phased Manufacturing Programmed: PMP, according to which organizations were
required to substitute all the imported parts with Indian parts in a specified period, was
abolished.
6. Trading House: In 1991, the policy allowed export houses and trading houses to import
a wide range of items. The government also permitted the setting up of trading houses with
51% foreign equity for the purpose of promoting exports. Under the 1992-97 trade policy,
 export houses and trading houses were provided the benefit of self-certification under the
advance license system, which permits duty free imports for exports.
7. Export Oriented Units (EOUs), Electronic Hardware Technology Parks (EHTPs),
Software Technology Parks (STPs) and Bio-Technology Parks (BTPs): The units
undertaking to export their entire production of goods and services (except permissible
sales in Domestic Tariff Area {DTA}), may be set up under the Export Oriented Unit
(EOU) Scheme, Electronics Hardware Technology Park (EHTP) Scheme, Software
Technology Park (STP) Scheme or Bio-Technology Park (BTP) Scheme for manufacture
of goods, including repair, re-making, reconditioning, reengineering and rendering of
services. Trading units are not covered under these schemes.
8. Free Trade & Warehousing Zones: The Free Trade & Warehousing Zones (FTWZ)
shall be a special category of Special Economic Zones with a focus on trading and
warehousing. The objective of FTWZ is to create trade-related infrastructure to facilitate
the import and export of goods and services with freedom to carry out trade transactions in
free currency. The scheme envisages the creation of world-class infrastructure for
warehousing of various products, state-ofthe-art equipment, transportation and handling
facilities; commercial office-space, water, power, communications and connectivity; with
one-stop clearance of import and export formality and to support the integrated zones as
‘international trading hubs’. These Zones would be established in the nearby areas to
seaports, airports or dry ports so as to offer easy access by rail and road.
9. Deemed Exports: Deemed Exports refer to those transactions in which goods supplied
do not leave country, and payment for such supplies is received either in Indian rupees or
in free foreign exchange.

Foreign Trade Policy 2009-2014

Higher Support for Market and Product Diversification
1. Incentive schemes have been expanded by adding new products and markets.
2. Twenty Six new markets have been added under Focus Market Scheme. These include
16 new markets in Latin America and 10 in Asia-Oceania.
3. The incentive available under Focus Market Scheme (FMS) has been raised from 2.5%
to 3%.
4. The incentive available under Focus Product Scheme (FPS) has been raised from 1.25%
to 2%.
5. A large number of products from various sectors have been included for benefits under
FPS. These include—Engineering products (agricultural machinery, parts of trailers,
sewing machines, hand tools, garden tools, musical instruments, clocks and watches,
railway locomotives, etc.), Plastic (value-added products), Jute and Sisal products,
Technical Textiles, Green Technology products (wind mills, wind turbines, electric
operated vehicles, etc.) Project goods, Vegetable textiles and certain Electronic items.
6. Market-linked Focus Product Scheme (MLFPS) has been greatly expanded by inclusion
of products classified under as many as 153 ITC (HS) Codes at 4 digit level. Some major
products include— Pharmaceuticals, Synthetic textile fabrics, Value-added rubber
products, Value-added plastic goods, textile made-ups, knitted and crocheted fabrics, glass
 products, certain iron and steel products and certain articles of aluminum among others.
Benefits to these products will be provided, if exports are made to 13 identified markets
(Algeria, Egypt, Kenya, Nigeria, South Africa, Tanzania, Brazil, Mexico, Ukraine,
Vietnam, Cambodia, Australia and New Zealand).
7. MLFPS benefits also extended for export to additional new markets for certain products.
These products include auto-components, motor cars, bicycle and its parts, and apparel
among others.
8. A common simplified application form has been introduced for taking benefits under
FPS, FMS, MLFPS and VKGUY.
9. To increase the life of existing plant and machinery, export obligation on import of
spares, moulds, etc., under EPCG Scheme has been reduced to 50% of the normal specific
export obligation.
10. Taking into account the decline in exports, the facility of Re-fixation of Annual
Average Export Obligation for a particular financial year in which there is decline in
exports from the country, has been extended for the Five Year Policy period 2009-14.

Stability/Continuity of the Foreign Trade Policy

11. Income Tax exemption to 100% EOUs and to STPI units under Section 10B and 10A
of Income Tax Act, has been extended for the financial year 2010-11 in the Budget 2009-
10.
12. Fisheries have been included in the sectors which are exempted from maintenance of
average EO under EPCG Scheme, subject to the condition that Fishing Trawlers, boats,
ships and other similar items shall not be allowed to be imported under this provision. This
would provide a fillip to the marine sector which has been affected by the present downturn
in exports.
13. Additional flexibility under Target Plus Scheme (TPS)/ Duty-Free Certificate of
Entitlement (DFCE) Scheme for Status Holders has been given to the Marine sector.

Gems & Jewelry Sector

14. In an endeavor to make India a diamond international trading hub, it is planned to
establish a ‘Diamond Bourse(s)’.
15. A new facility to allow import on consignment basis of cut and polished diamonds for
the purpose of grading/certification has been introduced.
16. To promote the export of Gems & Jewelry products, the value limits of personal
carriage have been increased from US$ 2 million to US$ 5 million in case of participation
in overseas exhibitions. The limit in case of personal carriage, as samples, for export
promotion tours, has also been increased from US$ 0.1 million to US$ 1 million.
Agriculture Sector.
17. To reduce transaction and handling costs, a single window system to facilitate the
export of perishable agricultural produce has been introduced. The system will involve
creation of multifunctional nodal agencies to be accredited by APEDA.

Leather Sector
18. Leather sector shall be allowed re-export of unsold imported raw hides and skins and
semi-finished leather from public bonded warehouses, subject to payment of 50% of the
applicable export duty.
19. Enhancement of FPS rate to 2% would also significantly benefit the leather sector.
20. Minimum value addition under Advance Authorization Scheme for export of tea has
been reduced from the existing 100% to 50%.
21. DTA sale limit of instant tea by EOU units has been increased from the existing 30%
to 50%.
22. Export of tea has been covered under VKGUY Scheme benefits.

Pharmaceutical Sector
23. Export Obligation Period for Advance Authorization issued with 6-APA as input has
been increased from the existing six months to 36 months, as is available for other products.
24. Pharma sector has been extensively covered under MLFPS for countries in Africa and
Latin America and for some countries in Oceania and Far East.

EOUs.
25. EOUs have been allowed to sell products manufactured by them in DTA up to a limit
of 90% instead of existing 75%, without changing the criteria of ‘similar goods’, within
the overall entitlement of 50% for DTA sale.
26. To provide clarity to the customs field formations, DOR shall issue a clarification to
enable the procurement of spares beyond 5% by granite sector EOUs.
27. EOUs will now be allowed to procure finished goods for consolidation along with their
manufactured goods, subject to certain safeguards.
28. EOUs will now be allowed CENVAT Credit facility for the component of SAD and
Education Cess on DTA sale.

Simplification of Procedures.
29. To facilitate duty-free import of samples by exporters, number of samples/pieces has
been increased from the existing 15 to 50. Customs clearance of such samples shall be
based on declarations given by the importers with regard to the limit of value and quantity
of samples.
30. To allow exemption for up to two stages from payment of excise duty in lieu of refund,
in case of supply to an Advance Authorization holder (against invalidation letter) by the
domestic intermediate manufacturer. It would allow exemption for supplies made to a
manufacturer, if such manufacturer, in turn, supplies the products to an ultimate exporter.
At present, exemption is allowed up to one stage only.
 31. Greater flexibility has been permitted to allow conversion of Shipping Bills from one
Export Promotion Scheme to other scheme. Customs shall now permit this conversion
within three months, instead of the present limited period of only one month.
32. To reduce transaction costs, dispatch of imported goods directly from the Port to the
site has been allowed under Advance Authorization scheme for deemed supplies. At
present, the duty-free imported goods could be taken only to the manufacturing unit of the
authorization holder or its supporting manufacturer.
33. Regional Authorities have now been authorized to issue licenses for the import of
sports’ weapons by ‘renowned shooters’, on the basis of NOC from the Ministry of Sports
& Youth Affairs. Now there will be no need to approach DGFT (Hqrs.) in such cases.
34. Automobile industry, having their own R&D establishment, would be allowed free
import of reference fuels (petrol and diesel), up to a maximum of 5 KL per annum, which
are not produced in India.

Directorate of Trade Remedy Measures

35. To enable support to Indian industry and exporters, especially the MSMEs, in availing
their rights through trade remedy instruments, a Directorate of Trade Remedy Measures shall be
set up.

B. TRADE BLOCKS

What is a Trade Bloc?

A group of countries
- Which are geographically close to each other
- Have similar trade policies
- With their mutual co-operation allow free flow of goods
- Trade blocs have liberal rules for the member countries and separate set of rules for the
non-member countries
- They facilitate trade to member countries of the group but create barriers and block the
trade of member countries
- These are inter-governmental associations to promote business, trade and exchange
beyond national boundaries.
- The role of trading blocs is to allow more efficient combinations technology, natural
resources, labor forces and management talent across countries that share geographic
proximity while minimizing transactions costs associated with legal, financial and
administrative differences in adjacent nations states including currencies, regulations and
other governance issues.
Features of Trade Blocs
- Voluntary in Character
- Mutual Negotiations
- Regional in Character
- Divisions based on political considerations
- Existence based on usefulness Objectives of Trade Blocs
- Reduction of trade barriers among the member countries
- Maintaining better relations
- Imposing barriers on nonmember countries
- Promoting free transfer of labour, capital and other factors
- Creating common currency and Central Bank
- Collective Bargaining - Assisting member countries
- Enhancing welfare of consumers
- Generating competition
- Promoting Higher Employment Positive Effects of Trade Blocs
- Economic Integration
- Co-operative Spirit
- Expansion of Markets
- Growth and Development of the region
- Uniform policies
- Increase in trade
- Product and Market Development
- Benefits to consumers of member countries
- Free transfer of resources / factors

Negative Effects of Trade Blocs

- Negative effects are for the non-member countries
- Common External Barriers
- Absence of Collective Bargaining
- Affects Competition
- Affects global and international trade
- High Tariffs
- Import Restrictions
- Loss of Political Sovereignty

Trade Blocs & Intra-regional trade

Intra-regional trade means trade carried on within one trading blocs. Trade Blocs
have contributed the following favorable factors for the growth of Intra-Regional Trade:
- Removal of trade barriers
- Transfer of labour and capital
- Uniformity in political and economic policies
- Close relations between members
- Transport and other infrastructural facilities
 - Common external barriers on non-members
- Common economic policy

Major Trade Blocks

ASEAN
The Association of Southeast Asian Nations (ASEAN) is a primary multinational trade
group of Asia. The goals of this group are economic integration and cooperation through
complementary industry programs; preferential trading, including reduced tariff and non-tariff
barrier; guaranteed member access to markets throughout the region; harmonized investment
incentives. Today, ASEAN economic cooperation covers the following areas: trade, investment,
industry, services, finance, agriculture, forestry, energy, transportation and communication,
intellectual property, small and medium enterprises, and tourism.

SAARC
The South Asian Association for Regional Cooperation (SAARC) was established on December
8, 1985. It involves seven states of the Indian sub-continent—Bangladesh, Bhutan, India,
Maldives, Nepal, Pakistan and Sri Lanka. The objective of the Association is to promote the
welfare of the people of South Asia and to improve their quality of life through accelerated
economic growth, social progress and cultural development in the region.

SAPTA
South Asian Preferential Arrangement (SAPTA) was signed by the SAARC members on
April11, 1993 and came into force in December 1995. The objective of the SAPTA is the creation
of trade among the SAARC countries through the reduction of tariffs and on preferential basis. It
thus, seeks the economic development of all the SAARC nations. The biggest argument in favor
of SAPTA is that there is geographical proximity (a big scope for cross border railway and road
link) among the member nations and nations are also culturally close to each other.

SAFTA
The South Asian Free Trade Area (SAFTA) Agreement came into force in January 2006,
with a ten-year period for full-fledged implementation. SAFTA is supposed to open a new vista of
regional economic cooperation and integration. The SAFTA agreement replaces SAARC
Preferential Trading Agreement (SAPTA). SAFTA moves the region to higher levels of trade and
economic cooperation by “removing barriers to cross-border flow of goods. It provides Bhutan,
Bangladesh, Maldives, Nepal, and Sri Lanka - the Least Developed Countries (LDCs) - special
and differential treatment “commensurate with their development needs.” It bills India and
Pakistan as “NonLeast Developed Countries” (NLDCs). The objectives of this agreement are to
promote and enhance mutual trade and economic cooperation among contracting states by inter
alia.
BIMST-EC
Free Trade Area The initiative to establish Bangladesh-India-Sri Lanka-Thailand
Economic Cooperation (BISTEC) was taken by Thailand in 1994 to explore economic cooperation
on a sub-regional basis involving contiguous countries of South East & South Asia grouped around
the Bay of Bengal. Myanmar was admitted in December, 1997 and the initiative was renamed as
BIMST-EC. It may be mentioned that the initiative involves 3 members of SAARC (India,
Bangladesh & Sri Lanka) and 2 members of ASEAN (Thailand, Myanmar). BIMST-EC is an
important element in India’s “Look East” strategy and adds a new dimension to our economic
cooperation with South East Asian countries.

India-Thailand FTA
A Framework Agreement for establishing Free Trade Area between India and Thailand
was signed by the Commerce Ministers of the two sides on October 9, 2003 in Bangkok, Thailand.
The key elements of the Framework Agreement cover FTA in Goods, Services and Investment,
and Areas of Economic Cooperation. The Framework Agreement also provides for an Early
Harvest Scheme (EHS) under which common items of export interest to the sides have been agreed
for elimination of tariffs on a fast track basis. The tariffs will be abolished in a two phased manner.

India-Singapore Comprehensive Economic Cooperation Agreement (CECA)

India and Singapore are mutually important economic partners. Singapore is India’s most
important trading partner among the ASEAN countries and also India’s gateway to ASEAN and
China. It is India’s largest export partner and the second largest source of imports from ASEAN.
India and Singapore singed the Comprehensive Economic Cooperation Agreement (CECA), in
June 2005. Thus, they paved the way for an integrated package of trade in goods and services; an
agreement on investments; mutual recognition in services; a cooperation pact in customs, science
and technology, education, e-commerce, intellectual property and media. The Singapore
Commerce Minister, Mr. Lim H. Kiang, told a news conference that the CECA, “will go beyond
free trade” as it has other elements such as special visa arrangements and liberalisation of air
transport.

India-MERCOSUR PTA
The major product groups covered in the offer are food preparations, organic chemicals,
pharmaceuticals, essential oils, plastics & articles thereof, rubber and rubber products, tools and
implements, machinery items, electrical machinery and equipment. The break-up of the number
of tariff lines for different MOPs is: - 393 tariff lines - 10%, 45 tariff lines - 20% and 14 tariff
lines- 100%. MERCOSUR is a trading bloc in South America region comprising of Argentina,
Brazil, Paraguay and Uruguay. It was formed in 1991 with the objective of free movement of
goods, services, capital and people and became a customs union in January 1995. MERCOSUR's
role model is European Union.
European Union
The European Union or EU is an intergovernmental and supranational union of 25
European countries, known as member states. The European Union was established under that
name in 1992 by the Treaty on European Union (the Maastricht Treaty). However, many aspects
of the Union existed before that date through a series of predecessor relationships, dating back to
1951. The foundation of the European Union was laid in 1952 with the European Coal and Steel
Community (ECSC). Six countries—Germany, France, Belgium, Luxembourg, Italy and the
Netherlands— agreed to place the control of those industries under a central authority. The success
of that arrangement led to the creation of the European Economic Community in 1958. New
members were added: Denmark, Ireland and the United Kingdom in 1973; Greece in 1981; Spain
and Portugal in 1986; Austria, Finland, and Sweden in 1995. At present, the EU has 25 members.

NAFTA
In January 1994, Canada, the United States and Mexico launched the North American Free
Trade Agreement (NAFTA) and formed the world’s largest free trade area. The Agreement has
brought economic growth and rising standards of living for people in all three countries. In
addition, NAFTA has established a strong foundation for future growth and has set a valuable
example of the benefits of trade liberalization. Canada and U.S had signed a Free Trade Agreement
which came in effect on January 1, 1989, and later Mexico approached the United States to
establish one. The result was that on January 1, 1994, North America Free Trade Agreement came
into effect.

Southern Cone Free Trade Area (MERCOSUR)

The Treaty of Asuncion which provided the legal basis for MERCOSUR was signed in
1991 and formally inaugurated in 1995 and thus, MERCOSUR (Mercado Comun Del Sur in
Spanish) came into existence. The signatories of the treaty were Brazil, Argentina, Paraguay, and
Uruguay. In addition, MERCOSUR signed a free trade agreement with Bolivia and Chile and is
negotiating with EU and other countries to do the same. MERCOSUR has become a successful
market of about 200 million people representing about 1 trillion dollars of GDP and 190 billion
dollars of trade. It is the fourth largest integrated market after the European Union (EU), North
American Free Trade Agreement (NAFTA) and ASEAN.

Asia Pacific Economic Integration

Asia Pacific Economic Cooperation (APEC) was formed in 1989. It has 21 member
countries which account for more than a third of the world’s population (2.6 billion people),
approximately 60% of world GDP (US$19, 254 billion) and about 47% of world trade. It also
proudly represents the most economically dynamic region in the world having generated nearly
70% of global economic growth in its first 10 years. Leaders of APEC have adopted their vision
referred to as the ‘Bogor Goals’ of free and open trade and investment in the Asia-Pacific by 2010
for industrialized economies and 2020 for developing economies.
Member economies of the APEC are: Australia; Brunei; Canada; Chile; People’s
Republic of China; Hong Kong (China); Indonesia; Japan; Republic of Korea; Malaysia; Mexico;
New Zealand; Papua New Guinea; Peru; Philippines; Russian; Singapore; Taiwan; Thailand;
United States of America; Vietnam. APEC focuses on three key areas:
1. Trade and Investment Liberalization
2. Business Facilitation
3. Economic and Technical Cooperation (ECOTECH)

Cartels and Commodity Price Agreements

Producers and consumers of primary commodities also come together and make a cartel or
enter into an agreement to stabilize commodity prices and supply. These cartels are very important
for countries like in the Middle East and African countries where a major portion of the export
consists of crude petroleum, natural gas, copper, tobacco, coffee, cocoa, tea and sugar. Commodity
agreements are of two basic types:
1. Producers’ Alliances:
2. International Commodity Agreements (ICCAs) Producers’ alliances are exclusive
membership agreements between producing and exporting countries. Examples are the
Organization of Petroleum Exporting Countries (OPEC) and the Union of Banana Exporting
Countries, etc. Examples of ICCAs are the International Cocoa Organization (ICCO) and
International Sugar Organization (ISO) etc. For example, membership of the 1993 ICCO
Agreement comprises 42 countries plus the European Union and represents over 80% of the
world’s cocoa production and over 70% of world cocoa consumption.

C. INTERNATIONAL FINANCE AND FOREIGN EXCHANGE

International finance is an important part of financial economics. It mainly discusses

issues related with monetary interactions of at least two or more countries.
International finance is an important tool to find the exchange rates, compare inflation
rates, get an idea about investing, to know the economic status of other countries and judge the
foreign markets.

Foreign Exchange and Currency Controls

Foreign Exchange is the process of converting the currency of one country into the
currency of another country.
Exchange Rate is the amount of currency of one country that can be traded for one unit of
the currency of another country.
INTEREST RATE is the amount of interest due per period.

The Foreign Exchange Market

 The process of exchanging one currency for another occurs in the foreign exchange
market.
 The foreign exchange market is the network of banks and other financial institutions that
buy and sell different currencies. Most large banks are part of the foreign exchange market
and may provide currency services for businesses and consumers. Before citizens travel
 outside of the United States, they can exchange dollars for the currencies of the countries
they will visit. This exchange can be done at some large banks or companies that specialize
in foreign currency services.

Foreign Exchange Controls

 To maintain the value of its currency, a nation may limit the flow of money out of the
country.
 Exchange controls are government restrictions to regulate the amount and value of a
nation’s currency. These controls can be either a fixed exchange rate or a limit on the amount and
cost of currency. One common exchange control limits the amount of local currency a person can
take out of a country. In past years, Australia, Bangladesh, France, Italy, Japan, Portugal, South
Africa, Spain, and Sweden placed restrictions on exporting local currency.

Foreign exchange (Forex or FX)

Is the conversion of one currency into another at a specific rate known as the foreign
exchange rate. The conversion rates for almost all currencies are constantly floating as they are
driven by the market forces of the supply and demand. The most traded currencies in the world are
the United States dollar, Euro, Japanese yen, British pound, and Australian dollar. The US dollar
remains the key currency in foreign exchange markets, accounting for more than 87% of total daily
value traded.

Factors that Affect Foreign Exchange Rates

Many factors can potentially influence the market forces behind foreign exchange rates.
The factors include various economic, political, and even psychological conditions. The economic
factors refer to a government’s economic policies, trade balances, inflation, and economic growth
outlook. Political conditions also exert a significant impact on the forex rate, as events such as
political instability and political conflicts may negatively affect the strength of a currency. The
psychology of forex market participants can also influence exchange rates.
International Financial Agencies Exchange controls can help maintain the value of a
nation’s money by limiting the amount in the foreign exchange market. Two international
agencies:

The World Bank

 The International Bank for Reconstruction and Development, commonly called the
World Bank, was created in 1944 to provide loans for rebuilding after World War II.
 Today the World Bank is a bank whose major function is to provide economic assistance
to less developed countries. Its funds build communications systems, transportation
networks, and energy plants. The World Bank has two main divisions.
 The International Development Association (IDA) makes funds available to help
developing countries. These loans can be paid back over many years (up to 50) and have
very low interest rates.
  The International Finance Corporation (IFC) provides capital and technical assistance to
businesses in nations with limited resources. The IFC encourages joint ventures between foreign
and local companies to encourage capital investment within the developing nation.

The International Monetary Fund

 The International Monetary Fund (IMF) is an agency that helps to promote economic
cooperation by maintaining an orderly system of world trade and exchange rates.
 The IMF was established in 1946, when the economic interdependence among nations
was escalating at a greater pace than ever before in history. Before the International
Monetary Fund, a country could frequently change the value of its currency to attract more
foreign customers.