Chapter 5 - INTERNATIONAL BUSINESS AND TRADE POLICIES

Objectives:

✓ State the main points trade policy,

✓ Discuss the role and importance of international trade policies,
✓ Discuss the features of foreign trade policy,
✓ Distinguish the positive and negative effects of trade blocs,
✓ Identify the types of regional grouping,
✓ Discuss major trade blocks, and
✓ Explain the role of international finance and foreign exchange.

Introduction
The objective of the country as a whole was the attainment, as far as possible, of national
sufficiency. International trade was certainly to be included but we were anxious to avoid being drawn into
the whirlpool of economic imperialism.

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.

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- laws related to
the exchange of goods or services involved in international
trade including taxes, subsidies, and import/export regulations.
Trade policies determine the size of markets for the output
of firms and hence strongly influence both foreign and domestic
investment. Over time, the influence of trade policies on the
investment climate is growing. Changes in technology,
liberalization of host country policies towards trade and investment
and the growing organization of global production chains within
multinational enterprises (MNEs) have all served to make trade policies in home and host countries alike a
crucial ingredient in encouraging both foreign and domestic investment and in maximizing the contribution
of that investment to development.

Trade is basic economic concept that involves multiple parties participating in the voluntary
negotiation and then the exchange of one's goods and services for desired goods and services that someone
else possesses.
What is international trade policy? What is the government’s role in international trade policies?
International trade policy 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.

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 Some of the major actions governments take are free trade policies or tariffs. Free trade policies
encourage trade between certain countries. A good example of this is NAFTA, the North American Free
Trade Agreement, which allowed free trade throughout the United States, Mexico, and Canada.

International trade policy describes collectively the international laws and multilateral trade
agreements that govern the sale of goods between different countries. 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.

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 a import tariff of $t per unit of Wheat at Home
• For trade to take place, Home price should exceed at least by $t 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
Ex: car production in India before 1991
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

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 • 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.

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Voluntary Export Restraints
• A variant of import quota
• A VER is a quota on trade imposed from the exporting country's side
• Generally imposed at the request of the importer
• It is like an import quota assigned to foreign governments.

Effects of a VER
• Foreign producers agree to VERs
because they fear far more damaging
punitive tariffs or import quotas
• VER - a way of making the best of a bad
situation
• Benefits domestic producers by limiting
import competition
• Domestic consumers are affected due to
higher domestic price for the imported
good (foreign supply is limited)
• Very costly to an importing country than
a tariff -revenue under a tariff becomes
rent earned by foreigners
Local Content Requirements
- A regulation that requires some specified fraction of a final good be produced domestically
- Widely used by the developing countries
- For the domestic producers of parts, this provides protection in the same way an import quota does
- Does not produce either government revenue or quota rent
Informal or Administrative Policies
- Bureaucratic rules that are designed to make it difficult for imports to enter a
country
Antidumping Policies
- Dumping is variously defined as selling goods in a foreign market at below their cost of production or
below their domestic market price
- Viewed as a method by which firms unload excess production in foreign markets
- Using substantial profits from their home markets to subsidize prices in a foreign market to drive
indigenous competition out of that market
- Antidumping policies are designed to punish foreign firms that engage in dumping
- Antidumping duties are often called countervailing duties
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

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 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. Another 29 items
were shifted to OGL. 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

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 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-of-
the-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.

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 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
EPCG Scheme Relaxations
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 multi-
functional 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.

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 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

Introduction

Globalization is today’s buzzword. International trade barriers are coming down, nations are
coming closer, they are negotiating with each other on the common table to access other markets, and they
are negotiating for fair competition in the world. Nations are altering their domestic law according to
international standards, and above all, today 153 nations sit together on one table at the WTO and discuss
trade.

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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 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

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 - 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
Types of Regional Groupings

1. Preferential Trade Agreement: Here the member countries lower the barrier for imports of
identified products from one another, like the SAARC Preferential Trading Arrangement (SAPTA).

2. Free Trade Area (FTA): In FTA, countries

eliminate duties among themselves while
maintaining the same with the outsiders. The
free trade area is the least restrictive and most
loose form of economic integration among
countries. Its goal is to abolish all tariffs
between member countries. This is usually
done in a phased manner.

As the tariffs are eliminated, FTA members

might explore other forms of cooperation such
as the reduction of non-tariff barrier or trade in
services and investment. In FTAs, the focus is
usually on eliminating tariffs only. The first
free trade agreement signed by the United
States was with Israel in 1985. SAPTA (South
Asia Preferential Agreement) establishes the FTA among the SAARC nations. FTA allows the
member countries to follow a different policy with the non-member country. Thus, every non-
member country can have different tariff structure with other non-member countries.

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 3. Custom Union: The objective of a custom union is to harmonise trade regulations and to establish
common barriers against outsiders. A custom union is an extension of FTAs. In addition to the
elimination of tariff among themselves, they also agree to a common external tariff on goods
imported from non-members. This takes the form of a common external tariff whereby imports
from non-members are subject to the same tariff when sold to any member country.

Tariffs revenues are then shared among members according to a prescribed formula. It removes the
drawback of FTAs where an exporting country can export the goods to the FTA through a member
nation having low tariff and thus, can have access to all FTA members. In a custom union all the
member nations have common tariffs against the non-member, whichever route it takes. The
world’s oldest custom union is the Benelux Custom Union (Belgium, the Netherlands, and
Luxembourg).

4. Common Market: A common market is a higher and more complex level of economic integration
than either a free trade area or a custom union. A common market has all the elements of a custom
union and in addition to that, it allows free movement of all factors of production (such as labour,
capital, raw material, services etc.). A common market agreement eliminates all tariffs and other
restrictions on internal trade, adopts a set of common external tariffs, and removes all restrictions
on the free flow of capital and labour among member nations.

Thus, restrictions on immigration, emigration and cross border investment are abolished. In a
common market there is a free movement of factors of production. Productivity increases in a
common market as the factors of production are employed, where their productivity is higher.

5. Economic Union: When the members of a common market agree to have common economic
policies, then it becomes an economic union. A true economic union has an integration of economic
policies among member countries. The members of an economic union harmonise their monetary,
taxation and fiscal policy and therefore, have to surrender their economic sovereignty. Members of
the economic union work as a single nation, as far as economic policy is concerned.

Economic unions have one currency. Though some authors distinguish between economic and
monetary union. In essence, Monetary Union means one money (i.e., a single currency). The Delors
committee, chaired by Jacques Delors (“Delors Report Suggests Step by Step Process of European
Integration,” IMF survey, 10 July 1989, 209,219), president of the European Commission, issued
a report entitled Economic and Monetary Union in the European Community that defines monetary
union having three basic characteristics:

(i) Total and irreversible convertibility of currencies.

(ii) Complete freedom of capital movement in fully integrated financial markets.
(iii) Irrevocably fixed exchange rates with no fluctuation margins between member currencies,
ultimately leading to a single currency.

The European Commission’s One Market, One Money report defines an Economic Union as a
single market for goods, services, capital and labour, complemented by common policies and coordination
in several economies and structural areas. Economic Unions improve trade and capital mobility as they
eliminate the cost associated with converting one currency into another and also eliminates foreign
exchange risk.

According to the Delors Committee, the basic element of an economic union includes the
following: a single market within which person, goods, services, and capital could move freely, a joint
competition policy to strengthen market mechanism, common competition, structural and regional policies,

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and sufficient coordination of macroeconomic policies, including binding rules on budgetary policies
regarding the size and financing of national budget deficit.

Advantages of Regional Groupings

• Countries feel that RTAs such as GATT and WTO are more advantageous. They feel that it is
difficult to save national interest in the case of GATT. But in RTAs they have preferential economic
integration among a few nations willingly selected after proper evaluation of all pros and cons.
• In RTAs, countries can give much more leeway to each other than that in GATT. They can go to
the extent of a Common Market. Negotiation. With only a few countries participating, it is also
easier.
• RTAs also increase the bargaining power of trading blocks in the WTO because they cooperate
with each other in the process of negotiation. It also helps in decreasing the bargain power of other
countries because with the formation of RTAs among the developing nations like G-15 and
ASEAN, their bargain power has increased significantly.
• In international trade, most of the countries follow the principle of 80/20, that is, about 80% of their
business comes from 20% of the nations. Therefore, they feel that it is better to have close ties with
these 20% nations and so they form RTAs, which are more logical and advantageous.

The following arguments are given in favor of Economic Integration:

1. Trade Creation and Trade Diversion: Economic integration helps in generating trade because
trade shifts to a member either because of its comparative advantage in production of particular
goods or it drives a cost advantage because of elimination of trade barriers.
2. Reduced Import Price: Smaller countries do not have much bargaining power. If they increase
import tariffs, the exporter wouldn’t bother much. He will either look for a new market or simply
increase prices. But if the country is a member of some trading block, then its bargaining power
increases. If the block countries impose tariffs on the exporting country, the damage in terms of
lost sales will be very high and exporting country will be bound to reduce its price. Trade blocks
are therefore, beneficial for people of member countries. Among the member countries, the tariffs
get eliminated, leading to a decrease in the import price for them.
3. Increased Competition and Economies of Scale: Integration results in increased market size that
attracts a number of competing firms resulting in increased competition, greater efficiency and
lower prices for consumers. Because large market firms also operate on economies of scale, as a
corollary, cost per unit decreases. Common markets also lend the advantage of external economies
of scale. Because a common market allows factors of production to flow freely, firms can have
access to cheaper capital, more skilled labour, or superior technology. These factors will improve
the quality of the firm’s product or service, will lower costs, or even do both.
4. Higher Factor Productivity: With economic integration, mobility will lead to the movement of
labour and capital from areas of low productivity to areas of high productivity, resulting in decrease
in production costs. In addition to this, there are other benefits which cannot be easily quantified
such as free movement of labour that leads to a higher level of communication across cultures. This
in turns leads to a higher degree of cross-cultural understanding.
5. Better International Political Relations: In most cases, international political relations are
governed by economics and business. Business and SAPTA are two reasons why India and Pakistan
are coming closer. Trade will increase between the two because they are both signatories of
SAPTA.

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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 favour 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.

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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.

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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. ICCAs are agreement between producing and consuming countries. Examples of
ICCAs are the International Cocoa Organization (ICCO) and International Sugar Organization (ISO). 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.

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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.

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 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.

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https://www.researchgate.net/post/html
Batchelor L. What is trading bloc? Retrieved from https://opentoexport.com/article/what-is-a-trading-bloc/
Buffett W. (2010) International economy watch. Retrieved from
https://www.economywatch.com/international- trade/trade- policy.html
International finance: About foreign exchange. Retrieved from https://www.infoplease.com/html
Kagan J. (2019). Understanding international finance. Retrieved from
https://www.investopedia.com/terms/i/international-finance.asp
Madhurisakpal (2012).Trade policies. Retrieved from https://www.slideshare.net/madhurisakpal/trade-
policies-144507377

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