Ib Key Regular February2023
Ib Key Regular February2023
Ib Key Regular February2023
The General Agreement on Tariffs and Trade (GATT) covers international trade in goods. The
workings of the GATT agreement are the responsibility of the Council for Trade in Goods
(Goods Council) which is made up of representatives from all WTO member countries. The
current chair is Mr. Etienne OUDOT DE DAINVILLE (France).
The Goods Council has 10 committees dealing with specific subjects (such as agriculture, market
access, subsidies, anti-dumping measures and so on). Again, these committees consist of all
member countries.
Also reporting to the Goods Council are a working party on state trading enterprises, and the
Information Technology Agreement (ITA) Committee.
Objectives of GATT
1. To raise standards of living
2. To ensure full employment and large and steadily growing volume of real income
3. Effective demand
4. To develop the full use of the resources of the world
5. To expand production and international trade
Principles of GATT
1. Non-Discrimination
2. Prohibition of quantitative restrictions –limit restrictions on trade to less rigid tariffs
3. Consultation to resolve disagreements
1.c.
2.a.
Ans: STAGES OF INTERNATIONAL BUSINESS
Every company in the International Business will pass through the 5 different stages of
International business.
They are:
Domestic Company
International Company
Multi-National Company
Global Company
Transnational Company
Stage 1: Domestic Company
Domestic Company limits its operations, mission and vision to the national boundaries. This
Company focuses its view on the domestic market opportunities, supplies and customers. These
Companies analyze the national environment of the country, formulate the strategies to exploit.
The opportunities offered by environment. They never think of growing globally. They believe
in Saying, “ if it is not happening in home country, it is not happening”.
Stage – 2: International Company
Domestic companies which grows beyond their production capacities, think of
Internationalizing their operation. Those companies which decide to exploit the opportunities
Outside the domestic country is stage – 2 companies.
These companies believe that the practices the people and products of domestic business are
Superior to those of other countries. The focus of these companies is domestic but extends the
Wings to the foreign countries. These companies select the strategy of locating a branch in
foreign markets and extend same domestic operations into foreign markets.
Stage – 3: Multi-National Company
International companies turn into the Multi-National companies when they start responding to
the specific needs of different country market regarding product, price and promotion. This
stage is also referred as Multi-Domestic companies. These companies formulate different
strategies for different markets. They operate like a domestic market of country concerned in
each of their market.
Stage – 4: Global Company
A global company is the one, which has either global strategy. Global Company either
produces in home country or in a single country and focuses on marketing these products
globally or produces globally or focuses on marketing these products domestically.
Stage – 5: Transnational Company
It produces, markets, invests and operates across the world. It is an integrated global enterprise
that links global resources with global markets at profits. There is no pure Transnational.
2. Expanding the Production Capacities beyond the Demand of the Domestic Country:
Some of the domestic companies expand their production capacities more than the demand
for the product in domestic countries. These companies, in such cases, are forced to sell their
excess production in foreign developed countries. Toyota of Japan is an example.
4. Political Stability vs. Political Instability: Political stability does not simply mean that
continuation of the same party in power, but it does mean that continuation of the same policies
of the Government for a quite longer period. It is viewed that the USA is a politically stable
country; countries like the UK, France, Germany, Italy and Japan are also politically stable.
Most of the African countries and some of the Asian countries are politically instable countries.
Business firms prefer to enter politically stable countries and are restrained from locating their
business operations in politically instable countries. In fact, business firms shift their operations
from politically instable countries to politically stable countries.
6. High Cost of Transportation: Initially companies enter foreign countries for their
marketing operations. But the home companies in any country enjoy higher profit margins as
compared to the foreign firms on account of the cost of transportation of the products. Under
such conditions, the foreign companies are inclined to increase their profit margin by locating
their manufacturing facilities in foreign countries through the Foreign Direct Investment (FDI)
route to satisfy the demand of either one country or a group of neighboring countries. For
example, Mobil which was supplying petroleum products to Ethiopia,Kenya, Eritrea, Sudan
etc., from its refineries in Saudi Arabia, established its refinery facilities in Eritrea in order to
reduce the cost of transportation.
7. Nearness to Raw Materials: The source of highly qualitative raw materials and bulk raw
materials is a major factor for attracting the companies from various foreign countries. For
example Vedanta Resources is a London Stock Exchange (LSE) listed UK based company
operating principally in India due to availability of raw materials such as iron ore, copper, zinc
and lead. It also has substantial operations in Zambia and Australia where ample copper is
available.
8. Liberalization and Globalization: Most of the countries in the globe liberalized their
economies and opened their countries to
the rest of the globe. These change in policies attracted multinational companies to extend their
operations to these countries.
Assumptions
Limitations
According to this theory, one condition for trade is that countries differ with respect to
the
availability of the factors of production. The Heckscher-Ohlin theory focuses on the two
most important factors of production: labor and capital
In the 2x2x2 model or two countries, two commodities & two factor model, implies that
the
capital rich country will export capital intensive commodity and the labor rich country
will
export labor intensive commodity
A country has a comparative advantage in producing products that intensively use
factors of
production (resources) it has in abundance.
Factors of production: labor, capital, land, human resources, technology
Assumptions
There are two countries involved.
Each country has two factors (labour and capital).
Each country produce two commodities or goods (labour intensive and capital
intensive).
There is perfect competition in both commodity and factor markets.
All production functions are homogeneous of the first degree i.e. production function is
subject to constant returns to scale.
Factors are freely mobile within a country but immobile between countries.
Two countries differ in factor supply
Each commodity differs in factor intensity.
The production function remains the same in different countries for the same
commodity. For e.g. If commodity A requires more capital in one country then same is
the case in other country.
There is full employment of resources in both countries and demand are identical in
both countries.
Trade is free i.e. there are no trade restrictions in the form of tariffs or non-tariff
barriers.
There are no transportation costs
Explanation
The theory believes that different countries are endowed with varying proportions of
different factors of production.
Some countries have large population and large labour resource. The others have
abundance of capital but short of labour resource.
Thus, a country with large labour force will be able to produce those goods at lower
cost that
involve labour intensive mode of production.
Similarly the countries with large supply of capital will specialize in those goods that
involve capital intensive mode of production.
Limitations
Partial Equilibrium Analysis and it fails to develop a general equilibrium concept.
This theory maintains that there are no qualitative differences in factors and that these
factors are capable of exact measurement so that factor endowment ratios can be
calculated. In the real world, however, qualitative factor differences exist.
This theory is based upon highly over-simplifying assumptions of perfect competition,
full employment of resources, identical production function, constant returns to scale,
absence of transport costs and absence of product differentiation. Given this set of
assumptions, the whole model becomes quite unrealistic.
3.b.
Levels of Economic Integration
Economic integration can be classified into five additive levels, each present in
the global landscape:
Custom union. Sets common external tariffs among member countries, implying
that the same tariffs are applied to third countries; a common trade regime is
achieved. Custom unions are particularly useful to level the competitive playing
field and address the problem of re-exports where importers can be using
preferential tariffs in one country to enter (re-export) another country with which it
has preferential tariffs. Movements of capital and labor remain restricted.
Common market. Services and capital are free to move within member
countries, expanding scale economies and comparative advantages. However,
each national market has its own regulations, such as product standards, wages,
and benefits.
Economic union (single market). All tariffs are removed for trade between
member countries, creating a uniform market. There are also free movements of
labor, enabling workers in a member country to move and work in another
member country. Monetary and fiscal policies between member countries are
harmonized, which implies a level of political integration. A further step concerns
a monetary union where a common currency is used, such as the European
Union (Euro).
Political union. Represents the potentially most advanced form of integration
with a common government and where the sovereignty of a member country is
significantly reduced. Only found within nation-states, such as federations where
a central government and regions (provinces, states, etc.) have a level of
autonomy over well-defined matters such as education.