FYBCOM Sem 1 Commerce Chapter 5 Notes | International Environment | Mumbai University

FYBCOM Sem 1 Commerce Chapter 5 Notes
(International Environment)

1) Write a note on International Environment.

Answer : The present International environment is favourable for business growth and expansion. The world economy offers unlimited but challenging opportunities. Business units particularly connected with import-export should continuously monitor the international environment, identify and make use of opportunities for the betterment of company and country.

i) Business unit engaged in import or export trade or domestic units using imported raw materials, technology or machinery are affected more by a minor change in international environment. Further, business units engaged in export marketing are influenced by depression or boom in international market.

ii) The international environment of business comprises of a country’s foreign policy, bilateral relations, international agreements, the policies of trading blocks, import-export policy, monetary policies etc. Other factors like war, civil disturbances political instability etc., have also an effect on international environment. In recent years, the international environment has changed significantly.

The developments in transport and communication systems have brought countries closer to each other. Today, global market is emerging out as one single market. Under such situations, companies like multinationals are likely to dominate the world market.

2) Explain the functions of WTO.

Answer : In 1947, 23 countries including India signed the General Agreement on Tariffs and Trade (GATT). GATT was created to reduce global depression and to liberalise and regulate the world trade by reducing tariff barriers. GATT has been replaced by WTO in 1995.

i) WTO is wider in scope as it includes not only regulation of world trade of goods, but also it regulates trade in services, intellectual property rights and investment. It is concerned with not only reducing or eliminating tariff barriers but also non-tariff barriers such as quotas. In January, 2010, the membership of WTO was 153 countries.

ii) FUNCTIONS OF WTO :
WTO performs important functions to increase world trade and development. The main functions are as follows-

1) Administration of agreement :
It looks after the administration of the 29 agreements (signed at the conclusion of Uruguay round in 1994), plus a number of other agreements, entered into after the Uruguay round.

2) Implementation of reduction of trade barriers :
It checks the implementation of the tariff cuts and reduction of non-tariff measures agreed upon by the member nations at the conclusion of the Uruguay round.

3) Examination of members’ trade policies :
It regularly examined the foreign trade policies of the member nations, to see that such policies are in line with WTO guidelines.

4) Assistance of IMF and IBRD :
It assists International Monitory Fund (IMF) and International Bank for Reconstruction and Development (IBR) i.e. world Bank for establishing coherence in universal economic policy administration.

5) Settlement of dispute :
It provides conciliation mechanism for arriving at and amicable solution to trade conflicts among member nations. The WTO dispute settlement body adjudicates the trade dispute that can’t be solved through be lateral talks between member nations.

6) Forum for negotiation :
WTO is a forum where member nations continuously negotiate the exchange of trade concessions. The member nations also discuss trade restrictions in areas of goods, services, intellectual property, etc.

3) Discuss the positive impact of WTO.

Answer : In 1947, 23 countries including India signed the General Agreement on Tariffs and Trade (GATT). GATT was created to reduce global depression and to liberalise and regulate the world trade by reducing tariff barriers. GATT has been replaced by WTO in 1995.

i) POSITIVE IMPACT OF WTO :
The positive impact of WTO on developing countries like India can be described as follows.

1) Growth in Merchandise Exports :
The exports of developing countries like India, China, Brazil etc. have increased since the setting up of WTO. The increase in exports of developing countries is due to reduction in trade barriers i.e. tariff and non-tariff. For example, India’s merchandise exports have increased by 7.8 times since 1995. In 1995 it was 32 US$ Billion and it was 251 US$ Billion in 2010-11.

2) Growth in services exports
The WTO has also introduced an agreement on services called GATS. Under this agreement, the member nations have to liberalise the services sector. Certain developing countries like India would benefit from such an agreement. For example, India’s services exports have increased from about 5 billion US$ in 1995 to 133 US$ billion in 2010-11. The software services accounted for
about 42% of the services exports of India in 2010-11.

3) Foreign Direct Investment :
As per the TRIMs agreement, restrictions on foreign investment have been withdrawn by member nations of WTO including developing countries. Therefore, the developing countries like Brazil, India, China, etc. have been benefited by way of foreign direct investment as well as by Euro equities and portfolio investment in 2010-11, foreign direct investment in India was 26 US$ billion.

4) Textiles and clothing :
It is estimated that the textiles sector would be one of the major beneficiaries of the impact of Uruguay Round. At the Uruguay Round, it was agreed upon by member countries to phase out MFA by 2005. Under MFA, the developed countries like France, USA, UK, Canada etc. used to import quotas on textile exporting countries. The MFA has been withdrawn with effect from 1st Jan, 2005, and therefore, it would benefit the developing countries including India by way of increase in export of textiles and clothing.

5) Benefits of TRIP’s Agreement :
The TRIP’s agreements have benefited the developing countries like Brazil, India, China and others. The firms in developing countries have also developed new products and got them patented. Developing countries have also benefited by way of GIs status. For example, India has obtained GIs for products like Darjeeling Tea, Goa Feni and so on. Therefore, it can be concluded that the WTO has created both a positive and negative impact on developing countries.

4) Write a detailed note on EU.

Answer : This was orginally established as European Common market by the treaty of Rome in 1957, and come into operation in 1959.
The founder members of the community were France, west Germany, Italy, Belgium, Netherlands and Luxembourg. In 1973 UK joined the community. Today it is known as EU, and Comprises Belgium, Denmark, France, Greece, Ireland, Italy, Nether lands, Portugal, Spain, United Kingdom, Germany, Luxembourg, Finland, Austria and Sweden.

i) The association has advanced to the extent of removing most trade barriers and allowing free movement of persons and goods within the union. They have also established a European Parliament for which member are selected from each country on proportionate basis, and are given powers to legislate may issues which are them ratified by the government at percent there are 27 member nations of European Union.

ii) OBJECTIVE OF EUROPEAN UNION :
The main objectives of European union are as follows :

1. To eliminate trade barriers on member nations.
2. To assist member nations during the times of emergencies.
3. To develop cultural and social relations.
4. To promote free transfer of labour and capital among member nations.
5. To bargain collectively with the non-members by means of collective strength.
6. To impose common external barriers on non-members.

5) Write a detailed note on NAFTA.

Answer : The North American Free Trade Agreement (NAFTA) is the most powerful trade bloc in the world. The member of the bloc are USA, Canada, and Mexico. This bloc came into operation in 1994. The NAFTA is basically a trade and investment agreement with a view to reduce barriers on the flow of goods, services and people among the three countries.
The agreement covers only goods and services manufactured / produced in North America or if imported goods and services that meet certain local content requirements, the nationality of ownership does not matter, as long as such local content requirements are net.

i) NAFTA has a total population of 360 millions. Its formulation is an attempt to gain comparative advantage against the enlarged European Union and to at pace the EEA. This trade agreement is quite comprehensive and covers many areas such as tariff reduction, free movement of professional among the member countries, free movement of professionals among the member countries, financial and direct investment matters and consumer safety.
There are “side agreements” relating to protection of labour and protection of the natural environment. The NAFTA treaty envisages elimination of all trade and investment restrictions among the member countries over a period of 15 year.

ii) OBJECTIVES OF NAFTA :
The main objectives of NAFTA are as follows :

1. To eliminate trade barriers on trade and facilitate movement of goods and services.
2. To develop cultural and social relations.
3. To remove restrictions on transfer of technology to member nations.
4. To negotiate collectively with non-members on certain foreign trade matters.
5. To promote fair competition in FTA.
6. To provide protection and enforcement of intellectual property rights.
7. To develop industries in Mexico in order to create employment and to reduce migration from Mexico to USA.
8. To assist Mexico in earning additional foreign exchange to meet foreign debts burden measures undertaken by NAFTA.
   a) Residents of NAFTA nations can invest freely in other NAFTA countries.
   b) Protection of intellectual property rights of the members countries.
   c) Free movement of labour from one country to another.
   d) Pollution control along the USA – Mexico border.
   e) Standardisation of product standards in member countries.

6) Write a detailed note on SAARC.

Answer : Seven nations in the Indian subcontinent region have joined hands to form the South Asian Association for Regional Co- operation (SAARC) in 1985. The SAARC members include India, Pakistan, Srilanka, Bangladesh, Nepal, Bhutan and Maldives. Its headquarter has been established at Kathmandu. A conference of heads of the countries is held every year but conferences were generally delayed for the one reasons or the other.

i) Among the SAARC countries, concessional tariff rates have been introduced for 226 trade items. These concessional rates range between 10% to 100%. India gave this concession to 106 items, which is the highest among all SAARC countries. Similarly, other member countries also gave concessional rates.

ii) To explore trade possibilities among SAARC nations, first SAARC trade fair was held at Pragati Maidan in New Delhi on January 9-14, 1996. The theme of the fair was co-operation for growth. SAARC nations displayed their various products and also their export capacities in this fair.

iii) OBJECTIVES OF SAARC :
The main objectives of SAARC are as follows :

1. To promote welfare of the people of the region and to improve the quality of life.
2. To accelerate economic growth in the region through regional co-operation.
3. To accelerate social progress and cultural development.
4. To promote and strengthen collective self-reliance among the member nations.
5. To contribute to mutual trust, understanding and appreciation of each others problems.
6. To strengthen co-operation with other developing countries.
7. To strengthen co-operation amongst member nations at international forums (such as WTO) on matters of common interests.
8. To co-operate with international and regional organizations with similar objectives.

7) Write a detailed note on ASEAN.

Answer : The ASEAN was established on 8th August, 1967 in Bangkok by five original member nations that include Malaysia, Indonesia,
Philippine’s, Thailand and Singapore. At present there are 10 members who also include Brunei, Combodia, Laos, Myanmar and Vietnam.

i) ASEAN original purpose was to preserve peace among its member nations and to respond to the communist threat in the region from China. During the first nine years of its existence, ASEAN’s primary focus was political.

ii) The economic co-operation began at the first ASEAN Summit in Bali in 1976, when the declaration of ASEAN accord was signed. The ASEAN countries agreed to co-operate in the supply and purchase of basic commodities, the establishment of preferential trading arrangements, and the stabilization of prices in the region and promotion of export earnings from production of
regional commodities.

iii) The ASEAN countries formed the ASEAN free Trade Area (AFTA) in September, 1994. The AFTA initially set to function for 10 years in order to develop inter ASEAN trade.

iv) OBJECTIVE OF ASEAN :
The main objectives of ASEAN are as follows :

1. To accelerate economic growth, social progress and cultural development of member countries.
2. To promote active collaboration and mutual assistance in matters of common interest.
3. To maintain close co-operation with the existing international and regional organization with similar aims.
4. To ensure the stability of the South East Asian Region.

8) Write a detailed note on OPEC.

Answer : OPEC it is an organization of petroleum exporting countries. It was founded in 1960 by Iran, Iraq, Kuwait, Saudi Arabia and
Venezuela. It is basic objectives were to unify and co-ordinate member’s petroleum policies and to provide member states with technical and economic aid.

i) The member countries coordinate their oil production policies in order to help stabilize the oil market and to help oil producers achieve a reasonable rate of return on their investment. This policy is also designed to ensure that oil consumers continue to receive stable supplies of oil. At present, it has 11 member countries.

ii) OPEC member nations currently supply about 40% of the world’s crude oil and 16% of natural gas. OPEC helps oil producers to achieve a reasonable rate. Further, it aims to mange the supply of oil in an effort to set the price of oil on the world market. This helps in avoiding fluctuations that might affect the economies of both producing and purchasing countries. There has been a continuous increase in India’s share of export to OPEC countries. Saudi Arabia is the main market for Indian goods in the OPEC region.

9) What is the positive impact of trading blocs.

Answer : Trading blocs and free international trading do not go together. In fact, trading blocs are against the growth of free global / international trade.
They adversely affect the process of trade liberalization at the global level. however, trade blocs are also useful for integration of economies of member countries. All member countries are getting benefits from this trading bloc. In brief trading blocs have positive and negative aspect. It is mixed blessing. Let us, now briefly note the impact of trading blocs.

1) Trade Creation :
Economists argue that economic integration leads to trade creation. This is because a trading bloc may remove tariff on member nations. As a result a high cost producing country of the bloc can import goods from low cost producing member nation. Due to formation of a free trade area, there is proper allocation of resources, and the nations can take advantage of comparative cost. Due to the comparative cost advantage, trade creation takes place.

2) Economies of large scale :
Due to economic integration, there can be economies of large scale production and distribution. Firms in the region will try to specialize in these goods and services which they are more capable of producing. This leads to large scale production and distribution, which in turn brings economies of large scale. The economies of large scale are partly passed on to the consumers in the form of lower prices.

3) Economic Growth :
The formation of a trading bloc can increase economic growth of the region. Due to reduction of trade barriers, firms in the region would be in a position to produce goods at a lower price. This would increase demand, which in turn would lead to large scale production. The increase in production of goods and services may lead to economic growth in the region.

4) Employment :
Due to large scale production and distribution of goods, the employment also increases. There can be direct and indirect effect on employment. The direct effect in the industries producing goods and services. The indirect effect is due to the increase in employment in the supporting industries such as ancillary units, banking, insurance etc.

5) Technological Developments :
Due to economic integration, there can be improvements in technology. As the firms grow they would go for higher technological developments. A part of the increased profits can be utilized for research and developments for the purpose of improving technology that will help to reduce prices, and improve quality.

6) Investment :
There can be higher investment. The member nations may reduce or remove restriction on investment. Therefore, there can be an increase in intra regional investments, which in turn would increase the economic development of the region. Also, the region would be in a position to attract more investment from other countries due to its growth potential.

10) Give the full forms of:

a) WTO – World Trade Organisation
b) EU – European Union
c) NAFTA – North American Free Trade Agreement
d) SAARC – South Asian Association for Regional co-operation
e) OPEC – Oil and Petroleum Exporting countries
f) ASEAN – Association of South East Asian Nations

Chapter-1–2–3–4–5–6–7–8–9

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