economic envrionment 1

8/12/2019 Economic Envrionment 1

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Elements of Economic environment• Different measures to asses a country’s performance and potential • Informal-No of newspapers, no of wireless phones• Managers need information on monetary value of the total flow of

goods and services in the economy of nation

1. Gross National Income2. Gross Domestic Product3. Growth Rates4. Income Distribution

5. Inflation6. Unemployment7. Wages8. Productivity debit

9. Balance of payments



Degree of Human Development• Helps to measure people in terms of capabilities and opportunities that

people enjoy• Human development is instrumental in increasing GNI• The Human Development Index combines indicators of real purchasing

power, education and health to give a more comprehensive measure ofeconomic development

• Analyze economic environment in terms of overall quality of life in acountry: measuring how well a country dos in terms of social liberties, lifeexpectancy and literacy rates

• UN Human Development Index: Measures average achievement s in a

country on 3 dimensions1. Longevity-as measured by life expectancy at birth2. Knowledge, as measured by adult literacy rat and combined, primary,

secondary and tertiary gross enrollment ratio3. Standard of living as measured by GNI per capita, expressed in PPP for

USD



• Classification of countries on the basis ofincome

• Region-Wise classification of countries• Economies in Transition• Economic Scenario• Economic Systems• Economic Policies• Structural Adjustments



Classification of Countries on basis ofincome

• OECD (Organization for Economic Cooperation and Development) and UnitedNations Classify countries by economic status

• But best system is the one recommended by World Bank-211 countries witha population of atleast 30,000 are ranked by their levels of gross nationalincome (GNI) per capita for the previous year.

•

These economies are then classified as of 1 July 2013:1. Low-Income (LIC)- Average incomes of $1,035 or less-South Sudan, BurkinaFaso, Mali, Ethiopia, Zimbabwe, Haiti, Nepal, Bangladesh

2. Lower-middle income(LMC)- $1,036 to $4,085-Mauritania, India, Srilanka,Ghana, Vietnam, Bolivia, Kirbati, Senegal

3. Upper Middle Income (UMC)- $4,086 to $12,615-Jordan, China, Malaysia,

Turkey, Hungary, Belize, Fiji, Mauritius, Costa Rica4. High Income - $12,616 or more-Lativa, Russian Federation, Chili, UAE,Finland, France, Australia, Japan, Germany

• LIC, LMC, UMC are called developing countries• High Incomes Countries are Developed Countries



Countries classified by economic System

•

The system of economy a nation follows depends onits political ideology• Countries with individual goals at upper most follow

market economies• Countries with collective goals are given

prominence, state intervention and restrictedmarkets do exist

1. Market Economies2. Command Economies3. Mixed Economies



MARKET ECONOMY

Also called capitalist economiesAll productive functions and privately ownedProduction of goods and services is not planned by individualsEconomic decisions are made by the basic principals of supply anddemandIf demand is more than supply, prices tend to rise forcing producers to

produce more

If Supply is more than demand, prices will fall, signaling producers to produce less.Consumers decide what producer should produce and supplyEconomic decisions are made by individuals competing to earn profitsProfit is the motive for increasing work rather than quotas

There are many economic freedomsThere is competition among businessesCompetition determines price which increase the quality of the productE.g: Hong Kong, Canada and US, Brazil, Kenya, India, United Kingdom,Nicaragua and Peru



Advantages1. Competition between different firms leads to increased efficiency, as firms do

whatever is necessary —including laying off workers —to lower their costs;2. Most people work harder (the threat of losing one's job is a great motivator);3. There is more innovation as firms look for new products to sell and cheaper ways

to do their work;4. Foreign investment is attracted as word gets out about the new opportunities

for earning profit;5. The size, power, and cost of the state bureaucracy is correspondingly reduced as

various activities that are usually associated with the public sector are takenover by private enterprises;

6. The forces of production, or at least those involved in making those thingspeople with money at home or abroad want to buy, undergo rapid development;

7. Many people quickly acquire the technical and social skills and knowledgeneeded to function in this new economy;

8. A great variety of consumer goods become available for those who have themoney to buy them; and

9. Large parts of the society take on a bright, merry and colourful air as everyonebusies himself trying to sell something to someone else.



MARKET ECONOMY

Characteristics:Private Ownership of ResourcesRole of Government Intervention

Disadvantage:

Gross in equalities of income, recurrence of trade cycles because of thee free play of market forces andexploitation of poor by richPeople in capitalist society earn more and consequentlyindulge in excessive and wasteful expenditure on

consumer durables and luxuriesDisproportional political influence, Corruption,Unemployment, unused industrial capacity.



Command economy• Also known as a planned economy, the government largely determines what is produced

and in what amounts and the price at which they are sold.

Change occur relatively less frequentlyThere is little individual freedomThere is no competitionBusinesses are not run to create a profitConsumers have few chooses in the market placeFactories are concerned with quotasShortages are common because of poorly run factories and farmsThe government dictates the job in which you workThe government sets the prices of goods and servicesExamples of command economies: Cuba, North Korea and the People’s Republic ofChinaPrices do not change but quality worsens for 3 reasons:

1. Most products are usually in short supply2. Consumers typically have few or no alternatives3. There is not much incentive for companies to innovate and little profit to invest in

upgrades.



Command economy• Command economies can appear to perform well for short periods of times, especially

in terms of growth rates, because by controlling everything and everybody, state hastremendous ability to mobilize unemployed or underemployed resources to generategrowth

• It is good in developing large-scale, capital-intensive production that often achievesmarginal rates of efficiency while making acceptable products that are not competitivewith global standards

• In practice, command economies are associated with socialism and communism, twoclosely related forms of government.

• Socialism and communism are characterized by collective ownership of the means ofproduction and central planning functions that try to produce what people want andneed, in the quantities and at the time required.

Disadvantages:• They tend to be badly organized, lack quality control or worker incentives, and have

been responsible for severe environmental degradation.• Denial of Individual Freedom, Failure in maintaining Rate of Economic Growth, (Soviet

Union-1/6 th of land surface of earth cannot feed it sown people), Assumes people’sCommitment to work, Equality, Lack of Flexibility, Luxurious Lifestyles-faith of Romanialeader and his wife-300 bullets



Mixed economyGovernment and individuals share the decision making processFollowed in France, India, Italy, Sweden

Government guides and regulates production of goods and services offeredIndividuals own means of productionProtects consumers and workers from unfair policiesMost effective economy for providing goods and services

• In general, market forces prevail in mixed economies.• The government does not direct the private sector to produce certain goods and

services in certain quantities at certain times.• However, the government's influence in the economy stems from the amount of money

(raised in the form of taxes and borrowings from the private sector) that it spends and,through various forms of welfare , redistributes.

1. Sectors in which both production and distribution are entirely managed andcontrolled by the State to the complete exclusion of private enterprise-E.g.: AirbusIndustries is jointly owned by several European governments

2. Government can influence private production or consumption decisions such as bybuying goods and services or by subsidizing or taxing certain activities3. The government can redistribute income and wealth in pursuit of some equity

objective, such as socialized medicine and other welfare programsDisadvantage:1. No clarity and things might change



Classification of Countries by Region• East Asia and Pacific• Europe (East and Central Europe) and Central Asia• Latin America and Caribbean• Middle East and North Africa• South Asia• Sub-Saharan Africa• High Income Countries-which are widely scattered• Implications:• MNC’s tend to organize their activities along geographical lines • E.g.: IBM has its operations in Africa, America, Asia Pacific, Europe and

Middle East• Siemens discloses its sales by region-Africa, Middle East, CIS, Asia Pacific, TheAmericas, Europe and Germany

• World Banks also uses theses parameters to publish reports giving trends inkey markets.

• Investors can use the data to analysis where potential growth and risk exist in

the regions where the firms operate.



Macroeconomic Issues AffectingBusiness Decisions

• Rate of Growth• Inflation• Savings and Investments•

Fiscal Stability• Balance of Payments (BOP)



Financial Systems• Money Market:• It is the market in which short-term funds are borrowed and lent mainly

through monetary assets.• It does not deal with cash or money• It transacts in financial assets like trade bills, Treasury bills,. Promissory

notes on short maturity periods• Also called as NEAR MONEY• The money market developed because there are parties that had surplus

funds, while others needed cash(inter banking lending)• Importance:• It enhances liquidity, Stabilizes interest rate and helps financial and

commercial institutions and commercial banks earn attractive interest.•

Capital Market:• Long Term Funds• Also called STOCK EXCHANGES

Well developed stock exchanges obviously add to attractiveness of countryfor FDO Flow



Economic Freedom Index• Economic Freedom Index talks about freedom from government constrain on

production, distribution or consumption of goods and service.• Countries with freest economies have highest annual growth and a greater degree of

wealth creation• There are 50 independent indicators that are organized into 10 dimensions:1. Business Freedom2. Trade Freedom

3. Monetary Freedom4. Freedom from Government5. Fiscal Freedom6. Property Rights7. Investment Freedom8. Financial Freedom9. Freedom from corruption10. Labor freedom• Higher score of the scale indicates the lesser interference from the Government in

economy• Hong Kong’s economic freedom score is 89.9, making its economy the freest in the 2012

Index.•

2nd-Singapore, 3 rd-Australia, 4 th New Zealand



Economies in Transition• A transition economy or transitional economy is aneconomy which is changing from a centrally planned

economy to a free market.

• The process has been applied in China, the former SovietUnion and Communist bloc countries of Europe, and manythird world countries.

• China and Vietnam adopted a gradual transition mode,however Russia and some other East-European countriesused more aggressive model of transition

• 1 May 2004 (Czech Republic, Estonia, Hungary, Latvia,Lithuania, Poland, Slovakia, Slovenia) have completed thetransition process

• Hungary, Cambodia, Vietnam, Kosovo, Serbia, Poland,Ukraine, Romania



The main ingredients of the transitionprocess are

• Liberalization – the process of allowing most prices to be determined infree markets and lowering trade barriers that had shut off contact withthe price structure of the world's market economies.

• Macroeconomic stabilization – bringing inflation under control andlowering it over time, after the initial burst of high inflation that followsfrom liberalization and the release of pent-up demand. This processrequires discipline over the government budget and the growth of moneyand credit (that is, discipline in fiscal and monetary policy) and progresstoward sustainable balance of payments.

• Restructuring and privatization – the creation of a viable financial sectorand reforming the enterprises in these economies to render them capableof producing goods that could be sold in free markets and of transferring

their ownership into private hands.• Legal and institutional reforms – redefining the role of the state in these

economies, establishing the rule of law, and introduce appropriatecompetition policies.



Economies in Transition-Russia• Russia as an entity came into being following the dissolution of USSR in 1991 and as of

today, it is leading member of Commonwealth of Independent States (CIS)• Central planning had been largely eliminated during the last two years of the Soviet

period in 1990-91• The remaining elements of central allocation of resources were terminated during

1992.• Nearly all prices were freed from state control on January 2, 1992• Russia also quickly established a regime of relatively free imports, free international

capital flows, and free currency exchange• Throughout the presidencies of Boris Yeltsin in the 1990s and of Vladimir Putin in 2007,

Russia has opened its doors to international trade, investment, tourism, the media, andthe Internet.

• In sharp contrast to the Soviet Union, Russia now publishes voluminous (if not alwaysreliable) economic, social, and demographic information.

• GDP is about one fifth that of China, but double in per capita terms.• Since 1991, Russia's real GDP growth rate has been more than twice the unweighted

average of the other G-8 members...



Economies in Transition-Russia• During Putin's tenure since 2000, ... its foreign debt has been reduced from 50 percent

of GDP to less than 30 percent, and its $3.3 billion debt to the International MonetaryFund was repaid ahead of schedule in 2005.

• Of the $40 billion owed to its creditors in the Paris Club, Russia has paid $15 billionahead of schedule, and its foreign-exchange reserves have more than tripled, to morethan $250 billion.

• The number of privately owned enterprises more than doubled in the past decade, tonearly 80 percent of all enterprises, while the share of state-owned enterprises shrankfrom 14 percent to less than 4 percent.

• How much of it should properly be attributed to the windfall of higher oil and natural-gas prices (hence, to factors not under Russia's control), rather than to improvedeconomic policies and reform.

•

Recent empirical work at the RAND Corporation ... highlights Russia's heavydependence on fossil fuels.• Increased oil and natural-gas prices explain between one third and two fifths of the

economy's growth over the period from 1993 to 2005. ...• The buildup of Russian foreign-exchange reserves is a further illustration of this

dependence.



• http://www.reuters.com/video/2013/03/05/economy-2013-intercontinental-europe-ceo?videoId=241457389

• Economy 2013: InterContinental Europe CEOtargets Russia

• Mar. 5 - InterContinental Hotels Europe CEO

Angela Brav says the group will double itspresence in Russia and introduce the Holiday InnExpress brand there for the first time. (Transcript)

http://www.reuters.com/video/2013/03/05/economy-2013-intercontinental-europe-ceo?videoId=241457389















Economies in Transition-Russia• Russia also quickly established a regime of relatively free imports, free international

capital flows, and free currency exchange• Among economies in transition, growth in the economies of the Commonwealth of

Independent States (CIS) has continued in 2012, although it moderated in the secondhalf of the year.

• Firm commodity prices, especially those of oil and natural gas, held up growth among

energy-exporting economies, including Kazakhstan and the Russian Federation.• In contrast, growth in the Republic of Moldova and Ukraine was adversely affected bythe economic crisis in the euro area.

• The economies of small energy-importing countries in the CIS were supported byprivate remittances.

• Among economies in transition, the unemployment rate in the Russian Federationdeclined to a record low of 5.2 per cent in August 2012, partly as a result of increasedpublic spending, but also because of a shrinking active population.

• Notable job creation has also been recorded in Kazakhstan, but the unemploymentrate has increased in Ukraine as a result of tighter fiscal policy and weaker externalsector.

• Source: World Economic Situation 2013-Global Outlook



Classification based on Trade Policies• Inward-Looking Approach: Advocates that a country should not

trade with other• Restrictions on trade, people and communications• Countries should evolve their own style of development-learning by

doing• Also called Import Substitution approach to international trade• Outward-looking strategy calls for easy movement of goods and

services among nations• Free trade, encourages learning by trade and implies achievements

of dynamic transformation of economy• Also called Export Promotion Strategy• Goods, capital, labor, enterprises and students



Barriers To trade• Inward-looking strategy toward foreign trade•

These countries use several barrier to protect domestic industries fromcompetition from foreign firms• Tariff and Non-Tariff Barriers• Tariffs:1. Export Tariff2. Import Tariff3. Transit Tariff• Non-Tariffs Barriers:1. Quotas2. Subsidies3. Others• Product and Testing Standards• Embargoes• Local Content Requirements• Administrative Delays• Currency controls

Visa restrictionsamount to 'non-

tariff barriers':Chidambaram

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Tariff Barrier• Tariff is tax imposed on goods involved in international trade• Import Duties•

Export Tariff• Tariffs may be either specific or ad valorem• Specific Tariffs• A fixed fee levied on one unit of an imported good is referred to as a specific tariff.• This tariff can vary according to the type of good imported.• E.g.: A country could levy a $15 tariff on each pair of shoes imported, but levy a $300 tariff on each

computer imported.• India levies specific duties on many textile and apparel products in Rupees per square meter, kilogram, or

piece. Yarn-Silk or Wool-10-20% Ad Valorem Tariffs

• The phrase ad valorem is Latin for " according to value ", and this type of tariff is levied on a goods basedon a percentage of that good's value.

• An example of an ad valorem tariff would be a 15% tariff levied by Japan on U.S. automobiles.• The 15% is a price increase on the value of the automobile, so a $10,000 vehicle now costs $11,500 to

Japanese consumers.•

This price increase protects domestic producers from being undercut, but also keeps prices artificiallyhigh for Japanese car shoppers.• Transit Tariff:• This type of duty is levied on commodities that originate in one country, cross another, and are consigned

to a third. As the name implies, transit duties are levied by the country through which the goods pass• No longer in existence



Non Tariff Barriers• Non-tariff barriers to trade (NTBs) are trade barriers that restrict imports but

are not in the usual form of a tariff• Their use has risen sharply after the WTO rules led to a very significant

reduction in tariff use.• Some non-tariff trade barriers are expressly permitted in very limited

circumstances, when they are deemed necessary to protect health, safety, orsanitation, or to protect depletable natural resources.

• Classification formed in 2008 by the eight international organizations –FAO,IMF, ITC, OECD, UNCTAD, UNIDO, the World Bank and the WTO with subsequentrevision in 2009 and 2012:

1. Technical(Chapters A and B) refer to product-specific properties such ascharacteristics, technical specifications and production process of a product. Italso includes conformity assessment methods, which affirm the compliance of

a product to a given requirement. These technical regulations are generallyaimed at ensuring quality and food safety, environmental protection andnational security, and at protecting animal and plant health.

2. Non-technical measures (Chapters C to O) do not refer to product-specificproperties but to trade requirements, such as shipping requirements, customformalities, trade rules, taxation policies, etc.



• CHAPTER A: SANITARY AND PHYTOSANITARY MEASURES (SPS):• Sanitary and phytosanitary (SPS) measures are technical in nature and can include

prohibition, measures governing quality and hygenic requirements, productionprocess, and related conformity assessments. SPS measures are generally appliedto:

•

Protect human or animal life from risks arising from additives, contaminants, toxinsor disease-causing organisms in their food;• Protect human life from plant- or animal-carried diseases;• Protect animal or plant life from pests, diseases, or disease-causing organisms;• Prevent or limit other damage to a country from the entry, establishment or spread

of pests; and to protect bio-diversity. These include measures taken to protect thehealth of fish and wild fauna, as well as of forests and wild flora.

• Measures used for these objectives include import prohibition, authorization,tolerance limits and hygienic requirements, labeling and marking requirements, andconformity assessments such as testing, certification and quarantine requirements.

• Examples: • Prohibition on import of poultry from countries affected by avian flu.• Liquid eggs should be pasteurized or otherwise treated to destroy all viable

Salmonella microorganisms;• Live animals required to be quarantined for two weeks before entry into the

territory



• CHAPTER B: TECHNICAL BARRIERS TO TRADE (TBT)• TBT measures refer to technical regulations, and procedures for assessment of

conformity with technical regulations and standards, excluding measures covered bythe SPS Agreement. TBT regulations lay down product characteristics or their relatedprocesses and production methods, including the applicable administrativeprovisions, with which compliance is mandatory. It may also include or dealexclusively with terminology, symbols, packaging, marking or labeling requirements asthey apply to a product, process or production method.

• This chapter also covers conformity assessment, i.e. any procedure used, directly orindirectly, to determine that relevant requirements in technical regulations orstandards are fulfilled. It may include, inter alia:

• Procedures for sampling, testing and inspection;•

Evaluation, verification and assurance of conformity;• Registration, accreditation and approval;• Combinations of the above• Examples:• Importers of "sensitive product" such as medicines, drugs, explosives, firearms,

alcohol, cigarettes, game machines, etc. may be required to be registered in theimporting country;

• Refrigerators need to carry a label indicating its size, weight as well as electricityconsumption level.

• For a product to be identified as “chocolate”, it must contain a minimum of 30%cocoa.



• Standards• Standards take a special place among non-tariff

barriers.• Countries usually impose standards on classification,

labeling and testing of products in order to be able tosell domestic products, but also to block sales ofproducts of foreign manufacture.

• These standards are sometimes entered under thepretext of protecting the safety and health of localpopulations. E.g.: UK-MCA, Australia-TGA, ISO

• In Europe such requirements range from banningimported beef from cattle raised with hormones to notallowing older airplanes to land because of noisepollution concerns.



• CHAPTER C: PRE-SHIPMENT INSPECTION AND OTHERFORMALITIES

• This chapter includes measures that require mandatoryquality, quantity and price control of goods prior toshipment from the exporting country. It my also includegovernments requirement for shipments to arrivedirectly from the country of origin (without stopping in athird country), or to pass through a designated entry

point or to pass through specified port of customs.• Examples: • A pre-shipment inspection of textile imports by a third

party is required for verification of colors and types ofmaterials

• DVD players need to be cleared at a designated customsoffice



• CHAPTER D: CONTINGENT TRADE PROTECTIVE MEASURES• These are measures implemented to counteract particular

adverse effects of imports in the market of the importingcountry, including measures aimed at 'unfair' foreign-tradepractices, contingent upon the fulfillment of certainprocedural and substantive requirements. It includes anti-dumping, countervailing and safeguard measures.

• Examples: •

Antidumping duty imposed on particular product fromcertain countries to correct unfair pricing practices.• A countervailing duty of 44.71% imposed by Mexico on

imports of 'dynamic random access memory (DRAM)semiconductors' from Country A to offset the subsidies

granted by the exporting country on the production or tradeof the product.



• CHAPTER E: NON-AUTOMATIC LICENSING, QUOTAS, PROHIBITIONS ANDQUANTITY-CONTROL MEASURES OTHER THAN FOR SPS OR TBTREASONS

• These measures are generally aimed at restraining the quantity of goods

that can be imported, regardless of whether they come from differentsources or one specific supplier. These measures can take the form ofnon-automatic licensing, fixing of a predetermined quota(Import Quotaand Export Quota, Voluntary export Quota-VER), or through prohibitions.

• This creates a restriction on competition, and increases prices faced byconsumers

•

Examples:• For example, Brazil could place a VER on the exportation of sugar toCanada, based on a request by Canada. Canada could then place a VER onthe exportation of coal to Brazil.

• This increases the price of both coal and sugar, but protects the domesticindustries.

•

Imports of textile products are subject to a discretionary license.• Import of motor a vehicle with cylinder under 1500cc is not permitted to

encourage domestic production.• Annual import of fish restricted to 100 tons.



• Embargo• Embargo is a specific type of quotas prohibiting the trade.•

Like quotas, embargoes may be imposed on imports or exports of particulargoods, regardless of destination, in respect of certain goods supplied to specificcountries, or in respect of all goods shipped to certain countries.

• Although the embargo is usually introduced for political purposes, theconsequences, in essence, could be economic.

• Example: US’s embargo with Cuba



• CHAPTER F: PRICE CONTROL MEASURES, INCLUDINGADDITIONAL TAXES AND CHARGES

• Measures implemented to control or affect the prices ofimported goods in order to, inter alia,: support the domesticprice of certain products when the import prices of thesegoods are lower; establish the domestic price of certainproducts because of price fluctuation in domestic markets, orprice instability in a foreign market; or to increase orpreserve tax revenue. This category also includes measures,other than tariffs measures, that increase the cost of importsin a similar manner, i.e. by a fixed percentage or by a fixedamount: they are also known as 'para-tariff' measures.

• Examples: • A minimum import price is established for fabric and apparel.• Excise tax, tax on alcoholic consumption, cigarette tax• CO2 emission charge on motor vehicles.

CHAPTER G FINANCIAL MEASURES



• CHAPTER G: FINANCIAL MEASURES• Financial measures are intended to regulate the access

to and cost of foreign exchange for imports and definethe terms of payment. They may increase import costs inthe same manner as tariff measures. It includesmeasures such as advance payment requirements, andregulations governing foreign exchange rates.

• Examples: •

Payment of 50% of the transaction value is requiredthree months before the expected arrival of the goods tothe port of entry.

• Imports of construction materials are allowed only ifpayments may be made through the foreign directinvestment fund.



• CHAPTER H: MEASURES AFFECTING COMPETITION• These measures are aimed at granting exclusive or

special preferences or privileges to one or more

limited group of economic operators. It mayinclude government imposed special importchannels or enterprises, and compulsory use ofnational services.

•

Examples: • A statutory marketing board with exclusive rights

to control imports of certain grains;• A canalizing agency with exclusive right to

distribute petroleum.



• CHAPTER I: TRADE-RELATED INVESTMENT MEASURES• These measures include requirement to use certain

minimum levels of locally made components, restrictingthe level of imported components or measures limitingthe purchase or use of imported products by anenterprise to an amount related to the volume or valueof local products that it exports.

• Examples: • In the production of automobiles, locally-producedcomponents must account for at least 50% of the value

of the components used.• A company may import materials and other products

only up to 80% of its export earnings of the previousyear.



• CHAPTER J: DISTRIBUTION RESTRICTION• Distribution of goods inside the importing country

may be restricted. This may be controlled throughadditional license or certification requirements.

• Examples: • Imported beverages may only be sold in cities that

have facility to recycle the containers.• Exporters of motor vehicles need to set up their

own retail points as existing car dealers in thedestination country belong exclusively to carproducers in that country.



• CHAPTER K: RESTRICTION ON POST-SALESSERVICES

•

Measures restricting producers of exportedgoods from providing post-sales services in theimporting country.

•

Example: • After-sales servicing on exported TV sets must

be provided by local service company of the

importing country.



• CHAPTER L: SUBSIDIES• Financial contribution by a government or

government body to a domestic production

structure of a particular industry or company, suchas direct or potential transfer of funds (such asgrants, loans and equity infusions).

• Example: • The government provides producers of chemicals aone-time cash grant to replace antiquated

production equipment.• By lowering costs, subsidies help domestic products

to:1. Help them to compete against foreign imports2. Gain access to exports markets



• CHAPTER M: GOVERNMENT PROCUREMENTRESTRICTIONS

• Measures controlling the purchase of goodsby government agencies, generally by givingpreference to national providers.

• Example: • Government office has a traditional supplier

of its office equipment requirement, despite

higher prices than similar foreign suppliers.



• CHAPTER N: INTELLECTUAL PROPERTY• Measures related to intellectual property rights

in trade: intellectual property legislation coverspatents, trademarks, industrial designs, lay-outdesigns of integrated circuits, copyright,geographical indications and trade secrets.

• Example: • Clothing with unauthorized use of trademark is

sold at much lower price than the authenticproducts



• CHAPTER O: RULES OF ORIGIN• Rules of origin cover laws, regulations and

administrative determinations of general application

applied by governments of importing countries todetermine the country of origin of goods. Rules oforigin are important in implementing such trade policyinstruments as anti-dumping and countervailing duties,origin marking, and safeguard measures.

• Example :• machinery products produced in a country is difficult to

fulfill the rules of origin to qualify for the reduced tariffrate of the importing country, as the parts andmaterials originate in different countries.



• CHAPTER P: EXPORT-RELATED MEASURES• Export-related measures are all measures applied by the

government of the exporting country to exported goods,including both technical and non-technical measures.

• Examples: • Export of corn is prohibited because of shortage in

domestic consumption•

An export monopoly board, to take advantage of terms ofsale abroad; a marketing board, to promote for export onbehalf of a large number of small farmers

• Exports of processed food products must be inspected forsanitary conditions.



Need for Trade Barriers• Tariffs and other trade barriers have a definite effect on

consumption and production.• Tariff raises the domestic price of the import• The overall effect of tariffs and trade barriers is to reduce the

volume of trade and to increase the prices of imports.• There are several reasons advanced for imposing trade barriers.

1. National Security-Defense and Airlines2. Protecting domestic producers against foreign competitors

(especially infant industries)-E.g.: India protecting SSI3. improving a nation's terms of trade,4. Reducing domestic unemployment-E.g: BPO

5. improving a nation's balance of-payments position.-First moveradvantage-helps country to survive in recession



Protectionism

Economic

ArgumentsPolitical

Argument

InfantIndustry

ArgumentStrategicTrade

Policy

NationalSecurity

Retaliation

Protecting

Jobs

ProtectingHuman Rights

economic envrionment 1

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