Southwestern University

School of Business and Governance

Business Management and Public Administration Department

SEMESTRAL REQUIREMENTS

IN

MBA 509 COMPETITIVE STRATEGY

Dr. InfanteProfessor Joseph T. Giduquio

HISTORY OF WORLD TRADE

Man is a social being. It is a known fact that no man is an island. Thus, it can be associated with the reality that no nation could stand under a hermit life. In relation to this principle, trading was a form of language between different nations.

Our civilization has been built upon the exchange of goods between countries. The lives of millions people in all parts of the world depend on the exchange of goods. Commerce and communication have brought the countries of the world closer together as much so that we find different parts of the earth make contributions to supply the wants of man and as civilization on its march, no single country produces everything that its people need. Thus, no country is denied the benefits of progress. all these are made possible through the existence of trade.

Throughout history, people have exchanged goods with people of distant lands. In biblical times, long caravans were a common sight which brought frankincense and myrrh from the East. During the middle ages, spices, condiments and silk from the Orient were known to have contributed immeasurably toward the enrichment of European manorial and monastic life. One many doubtless recall the various expeditions which were sent out by the kings of Portugal and Spain in search of the shortest route to the Moluccas group of islands in order to take advantage of the fabulous spice trade, a circumstance that has been responsible for the discovery of the Philippines by Ferdinand Magellan and the consequent colonization of our country by Spain.

Early trades have been credited of contributing to the spread of knowledge and ideas. They have transplanted plants, animals, products, processes and ideas among the many countries of the world from earliest times.

FACTORS THAT CONTRIBUTED TO THE ACCELERATION OF INTERNATIONAL TRADE

A number of important factors and conditions may be noted briefly as having contributed their share to the acceleration of international trade. Events which began at the end of the 18th Century were quite rapid and profound which produced effects of far-reaching significance if not to say helped transform primitive economy into an industrial one.

a) INDUSTRIAL REVOLUTION

The introduction in the use of power machines in factories which substituted for the use

of hands and simple tools in production did not only lighten the physical burdens of man but resulted in a number of advantages, one of which was the tremendous increase in output in production.

The setting of the Industrial Revolution was England may be explained if for no other reason than the fact that the English people have favourable and stable political institutions, internal free trade, advantages of climate and geographical position, considerable experience with foreign trading, special connections with the New World and an abundance of coal. With coal becoming in time as the chief source of economic power, England started to enjoy a position of tremendous importance both in production as well as in trade.

The great increase of commerce during the period of mercantilism was the result of wind-driven ships, which were great improvements over the earlier vessels. Also, growth in commerce had extended the use of water wheels. These improvements, however, were insignificant compared to the results of the steam engine, to which were added electrical power, the internal combustion engine, the jet engine and now, on the horizon, the likely harnessing of the atomic power for good instead of for war efforts alone.

Thus, it could be said that it was only much later when the world became the beneficiary of a number of inventions.

The constant improvement in transportation, land, water and air, has not only resulted in increasing production in the industries but also facilitated the growth of agricultural production.

b) COMMERCIAL DOCUMENTS

Nobody needed documents more than those who were engaged in trade. In fact, it appears

Quite logical to believe that the early trades had a hand in invention of writing, thereby making records and history possible. Writing was not invented all at once just as alphabetical writing did not come about till after many centuries of experimentation with crude pictographs.

The early records were made of material that was abundant-clay. Thus, bills of exchange, promissory notes and the like were engraved on clay tablets, baked hard under the scorching heat of the sun, and stored in temple jars. With the invention of writing, documents came to be written in the hand of the principal known as holographs, from a Greek word, holography, which means the whole message.

Bills of exchange were to believe to have been invented by Florentine Jews and were very well known in England during the middle-ages, although their first use was confined between England and foreign merchants.

c) COMMERCIAL LAW

Much of the law by which we regulate the vast complexity of modern production and trade, even the law of partnership and of corporate relationships, rests upon concepts of fair practice applied to intricate and ever-changing situations according to the experience of actual traders. Custom and precedent count far more than is often realized, especially in the basic relations between men. Their roots go very deep in human consciousness. Inevitably men have attached to them reverence and religious authority or have sought to identify them with the natural order of the universe.

The medieval Law Merchant or Lex Mercatoria (meaning law of trade) out of which our modern commercial law developed, has been described as a particular application of the law of the contract. As a body of rules laid down by merchants they were intended for regulating their conduct with one another. Together with fellow merchants from all the trading regions, the merchant had to devise both rules by which he could carry trade peacefully and equitably, and the tribunals in which those rules could be interpreted and enforced.

This cosmopolitan body of rules and customs formed by the traders principally of the Mediterranean designed to solve disputes between the traders attending the fairs gained public attendance neither in the name of Justinian (a Roman emperor who was famous as a legislator and codifier of law) nor of the Church, but for universal reason.

The Law of the Merchant covers not only commercial contracts but marine insurance as well. The Law of the Merchant has been accumulating in English-speaking countries for more than four hundred years. Reliable marine insurance brokers can be depended upon to advise the foreign trader on the proper coverage of risks and to represent his interests in the collection of claims and in similar matters.

d) BANKING INSTITUTIONS

Observed from what have transpired in the centuries past, if trade was responsible for the

development of a system of finance through ambulatory bankers, doubtless, it could also be equally said that banks in the course of their own contributions to the rapid acceleration of international trade. In fact, it is because of commercial banks that goods are able to move at a faster pace from one nation to another than otherwise would be the case. This may be best appreciated when one takes into account the use of what is known as commercial letters of credit as a means of financing foreign trade shipments. The bank, acting as a fiduciary agent for the buyer (importer) and the seller (exporter),

guarantees the exchange of documents giving title to the merchandise, in spite of the fact that the seller and the buyer are situated in different countries separated by thousands of miles. The form of the banks undertaking is known as a documentary credit, or letter of credit. e) PORTS OF ENTRY

What originally was introduced in England as the staple (literally meaning a market or

commercial emporium), that is, a system whereby the stream of commerce is regulated and direct into definite channels, has come to be known in modern times as ports of entry.

A port of entry is simply a domestic port open to both foreign and coastwise trade. In the case of the Philippines, all articles imported into this county, whether subject to duty or not, shall be entered through a customhouse at a port of entry. Failure to do so shall subject the merchandise to the treatment given to contraband or smuggled goods. Not only are imports required to pass through customhouse at the port of entry; export of goods must go through the same channel.

With the designation of ports of entry, as in the case of system of the staple, collection of customs duties, taxes and other charges facilitated and rules and regulations governing the countrys foreign trade could easily be implemented. For instance, where goods for export are subject to proper standardization in order to maintain goodwill in the international market, proper inspection could be easily made to find if there is proper compliance or not with the regulations pertaining thereto.

f) LAISSEZ FAIRE

Laissez Faire may be defined as the doctrine which demands the minimum interference by the government in economic and political affairs. Under the doctrine of laissez faire, the ideal society is characterized by the competition of individuals armed with equal rights who freely search for their interests in the interaction of economic relationships. From its beginnings, laissez faire is marked by an optimistic faith in the power of uncontrolled action to produce social good. As a theory of exchange, laissez faire leads to such a stabilization of prices as results, in a given market, in the maximum possible satisfaction to all those participating therein.TRADE

Trade may be described briefly as an economic activity which deals with an exchange of goods and services motivated by a desire for profit. While this activity represents as the exclusive prerogative of some governments as those of socialist and communist countries, those which adhere to a system of free private enterprise vests it as the privilege and right to its citizens.

Briefly observed then, state trading is characteristic of countries which have centrally-planned economies. In these countries, foreign trade is usually a State-monopoly and their trade policy is determined largely within the context of their national plans. Export and import trade is carried out almost exclusively by specialized foreign trade agencies which handle a determined range of products and buy sell in accordance with targets set by the countrys long term and short-term economic plans. Foreign trade is usually carried within the framework of bilateral agreements setting out products and quantities to be exchanged in both directions. Some trading practices are also applied to developed, market-economy countries, although only for certain products, such as tobacco and liquor.

KINDS OF TRADE

Fundamentally, there is not much difference between international, and what is oftentimes termed as foreign trade, and local or invariably called domestic trade, inasmuch as both represents private merchandising activity which consists of the purchase and sale of commodities entering into the exchange transaction. Such activity is made possible by individuals who take long journeys to get the things that are wanted and desired by others. They are called traders. It led others to act as merchants who stayed in one place and sent someone else to get things for them. All such individuals in the pursuit of trade are always motivated by profit. Moreover, both are highly responsible for increased production through division of labor.

In international trade, the objects of exchange cross political boundaries and destined for other countries. Thus, such goods usually cover greater distances than those which become objects of domestic trade transactions. Briefly stated, the movements of goods in domestic trade are confined within the borders of a country.

IMPORTANT BASES OF INTERNATIONAL TRADE

The different factors that account for the existence of international trade are many and varied. They may be divided for purposes of better understanding and convenience into two: primary and secondary functions. In the development of international trade, the following constitute the primary factors:

1. Differences in environmental conditions

2. Stage of economic development

3. Population distribution

4. Transportation and communication facilities

5. Price structure

No nation is self-sufficient. Most countries, as a general rule, are far from being so. Even the developed nations have to depend upon other countries for some of the requirements of her industries and people.

The search for new routes to the East led to the discovery of the New World and ushered in a period of exploration and growth of trade. While we cannot trace step by step the history of this growth, nevertheless, it has never stopped. In fact, today the merchant fleets of the world are to be found on every sea and in every harbour. Sailing vessels have been replaced by steamships, and these ships are larger, better built, safer, faster, and more comfortable. On land, better roads replaced old ones, and transportation by animals has given way to transportation by railroads and motor busses and trucks, just as airplanes have become prominent and important in trade.

With these developments, not frequently, we hear it said that man today lives in a shrinking world. Thus, on account of the progress in the development of transportation, we are today the beneficiaries of trade by consuming and using goods which are the products of far distant countries. Take the case of the refrigerator ship. Because of this great improvement in transportation, fresh fruits, vegetables, meat and dairy products from different regions of the world are now available in the local markets of our own country.

With respect to communication facilities, it is quite evident that its absence hampers the progress of trade. Unless buyers and sellers can communicate with one another and be informed of what they need as well as offer something for sale, no trade will take place. Frequent intercourse, fostered by easy communication facilities, tends to hasten the flow of goods from one region or country to another.

It cannot be gainsaid that improvements in the means communication and transportation and the greater security of travel made possible the long distance movements of any kinds of goods. They have, as a matter of fact, transformed the modern world into one immense market.

If the trade is legally free to move, it is because of no difference in money costs and money prices of goods in different countries which determines their movement. As a matter of fact, the difference in price structures is responsible for either an increase, decrease, or even a change in the direction of trade. As pointed out in many textbook in economics, the creation of place utility, resulting in the increasing usefulness of goods, stems from the fact that such goods are moved from places where they are relatively abundant, and therefore cost less, to places where they are scarce, if not totally absent, and therefore cost more. Since any businessman is motivated by the desire to make profit, he takes advantage of such an economic circumstance and creates what is commonly termed as place utility. If there are no differences in prices of goods and services, no movement of goods will be observed from one place to another, and hence there will be no motive to trade. ITEMS OF INTERNATIONAL TRADE

The items of international trade consist of goods and service, the former being referred to at times as visible items whereas the latter are invariably described as invisible items. Based upon their movement and destination, such items are classified as imports and exports.

Imports, from the latin in which means in and porto meaning carry, are items that enter in a port coming from a foreign one. Thus, we call merchandise imports as those goods or commodities bought from a foreign country entering into another, while merchandise exports are those goods sold by a country and destined for a foreign one. In the case of services, an import of services call for the use of foreign labor usually in the form of professional and technical service into a country coming from another. The country of the citizen who renders such technical or professional services abroad is said to be exporting services. These are the invisible items in international trade. As may appear quite obvious by now, the recipient of such services is termed as the importing country. THE NATURE OF INTERNATIONAL TRADE

The nature of international trade may be likened to a coin which has two sides or faces. On one side is export while import appears on the other. Thus, viewing the coin of international trade, if from a countrys point like the Philippines are observed the goods which she sells (exports) as for instance, sugar, hemp, copra and others, without gainsaying, the same commodities represent the purchases (imports) of other countries from us. Clearly then, a countrys export is simply the import of another. No country can export unless another country imports since they are complementary to one another, that is, for every export, there is corresponding import.

Likewise, mention may be of the fact that a country does not import from other countries of the world cannot expect to export to them after a brief period of time. This may be explained by the fact that exports are highly significant to a country in that they provide the means (foreign currency) with which it could pay for her imports. Thus, if it is assumed that the United States will merely keep on exporting to us without at the same time importing from us (such products like sugar, copra, hemp, tobacco, pearl buttons and others which represent our chief exports), our inability to export to her will mean that we would no longer be able to import from her, much as we may want to, since we will not have the dollars that are necessary to cover the payment of such imports.

It could therefore be stated correctly that if a country restricts her imports, whether for the purpose of protecting her local industries or for whatever reasons, such a policy would generate serious repercussions in the exporting country. As such, the exporting country has either to stop or reduce the production of the goods which are being restricted from entry into the other country or seek markets elsewhere. International trade then, more than any other aspect of economics, is inextricably linked with international political complications.

ADVANTAGES OF INTERNATIONAL TRADE

The impact of international trade in the lives of peoples and nations is already well-known. We are so accustomed to the benefits of international trade that we never think of it as anything but natural. Some of the important ones are:

1. International trade gives rise to improved production and specialization through geographical division of labor.

As nations of the world are endowed differently from one another with respect to the distribution of natural resources, skills and aptitudes, talents and attitudes, each nation tends to produce from a given quantity of productive resources a larger volume of goods which she finds profitable. In the process, nations find it to their advantage and interest to specialize resulting in geographical division of labor. However, needless to state, improved production and specialization through geographical division of labor is impossible without trade.

2. International trade helps to assemble the things each nation needs.

The average consumer must have taken the position all to commonly assumed that the pan de sal which graces the breakfast table of the Filipino family comes from the bakery shop, cheese from the grocery store, the newspaper from the publishing house and the others. However, what escapes the minds of us is that pan de sal is made and baked out of wheat flour which is imported from abroad, principally from the United States and Canada; that the cheese comes from Holland; and that the newspaper comes from the newsprint imported from Canada; that the jeepney is produced out of parts manufactured in the United States;

3. It helps raise peoples standard of living.

If it is correct to assume that, through international trade, a nation can obtain the many things which she needs but could not produce at lower costs, then, it is also logical to expect the good effect of trade upon the standard of living of the people. For countries dependent upon international trade for raw materials, capital equipment, or consumption of goods not produced domestically, gains through international trade could be considerable in magnitude.

4. It serves as a vehicle for alleviating the economic difficulties that attend congested regions of the world.

Through international trade, countries which are densely populated and handicapped by limited food resources can get their supply by exchanging their manufactured products for food. Apparently, a world in which all countries could carry on international trade freely under international regulation would be less likely to produce conflicts and chaos than a world in which each nation, through its governmental control of foreign trade, competes with every other nation for the most favourable bargain.

5. Exchange of goods tends to increase the total utility of goods entering the transaction.

It is self-evident that if goods remain in regions where they are produced on account of their failure to enter the stream of commerce and trade, only inhabitants of such regions would benefit from their production. Trade has contributed to the widespread benefits arising from exchange.

6. To the economic benefits we derive from international trade, cultural advantages may be added.

The frequent intercourse fostered by trade has not only maximized the advantages of production and specialization, but at the same time has contributed to mutual understanding of the ways of life, customs, philosophies and traditions of people. This mutual understanding contributes greatly in turn to better respect, promotion of good-will, and a feeling of brotherhood among men, thus insuring peaceful relations among the peoples of the world. As such, international trade serves not only as a medium of cross-cultures but also as a strong link between the activities of peoples in all parts of the world.WORLD TRADE ORGANIZATION

The existing framework within which world trade takes place is the result among others of international negotiations. It includes negotiations which merely serve to codify and legitimize practices that had evolved earlier.

The negotiations eventually led to the establishment of the International Monetary Fund, the International Bank for Reconstruction and Development, popularly known as the World Bank, and quite recently, the AFTA, an acronym for Asean Free Trade Agreement initiated by the Association of Southeast Asia Nations designed to speed up trading within the region.

The negotiations that eventually led to the establishment of the General Tariffs and Trade, better known as the GATT, for short, paved the way to the rounds of subsequent negotiations which created the ground that govern world trade. Among such negotiations are UNCTAD I, held in Geneva, Switzerland in 1964; UNCTAD II held in New Delhi, India in 1968; UNCTAD III, held in Santiago, Chile in 1972; UNCTAD IV, held in Nairobi, Kenya in 1976; UNCTAD V, held in Manila, Philippines in 1979. The name UNCTAD is the abbreviation for United Nations Conference of Trade and Development.

After six years of negotiation with the successful conclusion of the General Agreement of Tariffs and Trade the round of talks held in Punta del Este, Uruguay finally reached a historic agreement on December 13, 1993. The Punta del Este, Uruguay talks, after three years delay due to the stubborn insistence of European Community on some last vestiges of protectionism and six years of negotiation since September 1986 hopefully augurs bright tidings for mankind.

The world trade pact, of which the Philippines is a signatory and a member of the trade talks, composed from 17 nations, provides for a gradual liberalization of trade in agriculture over a six-year period including cut-backs in export subsidies to guarantee a truly deregulated and non-subsidized free trade zone, cutting industrial duties by one-third, and setting multilateral arrangements for trade in services.

This ultimately means free exchange of goods among nations by means of a gradual disappearance of tariffs to ensure a competitive system in the classical sense which, when supply meets demand without intervention such as trade barriers and tariffs, guarantees the best prices.

The Uruguay round was a global negotiation with global result, paving to the establishment of World Trade Organization (WTO) which envisages a single institutional framework encompassing the GATT. Aptly observed, the World Trade Organization will replace the GATT which has been in existence as an interim measure since 1947. The WTO framework will ensure a single undertaking approach. The World Trade Organization have become operational on January 1, 1995, and by July of the same year, the commitments and pledges made by the signatory countries shall be effective and enforceable.

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