Chapter 3 – Global Trading Environment | IBE

MBAH 503: INTERNATIONAL BUSINESS ENVIRONMENT

Chapter 3
Global Trading Environment
World trade in goods and services – Major trends and developments; World trade and
protectionism – Tariff and non-tariff barriers; Counter trade.
----------------------------------------------------------------------------------------------------------------
World trade or international trade are the exchange of capital, goods and services across
international borders or grounds, which might include the actions of the government and
separate.
Trading globally gives patrons and countries occasion to be exposed to new markets and
products. Virtually every kind of invention can be originated on the international market: food,
clothes, spare parts, oil, jewellery, wine, stocks, currencies and water. Services continue also
functioned: tourism, banking, consulting and conveyance.
Before 1991, India followed an approach of mixed economy for its economic development.
The public sector was assigned a commanding position and was made the main instrument of
achieving growth. The government retained all the industries which were vital for the economy
such as steel, coal mining, power and roads. On the other hand, the private sector was strictly
retained through a system of permit and licenses. The inflow of foreign capital was subject to
various restrictions and regulations under which majority participation and control had to
remain in the hands of Indian. All these restrictions discouraged investment by private sector
and also foreign investment into the country. Thus, there was a need to assess the economic
policies in order to improve growth and efficiency. As a result, the government introduced New
Economic Reforms or New Economic Policy in 1991. These reforms have promoted
liberalisation, privatisation and globalisation.

Economic Reforms
Economic reforms refer to necessary structural adjustments to external events. These includes
policy measures such as reducing country’s spending to the level parallel to its income,
reducing import restriction, eliminating export restriction, market based structural change so
that the economy become more efficient and flexible.
Liberalisation, Privatisation and Globalisation are the main features of the new economic
policy.

Liberalisation
Liberalisation is a policy regime which aims at ensuring greater freedom from all unnecessary
controls and restrictions imposed by the government like permits, quantitative restrictions,
quotas, licenses etc. It involves reduction in government regulation of and state intervention
and increase in the role of market forces. In a liberalised economy, all the major decisions are
taken on the basis of market forces of demand and supply.

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Liberalisation may take in any or all of the following forms:

 Abolition of restrictions on the movement of goods and services.

 Ensuring producers to fix prices of their goods and services.

 Allowing greater opportunities to private sector.

 Allowing freedom to producers on distribution of goods.

 Minimization in tax rates and controls over economy.

Before 1991, various types of controls had imposed by the government on Indian economy e.g.
system of industrial licensing, price control on goods, control on foreign exchange, import
license, control on investment by big business houses etc. These controls had dampened the
willingness of the entrepreneurs to set up new industries. These restrictions had given rise to
several shortcomings such as corruption, inefficiency and undue delays. Therefore, economic
reforms are necessary to reduce restrictions or controls imposed on the economy.

Impact of Liberalisation
Positive Impact
1. Promotes Efficiency
Liberalisation helps in promoting the levels of industrial efficiency by removing unnecessary
restrictions such as licensing, controls and regulation. Also, the economic agents have the
freedom to take their own decisions on market forces of demand and supply.
2. Increases Industrial Activity
Liberalisation encourages existing economic entities to enlarge their scale of operations and
amount of investment by removing government controls on business activities. It also boost
new entrepreneurial skills to enter the economic field.

3. Competition
The policy of liberalisation helps in increasing the number of entrepreneurs and business
entities operating in the market. Due to completion, the productivity of the economy get
increases.
4. Benefits to Consumer
The consumers are also benefitted as they get cheaper and more variety of goods and services.
5. Increased Foreign Investment
The policy of liberalisation permits a greater involvement of foreign investment. This, in turn
encourages the flow of foreign investment and thus industrial growth of the economy.

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Negative Impact
1. Regional Imbalances
In the absence of restrictions, private enterprises would be set up in the developed regions. This
might lead to unbalanced regional development in the economy.
2. Ignores Social Welfare
The extent of market orientation increases due to liberalisation. As a result, all decisions taken
by the industries shall be based largely on profit thereby neglects social welfare.
3. Concentration of Economic Power
Due to liberalisation, all the limits on expansion of business come to an end. Thus, there is a
possibility of concentration of economic power and wealth. Small producers can suffer due to
endless growth of large-scale business firms.

Privatization
Today the pace of economic change is far rapid than at any point in the history of the world.
With the passage of the time the economies of the world are getting further integrated and
interlinked. Lesser government involvement is desired in the business of the world. Since the
privatization wave across the world the famous quote “the business of government is not to be
in business” by John Moore seems to hold more relevance these days. In order to diversify the
economy, the government of India has been working towards the privatization.
The transfer of ownership, management and control of an enterprise from the public sector to
the private sector is called privatization. The main aim of these private sector enterprises is to
earn profit. There are different names of privatization in different countries of the world like in
England it is known as de-nationalisation, in Australia as Prioritization, in New Zealand as
Asetsales Programme, in Mexico as Disincorporation and in Sri Lanka as Peoplelisation.
Since 1991, there had been a marked change in the perception towards the role of public sector
in the Indian economy. Some economists argued that the financial crisis of 1991 was the result
of inefficiency and ineffectiveness of Public sector enterprise. Insufficient growth in
productivity, poor project performance, lack of continuous technological up gradation,
inadequate attention towards research& development and the low rate of return on capital
investment, was the serious problems attached to public sector enterprises. As a result, rather
than being an asset to the government, public sector enterprises have become a burden.
Consequently, the new industrial policy 1991, advocated privatization of the public sector
enterprises. In order to achieve privatization, the government adopted the route of
disinvestment i.e. the sale of public sector equity to private sector and to public at large.
The Impact of Privatization on Economic Environment
There was a great deal of controversy among economists, political thinkers and policy makers
on the issue of Privatization. Privatization has both supporters as well as opponents. Some are
of the opinion that privatization is the only way to get rid of the inefficiency, incompetency
and losses of the public enterprises. On the other hand, some are of the opinion that
privatization is antilabor and anti-welfare that will cause sufferings of the people.

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The impact of the privatization is both positive and negative.

 More Efficiency
Private enterprises are faced with severe competition in the market; therefore, in order to
survive or grow they are compelled to make all kinds of improvements in their organization
and management. This in turn leads to increase in efficiency and performance of private sector
enterprises.

 Less wastages and reduced costs

The private enterprises are based on the basic principal of profit maximization. Therefore, in
order to make profit, the private sector will make all efforts to reduce costs. The costs can be
reduced by minimizing wastages and adopting the cost saving techniques.

 No Political Interference
In private sector enterprises there is no political interference as compare to the public
enterprises in which political interference is very common. This political interference was the
major cause for the poor performance of the public sector enterprise. And since there is no
political interference for private sector unit they can work freely and can take their decisions
on time

 Flexibility in Decision Making

Timely and quick decisions are very important for a successful business. In case of public
sector enterprise decision making was very time consuming and lengthy, as government and
various other agencies were involved. But in case of private sector enterprise decisions are
taken quickly and in the shortest possible time as they have proper delegated authority and
command structure. Thus, private sector units can respond to the changing business
environment almost immediately.

 Beneficial to customers
The main objective of private sector is to maximize profits and this sector cannot succeed
unless they are able to improve customer satisfaction. Therefore, with a view to increase their
sales and performance the management of private sector units would have to ensure customer
satisfaction.

 Responsibility and Accountability

In private sector enterprise the delegation of responsibility and accountability is properly
defined. So, in this type of organization it is very easy to hold people accountable for their
decisions and actions.

 Capacity to raise funds

The performance of the private sector enterprise decides their capacity to raise funds from the
capital market. And also, there is a system of incentives in the working of these enterprises,
therefore they are forced to perform well.

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 No mismatch between production and demand

A private sector unit produces and sells only those goods that ensure maximum returns.
Therefore, these units try that there is no mismatch between what people demand and what
industry produces. This in turn assures that there is no wastages or shortages.

 Ignore Social Welfare

The main motive of private sector is to earn profit .so it is quite possible that the motive of
profit may sometimes go against the motive if social welfare. For example, the production and
price of some goods were regulated by government; so as to be within the reach of common
people had now become unaffordable to the poor after the process of privatization.

 Unemployment and poverty

Private entrepreneurs use capital intensive techniques in the pursuit of cost reduction and higher
profitability. In these capitals’ intensive techniques, the number of workers employed is smaller
as compare to some other labour-intensive techniques used. And also, the private sector cannot
compromise on efficiency for the sake of generating employment. So, the reduction in
employment causes loss of means of living for workers as well as their family members. This
would result in spread of poverty.

Different forms or methods of Privatization adopted in India

 Initial Public Offering (IPO)
This is the most important method used for privatization. Under this method the shares of
public sector undertakings are sold to the retail investors and institutions. The government may
in some cases sells shares of a public sector unit in international market also. The IPO method
is the best method in the case of those countries which have a strong capital market.

 Strategic sales
In this method, the government sells its shares in the PSU to a strategic partner. As a result, the
management passes over to the buyer.

 Sale to foreigners
This is a variant of the strategic sales method where the buyer is not a domestic company but
a foreigner company. In small countries, the amount of domestic private capital is often limited.
Therefore, the government sells its stakes to a foreign company. Sales to foreign company is
preferred as the expectation is that the foreign company will bring with-it world-class
technology and expertise to run the PSU. Government of India has done this in the case of
Maruti Udyog where it has sold its stake to the foreign collaborator Suzuki company of Japan.

 Management- employee’s buyouts

In this method of privatization management and employees themselves buy major stakes in the
public sector undertaking.

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 Auction
Auction is one of the methods for divesting shares under market sale where the sale proceeds
are maximized through bidding. It is less time consuming and involves low transaction cost. It
is targeted at the institutional investors. In the initial round of disinvestment, government
divested its stake in PSU’s through this method. When in the year 1993, the government
appointed a committee on disinvestment in the public sector enterprise-the committee
suggested that the best method for disinvestment is by offering the shares to the general public
at affixed price through a general prospectus. Since these shares were not traded on the stock
market it would be difficult to decide the fixed price. Till a normal trading atmosphere is
created, the auction method with wide participation may be adopted.

GLOBALIZATION
The world is getting more and more interconnected. In today’s world, because of this
interdependence, economic, environmental, social and political issues are no longer limited to
the national level. Sometimes it is an opportunity while sometimes it is a new challenge. The
introductions of information technology and communication techniques along with
liberalization of trade and investment in most countries have accelerated globalization process.
For instance- a product A is being manufactured in a country X with parts imported from many
other countries and the product is sold and used across the world. Globalization is a complex
term as used in international business, and has wider meaning.
Concept of Globalization
‘ Globalization’ means ‘the reduction of the difference between one economy and another’ so
that trade within and between different countries becomes increasingly similar all over the
world. Therefore, Globalization is a process of going to a more interconnected world.
Globalization is bringing the countries and the people of the world together. With the
emergence of internet facility, the transaction costs of transferring ideas and information have
fallen tremendously and have made globalization much more feasible and desirable.
Globalization can be defined as the process of convergence and amalgamation of political,
cultural, financial and economic system across the world. Globalization thus could be:
1. Economic Globalization:

It means increasing interdependence amongst national, regional and local economies and
economic integration among the world through cross border flow of goods, services, capital
and technologies. In the globalized economy, national boundaries and distances have
substantially diminished with the removal of market access obstacles. Let us have a look at the
definition of economic Globalization: Dictionary of Trade Policy Terms, WTO- The increasing
integration of national economic systems through growth in international trade, investment and
capital.

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2. Financial Globalization:

Liberalization has resulted in financial globalization which can also be defined as free
movement of finance across national boundaries without facing any restrictions. Due to
liberalization, there has been a spurt in cross-border capital flows.
3. Cultural Globalization:

In simple words, cultural Globalization refers to the transmission of ideas, meanings and values
across world space. Globalization has accelerated the development of global pop culture.
4. Political Globalization:

Political globalization refers to the convergence of political activities around the world .

Globalization of Business
Globalization may affect businesses throughout the world. Though, its effect can be different,
it may be stronger on some businesses, especially large businesses, but weaker on others. In
the initial years of human history, people remained confined to their communities, villages or
local regions. There were hardly any formal barriers, such as tariffs or non- tariffs restrictions,
for the movement of goods. The effect of this bundle of interconnected chains i.e. globalizat ion
on business can be expressed in a following manner:
1. Level of competition: Deregulations has allowed flowing of foreign investment in the
country resulting in more and more foreign businesses entering in local markets, so the
competition level has increased.
2. Awarene ss among consumers: Due to varieties of available products, consumers have
become very much selective on such essentials as quality, service and price. They can buy the
best product at best price.
3. Benefits of economies of scale: By selling across many continents business can acquire
economies of large scale of production, which in turn reduces cost of production.
4. Flexibility in location decision: The most favorable location of business operation or
production can be decided independently. This allows them to reap the benefits of low-cost
labour and other resource charges.
5. Increasing joint ventures and mergers: Different business can be joined together to
produce goods and services so that they can have access to bigger markets and associated cost
advantages.

Factors influencing Globalization

There exist numerous factors that affect the spread of Globalization; few of these are as follows:
1. Technological enhancement: Globalization has resulted in advancement of technology.
Today’s modern communication technology and mass media like radio, T.V, phones or internet
are global standards. With this positive change in technology, the data can be transferred easily
from one place to another.

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2. Cheaper and faster transportations: Due to continuous improvement in transportation,

goods can be transferred from one place to other in minimum period of time which has
improved the developing environment of globalization.
3. Control on capital exchange: The movement of capital from one country to another was
also controlled, and these controls were abolished over the same period. This allowed
businesses to move money from one country to another in search for better business return.
4. Expansion of trade: Due to abolition of barriers to trade, trade became cheaper and
therefore more appealing to business. The international institutions like World Bank and
International Monetary Fund have also contributed in the expansion of trade, which is a major
factor in the promotion of Globalization.
5. Expansion of competition &markets: Competition plays an important role in an economy.
Due to favorable business atmosphere, new markets have opened up in various countries,
giving more and bigger markets to the companies. They have also gained due to higher growth
rates and the emergence of a large number of middle-class populations who has money to spend
in the market in many developing countries like India.
Definitions of Globalization
There are several ways to define globalization. Some of the definitions can be stated as under:
(1) In the words of Rubens Ricupero, Secretary-General of UNCTAD. "Globalisation is the
integration of the world economy as a result of three main forces: (i) increase in trade in goods
and services (ii) increase in the investment of transnational companies and the consequent
change in the nature of production. Production is becoming no longer national but as a process
that takes place in different countries, and (iii) international monetary transactions".
(2) According to eminent economist Deepak Nayyar, "Globalisation may be defined as a
process associated with increasing openness, growing economic interdependence and
deepening economic integration in the world economy. "
(3) According to International Monetary Fund, "Globalisation means growing economic
interdependence of different countries through increasing cross-border transactions in goods
and services and of international capital flows, and also through widespread diffusion of
technology. "
In short, above definitions highlight the following features of globalisation:
(i) Integration of domestic economy with global economy.
(ii) Opening up of the economy to foreign capital, foreign technology and foreign
competition.
(iii) Free world trade with Liberalised approach towards exports and imports.
Elimination of tariffs and quotas.
(iv) Expansion of multinational corporations.
(v) Free flow of international capital.

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The Effects of Globalisation on Business

The effects vary from one part of the world to another and from one area of business to another.
Communications infrastructure is most important in digital world and so its businesses, but not
all countries have got one. There is also the ‘non-traded’ sector i.e goods and services which
are not traded internationally. Following factors can be assessed as key factors affected by
globalization:

 Competition
Globalization leads to increased competition. This competition can be related to product and
service cost and price, target market, technological adaptation, quick response, quick
production by companies etc. When a company produces with less cost and sells cheaper, it is
able to increase its market share. Customers have a large multitude of choices in the market
and this affects their behaviours: they want to acquire goods and services quickly and in a more
efficient way than before. They also expect high quality and low prices. All these expectations
need a response from the company, otherwise sales of company will decrease and they will
lose profit and market share. A company must always be ready for price, product and service
and customer preferences because all of these are global market requirements.

 Meeting consumer expectations and tastes

Consumers all over the world are better informed, have higher incomes and therefore higher
and more challenging expectations. These force marketers to meet higher standards. Marketers
have to research more extensively to understand changing consumer behaviour.

 Economies of scale
Selling into a global market allows for enormous economies of scale, although not all industries
benefit from these.

 Choice of location
Businesses are now much freer to choose where they operate from, and can move to a cheaper
and more efficient location. This increased movement of businesses and jobs has, to some
extent, forced governments to compete with each other in providing an attractive and low-cost
location. Inputs vary in price across the world, and businesses now have more freedom of
movement in moving to get hold of those cheaper. One limitation on this is that managers won’t
always move to some countries if living conditions are unpleasant or even dangerous.
 Multi-national and multi-cultural management
This is a major challenge to businesses and their managers. A multi-national business
environment is more complex with more variables, and so is more difficult to manage. A multi-
cultural employment policy leads to employees of many different nationalities, languages,
religions and cultures in different offices across the globe. These employees react in quite
different ways to incentives, to motivation and it is very difficult to find managers who are
sensitive to all these different factors. It is very easy to inadvertently give offence and
demotivate the workers.

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 Globalisation of markets
National borders are becoming less and less important. Markets stretch across borders and
MNCs have taken advantage of this. There are issues of languages, culture still, Consumers are
more alike, but by no means are the same. Many businesses have made expensive mistakes by
not taking local variation sufficiently into account. Marketing, in particular, is a minefield
because of its dependence on language. The marketing books are full of stories, often very
amusing, of how businesses got, wrong.

 Knowledge/Information transfer
Information is a most expensive and valuable production factor in the current environment.
Information can be easily transferred and exchanged from one country to another. If a company
have a chance to use knowledge and information then it means that it can adapt to this global
changing. This issue is similar with the technology transfer issue in global markets. The rapid
changing of the market requires also quick transfer of knowledge and efficient using of that
knowledge and information.

Support & Criticism of globalization

People have varieties of opinions about the process of Globalization. Some find it beneficial
for the development of a particular country whereas, there also exists many people who
completely oppose it.
Arguments in Support of Globalization: -
In general, Globalization is considered as a positive force especially in the field of corporate
businesses, particularly in the area of finance. For example- per capita GDP growth showed an
upward trend from 1.4 % a year in 1960 and 2.9 % a year in the 1970s to 3.5 % in the 1980s
and 5.0 % in 1990s.
1. Import- export – After liberalization, import- export becomes more convenient and hence
it affects the Indian economy favorable.
2. Industrialization: - The number of industries has increased after the liberalization. The
impact of increasing industries can be observed in rapidly increasing growth rate since 1991.
3. Increase in foreign investment: - After liberalization the multinational companies have
expanded their investment in India. These companies have shown their interest in different
sectors of the economy. Likewise, many Indian companies have become multinationa l
companies.
4. Expansion of service sector: - The most important effect of globalization in India is the
expansion of service sector. Globalization has increased the share of service sector in GDP.
5. Multinational Companies: - Multinational companies play a vital role to bring different
countries closer. Factories for production in different countries are set up by these companies.
Goods of international level are produced by these countries.
6. Economic liberalism and free trade: -. Globalization is viewed as the beneficial spread of
capitalism and liberty. Higher degree of political and economic freedom in the form of free
trade in the developed world is an end in itself which has produced higher levels of overall

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material wealth. Demographic changes in the developing world after international integration
and active economic liberalization resulted in rising general welfare and also reduced the level
of inequality.

Proponents of Globalization:
 Economist Paul Krugman is a firm supporter of free trade and globalization who
disagrees with many opponents of globalization. He argues that many of them lack a
basic understanding of comparative advantage and its importance in today's world.

 British economic journalist Martin Wolf says that incomes of poor developing
countries, with more than half the world’s population, grew significantly faster than
those of the world’s richest countries that remained relatively stable in their growth,
leading to incidence of poverty and reduced international inequality.

Criticism of Globalization
This is not true that India has only benefited by globalization. The reality is that the
globalization has created several problems as well. The issues associated with globalization are
as follows:
1.Impact on small producer: -Globalization adversely affects the small-scale industries in
India. The small industries find it difficult to compete with the multinational companies. The
condition of these industries is very poor because of globalization. This is notable that after
agriculture most of the people are engaged in small scale industries in India.
2. Effect on employment level: - The jobs of labour are not secure due to globalization. The
factory owners provide temporary employment in order to minimize costs. The labour has to
work for long hours in the factories. Globalization also permitted corporations to shift
manufacturing and service jobs from high cost locations, thereby creating economic
opportunities with the most competitive wages and worker benefits (a shift to outsourcing).
3. Uneven distribution of benefits: - The globalization has not been beneficial to all. The poor
and weaker sections of the society are far away from the benefits of globalization. While it is
universally accepted that free trade encourages globalization among countries, some countries
tend to protect their domestic producers. The primary exports of poor countries are usually
agricultural productions. Large countries subsidize their farmers (e.g., the EU’s Common
Agricultural Policy) for foreign crops.
4. Influence of developed countries: - The globalization is implemented by the directives of
World Trade Organization. The developed countries affect such types of organization more
than developing countries and got benefitted more than developing countries.
5. Regional disparities: Globalization causes increase in regional disparities. Developing
countries have not received benefits as much as Developed countries have. Similarly, within
the country the developed regions are benefited more than backward region.

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6. Impact on diversity of culture: - Few critics of globalization argue that it affects the cultural
diversity adversely. Introduction of a culture by a dominating country through globalizat ion
can become a threat to the local culture diversity. Some claim that globalization might actually
lead to Americanization or Westernization of culture, wherein the overpowering cultural
concept of politically and economically powerful Western countries spread and cause harm to
local cultures.
7. Gender inequality in labour force: -Though Globalization has increased women’s reach
to employment but the goal of lowering gender inequalities remains distant and hard to attain
without capital regulation and a re-orientation and expansion of the state’s role to fund public
goods and to provide a social safety net.

Opponents of Globalization
Joseph Stiglitz says that countries that have pioneered globalization with their own efforts
have succeeded in benefitting from globalization, while countries which were economically
backed by international institutions like IMF have gained very little from globalization.

Globalisation of Indian business

Globalization, liberalization and privatization were the three cornerstones of India’s New
Economic Policy defined in 1991. The year 1991 marks the beginning of a new era in the Indian
economy. The new objective to be pursued by the policy makers, strategists and executives
was to make India the largest free market economy of the 21st century. In pursuit of this
objective, the Indian economy was to be integrated with the world economy through a
programme of structural adjustment and stabilization. While the stabilization programme
included inflation control, fiscal adjustment and BOP adjustment, the structural reforms
included trade and capital flows reforms, industrial deregulation, disinvestment and public
enterprise reforms and financial sector reforms. The programme of economic reforms has not
been entirely successful and as a result, the globalization process of the Indian economy has
not gathered momentum. Indian business continues to face a number of difficulties and
obstacles in their effort to globalize their business. These obstacles are as follows:

 Government Policy and Procedures:

Government policy and procedures in India are extremely complex and confusing. Swift and
efficient action is a prerequisite for globalization- which sadly missing. The procedures and
practice continue to be bureaucratic and hence a speed breaker in the globalization effort.
 High Cost of Inputs and Infrastructural Facilities:
The cost of raw materials, intermediate goods, power, finance, infrastructural facilities etc. in
India is high which reduces the global competitiveness of Indian business. The quality and
adequacy of infrastructural facilities in India is far from satisfactory. Further the technology
employed by Indian industries and the style of operation is generally out dated.

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 Resistance to Change:
The pre-reform era (1951- 1991) breaded lethargy, created rigid structures, systems, practices
and procedures and generally instilled a laid back attitude. These factors are a hindrance to the
processes of modernization, rationalization and efficiency improvement. Technological change
is generally perceived to be employment reducing and hence resisted to the extent possible.
For instance, information technology was introduced in India in the early eighties. However,
computerization process of nationalized banks began only in the mid-nineties. Excess labour
is particularly employed in the public sectors in areas such as banking, insurance, and the
railways and Indian industry in general. As a result, labour productivity is low and cheap labour
in many a case turns out to be dear.
 Small Size and Poor Image:
Grand Indian firms are known to be global pygmies. A look at the fortune 500 list would reveal
all to you. On a global scale, Indian firms are found to be small in size with low availability of
resources. Indian firms there for cannot compete successfully in the international market.
Indian products suffer from a poor image in the international market for both reasons valid and
otherwise. Indian firms continue to miss consumer focus both domestically and internationally.
The value-money equilibrium is missing in Indian products. Further, Indian firms are do not
have the where- withal to keep up to the delivery schedule, accepts large orders and match up
to international specifications.

 Growing Competition and Poor Spend:

Indian firms are not only up and against competition from developed countries but also
emerging Asian powerhouses such as South Korea and China. Continuous improvement in
quality and usefulness and competitive costs with competitive pricing can only keep you afloat
and in order to remain afloat, one has to spend quite a lot on R & D. both public and private
sector outlays on research in India is deliberately low when compared to the developed
countries.

 Non – Tariff Barriers:

Member nations of the World Trade Organizations are bound to progressively reduce tariff
rates across the board over a definite period of time so that level playing field is created in
global trade. Tariff barriers are therefore not of much concern. What concerns developing
nations in particular, are non- tariff barriers imposed by the developed countries. Issues such
as child labour content in some of the products exported by India to the developed nations had
cropped up and remain unresolved.
Advantages of Globalisation:
For successful globalization, countries need to chalk out strategies and policies to open up the
doors for the inflows of foreign direct investment (FDI). The FDI by the MNCs brings with it
flow of foreign exchange/ foreign capital, inflow of technology, real capital goods, managerial
and technical skills and know- how. Globalization can easily promote exports of the country
by exploiting its export potentials in a right way. Globalization can be the engine of growth by
facilitating export- led growth strategy of developing country. Globalization can provide
sophisticated job opportunities to the qualified people and check ‘brain drain’ in a country.

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Globalization would provide varieties of products to consumers at a cheaper rate when they are
domestically produced rather than imported. This would help in improving the economic
welfare of the consumer class. Under globalization, the rising inflow of capital would bring
foreign exchange into the country. Consequently, the exchange reserve and balance of
payments position of the country can improve. This also helps in stabilizing the external value
of the country’s currency. Under global finance, companies can meet their financial
requirements easily. Global banking sector would facilitate e banking and e-business. This
would integrate countries economy globally and its prosperity would be enhanced.

Disadvantages of Globalization
Globalization is never accepted as unmixed blending. Critics have pessimistic views about its
ill- consequences. When a country is opened up and its market economy and financial sectors
are well liberalized, its domestic economy may suffer owing to foreign economic invasion. A
developing economy hence lacks sufficient maturity; globalization may have adverse effect on
its growth. Globalization may kill domestic industries when they fail to improve and compete
with foreign well-managed, well-established firms. Globalization may result into economic
imperialism. Unguarded openness may become a playground for speculators. It may lead to
unemployment, poverty and growing economic inequalities.
Effects of Globalisation on Indian Economy
Positive Effects of Globalisation
(1) Increase in Foreign Trade:
As a result of foreign trade policies adopted in the wake of globalisation, India's share in the
world trade has gone up. In 1990-91, India's share in world trade was 0.53 per cent. In 1995-
96, it rose to 0.60 per cent. In 2009-10 it further increased to 1.78 per cent. It shows that as a
result of globalisation of India's foreign trade, there has been some increase in India's share in
world trade. Share of India's exports in India's GDP has also been constantly rising. In 1990 -
91, it was 6 per cent of GDP that rose to 15.54 per cent in 2009-10. It also shows that as a
result of globalisation of India's foreign trade, there has been some increase in India's share in
world trade. India’s share in global merchandise trade stood at 2.0% in 2015*. Share of India's
exports in India's GDP has also been constantly rising. In 1990-91, it was 6 per cent of GDP
that rose to 15.54 per cent in 2009-10. GDP rose to an average of 6.9 in 2013-14 and to 7.5 in
2015**.
*Source: World Trade Organization. ** Source: tradingeconomies.com

2) Increase in Foreign Investment:

As a consequence of globalisation, there has been a considerable increase in foreign direct
investment as well as foreign portfolio investment.
(a) Foreign Direct Investment (FDI): Foreign direct investment is made by foreign
companies in order to establish wholly owned companies in another country and to manage
them or to purchase shares of companies in another country for the purpose of managing such
companies. The main characteristic of foreign direct investment is that native companies are
managed by the foreign companies or new companies are set up in India by foreign companies.

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In this type of investment, it is the foreign investor who takes risk and is solely responsible for
profit/loss of such company.
(b) Portfolio Investment: Under this type of investment, foreign companies/foreign
institutional investors (FIls) buy shares/debentures of native companies, however management
and control remain vested with the native/domestic companies themselves. There is significant
increase in foreign investment in India. In the year 1990-91, total foreign investment (FDI and
Portfolio investment) was US$ 103 million. In the year 2007-08, amount of foreign investment
increased to US $ 62,106 million. Due to global slowdown, inflow of foreign investment in
2008-09 has reduced to US $ 23,983 million. In 2009-10 again inflow of foreign investment
has increased to US $ 70,139 million. FDI inflow into India increased to US$ 55 bn in 2015 -
16, as compared to US$ 45 bn in 2014-15. Because of significant increase in foreign
investment, India began to experience a surplus balance of payments and a very remarkable
improvement in foreign exchange reserves.
(3) Increase in Foreign Collaborations:
Globalisation has promoted collaboration of foreign companies with many Indian companies.
These collaboration agreements can be technical collaboration, financial collaboration or both.
In financial collaboration, foreign companies provide financial resources, while in technical
collaboration modern foreign technology is provided by foreign companies. Foreign companies
are setting up many enterprises in India in collaboration with Indian companies.
(4) Increase in Foreign Exchange Reserves:
As a result of globalisation of Indian economy, foreign exchange reserves have also increased
substantially. In 1991, foreign exchange reserves of India amounted to Rs. 4,388, crore which
in March, 2011 increased to Rs. 13,43,188 crore (US $ 301.84 billion). Thus, there has been an
increase of 306 times in foreign exchange reserves of India.

(5) Expansion of Market:

Globalisation has expanded the size of market. It has permitted Indian business units to expand
their business in the whole world. Now multinational corporations have no national boundaries.
Indian companies like Infosys, Tata Consultancy, Wipro, Tata Steel, Reliance, etc. are doing
their business in many countries.

(6) Technological Development:

Globalisation has enabled the inflow of foreign technology, which is very superior and
advanced. Now Indian business units use this modern technology.

(7) Brand Development:

Globalisation has promoted the use of branded goods. Now not only durable goods are branded
but products like garments, juices, snacks, food grains, etc., are also branded. Foreign brands
are very popular among Indian consumers. Brand development has led to quality improvement.

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(8) Development of Capital Market:

Globalisation has helped in development of Indian capital market. Now many foreign investors
invest in Indian Capital market. Recently, there has been substantial increase in inflow of
foreign direct investment and portfolio investment.
(9) Development of Service Sector:
Globalisation has helped in growth of service sector. With the entry of foreign companies,
tremendous improvement has been witnessed in various services like telecommunication,
insurance, banking, etc. Now mobile phones are very cheap and popular in India.

(10) Increase in Employment:

Globalisation has promoted employment opportunities. Foreign companies are establishing
their production and trading units in India. It has increased employment opportunities for
Indians, e.g. many Indians are presently employed in foreign insurance companies, mobile
companies, etc.

(11) Reduction in Brain Drain:

As a result of globalisation, many multinational corporations have set up their business units
in India. These MNCs provide attractive salary package and good working conditions to
efficient, skilled Indian engineers, managers, professionals, etc. Now Indians get good
employment opportunities in India. It has resulted in reduction in brain drain.
(12) Improvement in Standard of Living:
As a result of globalisation, the standard of living of Indian population has improved. Now
Indians get better quality goods at low prices. Globalisation has resulted in reduction of prices
of many products particularly electronic items like television, AC, mobile phones, refrigerator,
etc. Now middle-income group also uses these luxury products, which were earlier used by
rich class only.

Negative Effects of Globalisation

(1) Loss to Domestic Industries:
As a consequence of globalisation foreign competition has increased in India. Now Indian
industrial units have to compete with foreign industrial units. Because of better quality and low
cost of foreign goods, many Indian industrial units have failed to face competition and have
been closed. Small and cottage industries are worst hit by this increased competition.
(2) Unemployment:
Foreign companies operating in India use capital intensive technology. Even some Indian
companies use imported capital-intensive technology. With the increasing use of computers
and automatic machines, employment avenues are reduced.

(3) Exploitation of Labour:

Globalisation is exploiting unskilled workers by giving lower wages, less job security, long
working hours. Labourers have to work even in these conditions because bad job and less wages
are better than no jobs.

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(4) Demonstration Effect:

With the easy availability of foreign goods, demonstration effect has increased among Indians.
Now many consumers are using luxury products by imitating others. It has promoted tendency
of wasteful consumption in India. This increasing wasteful expenditure has in turn reduced
saving and capital formation.

(5) Increase in Inequalities:

Globalisation has increased inequalities in our economy. Globalisation has benefitted MNCs
and big industrial units but small and cottage industries are adversely hit by it. It has increased
income inequalities in India.

(6) Dominance of Foreign Institutions:

With globalisation dominance of foreign institutions has increased in India. Globalisation has
helped foreign companies in enlarging their market share. For example, in Indian cold drink
market, a large share is controlled by Pepsi and Coca-Cola, which are foreign companies.

Political Impact of Globalisation

Globalisation has multidimensional character covering economic, social, political and cultural
aspects. The main political impact of globalisation is as follows:
(1) Improvement in Cross -border Relationship: Globalisation has increased interaction
among different nations of the world. It has made the whole globe one market. It has improved
the relations among different nations.
(2) Changing Role of Bureaucracy: Globalisation and liberalisation have resulted in
procedural simplification. It has reduced government intervention in the economic activities.
Earlier, bureaucracy was a hurdle in the path of development, but now it is a booster,
accelerator and facilitator in the development process.
(3) Growth in Capitalism: Globalisation has promoted capitalism across the world. Even
countries like China and Russia who were great advocators of socialism have adopted
capitalism.
(4) Changing Role of Government: Prior to globalisation, government had to participate in
economic, political, social activities, but with globalisation, government has reduced its role in
the economic sector. Now private sector, MNCs play an important role in the economic sector.
Now government can concentrate on other sectors like health, education, safe drinking water,
environmental protection, infrastructure, defence, etc.
(5) Increase in Efficiency of Public Sector Units: With the globalisation, privatisation and
liberalisation, the efficiency of public sector units has increased. With increase in competition
and threat of privatisation, now public sector units are under pressure to cut down wasteful
expenses and increase productivity and efficiency

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Obstacles in the Path of Globalisation

(1) Bureaucratic Hurdles: Business units have to face many bureaucratic hurdles in the form
of much documentation, lengthy and cumbersome procedures, etc. Many foreign investors
hesitate to invest in Indian economy due to excessive administrative hindrances.
(2) Unstable Government Policy: In India, there are frequent changes in ruling party. As a
result, the economic policies of government are not stable. Frequently changing economic
policies discourage long-term investors to invest in Indian economy. Moreover, there is lack
of transparency in the working of government which also raises doubt in the minds of foreign
investors.
(3) Backward Technology: In Indian industries, level of technology is poor and low in
comparison to advanced nations. Research and development of technology is also very poor in
India. Due to backward technology, Indian products are of poor quality. Indian companies find
it very difficult to expand their business in foreign nations due to poor quality products.
(4) Poor Infrastructure : In India, infrastructural facilities are very poor in comparison to
developed nations. MNCs hesitate to invest in India due to poor infrastructure. Lack of strong
infrastructure also creates hindrance in expansion of Indian companies in other nations. Like
lack of sufficient port facilities is a great hindrance in export-import transactions.
(5) Small-sized Business Units : In India, most of the business units are family owned. Their
business activities are mainly confined to local or regional level. They cannot think of
expanding their business activities to other nations.
(6) Lack of Global Vision: In India, very few entrepreneurs have global vision. Most of the
entrepreneurs have narrow vision. They do not have global orientation. They avoid risk
involved in foreign business and remain confined to local or at the most national level.
(7) Increasing Global Competition: Indian goods have to face tough competition in the global
market from the products of other nations. Increasing global competition has made it very
difficult for Indian exporters to sell their products in global market.
(8) Tariff and Non-tariff Barriers Imposed by Developed Nations: Developed countries
have imposed various tariff and non-tariff barriers to the imports from developing countries
like custom duties, quantitative restrictions, packing regulations, safety norms, etc. This has
adversely affected exporters of developing nations to sell their products in developed countries.

New and ever improving communications technology has spread throughout the world,
allowing international marketing campaigns to be coordinated all from a domestic base. The
internet and mobile phones have opened up entirely new international industries with endless
potential. Globalisation has changed the way people shop. Consumers are better able to shop
around for good deals and are prepared to buy from overseas without necessarily viewing
products first hand. Globalisation has also increased market competition, in turn increasing the
importance of effective international marketing. Many organisations cannot rely on the fact
that they are the only player in a long held domestic market; there are new competitors from
overseas appearing all the time. Transport and distribution systems are more efficient than ever
before, making it easier, faster and cheaper for businesses to get their products to consumers.

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Electronic transfers have also made making and receiving international payments faster and
more secure. Finance is more readily available to both consumers and organisations, thanks to
the globalisation of many financial providers. Investors are interested in spreading their
investments over a wider range of markets to reduce their overall level of risk. An increased
availability of capital makes it easier for organisations to finance their international marketing
efforts.

Domestic versus International Business

Domestic Business includes all the business transactions conducted within a border of a
particular nation or a commercial entity. It has the advantage of dealing with its local factors
e.g. currency, customs, culture, regulations and tax system.
On the other hand, international business includes all the commercial activities conducted
beyond national boundaries i.e. all business activities occur between two or more regions,
countries or nations. Undertaking business activities globally is more complex than domestic
business activities.
There can be a number of aspects to differentiate international business from domestic business
like less mobility of factors of production, heterogeneous customers, variations in business and
political activities and so on. Following are the main factors that show why international
business activities are said to be more complex and difficult activity than domestic one.
Scope: The scope of international business is much wider than domestic one. It not only
includes export material but also trade in services, licensing and franchising as well as foreign
investments. On the other hand, domestic business is limited to a particular territory. Although
firms may have many small business units in different areas but all are trading inside a single
boundary.
Benefit to nations: International business helps nations to gain foreign currency, efficient use
of domestic resources and employment opportunities. In contrast, domestic business does not
need foreign currency. It also helps in creating employment opportunities. The main benefit of
doing business is perfection in utilization of resources and earning more benefits.
Benefit to firms: Through international business firms can earn higher profits, greater
utilization of production capacities, improved business vision etc. Profits by domestic business
activities are generally less than international business transactions.
Fluctuations in market: Firms can bear the market fluctuations if it is operating globally, and
can withstand with huge losses because of widespread business operations. Though losses in
one area can be stabilized by profits from other area. Whereas, firms doing business
domestically have to face this situation which results in low profits and in some cases losses
too.
Technological benefit: International business provides firms to share latest technology across
the globe which as a result, improve the mode and quality of production process.
Improvement in political relations: International business results in cross national
cooperation and agreements because of healthy political relations among nations.

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Here is tabular representation showing difference between both

Managing Business in the era of Globalization

Globalization has become the buzzword that has changed human lives around the world in a
number of ways. The growing integration of societies and national economies has been among
the most fervently discussed topics during recent years. Firms, in the era of globalizat ion,
determine its strategies and behaviour so that it can respond to environmental changes. The
high degree of economic integration also poses economic and financial constraints in the path
of business operations. Globalization offers challenges as well as opportunities for business
enterprises. Some of them are as follows:

 Introduction of foreign companies in domestic territory raises level of competition.

 Reduction in tariffs gives way to ease of market access which enables foreign markets
accessible as well as increases competition.
 Removal of trade barriers and liberal investment regime enables companies to invest
everywhere and expand their business activities outside the domestic area.
 It motivates integration of business operation globally.
 Development of capabilities across the world.
 Managing its business across highly divergent and fast-moving markets requires a laser
like focus on execution and operational work.
 Companies must develop highly flexible business models that enable them to face and
respond to new opportunities and threats.

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 They must make efforts to ensure a strong talent pipeline that will provide them with
the skills and capabilities to thrive in constantly changing conditions and to take steps
according to it.
Firms can expand their scale of production by being global. In other words, they can reap the
benefit of economies of scale by expanding its activities internationally. Global companies can
be differentiated by their strong global position in terms of global assets, capabilities, brands,
and their relative resilience to shocks and even to business cycle. The global strategies adopted
by business enterprises may include-

 Global conception of markets

 Multi-regional integration strategy

 Changes in external organization of multinational firms- worldwide network structure etc.

 Changes in internal organization- global outsourcing, greater transparency and corporate
governance regulations etc.

Importance of Globalization
1. World Class Services: A country can enjoy world class services through globalization. For
instance, in India, the Banking activities have undergone a major transition through the
introduction of world class technology. People can perform banking transaction at anytime and
anywhere.
2. Standard of Living: Living standard is a by-product of globalization. Owing to availability
of affordable goods and services, the standard of living of people increases.
3. Infrastructure Development: Globalization promotes development of infrastructure
thought the transfer of technology from one country to another.
4. Foreign Exchange Reserves: Through globalization countries can build foreign exchange
reserves owing to international financial flows.
5. Economic Growth: Globalization entails to optimum utilization of resources wherein deficit
resources are procured and surplus resources are exported to other countries. This ensures
overall economic growth of a country.
6. Contribution to World GDP growth rate: Globalization ensures contribution of every
country to world GDP growth rate.
7. Affordable Products: With the access to latest technology, the countries can provide
products to its countrymen at affordable prices. Globalization promotes competition in
domestic economies and in their endeavour to compete against competition, companies reduce
product prices or follow penetration pricing strategies.
8. Extension of Markets: Above all, globalization promotes extension of markets. It provides
an opportunity to the domestic companies in going global. For instance, domestically,
companies can witness a saturation in the demand for their products or services but through
globalization the domestic companies can sustain and satisfy the growing demands of foreign
customers.

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Impact of Globalization
We can analyse the impact of globalization from several aspects; impact on society, culture,
politics, economic reforms, etc. Globalization entails to a structural change of an economy
wherein countries not only undertake trade ventures but adopt several other norms as well.

A. Impact of Globalization on Agricultural Sector:

Agriculture sector is the backbone of Indian economy. The globalization has resulted in large
number of benefits for the agriculture sector.
1. Special assistance and loans from World bank as well as other international financial
institutions are provided to agriculture sector.
2. This has resulted in increase in standard of living of people.
3. World class seeds as well as technologies are available to the farmers at their door step.
4. Domestic subsidy programs are properly marginalized considering the requirements of
World Trade Organization.
5. Globalization has provided an international platform to the farmers so as to sell their produce
at competitive prices.
B. Impact of Globalization on Industrial Sector:
After agriculture sector, industrial sector also contributes to a larger extent in creation of
employment as well as GDP growth rate. In the year 1991, lot many sectors were opened up
for foreign investments such as steel, pharmaceutical, chemical, textile, etc. Through
globalization, most of the countries have reduced trade barriers and allowed free flow of goods
as well as services from one country to another. 1. Globalization has resulted in extension of
markets for the domestic companies.
2. Highly advanced technologies are available to the companies at much cheaper prices now a
day.
3. Foreign investments are allowed in indigenous companies in the form of Foreign Direct
Investment (FDI).
4. Globalization led to industrial revolution in 1990's thereby creating large number of
employment for the workers.
5. Incorporation of Transnational as well as Multinational corporations have increased over a
period of time.
6. The contribution of the export sector has increased in the overall GDP growth rate.
7. Globalization has provided a special platform to small and medium enterprises in the context
of international markets and technology transfers.
C. Impact on Financial Sector:
Now a days, there is free flow of financial capital (both portfolio as well as direct investment)
across the countries. This has further led to the development of the financial service industry.

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1. Globalization has made the banking sector more technologically as well as operationally
efficient.
2. Foreign investors can invest their money in domestic financial markets and further in its
various products like equity, debt, mutual funds, etc.
3. Foreign insurance companies undertake insurance ventures in the domestic economy through
joint ventures or partnerships.
4. Globalization has led to building up of huge foreign exchange reserves. 5. International
payments have become far more convenient and efficient.

D. Impact on Social and Cultural Sector

The globalization is having an impact not only on the economic aspects but on social and
cultural aspects too.
1. People's taste and preferences are changing at a rapid pace over a period of time.
2. Clothing patterns are also witnessing a drastic spillover of western styles.
3. Electronic gadgets are in huge demand not only in urban areas but in rural as well.
4. Above all, globalization is having an impact on society's value system as well.
5. Creation of a globalized civil society having common thoughts as well as appearances.
E. Impact on Export and Import
Seemingly, globalization is having an impact on import as well as export of a country as well.
Owing to extension of international markets, exports and imports have increased over a period
of time followed by a very high current account deficit.
Due to financial and trade related linkages among the countries, domestic economies have
become more prone to external shocks. These further have an impact on import and export of
a country, like in case of the Indian economy as depicted in graph.
F. Political Ideologies and Regulatory Framework
Now a days, politics is not confined within the domestic boundaries, whereas it has become a
subject matter of international players. The political ideologies are changing very fast
considering the foreign parties' interests. Globalization acts as a medium of trillions of dollars
entering into an economy for the purpose of investment and business. So, the political leaders
are expected and supposed to follow the international standards and norms. Sometimes,
specific policies are incorporated considering the interest of foreign companies. The above
mentioned are some of the areas on which globalization is having an impact. However,
practically the list is quite exhaustive. Apart from this, Globalization is also becoming a culprit
of importing western thoughts and lifestyles, which are having a detrimental impact on the
domestic economy.

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Factors affecting global business environment

1. Social factors: These factors include behaviour, tastes, socio-cultural and lifestyles patterns
of a population. Demographics play an important role in determining buying patterns of
population. Age, gender, profession, composition, etc., have an impact on overall buying
behaviour of population and understanding of such changes is critical for developing corporate
strategies. In a globalized environment, the social factors vary from one country to another. For
instance, global chain of Quick Service Restaurants (QSR) McDonalds introduce products
considering not only the taste and preferences of its domestic consumers, but religion
sentiments are also considered at the time of designing menu strategies.
2. Legal factors: These factors involve changes in government laws and regulations. An
understanding of these legal regulations is utmost essential owing to increasing trade as well
as financial linkages among the international economies. Laws and concerning rules and
regulations are changing over a period of time. To quote, laws relating to consumer health and
consumerism are particularly different across nations. So, for successful functioning of
business houses, international trade laws and regulations play a pivotal role.
3. Political factors: This refers to political ideologies comprising changes in government
policies. These factors have an impact on overall operations of the business. For example, rules
relating to foreign direct investments (FDI) and foreign financial flows are changing over the
years. These changing patterns are particularly relevant for the emerging markets, like India.
On a similar note, fiscal policy initiatives undertaken in the emerging economies are
particularly increasing competing elements among the said markets. The international business
houses are required to comprehend these political ideologies time and again.
4. Economic factors: These factors involve changes in overall economic structures.
Inflationary pressures are the core economic factors driving international business strategies.
Increasing living standards imply increasing inflationary pressures due to increase in demand
for products. Consequently, increase in demand for the products causes business houses to
witness profits. So, an understanding of overall economic conditions is essential for successful
operations of business. Other economic factors that affect business include changes in real
interest rate, wage rates, unemployment levels, consumer confidence levels, production levels,
etc. Increasing consumer confidence also channelize business strategies across the nations.
5. Technological factors: New innovations and inventions always have an impact on overall
business operations because the said factors reduce costs and develop new products. With the
advent of modern information and communication technologies, relevant information can be
transferred from one country to another in just few micro seconds. This further helps in gaining
competitive advantage. For instance, international brokerage houses are heavily reliant on
modern technologies, whereby buy and sell related strategies are provided with respect to
worldwide markets across different nations.

Forces behind Globalization

There are generally two types of factors that prompt a country to follow globalization path.
These factors are: pull and push factors. As the name suggest, pull factors reflect voluntary
movement toward new avenues or factors that motivate firms in one country to undertake
business ventures in another country owing to diverse opportunities available, whereas, on the
other hand, push factors reflect negative aspects that force business firms to leave their own
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countries and indulge in international trade ventures. The following is a list of some of the
important factors or forces that drive globalization.
A. Increase in demand
One of the major factor that has led to globalization is increase in demand for products. With
the increase in population, demand for products is increasing at a rapid pace. Consequently,
the countries are required to depend on each other in their attempt to satisfy the needs of their
natives. Furthermore, with the increase in demand for products, multinational companies are
easily finding a way to enter international borders.

B. Technology
Now a days, trade is not confined to domestic borders only, rather, with the advancement of
technology, international ventures are becoming an important part of a business portfolio. It is
quite easy to place orders online and keep tracking the same. A simple example that can be
quoted to comprehend the role of technology in promoting globalization is of Information
Technology sector in India. The IT industry is well known for its IT services worldwide. A big
share of industries in the US has outsourced their IT related activities to Indian IT companies,
namely, Infosys, Wipro, TCS, etc. The very act of outsourcing explains globalization act of
Indian IT companies.
C. Liberalization:
Over the years, the countries are following liberalize approaches in terms of international flow
of goods, services and finances. For instance, most of the emerging markets are slowly opening
up their gates for offshore funds, goods and services. All this prompt activity toward
globalization. With the opening up of Indian economy in the year 1991, large number of
worldwide companies are finding their home in Indian shores. Now a day, it is very easy to
start any new venture in any country. Due to relaxations in laws and regulations, business firms
can undertake business ventures in other countries subject to demand and preferences of the
foreign land.

D. Changing needs and preferences

As we know that with the change in needs and preferences, new products or services are floated
in the market. However, with the globalization of goods and services, people are having more
options with regard to different varieties of products and services in their home country. This
also promotes globalization at a larger scale. For instance, number of foreign branded stores
have increased over a period of time in our country owing to change in needs and preferences
of people.
E. Capital Flows:
Due to liberalize financial flows across the countries, globalization is at its zenith. Many joint
ventures are undertaken with foreign parties on the other hand. For example, Softbank of Japan
has invested huge amount of resources in India's Snapdeal e-commerce business. All this
further prompts to globalization. The increasing ties in terms of cross country financial
resources make business firms to experience worldwide trends.

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F. Factor Mobility:
The mobility of individuals, information, communication and knowledge (as major agents of
production and countries) has further smoothened the growth process of globalization. The
movement of all of these resources automatically prompts globalized environment. As we
know that land, labour, capital and entrepreneur acts as major factors of production, so, in the
event of mobility of the same, business firms can indulge in international ventures.

Recent trends
1. Global banking structure: Domestic banking institutions are slowly increasing their
exposure to international assets and liabilities. To quote, the US financial crisis had an impact
on other international economies due to exposure of the latter economies in structurally created
international mortgage assets. With the advent of modern technology, domestic banking
institutions are converting into global banking institutions. These increasing international
exposures are substantially driving global business strategies.
2. Sustainable and clean energy: Climate change agreements are talk of the town these days.
The emerged markets like, the US, UK, European Union (EU), Japan, etc, are entering into
agreements in taking emerging markets to the path of sustainability and usage of clean energy.
The countries are deriving ways in procuring clean energy from international shores.
Consequently, these agreements are seriously impacting the way businesses are conducted in
domestic a well as international markets.
3. Increasing economic power of emerging markets: The contribution of the emerging
markets in overall global factors is increasing over the years. The acronym 'BRICS' comprising
Brazil, Russia, India, China and South Africa is gaining importance since the last decade. The
said economies are expected to outperform other emerged markets in coming future owing to
the existence of diverse opportunities in the wake of middle class strata of society,
technological revolutions, infrastructure advancements, education levels, socio-cultural
factors, etc. So, due to these opportunistic factors, emerging markets are considered to be an
important import and export destinations for the international players thereby driving business
strategies.
4. Increasing Privatization: Slowly, the international economies are moving toward
privatizing corporate affairs. Public-private partnerships and divestment programs are core
parts of these strategies undertaken in worldwide markets. The role of government in
channelizing funds is slowly reducing, i.e. capitalism is state of the art philosophy which
international economies are following. Obviously, these changing patterns are having an
impact on international business environment.
5. Technological revolution: With the advent of information and communication technology,
new business opportunities are emerging. Cloud computing is a new way of handling business
operations worldwide. Mobile phones and broadband connections are changing the way of
doing businesses by promoting virtual teams. Moreover, the role of government in enhancing
the use of technology is quite commendable. For instance, the concept of 'smart city' under the
flagship of present National Democratic Alliance (NDA) government clearly reflects the
importance that is being placed on the technological revolutions that the government attempts
to introduce. For this, the government is also considering international financial flows.

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6. Changing Demographic features: Owing to globalization, consumers' tastes and

preferences are changing over the years. More and more women candidates are getting
employment in industrial and financial houses. Growing e-commerce platforms are helping
consumers and prospective customers in buying and even selling through international
platforms. The said platforms are creating new employment avenues for the people. For
instance, Japanese economy is witnessing aging population, however, it is finding respite in
selling its products to the worldwide consumers.
7. International arbitration: These days’ international arbitrators are playing an important
role in directing global business strategies. The disputes which are outside the purview of
domestic rules and regulations are referred to international arbitrators. The existence of these
agencies is not only resolving the said disputes but also promoting and enhancing confidence
among the business fraternities for entering into international trade relationships.
8. Competitive advantage: In today's scenario, most of the emerged markets are witnessing
slower growth rates, so, this situation is placing an important role that the emerging markets
can play in driving international growth rates. Increasing trade relations with the emerging
markets vividly highlight the growing importance and competitive advantage of the said
economies.
9. Regional and economic blocs: Lastly, these regional and economic blocs, like EU, ASEAN
nations, etc., are slowly increasing cooperation among the international economies. The said
economies are opening up their respective domestic economies for the international investors.
Consequently, these regional and economic blocs are having an impact on the global business
environment.

Protectionism Policy
Protectionism it is the policy of protecting domestic industries against foreign competition by
means of tariffs, subsidies, import quotas, or other restrictions or handicaps placed on the
imports of foreign competitors. Protectionist policies have been implemented by many
countries despite the fact that virtually all mainstream economists agree that the world economy
generally benefits from free trade.
Protectionism is the economic policy of restricting imports from other countries through
methods such as tariffs on imported goods, import quotas, and a variety of other government
regulations. Proponents argue that protectionist policies shield the producers, businesses, and
workers of the import-competing sector in the country from foreign competitors. However,
they also reduce trade and adversely affect consumers in general (by raising the cost of
imported goods), and harm the producers and workers in export sectors, both in the country
implementing protectionist policies and in the countries protected against.

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Government-levied tariffs are the chief protectionist measures. They raise the price of imported
articles, making them more expensive (and therefore less attractive) than domestic
products. Protective tariffs have historically been employed to stimulate industries in countries
beset by recession or depression. Protectionism may be helpful to emergent industries in
developing nations. It can also serve as a means of fostering self-sufficiency in defence
industries. Import quotas offer another means of protectionism. These quotas set an absolute
limit on the amount of certain goods that can be imported into a country and tend to be more
effective than protective tariffs, which do not always dissuade consumers who are willing to
pay a higher price for an imported good.
Throughout history, wars and economic depressions (or recessions) have led to increases in
protectionism, while peace and prosperity have tended to encourage free trade. The European
monarchies favoured protectionist policies in the 17th and 18th centuries in an attempt to
increase trade and build their domestic economies at the expense of other nations; these
policies, now discredited, became known as mercantilism. Great Britain began to abandon its
protective tariffs in the first half of the 19th century after it had achieved industrial pre-
eminence in Europe. Britain’s spurning of protectionism in favour of free trade was symbolized
by its repeal in 1846 of the Corn Laws and other duties on imported grain. Protectionist policies
in Europe were relatively mild in the second half of the 19th century, although
France, Germany, and several other countries were compelled at times to impose customs
duties as a means of sheltering their growing industrial sectors from British competition. By
1913, however, customs duties were low throughout the Western world, and import quotas
were hardly ever used. It was the damage and dislocation caused by World War I that inspired
a continual raising of customs barriers in Europe in the 1920s. During the Great Depression of
the 1930s, record levels of unemployment engendered an epidemic of protectionist measures.
World trade shrank drastically as a result.
The United States had a long history as a protectionist country, with its tariffs reaching their
high points in the 1820s and during the Great Depression. Under the Smoot-Hawley Tariff
Act (1930), the average tariff on imported goods was raised by roughly 20 percent. The
country’s protectionist policies changed toward the middle of the 20th century, and in 1947 the
United States was one of 23 nations to sign reciprocal trade agreements in the form of

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the General Agreement on Tariffs and Trade (GATT). That agreement, amended in 1994, was
replaced in 1995 by the World Trade Organization (WTO) in Geneva. Through WTO
negotiations, most of the world’s major trading nations have substantially reduced their
customs tariffs.
The reciprocal trade agreements typically limit protectionist measures instead of eliminating
them entirely, however, and calls for protectionism are still heard when industries in various
countries suffer economic hardship or job losses believed to be aggravated by foreign
competition.
There is a consensus among economists that protectionism has a negative effect on economic
growth and economic welfare, while free trade, deregulation, and the reduction of trade
barriers has a significantly positive effect on economic growth. Some scholars have implicated
protectionism as the cause of some economic crises, most notably the Great Depression.
However, although trade liberalization can sometimes result in large and unequally distributed
losses and gains, and can, in the short run, cause significant economic dislocation of workers
in import-competing sectors, free trade has advantages of lowering costs of goods and services
for both producers and consumers.

Protectionist Policy:
A variety of policies have been used to achieve protectionist goals. These include:
Tariffs and import quotas are the most common types of protectionist policies. A tariff is
an excise tax levied on imported goods. Originally imposed to raise government revenue,
modern tariffs are now more often designed to protect domestic producers that compete with
foreign importers. An import quota is a limit on the volume of a good that may be legally
imported, usually established through an import licensing regime.
Protection of technologies, patents, technical and scientific knowledge
Restrictions on foreign direct investment, such as restrictions on the acquisition of domestic
firms by foreign investors.

 Administrative barriers: Countries are sometimes accused of using their various

administrative rules (e.g. regarding food safety, environmental standards, electrical
safety, etc.) as a way to introduce barriers to imports.
 Anti-dumping legislation: "Dumping" is the practice of firms selling to export markets
at lower prices than are charged in domestic markets. Supporters of anti-dumping laws
argue that they prevent the import of cheaper foreign goods that would cause local firms
to close down. However, in practice, anti-dumping laws are usually used to impose
trade tariffs on foreign exporters.
 Direct subsidies: Government subsidies (in the form of lump-sum payments or cheap
loans) are sometimes given to local firms that cannot compete well against imports.
These subsidies are purported to "protect" local jobs and to help local firms adjust to
the world markets.
 Export subsidies: Export subsidies are often used by governments to increase exports.
Export subsidies have the opposite effect of export tariffs because exporters get
payment, which is a percentage or proportion of the value of exported. Export subsidies

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increase the amount of trade, and in a country with floating exchange rates, have effects
similar to import subsidies.
 Exchange rate control: A government may intervene in the foreign exchange
market to lower the value of its currency by selling its currency in the foreign exchange
market. Doing so will raise the cost of imports and lower the cost of exports, leading to
an improvement in its trade balance. However, such a policy is only effective in the
short run, as it will lead to higher inflation in the country in the long run, which will, in
turn, raise the real cost of exports, and reduce the relative price of imports.
 International patent systems: There is an argument for viewing national patent
systems as a cloak for protectionist trade policies at a national level. Two strands of this
argument exist: one when patents held by one country form part of a system of
exploitable relative advantage in trade negotiations against another, and a second where
adhering to a worldwide system of patents confers "good citizenship" status despite 'de
facto protectionism'. Peter Drahos explains that "States realized that patent systems
could be used to cloak protectionist strategies. There were also reputational advantages
for states to be seen to be sticking to intellectual property systems. One could attend the
various revisions of the Paris and Berne conventions, participate in the cosmopolitan
moral dialogue about the need to protect the fruits of authorial labour and inventive
genius...knowing all the while that one's domestic intellectual property system was a
handy protectionist weapon."
Political campaigns advocating domestic consumption (e.g. the "Buy American" campaign in
the United States, which could be seen as an extra-legal promotion of protectionism.)
Preferential governmental spending, such as the Buy American Act, federal legislation which
called upon the United States government to prefer US-made products in its purchases.
In the modern trade arena, many other initiatives besides tariffs have been called protectionist.
For example, some commentators, such as Jagdish Bhagwati, see developed countries' efforts
in imposing their own labour or environmental standards as protectionism. Also, the imposition
of restrictive certification procedures on imports is seen in this light.
Further, others point out that free trade agreements often have protectionist provisions such as
intellectual property, copyright, and patent restrictions that benefit large corporations. These
provisions restrict trade in music, movies, pharmaceuticals, software, and other manufactured
items to high-cost producers with quotas from low-cost producers set to zero.

Types of protection policy

1. Tariffs
The taxes or duties imposed on imports are known as tariffs. Tariffs increase the price of
imported goods in the domestic market, which, consequently, reduces the demand for them.
Consider the following example, which analyses the UK market for US-made shoes. Due to
the imposition of tariffs, the price for the product increases from GBP100 (P1) to GBP120 500
(P2). The demand for US-made shoes in the UK market decreases (from Q2 to Q4).

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Import tariffs are one of the top tools a government uses when seeking to enact protectionist
policies. There are three main import tariff concepts that can be theorized for protective
measures. In general, all forms of import tariffs are charged to the importing country and
documented at government customs. Import tariffs raise the price of imports for a country.
Scientific tariffs are import tariffs imposed on an item by item basis, raising the price of goods
for the importer and passing on higher prices to the end buyer. Peril point import tariffs are
focused on a specific industry. These tariffs involve the calculation of levels at which import
tariff decreases or increases would cause significant harm to an industry overall, potentially
leading to jeopardy of closure due to an inability to compete. Retaliatory tariffs are tariffs
enacted primarily as a response to excessive duties being charged by trading partners.

2. Quotas
Quotas are restrictions on the volume of imports for a particular good or service over a period
of time. Quotas are known as a “non-tariff trade barrier.” A constraint on the supply causes an
increase in the prices of imported goods, reducing the demand in the domestic market.
Import quotas are non-tariff barriers that are put in place to limit the number of products that
can be imported over a set period of time. The purpose of quotas is to limit the supply of
specified products provided by an exporter to an importer. This is typically a less drastic action
which has a marginal effect on prices and leads to higher demand for domestic businesses to
cover the shortfall. Quotas may also be put in place to prevent dumping, which occurs when
foreign producers export products at prices lower than production costs. An embargo, in which
the importation of designated products is completely prohibited, is the most severe type of
quota.

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3. Subsidies
Subsidies are negative taxes or tax credits that are given to domestic producers by the
government. They create a discrepancy between the price faced by consumers and the price
faced by producers.
Government subsidies can come in various forms. Generally, they may be direct or indirect.
Direct subsidies provide businesses with cash payments. Indirect subsidies come in the form
of special savings such as interest free loans and tax breaks. When exploring subsidies,
government officials may choose to provide direct or indirect subsidies in the areas of
production, employment, tax, property, and more.
When seeking to boost a country’s balance of trade, a country might also choose to offer
subsidies to businesses for exports. Export subsidies provide an incentive for domestic
businesses to expand globally by increasing their exports internationally.

4. Standardization
The government of a country may require all foreign products to adhere to certain guidelines.
For instance, the UK Government may demand that all imported shoes include a certain
proportion of leather. Standardization measures tend to reduce foreign products in the market.
Product safety and high volumes of low quality products or materials are typically top concerns
when enacting product standards. Product standard protectionism can be a barrier that limits
imports based on a country’s internal controls. Some countries may have lower regulatory
standards in the areas of food preparation, intellectual property enforcement, or materials
production. This can lead to a product standard requirement or a blockage of certain imports
due to regulatory enforcement. Overall, restricting imports through the implementation of
product standards can often lead to a higher volume of product production domestically.
For one example, consider French cheeses made with raw instead of pasteurized milk, which
must be aged at least 60 days prior to being imported to the U.S. Because the process for
producing many French cheeses often involves aging of 50 days or fewer, some of the most
popular French cheeses are banned from the U.S., providing an advantage for U.S. producers.

Reasons for Protectionism

An economy usually adopts protectionist policies to encourage domestic investment in a
specific industry. For instance, tariffs on the foreign import of shoes would encourage domestic
producers to invest more resources in shoe production.
In addition, nascent domestic shoe producers would not be at risk from established foreign shoe
producers. Although domestic producers are better off, domestic consumers are worse off as a
result of protectionist policies, as they may have to pay higher prices for somewhat inferior
goods or services. Protectionist policies, therefore, tend to be very popular with businesses and
very unpopular with consumers.

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Advantages of Protectionism
 More growth opportunities: Protectionism provides local industries with growth
opportunities until they can compete against more experienced firms in the international
market
 Lower imports: Protectionist policies help reduce import levels and allow the country
to increase its trade balance.
 More jobs: Higher employment rates result when domestic firms boost their workforce
 Higher GDP: Protectionist policies tend to boost the economy’s GDP due to a rise in
domestic production

Disadvantages of Protectionism
 Stagnation of technological advancements: As domestic producers don’t need to
worry about foreign competition, they have no incentive to innovate or spend resources
on research and development (R&D) of new products.
 Limited choices for consumers: Consumers have access to fewer goods in the market
as a result of limitations on foreign goods.
 Increase in prices (due to lack of competition): Consumers will need to pay more
without seeing any significant improvement in the product.
 Economic isolation: It often leads to political and cultural isolation, which, in turn,
leads to even more economic isolation.

Tariffs and Non – Tariff Barriers

Free Trade
Free trade is a situation where the government does not stop its citizens to buy goods and
services from abroad or sell goods and services in foreign countries. However, free trade is a
rare phenomenon. Governments actually try to control what their citizens can buy or sell abroad
through interventions in free trade with the instruments of trade policy. The instruments that
governments use to intervene in trade policy can broadly be classified under the following two
heads:

 Tariff barriers
 Non-tariff barriers
Put simply, a tariff is a specific tax levied on an imported good at the border. Tariffs have
historically been a tool for governments to collect revenues, but they are also a way to protect
domestic industry and production. The theory is that with an increase in the price of imports,
American consumers would choose to buy American goods instead. In today’s global
economy, many products we buy in the United States have parts from other countries, or were
assembled in other countries, or were manufactured entirely overseas.

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In today’s free market-leaning global economy, tariffs have something of a bad reputation. And
rightfully so: many economists, for instance, blame the Smoot-Hawley Tariff for worsening
the Great Depression in the 1930s. In an attempt to strengthen the U.S. economy during the
Great Depression, Congress passed the Smoot-Hawley Tariff Act which increased tariffs on
farm products and manufactured goods. In response, other nations, also suffering, raised tariffs
on American goods bringing global trade to a standstill. Since then, most policymakers, on
both sides of the aisle, have turned away from trade barriers like tariffs towards free-market
policies that allow nations to specialize in certain industries and incentivize optimal efficiency.
The U.S. had not imposed high tariffs on trading partners since the early 1930s. Because of the
tariffs during that era, economists have estimated that overall world trade declined about
66% between 1929 and 1934. In the post-World War II period, President Donald Trump was
one of a few presidential candidates to speak about trade inequities and tariffs when he vowed
to take a tough line against international trading partners, especially China, to help American
blue-collar workers displaced by what he described as unfair trade practices.

How a Tariff Works

Tariffs are used to restrict imports by increasing the price of goods and services purchased from
another country, making them less attractive to domestic consumers. There are two types of
tariffs: A specific tariff is levied as a fixed fee based on the type of item, such as a $1,000 tariff
on a car. An ad-valorem tariff is levied based on the item's value, such as 10% of the value of
the vehicle.
Governments may impose tariffs to raise revenue or to protect domestic industries—especially
nascent ones—from foreign competition. By making foreign-produced goods more expensive,
tariffs can make domestically produced alternatives seem more attractive. Governments that
use tariffs to benefit particular industries often do so to protect companies and jobs. Tariffs can
also be used as an extension of foreign policy: Imposing tariffs on a trading partner's main
exports is a way to exert economic leverage.
Tariffs can have unintended side effects, however. They can make domestic industries less
efficient and innovative by reducing competition. They can hurt domestic consumers, since a
lack of competition tends to push up prices. They can generate tensions by favoring certain
industries, or geographic regions, over others. For example, tariffs designed to help
manufacturers in cities may hurt consumers in rural areas who do not benefit from the policy
and are likely to pay more for manufactured goods. Finally, an attempt to pressure a rival
country by using tariffs can devolve into an unproductive cycle of retaliation, commonly
known as a trade war.

The Basics of Tariffs and Trade Barriers

International trade increases the number of goods that domestic consumers can choose from,
decreases the cost of those goods through increased competition, and allows domestic
industries to ship their products abroad. While all of these effects seem beneficial, free
trade isn't widely accepted as completely beneficial to all parties.

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Who Collects a Tariff?

In simplest terms, a tariff is a tax. It adds to the cost borne by consumers of imported goods
and is one of several trade policies that a country can enact. Tariffs are paid to the customs
authority of the country imposing the tariff.
It is important to recognize that the taxes owed on imports are paid by domestic consumers,
and not imposed directly on the foreign country's exports. The effect is nonetheless to make
foreign products relatively more expensive for consumers - but if manufacturers rely on
imported components or other inputs in their production process, they will also pass the
increased cost on to consumers. Often, goods from abroad are cheaper because they offer
cheaper capital or labour costs, if those goods become more expensive, then consumers will
choose the relatively costlier domestic product. Overall, consumers tend to lose out with tariffs,
where the taxes are collected domestically.
What Is a Trade War?
A trade war happens when one country retaliates against another by raising import tariffs or
placing other restrictions on the other country's imports.
Trade wars can commence if one country perceives that a competitor nation has unfair trading
practices. Domestic trade unions or industry lobbyists can place pressure on politicians to make
imported goods less attractive to consumers, pushing international policy toward a trade war.
Also, trade wars are often a result of a misunderstanding of the widespread benefits of free
trade.

Why Are Tariffs and Trade Barriers Used?

Tariffs are often created to protect infant industries and developing economies but are also used
by more advanced economies with developed industries.9 10 Here are five of the top reasons
tariffs are used:

1. Protecting Domestic Employment

The levying of tariffs is often highly politicized. The possibility of increased competition from
imported goods can threaten domestic industries. These domestic companies may fire workers
or shift production abroad to cut costs, which means higher unemployment and a less happy
electorate. The unemployment argument often shifts to domestic industries complaining about
cheap foreign labour, and how poor working conditions and lack of regulation allow foreign
companies to produce goods more cheaply. In economics, however, countries will continue to
produce goods until they no longer have a comparative advantage (not to be confused with
an absolute advantage).
2. Protecting Consumers
A government may levy a tariff on products that it feels could endanger its population. For
example, South Korea may place a tariff on imported beef from the United States if it thinks
that the goods could be tainted with a disease.

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3. Infant Industries
The use of tariffs to protect infant industries can be seen by the Import Substitution
Industrialization (ISI) strategy employed by many developing nations. The government of a
developing economy will levy tariffs on imported goods in industries in which it wants to foster
growth. This increases the prices of imported goods and creates a domestic market for
domestically produced goods while protecting those industries from being forced out by
more competitive pricing. It decreases unemployment and allows developing countries to shift
from agricultural products to finished goods.
Criticisms of this sort of protectionist strategy revolve around the cost of subsidizing the
development of infant industries. If an industry develops without competition, it could wind up
producing lower quality goods, and the subsidies required to keep the state-backed industry
afloat could sap economic growth.
4. National Security
Barriers are also employed by developed countries to protect certain industries that are deemed
strategically important, such as those supporting national security. Defense industries are often
viewed as vital to state interests, and often enjoy significant levels of protection. For example,
while both Western Europe and the United States are industrialized, both are very protective
of defence-oriented companies.

5. Retaliation
Countries may also set tariffs as a retaliation technique if they think that a trading partner has
not played by the rules. For example, if France believes that the United States has allowed its
wine producers to call its domestically produced sparkling wines "Champagne" (a name
specific to the Champagne region of France) for too long, it may levy a tariff on imported meat
from the United States. If the U.S. agrees to crack down on the improper labeling, France is
likely to stop its retaliation. Retaliation can also be employed if a trading partner goes against
the government's foreign policy objectives.

Tariff Barriers
Tariff barriers refer to the tax imposed by the government on goods that are imported into the
country. Tariffs collected by the exporting country are called export tariffs; if they are collected
by a country through which the goods have passed, they are transit tariffs; those collected by
importing countries are called import tariffs. Since import tariffs are common of all, we discuss
import tariffs in detail. Tariff barrier increases the price of imported goods in comparison to
domestic goods which makes the imported goods costlier giving the domestic goods a relative
advantage over foreign goods. Thus, they help the domestic government in reducing imports.
In case of India, the cheap imports of refined oil have hit the domestic vegetable oil producing
industry hard with capacity utilisation of this sector dropping to 30-40 per cent. To protect the
domestic producers, the Indian government levies an import duty of 10 per cent on refined
edible oil to protect the domestic processing industry and farmers.

Who Benefits from Tariffs?

The benefits of tariffs are uneven. Because a tariff is a tax, the government will see
increased revenue as imports enter the domestic market. Domestic industries also benefit from

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a reduction in competition, since import prices are artificially inflated. Unfortunately for
consumers - both individual consumers and businesses - higher import prices mean higher
prices for goods. If the price of steel is inflated due to tariffs, individual consumers pay more
for products using steel, and businesses pay more for steel that they use to make goods. In
short, tariffs and trade barriers tend to be pro-producer and anti-consumer.
The effect of tariffs and trade barriers on businesses, consumers and the government shifts over
time. In the short run, higher prices for goods can reduce consumption by individual consumers
and by businesses. During this period, some businesses will profit, and the government will see
an increase in revenue from duties. In the long term, these businesses may see a decline in
efficiency due to a lack of competition, and may also see a reduction in profits due to the
emergence of substitutes for their products. For the government, the long-term effect of
subsidies is an increase in the demand for public services, since increased prices, especially in
foodstuffs, leave less disposable income.
How Do Tariffs Affect Prices ?
Tariffs increase the prices of imported goods. Because of this, domestic producers are
not forced to reduce their prices from increased competition, and domestic consumers are left
paying higher prices as a result. Tariffs also reduce efficiencies by allowing companies that
would not exist in a more competitive market to remain open.
The figure below illustrates the effects of world trade without the presence of a tariff. In the
graph, DS means domestic supply and DD means domestic demand. The price of goods at
home is found at price P, while the world price is found at P*. At a lower price, domestic
consumers will consume Qw worth of goods, but because the home country can only produce
up to Qd, it must import Qw-Qd worth of goods.

When a tariff or other price-increasing policy is put in place, the effect is to increase prices and
limit the volume of imports. In the figure below, price increases from the non-tariff P* to P'.

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Because the price has increased, more domestic companies are willing to produce the good, so
Qd moves right. This also shifts Qw left. The overall effect is a reduction in imports, increased
domestic production, and higher consumer prices.

Tariffs and Modern Trade

The role tariffs play in international trade has declined in modern times. One of the primary
reasons for the decline is the introduction of international organizations designed to improve
free trade, such as the World Trade Organization (WTO).11 Such organizations make it more
difficult for a country to levy tariffs and taxes on imported goods, and can reduce the likelihood
of retaliatory taxes. Because of this, countries have shifted to non-tariff barriers, such as quotas
and export restraints. Organizations like the WTO attempt to reduce production and
consumption distortions created by tariffs. These distortions are the result of domestic
producers making goods due to inflated prices, and consumers purchasing fewer goods because
prices have increased.
Since the 1930s, many developed countries have reduced tariffs and trade barriers, which has
improved global integration and brought about globalization. Multilateral agreements between
governments increase the likelihood of tariff reduction, while enforcement of binding
agreements reduces uncertainty.
The Bottom Line
Free trade benefits consumers through increased choice and reduced prices, but because the
global economy brings with it uncertainty, many governments impose tariffs and other trade
barriers to protect the industry. There is a delicate balance between the pursuit of efficiencies
and the government's need to ensure low unemployment.

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Types of Tariff
The tariff barriers can further be of three types:

a. 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. For example, a country could levy a $15 tariff
on each pair of shoes imported, but levy a $300 tariff on each computer imported.
Specific tariffs are levied as fixed charge for each unit of good imported. For example, Rs. 10
per unit of good imported.
b. Ad Valorem Tariffs
The phrase "ad valorem" is Latin for "according to value," and this type of tariff is levied on a
good based on 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 artificially high
for Japanese car shoppers.
Ad Valorem tariffs are levied as a percentage of the value of goods imported. For example,
10% of the value of goods. If value of goods is Rs. 1000, the ad valorem tariff would be Rs.
100.

c. Compound tariffs
Compound tariffs are assessed as both a specific tariff and an ad valorem tariff on the same
product.

Rationale for Imposing Tariffs

 Tariffs help in raising revenues for the domestic government especially in case of developing
countries.

 They protect domestic producers from foreign competition. This is because it increases the
prices of foreign goods by restricting the quantity of imports coming into the country. Suppose
the price of sugar in domestic market is Rs 60 per kilogram while the price of imported sugar
is Rs 50 per kilogram. In the absence of import tariffs, imported sugar would be cheaper.
Consumers would be more inclined to buy the imported sugar. Now let us suppose that the
domestic government levy an import tariff of Rs 20 per kilogram, the imported sugar would
become costlier as a result of which there would be a demand of domestic sugar.
Non-Tariff Barriers
Non-tariff barriers refer to any other government regulation, policy or procedure other than a
tariff that has the impact of minimizing imports. Non-tariff barriers can be of two types, one
that have direct influence on the price of the goods being imported and the other that influences
or control the quantity of the goods being imported.

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A. Direct Price Influences

a. Subsidies
Subsidies are the direct payments made by the government to domestic producers. It can take
form of cash payments, low interest loans, government participation in ownership, tax
incentives, etc.
Subsidies help in lowering down the cost of production of domestic goods as a result of which
the prices also come down. It helps domestic producers to capture export markets by making
their products cheaper in international markets. It also helps the domestic producers to compete
against cheaper imported goods in domestic markets. Another consequence of such subsidies
is to create surplus production. That surplus is then sold in international markets, where the
extra supply depresses the prices, making it much harder for producers in the developing world
to sell their output at a profit.
Agriculture is one of the greatest beneficiaries of subsidies in most countries. Many developed
nations like Japan, European Union, United States, Canada and many other countries are giving
huge subsidies to their farmers. Outside of agriculture, subsidies are much lower but they are
still significant. However, the problem with subsidies is that it requires expenditure on part of
the domestic government. It is because of this reason that developing countries find it difficult
to grant subsidies to their producers as compared to their foreign counterparts because of lack
of resources.
A government might have to choose between imposing a tariff on competing imports or directly
subsidise the industry concerned. A tariff would raise the domestic price of imports and the
domestic consumers have to pay the higher price. But if a subsidy is used, the domestic price
would still be less and the subsidy received by the domestic industry would allow it to compete
with foreign goods at competitive prices in global markets. Thus subsidy becomes a better
choice when the governments do not want the consumers to pay more but at the same time
enables its domestic producers to capture global markets.
Export subsidies, however under the WTO agreement are treated as unfair trade practice. The
importing countries counter such subsidies by levying countervailing duties on imported goods
so as to offset the impact of these subsidies. This helps in protecting domestic producers from
unfair foreign competition.

B. Quantity Controls
a. Quotas
Quota is the most traditional and common method of non-tariff barriers. It refers to the direct
restriction on the quantity of goods that can be imported into a country during any period of
time. In other words, quotas limit the quantity of imports of any particular commodity coming
into a country during a certain period of time. The quotas help the government to reduce the
consumption of any particular commodity in the country. This is normally done through giving
of import licenses to the importers. For example, the United States has a quota on cheese
imports; India has a quota on import of gold. Sometimes, governments may use tariff rate
quotas, according to which, a certain quantity of goods enter the country duty-free or at a low
rate. However, there is a very high rate of tariff for subsequent imports.

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Difference between quotas and tariffs

Quotas increase the prices of goods just as tariffs do. But while tariff is a source of revenue for
the government, quotas do not provide any revenue. In fact, quotas generate revenue for those
companies which have the licenses to import the limited quantity of goods by increasing the
prices in the absence of any competition.
An import quota is a restriction placed on the amount of a particular good that can be imported.
This sort of barrier is often associated with the issuance of licenses. For example, a country
may place a quota on the volume of imported citrus fruit that is allowed.

b. Voluntary Export Restraints (VERs)

VERs are bilateral agreements instituted to restrain the rapid growth of exports of specific
goods. Essentially, the government of country X asks the government of country Y to reduce
its companies’ exports to country X voluntarily to help the importing country X to protect its
domestic industry. One of the most famous examples of VERs is the limitation on auto exports
to the United States enforced by Japanese automobile producers in 1981. The effect of VERs
is similar to that of quota whereby there is an increase in the price of imported goods for
consumers because of limited supply of imported goods. In the above example, the VER
increased the price of limited supply of Japanese imports. According to a study by U.S. Federal
Trade Commission (FTC), the U.S. consumers had to pay 5 billion dollars extra due to this
VER.
This type of trade barrier is "voluntary" in that it is created by the exporting country rather than
the importing one. A voluntary export restraint is usually levied at the behest of the importing
country and could be accompanied by a reciprocal VER. For example, Brazil could place a
VER on the exportation of sugar to Canada, based on a request by Canada. Canada could then
place a VER on the exportation of coal to Brazil. This increases the price of both coal and sugar
but protects the domestic industries.
c. Local Content Requirement
A local content requirement is a requirement that some fraction of the product must be
produced locally or in the domestic market. The requirement can either be expressed in physical
terms (60% of the parts of the product) or in value terms (60% of the value of the product).
Thus, it ensures that if any company wants a contract from the government agency, it must
ensure that atleast a certain portion of the product must be produced or procured locally. For
example, The Jawaharlal Nehru National Solar Mission (JNNSM) launched by the Indian
government in 2010 requires that 75% of the solar equipment for all supported projects must
be locally-made. This clause has been incorporated by India to protect the domestic solar
industry against imports from China and the US since both these countries offer cheaper loans
to Indian projects to buy their equipment. It is important to note that solar manufacturers in
China and the US receive substantial state subsidies and loan guarantees from their
governments.
Instead of placing a quota on the number of goods that can be imported, the government can
require that a certain percentage of a good be made domestically. The restriction can be a
percentage of the good itself or a percentage of the value of the good. For example, a restriction
on the import of computers might say that 25% of the pieces used to make the computer are

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made domestically, or can say that 15% of the value of the good must come from domestically
produced components.
In the final section, we'll examine who benefits from tariffs and how they affect the price of
goods.
d. “Buy Local”
Legislation Under this form of trade policy the government makes its purchases from domestic
producers only. This legislation forbids the government departments to make use of imported
goods. However, the government may at times permits the use of imported products only if the
price is below than that of the domestic producer. This instrument is widely used by developing
countries to develop and broaden their manufacturing base. In case of developed countries this
measure aims to protect local jobs and industry from foreign competition. The economic effect
of local content requirement and buy local legislation is same as that of quota. It limits foreign
competition thereby benefiting the domestic producers. The restrictions on imports raise the
price of goods for the consumers.

e. Licenses
A license is granted to a business by the government and allows the business to import a certain
type of good into the country. For example, there could be a restriction on imported cheese,
and licenses would be granted to certain companies allowing them to act as importers. This
creates a restriction on competition and increases prices faced by consumers.

Effects of Alternative Trade Policies

Tariff Export Import Quota Voluntary
Subsidy export
restraint
Producer Increase Increase Increase Increase
Profit
Consumer Decreases Decreases Decreases Decreases
Welfare
Government Increase Decreases No Change No Change
net revenue

Other Non-Tariff Barriers

1. Labelling and Testing Standards
Some countries require that goods entering into their boundaries must meet certain
requirements in terms of packaging, labeling and testing standards. Such countries allow
sale of only those goods which satisfy these standards. These standards require that
companies must indicate on its products the name of the country where it is made or the
packaging of the goods must indicate the raw material used in its production. All these
requirements add to the production cost of the company.

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Testing standards require the testing of products coming from foreign countries’ to be tested
in domestic laboratories so as to ensure their quality. Labeling and testing standards are
insisted upon for ensuring quality of goods seeking an access to into the domestic markets
but many countries use them as protectionist measures. Such measures are complex and
discriminatory barriers to international trade. At the same time they are one of the most
difficult ones to control as compared to other barriers to trade.

2. Sanitary and Phytosanitary

Measures Sanitary and Phytosanitary (SPS) measures are taken to protect against risks
linked to food safety, animal health and plant protection or to prevent or limit damage
within the territory of a country from the entry, establishment and spread of pests from a
foreign country. The SPS Agreement under the WTO seeks to lay down the minimum
sanitary and phytosanitary standards that the member countries must achieve for
international trade of food products. This is to ensure the safety of life and health of humans,
animals and plants. However, countries actually lay down more stringent PSP norms. This
at times is done to decrease the imports coming into the country. Developing countries have
for long maintained that these standards can be and are being used as trade barriers against
them. This practice has an adverse impact on their exports. The most common complaint
is that the standards are set very high, and often unreasonably so. It is in fact contended that
the standards are strategically kept at high levels so that exports from the developing
countries can be banned. For example, Indian meat and poultry products faced such
standards imposed by European Union and United States.

3. Specific Permission Requirements

This measure requires that potential importers or exporters secure permission from
governmental authorities. This involves the issuing of import or export licences which may
be costly and time consuming.
4. Countertrade
The exchange of goods with goods between countries is referred to as countertrade. This
practice is common in case of aerospace and defence industries whereby the importer
country may not have enough foreign currency to pay for imports.

5. Administrative Barriers to Trade

Administrative barriers to trade are a special category of non-tariff barriers and their main
sources are administrative regulations and procedures that have a restrictive effect on
international trade. These trade barriers can take form of legal barriers or procedural
barriers. Legal barriers are caused by different laws and administrative regulation in
domestic economies. Procedural barriers are related to trade procedures and they include
all activities practices and formalities involved in international movement of goods. Delays
may be made with respect to issue of licences, customs valuation, and clearance of
consignment of goods and so on. These types of barriers are most difficult to monitor and
eliminate as compared to other tariff and non-tariff barriers.

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Anti-dumping
Before talking about antidumping one should know what is dumping. Dumping can be
defined as selling goods in foreign market at below their fair market value or selling goods
in foreign market at below their costs of production. It is a way by which companies unload
their excess production in foreign markets. It can also be predatory in nature with producers
using substantial profits from the home markets to subsidise prices in foreign markets with
a view to drive domestic producers out of that market and later rising prices and earning
huge profits.
If the export price is lower than the normal value, it constitutes dumping. Thus, there are
two fundamental parameters used for determination of dumping, namely, the normal value
and the export price.
Normal value: Normal value is the price at which the goods under complaint are sold, in
the ordinary course of trade, in the domestic market of the exporting country.
Export price: The Export price of the goods allegedly dumped into India means the price
at which it is exported to India.
Dumping Margin: The margin of dumping is the difference between the Normal value
and the export price of the goods under complaint. It is generally expressed as a percentage
of the export price. Example: Normal value US$ 110 per kg. Export price US$ 100 per kg.
There is dumping in this case as export price is lower than normal value and dumping
margin in this case is US$ 10 per kg., i.e. 10% of the export price.
Dumping is an unfair trade practice (when it causes injury to the domestic industry of any
country) and the antidumping policies are formulated to protect domestic producers from
unfair foreign competition. Anti-dumping is a measure to rectify the situation arising out
of the dumping of goods and its trade distortive effect. Thus, the purpose of anti-dumping
duty is to rectify the trade distortive effect of dumping and re-establish fair trade. It provides
relief to the domestic industry against the injury caused by dumping
As per WTO rules, member nations are allowed to impose anti-dumping duties on foreign
goods being sold cheaper in foreign markets than the home market. Anti-dumping duty
does not normally exceed the margin of dumping which is the difference between sale price
in domestic country and export price (the price at which the goods are being exported into
the foreign country). The Indian law also provides that the anti-dumping duty to be
recommended/levied shall not exceed the dumping margin.
However in the following two situations any exporter or country is to be excluded from the
scope of Anti-Dumping investigation/duties:

 Individual exporter: Any exporter whose margin of dumping is less than 2 per cent
of the export price shall be excluded from the purview of anti-dumping duties even
if the existence of dumping is established.
 Country: Further, investigation against any country is required to be terminated if
the volume of the dumped imports, actual or potential, from a particular country
accounts for less than 3 per cent of the total imports of the like product. However,
in such a case, the cumulative imports of the like product from all these countries

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who individually account for less than 3 per cent should not exceed 7 per cent of
the import of the like product.
All the anti-dumping investigations and recommendations in India are carried by
designated authority, Ministry of Commerce, whereas the imposition and collection of the
duties is done by Ministry of Finance.

Counter Trade
Countertrade is a reciprocal form of international trade in which goods or services are
exchanged for other goods or services rather than for hard currency. This type of international
trade is more common in developing countries with limited foreign exchange or credit
facilities. Countertrade can be classified into three broad categories: barter, counter purchase,
and offset.
Countertrade Explained
In any form, countertrade provides a mechanism for countries with limited access to liquid
funds to exchange goods and services with other nations. Countertrade is part of an overall
import and export strategy that ensures a country with limited domestic resources has access
to needed items and raw materials. Additionally, it provides the exporting nation with an
opportunity to offer goods and services in a larger international market, promoting growth
within its industries.
Barter
Bartering is the oldest countertrade arrangement. It is the direct exchange of goods and services
with an equivalent value but with no cash settlement. The bartering transaction is referred to as
a trade. For example, a bag of nuts might be exchanged for coffee beans or meat.

Counter purchase
Under a counter purchase arrangement, the exporter sells goods or services to an importer and
agrees to also purchase other goods from the importer within a specified period. Unlike
bartering, exporters entering into a counter purchase arrangement must use a trading firm to
sell the goods they purchase and will not use the goods themselves.

Offset
In an offset arrangement, the seller assists in marketing products manufactured by the buying
country or allows part of the exported product's assembly to be carried out by manufacturers
in the buying country. This practice is common in aerospace, defense and certain infrastructure
industries. Offsetting is also more common for larger, more expensive items. An offset
arrangement may also be referred to as industrial participation or industrial cooperation.

Other Examples of a Countertrades

 A counter purchase refers to the sale of goods and services to a company in a foreign
country by a company that promises to make a future purchase of a specific product
from the same company in that country.

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 A buyback is a countertrade occurs when a firm builds a manufacturing facility in a

country—or supplies technology, equipment, training, or other services to the country
and agrees to take a certain percentage of the plant's output as partial payment for the
contract.
 An offset is a countertrade agreement in which a company offsets a hard currency
purchase of an unspecified product from that nation in the future.
 Compensation trade is a form of barter in which one of the flows is partly in goods
and partly in hard currency.
Benefits and Drawbacks
A major benefit of countertrade is that it facilitates the conservation of foreign currency, which
is a prime consideration for cash-strapped nations and provides an alternative to traditional
financing that may not be available in developing nations. Other benefits include lower
unemployment, higher sales, better capacity utilization, and ease of entry into challenging
markets.
A major drawback of countertrade is that the value proposition may be uncertain,
particularly in cases where the goods being exchanged have significant price volatility. Other
disadvantages of countertrade include complex negotiations, potentially higher costs and
logistical issues.
Additionally, how the activities interact with various trade policies can also be a point of
concern for open-market operations. Opportunities for trade advancement, shifting terms, and
conditions instituted by developing nations could lead to discrimination in the marketplace.

KEY TAKEAWAYS
 Countertrade provides a mechanism for countries with limited access to liquid funds to
exchange goods and services with other nations.
 Bartering is the oldest countertrade arrangement.
 A major benefit of countertrade is that it facilitates the conservation of foreign currency.
 Common disadvantages of countertrade are complex negotiations, higher costs, and
logistical issues.
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