Bangladesh Army University of Science and Technology

Bachelor of Business Administration (BBA)

Course Title:International Trade and Business
Course code: BBA 3105
Level-3, Term-I
Credit: 3

Course Instructor: Tauhid Ahmed Bappy

Cell No:01738174705
Email:tauhidbappy@gmail.com

Objectives of the Course:

BBA 3105: INTERNATIONAL TRADE AND BUSINESS

COURSE OBJECTIVES:
This course offers a global perspective and helps build a solid foundation and under-standing of
the factors affecting the global marketplace and the mechanisms of shipping management. After
pursuing the course students will learn the theories of international trade, different terminology
used in international trade such foreign exchange, balance of payment, terms of trade with details
explanation, documents used in export and import, marketing strategy and policy applied for
exporting goods from Bangladesh, services and institutional facilities available in Bangladesh for
increasing export, the overall foreign trade condition of Bangladesh and the global structure and
conditions of shipping operations.
 Course Outline and Lesson Plan
Week & Objectives Contents of the Lecture Reference
Lecture (Chapter)
Week 1-2: Definition and ● Definition of International Trade, Difference Chapter:01
Class 1-6 Importance of Between Domestic Trade and International
International Trade, Importance of International Trade in the
Trade World Economy, Classifications of
International Trade, Procedures of Exporting
Goods from and Importing Goods in
Bangladesh.
Week 3-4: International ● Economic Basis for International Trade, Chapter:02
Class 7-12 Trade Theories Mercantilism, Absolute Advantage,
Comparative Advantage, Factor Endowment
Theory, Heckscher–Ohlin Theory,
International Product Life Cycle Theory
Class 13 Class Test: 01
Week 5-7: Protectionism ● What Is Meant by Protectionism, Arguments Chapter:03
Class 14-21 and Free for and Against Protectionism, Instruments of
Trade Protectionism, What Is Meant by Free Trade,
Arguments for and Against Free Trade,
Methods of Removing Barriers to Free Trade.
Class 22 Class Test: 02
Week 8: The Nature of ● Definition of Multinational Enterprise, Chapter :04
Class 23-24 Multinational Characteristics of Multinational Enterprises,
Enterprise The Internationalization Process, Forms of
Multinational Business (Licensing,
Franchising, Export, Joint Venture, Merger,
Local Packaging and Assembly, FDI), Why
Firms Become Multinational Enterprise,
Waterfall Approach, Sprinkle Approach.
Week 9: Foreign ● Equilibrium Exchange Rates, Determinants Of Chapter :05
Class 25-27 Exchange Foreign Exchange Rates, Nominal And Real
Markets and Exchange Rates,Appreciation And
Balance of Depreciation Of Currencies, International
Payments Balance Of Payments – Current Accounts,
Capital Accounts- Official Reserves Account.
Class 28 Class Test:03
Week 10-11: Global ● Standardized Global Marketing, Adapted Chapter:06
Class 29-33 Marketing Global Marketing, SRC and Associated
Program Ethnocentrism, Global Marketing Mix
Strategies, The Impact of Culture on
Marketing Strategies.
Week 12: Regional Free ● Regional Free Trade Zones (EU, NAFTA, Chapter:07
Class 34-36 Trade Zones CAFTA, ASEAN, APEC, SAARC), The
 and International Monetary Fund (IMF) – The
International World Bank (WB) – World Trade
Trade Issues Organization (WTC) and GATT.
Week 13: Bangladesh ● Bangladesh’sPosition in the Community of Chapter:08
Class 37-39 and Developing Countries, Major Export and
International Import Goods of Bangladesh, Major Trade
Trade Partners of Bangladesh, Export Processing
Zones in Bangladesh
Class 34 Class Test:04
Week 14 Review Class & Presentations

Books Recommended:
1. G. Jepma and A. Rhoen
2. Paul Krugman
3. Alan M. Ruggman
4. K.K. Dewett
5. Ricky W. Griffin
: International Trade, A Business Perspective
: International Economics
: International Business
: Modern Economic Theory
: International Business: A Managerial Perspective

Week : 1-2
Lecture : 1-6
Chapter One : Definition and Importance of International Trade

The world is shrinking rapidly with the advent of faster communication, transportation and
financial flows. Products developed in one country- Boeing’s Aircrafts, Sony Electronics and
McDonald’s Hamburger, Japanese Sushi, German BMWs, India’s spices and software, and
surgical instruments from Pakistan have gained enthusiastic acceptance in other countries. We
would not be surprised to hear about a German Businessman wearing an Italian Suit meeting an
English friend at a Japanese restaurant to drink Russian Vodka and then watch a Bollywood
movie together on TV. All these things are possible due to the booming international trade and
business.

✔ Definition of International Trade

International trade is the branch of economics concerned with the exchange of goods and
services with foreign countries and is also known as exports and imports. In other words, all
businesses that are transacted across the boundaries of your country fall under international trade.
Visible international trade refers to the buying and selling of goods – solid, tangible things –
between countries. Invisible trade, on the other hand, refers to services.
International trade is increasing at a rapid pace day by day. Since 1990s, the number of
multinational corporations in the world have grown from 30000 to more than 60000 (Kotler,
2014).
Many companies in the world have long been successful in international trade and business.
Amazon, Google, Apple, Coca-Cola, Netflix, Alibaba, Ford, Boeing, McDonald’s, Unilever,
Toyota, Sony and several other firms have made the world their market.
Some products that appear to be local are produced or owned by foreign companies. For
example, Bata shoes, Cadbury chocolates, Sony televisions and so on.
Countries that have absolute and comparative advantage in the production of a certain goods or
service normally engage in exporting. For example, BD specializes in the production of
readymade garments and therefore exports them in US.
But countries that have comparative disadvantage in the production of certain goods or that have
deficit production normally imports from other nations. For example, BD imports coffee, apple
and other products from several other nations.
 ✔ Domestic Trade Versus International Trade
Domestic trade is a trade which takes place within the borders of a given country. It is quite
common to have different natural resources in different parts within the same country. For
example, Tea is traded with other parts of the country from Sylhet and Chittagong whereas
Mango is better produced in Rajshahi and therefore is marketed everywhere within the country
from Rajshahi.This type of trade is known as internal trade or domestic trade.
Major differences between domestic trade and international trade are as follows:
● Domestic trade always takes place within the borders of a given country, while
international trade always goes beyond the borders of a given country.
● Domestic trade can never involve more than one country, but international trade always
involves two or more countries.
● Domestic trade, to a large extent involves the use of mainly local currency in trading,
whereas international trade involves the use of foreign currencies. The U.S. dollar is the
standard currency used in international trade.
● Domestic trade is free off restriction, so long as it is a legal commodity being traded.
Legal and wholesome commodities in domestic trade can move around the country
without facing any forms of restrictions such as embargoes and quotas. But this is not the
case for international trade. In international trade, certain goods, though legal, can face
certain restrictions such as embargoes and quotas.
● Domestic trade is not controlled by external bodies, but this is not the same for
international trade. International trade is controlled by certain external bodies to which a
country is a member. A very good example of an external body that controls trade all over
the world is the World Trade Organization.
● International trade generally involves very long distances, but this is normally not the case
with domestic trade. Take for example a trade between South Africa and Sweden or
between New Zealand and Egypt. These trades certainly involve very lengthy distances to
be covered. But a trade between any two points in South Africa or Sweden can never be
that lengthy.

✔ Importance of International Trade in the World Economy

 International trade is important for the following reasons:
● Proper Utilization of Resources
● To Increase Total Production
● Reducing Production Cost
● Exporting Surplus Goods
● Creating Foreign Markets for Domestic Goods
● To Improve the Quality of Goods and Services
● To Develop the Efficiency of Human Resources
● Being Able to Consume Goods Not Produced Domestically
 ● Importing Capital Intensive Goods
● To Reduce Dependency
● International Friendship
● Bringing Stability in the Price of Commodities
● To Handle the Effects of Natural Disasters

✔ Classifications of International Trade

International trade can be classified into three types:
1. Import Trade
2. Export Trade
3. Re-Export Trade
Let us discuss each of them in detail:
Import Trade
Imports are goods and services produced in one country and brought in by another country.
According to David J. Rachman, “importing is purchasing goods made in another country and
bringing them into once own country.” Japan, for example, is a major importer of petroleum
because it must rely on outside suppliers for all of its energy needs.
Importer are of two types. They include:
i) Direct Importer: Direct importer is the manufacturer or business organization that
purchases goods or services directly from the foreign manufacturers or exporters.
ii) Indirect Importer: Companies that perform import activities on behalf of the real
importer is known as indirect importer.
Some of the major import commodities in Bangladesh include machinery and equipment,
chemical, iron and steel, foodstuffs, petroleum products, electronics, cement and so on. China
and India are known to be the two largest import partners of Bangladesh.
Export Trade
Export trade involves goods and services produced by a firm in one country and then sent to
another country.
In other words, exporting is selling domestic made goods in another country.many companies in
China export clothing and other textile products to the United States.

Exporters are also of two types. They include:

 i) Direct exporters such as manufacturers, wholesalers or distributors abroad, and
jobbers abroad.
ii) Indirect exporters such as export merchants and jobbers, export commission house,
manufacturers export agents, resident buyer and exporting agents.
Some of the major import commodities in Bangladesh includeReadymade garments, frozen fish
and seafood, jute and jute made goods, leather and leather made goods, pharmaceuticals,
human resources and so on. United States is the largest export partner of Bangladesh.
Re-Export Trade
Re export refers to the action of exporting goods that have been imported. Sometimes, one
country might import goods produced in another country. Then, the importing country might
export those goods into another country with or without further processing. This process is
known as re-export trade.
For example, Bangladesh may import textiles from U.S, then convert those textiles into
readymade garments and export them in France.
If political relationship between two nations is not favorable or if one nation boycotts the
products of another nation, then companies can use re-export trade to continue their international
trade with those nations.

✔ Procedures for Importing Goods in Bangladesh

If anyone wants to start an import trade he should know the general procedure of import trade
which usually involves the following stages:
1. Obtaining Import Licenses: An importer can import goods in the country only when he has a
proper import license issued by the Government of Bangladesh.
For this purpose, an importer has the application to the Controller of Imports and exports and
exports, Ministry of Commerce, Government of Bangladesh, in the perceived form for obtaining
the import license.
2. Trade Inquiry: The next step in importing is to make trade inquiries. The intending importer
makes trade enquirers from possible exporters. A trade inquiry is a written request from the
intending importer for information regarding:
-The availability of goods,
-Price,
-Terms of supply,
-Terms of payment
-Size and weight,
-Design, etc.
In reply to the inquiry, the importer shall receive a quotation, which contains the detailed
answers to the queries made. An intending importer should make a thorough comparison of the
various quotations before taking the decision to import.
3.Placing the Indent (or Order): The importer prepares the details of goods he wants to import
and gives it to any import agent. The indent (order) contains instructions from the importer as to
the quantity, quality, prices of goods, mode of payment, shipping procedure, date of delivery,
nature of packing, etc. The import-agent sends the intent to an expert agent for necessary actions.
4.The Arrangement of Foreign Exchange: The importer will have to arrange for the necessary
foreign exchange in order to make payment to the exporter in this currency. In our country, the
Central Bank of Bangladesh (Bangladesh Bank) controls all transactions relating to foreign
exchange.
However, the Bangladesh Bank does not release foreign exchange directly to the importers. An
importer finally gets the foreign currency from the Exchange Bank concerned after fulfilling all
the necessary formalities.
5. Opening Letter of Credit: In this stage, the importer opens a letter of credit (LoC) in favor of
the exporter at a bank. Letter of credit is promise made by importer’s bank to make a payment to
the exporter after verifying that importer meets certain conditions. It gives the exporters the
confidence that the importer will pay the money.
6. Fixation of Foreign Exchange Rate: The rate at which the currency of one country is
exchanged for the currency of another country is known as exchange rate. The exchange rate
keeps on fluctuating. Generally, the importer fixes the exchange rate through his bank by
booking it in advance at the time of placing the order.
7. Receiving Informationabout Shipment: After receiving the LoC from the importer, the
exporter purchases the required goods, packs these goods as specified, gets them insured and
sends the information about shipment to the importer. Such information might include: product’s
name, quantity, the name of the ships carrying the goods, expected delivery date and so on.
8. Receiving Bill, Collecting Documents and Making Payments:In the next phase, the
importer collects necessary bills and documents such as bill of lading, insurance copy, consular
certified invoice, export invoice, certificates of origin that have been sent by the exporters.
Exporter sends these documents and bills through the bank and the importer collects them from
the bank after making payments on cash or honoring the bill of exchange on due date.
9. Observing Formalities regarding Tariff: When the ship carrying the goods arrives at the
port, the importer or his clearing agent prepares two copies of bill of entry along with other
necessary documents and submits them to the custom authorities. After examining the
documents, if customer authorities become satisfied, they determine the tariffs for the goods on
which duties are to be paid and collect them from the importer. Then the authority returns one
copy of bill of entry to the importer or his clearing agent. This copy is known to be “custom
pass”
10. Delivery of Goods from Ship: The importer or clearing agent should fill up the dock form
and pay the dock charges to collect the dock invoice. Then, they submit the dock invoice to the
dock authority in order to get “ship delivery order” and “gate pass.” With these documents, the
importer or his agent can take delivery of the goods from the ship.
11. Closing Transactions: In the end, if the goods are in proper condition, the importer sends a
letter or email to the exporter expressing his or her satisfaction and closes the transaction.
However, if the importer or his agent finds something irregular, he or she can lodge a complaint
with the exporter or shipping company and tries to settle them within a short period of time.

✔ Procedures for Export Trade

The general procedures for export trade involve the following stages:

1. Receipt of an Inquiry: The first stage in the export trade is the receipt of an inquiry by the
exporter from an importer or his agent. An inquiry is a written request by a prospective importer
regarding the quantity, quality, design, price, mode of payment of goods, which he intends to
purchase.

2. Sending Quotation: In reply to the inquiry, the exporter sends a quotation (or Proforma
invoice) in which all necessary details are given as required by the importer. The type for price
quotation depends upon the inquiry of the importer.

3. Receipt of an Indent (or Order): In case the importer is satisfied about the quotation from
the exporter, he will send an order (or indent) for the supply of goods. The exporter should
carefully check indents begin received from the importer, so that all necessary details of the
goods, its packing, bank guarantee, payment, etc., are clearly mentioned.

4. Receipt of Export License: Goods cannot be exported without an export license. It can be

obtained from the chief Controller of Exports & Importer by applying on a prescribed form. If
the exporter satisfies all conditions for the issue of a license, it is given to him normally for a
period of three months from the date of application.

5. Conducting an Inquiry about Credit: The exporter would like to know the credit worthiness
of the importer before dispatching the goods. The exporter likes to ensure that there is no risk of
non-payment. A bank reference may be considered to be sufficient in this regard.

6. Fulfillment of Foreign Exchange Requirements: Under the Foreign Exchange Regulation

Act (FERA), the exporter has to make a declaration that he will surrender the entire foreign
exchange earned on account of exports to the Bangladesh Bank within 180 days of shipment. For
this purpose, he has to fill in four G.R. forms.
7. Fixation of Exchange Rate: The rate at which the currency of one country is exchanged for
the currency of another country is called the exchange rate. The exchange rate keeps on
fluctuating. Generally, the importer fixed the exchange rate by booking it in advance at the time
of placing an order.

8. Preparation for Export: The following things are essential for preparing export:

● Packing, marking and forwarding of goods to be exported.

● Pre-shipment inspection of goods and excise clearance.
● Appointments of forwarding agent.
● Booking of shipping space etc.

9. Completing Customs Formalities: The exporter has to observe certain customs formalities

before dispatching the goods. He has to prepare and shipping bill in triplicate and application to
export in duplicate. The shipping bill is a document showing the details with regard to:

● The name of exporter.

● Description of goods.
● The name of the ship to carry the goods.
● The name of importer and
● The port of destination.

10. Obtaining Freight Note and Bill of Lading:  The shipping company prepares a freight note
mentioning the amount of freight payable. On payment of freight charges, the exporter obtains a
document called Bill of Lading.

The freight is paid by the exporter and it is mentioned in the bill of lading. When the importer
agrees to pay the freight, the bill of lading is marked Freight Forward.

11. Insurance of Goods: Goods exporter are exposed to several risks, called the perils of the
sea. Therefore, exportable goods should be insured against these risks. The insurance policy is
forwarded to the importer along with other documents.

12. Preparation of Necessary Documents: After receiving the Advice Note from the

forwarding agent, the exporter prepares the following documents:

-Export invoice.
-Consular invoice.
-Certificate of origin.
-Foreign bill of exchange.

13. Securing Payment from Importers: The payment of the order depends on the mutual
agreement between the exporter and the importer. The customary modes of payments are bank
draft, bill of exchange, Documents against Acceptance Bill (D/A Bill), Documents against
payment Bill (D/P Bill).
14. Claiming Incentives from the Government: An exporter is entitled to claim certain
benefits, which have been offered by Government as incentives to promote exports. These
benefits include:

-Drawback of import duty and excise duty

-Cash compensation support
-Import replenishment.
Week : 3-4

Lecture : 7-12

Chapter Two : International Trade Theories

Economic Basis for International Trade

Economic causes of occurring international trade are as follows:

● Labor Specialization
● Abundance of Natural Resources
● Climatic Environment
● Human Capabilities
● Abundance of Capital
● Abundance of Capital Goods and Machinery
● Difference in Market System
● Commercial Alliance and Agreement
● Difference in the Quality of Product
● Difference in Price
● Invention of High Technology

Theories of International Trade

Different theories of international trade have been developed over the years to better explain why
countries engage in international trade. Those international trade theories are elaborately
described below:

1. Mercantilism

One of the earliest and simplest theories of international trade was provided by mercantilism.
This theory was quite popular in the 18th century, when gold was the only world currency.

Mercantilism holds that a government can improve the economic well-being of the country by
encouraging exports and minimizing imports.

The result is a positive balance of trade that leads to wealth (gold) flowing into the country.
This trade theory was first developed in England and then in France, Italy and Germany. Some of
the famous advocates of this trade theory include Thomas Moon, James Stewart and W. Petty.

Most international trade experts believe that mercantilism is a simplistic and erroneous theory as
it does not take into the specialization of effort and production efficiency although it has had
followers. For example, China has proven to be a strong follower of mercantilism, because it
tries to have a positive balance with all of its trading partners.

2. Absolute Advantage:

In 1776, Adam Smith in his “Wealth of Nations” book argued that absolute cost advantage is the
reason why a country engages in international trade.

The theory of absolute advantage holds that nations can increase their economic well-being by
specializing in the production of goods that they can produce more efficiently than anyone else.

As per this theory, when a country can produce more of a certain goods or service at lower cost
per unit than any other country, it has an absolute advantage.

Assumptions: i) Only two nations, ii) Only two products, iii) Free trade, iv) Labor is only factor
of production and thus the only cost, v) Factors of production are completely movable within the
nation.

To illustrate the theory of absolute cost advantage, let’s discuss the following example:

Labor Cost(Hours) Needed to Make One Unit

Country 1 Car 1 Ton of Cheese

UK 15 5

China 4 2

As evident from the table, UK requires 15 hours of labor to produce 1 car and 5 hours of labor to
produce 1 ton of cheese whereas China requires 4 hours of labor to produce 1 car and 2 hours of
labor to produce 1 Ton of Cheese. Therefore, as per absolute advantage theory, UK is efficient
and should specialize in the production of both car and cheese as it can produce both the items at
lower cost per unit compared to China. Hence, it should attempt to export both.

Criticism of Absolute Advantage Theory:

 ● TheAbsolute Advantage Theory assumed that only bilateral trade could take place
between nations and only in two commodities that are to be exchanged.This theory did
not take into account the multilateral trade that could take place between countries.
● This theory also assumed that free trade exists between nations. It did not take into
account the protectionist measures that are adopted by countries.
● This theory considers labor to be the only factor of production. However, it does not take
into account the other factors such as land, capital, organization and so on.
● This theory ignores the transportation costs that are associated with international trade.

3. Theory of Comparative Advantage

This theory was first clearly explained by David Richardo in his “Principles of Political
Economy and Taxation” book in 1817.

The theory of comparative advantage holds that nations should produce and export those goods
for which they have the greatest relative advantage and minimum comparative disadvantage.

In other words, comparative advantage refers to a country’s ability to produce a goods and
services at a lower opportunity cost than another country.

Opportunity cost is anything that a country gives up to produce a certain good. If one country
bears less opportunity cost than another country to make a certain good, then the first country has
comparative advantage and therefore should engage in trade.

Assumptions:i) Only two nations, ii) Only two products, iii) Free trade, iv) Labor is only factor
of production and thus the only cost, v) Factors of production are completely movable within the
nation but immovable across the nations, vi) Zero transportation costs, vii) Homogeneous labor,
vii) Perfect competition.

In terms of the previous example of two countries, UK and China, and two products, Car and
Cheese, Ricardo’s model can be illustrated as follows:

Labor Cost (Hours) Needed to Make One Unit

Country Labor Hours Car Cheese

UK 100 15 Units 5 Tons

China 100 4 Units 2 Tons

In this example,UK has an absolute advantage in the production of both car and cheese, so it
would appear at first sight that trade would be unprofitable, or at least that incentives for
exchange no longerexist. Yet trade is still advantageous to both nations, if their
relative/opportunity costs of production differ.

In the above example, using the same 100 labor hours, UK gives up 3 Tons of Cheese to produce
1 unit of car, whereas China gives up 2 tons of cheese to produce 1 unit of car. So, China faces
lower opportunity cost/ greater comparative advantage in the production of car and therefore,
should attempt to specialize in car production and trade it with UK.

Similarly, U.K gives up 1/3 unit of car to produce 1 unit of cheese and China sacrifices ½ unit of
car to produce 1 unit of cheese. Hence, UK experiences lower opportunity cost or greater
comparative advantage in the production Cheese and should specialize in cheese production and
trade it with China. Thereby, both nations will be benefited from trade.

The general conclusions of the theory of comparative advantage are the same as those for the
theory of absolute advantage. In addition, the theory of comparative advantage demonstrates
that countries jointly benefit from free trade (under the assumptions of the model) even if one
has an absolute advantage in the production of both goods.

4. Factor Endowment Theory/Heckscher Ohlin Theory:

In recent years more sophisticated theories have emerged that help clarify and extend our
knowledge of international trade.

The factor endowment theory holds that countries will produce and export products that use
large amounts of production factors that they have in abundance, and they will import products
requiring large amounts of production factors that they lack.

This theory is also known as the Heckscher–Ohlin theory (after the two economists who first
developed it). Heckscher–Ohlin theory extends the concept of comparative advantage by
bringing into consideration the endowment and cost of factors of production.

It suggests that nations with relatively large labor forces will concentrate on producing labor-
intensive goods, whereas countries with relatively more capital than labor will specialize in
capital-intensive good. For example, China, concentrates on producing labor-intensive goods,
whereas countries like the Netherlands, which has relatively more capital than labor, specializes
in capital intensive goods.

5. International Product Life Cycle Theory:

Another theory that provides insights into international theory is Vernon’s international product
life cycle (IPLC) theory, which addresses the various stages of a good’s life cycle.
This theory suggests that a new product is first produced by the parent firm, then by its foreign
subsidiaries, and finally anywhere in the world where costs are the lowest; it helps explain why a
product that begins as a nation’s export often ends up as an import.

The IPLC has three stages:

i) New Product: A new product is one that is innovative or unique in some way.
Initially, consumption is in the home country, price is inelastic, profits are high, and
the company seeks to sell to those willing to pay a premium price. As production
increases and outruns local consumption, exporting begins.
ii) Maturing Product: In this stage, an increasing percentage of sales are achieved
through exporting. At the same time, competitors in other advanced countries develop
substitute products and replace the initial good. The introduction of these substitutes
and the softening of demand for the original product force the original company to
adopt market protection strategies. Attention will also be focused on entering markets
in less developed countries.
iii) Standardized Product:The technology becomes widely diffused and available.
Production tends to shift to low-cost locations, including less developed countries and
offshore locations. In many cases the product will end up being viewed as a generic,
and price will be the sole determinant of demand.
Week : 5-7

Lecture : 14-21

Chapter Three: Protectionism and Free Trade

✔ What is Meant by Protectionism?

Protectionism refers to the act of putting a trade barrier in place in order to protect a country’s
market from the intrusion of foreign companies.

These days, we see that a number of countries are putting different types of restrictions on
foreign trade. On the contrary, some countries encourage free trade and put few barriers on
international trade.

Basically, there are some pros and cons of protectionism. Some economists suggest that it is bad
for the country to impose restrictions on import as consumers ultimately have to bear the cost of
these barriers whereas some economists argue that it is inevitable for a country to increase trade
barriers to protect domestic economy.

If you analyze the arguments from both the side, we have to conclude that there are some
arguments for as well as against protectionism.

✔ Arguments for Protectionism

1. Protection of Infant Industry

2. Industrialization of Low Wage Nation
3. National Defense
4. Protection of the Home Market
5. Reduction of Balance of Payments Problems
6. Maintenance of the Standard of Living
7. Conservation of Natural Resources
 8. Maintenance of Employment and Reduction of Unemployment
9. Retaliation
10. Anti-Dumping

✔ Arguments against Protectionism

1. Unnecessary Protection
2. Economic Inefficiency
3. Product Price Increases (Consumers bear ultimate costs of tariffs)
4. Disrupt Consumers’ Freedom
5. Political Corruption
6. Rise of Monopoly
7. Product Quality Does Not Improve.

✔ Instruments of Protectionism

A variety of trade barriers deter the free flow of international goods and services. The following
presents six of the most commonly used barriers.

1. Price-based barriers/Tariff: Imported goods and services sometimes have a tariff added
to their price. Quite often this is based on the value of the goods. For example, some
tobacco products coming into the United States carry an ad valorem tariff (see below) of
over 100 per cent, thus more than doubling their cost to US consumers. Tariffs raise
revenues for the government, discourage imports, and make local goods more attractive.
2. Quantity limits/Quotas: Quantity limits, often known as quotas, restrict the number of
units that can be imported or the market share that is permitted. If the quota is set at zero,
as in the case of Cuban cigars from Havana to the United States, it is called an embargo.
If the annual quota is set at one million units, no more than this number can be imported
during one year; once it is reached, all additional imports are turned back. In some cases,
a quota is established in terms of market share. For example, Canada allows foreign
banks to hold no more than 16 per cent of Canadian bank deposits, and the EU limits
Japanese auto imports to 10 per cent of the total market.
3. International Price Fixing: Sometimes a host of international firms will fix prices or
quantities sold in an effort to control price. This is known as a cartel. A well-known
example is OPEC (Organization of Petroleum Exporting Countries), which consists of
Saudi Arabia, Kuwait, Iran, Iraq, and Venezuela, among others. By controlling the supply
of oil it provides, OPEC seeks to control both price and profit. This practice is illegal in
the United States and Europe
 4. Non-Tariff Barriers:Non-tariff barriers are rules, regulations, and bureaucratic red tape
that delay or preclude the purchase of foreign goods. Examples include:
-slow processing of import permits
-the establishment of quality standards that exclude foreign producers
- “buy local” policy. These barriers limit imports and protect domestic sales.
5. Financial Limits:There are a number of different financial limits. One of the most
common is exchange controls, which restrict the flow of currency. For example, a
common exchange control is to limit the currency that can be taken out of the country; for
example, travelers may take up to only $3,000 per person out of the country. Another
example is the use of fixed exchange rates that are quite favorable to the country. For
example, dollars may be exchanged for local currency on a 1:1 basis; without exchange
controls, the rate would be 1:4. These cases are particularly evident where a black market
exists for foreign currency that offers an exchange rate much different from the fixed
rate.
6. Foreign Investment Controls:Foreign investment controls are limits on foreign direct
investment or the transfer or remittance of funds. These controls can take a number of
different forms, including (1) requiring foreign investors to take a minority ownership
position (49 per cent or less), (2) limiting profit remittance (such as to 15 per cent of
accumulated capital per year), and (3) prohibiting royalty payments to parent companies,
thus stopping the latter from taking out capital.

Such barriers can greatly restrict international trade and investment. However, it must be
realized that they are created for what governments believe are very important reasons. A
close look at one of these, tariffs, helps to make this clearer.

✔ Types of Tariff:

A tariff is a tax on goods that are shipped internationally. Tariffs are of various types:

- Import Tariff: The most common is the import tariff, which is levied on goods shipped
into a country.
- Export Tariff:A tax levied on goods sent out of the country.
- Transit Tariff: A tax levied on goods passing through a country for goods passing
through the country.
- Specific Duty: It is a tariff based on units, such as $1 for each item shipped into the
country. So a manufacturer shipping in 1,000 pairs of shoes would pay a specific duty of
$1,000.
- Ad Valorem Duty: It is a tariff based on a percentage of the value of the item, so a watch
valued at $25 and carrying a 10 per cent duty would have a tariff of $2.50.
 - Compound Duty: It is a tariff consisting of both a specific and an ad valorem duty, so a
suit of clothes valued at $80 that carries a specific duty of $3 and an ad valorem duty of 5
per cent would have a compound duty of $7.

✔ What is Mean by Free Trade?

Free trade is a system of commercial policy which draws no distinction between domestic and
foreign commodities and thus which neither imposes additional burden on the latter nor imposes
any special favor to the former.

- It refers to the complete absence of trade barriers such as tariffs, quotas, taxes, subsidies
on foreign imports.

✔ Arguments for Free Trade:

- International Specialization
- Increases Production
- Proper Utilization of Natural Resources
- Opportunity to Export Surplus Goods
- Advantages to Consume Cheaper Goods
- Expansion of Markets
- Expansion of Knowledge and Culture
- Increases the Standard of Living of Labor
- World Peace
- Economic Developments of Developing Countries

✔ Arguments Against Free Trade:

- Destruction of Infant Industries
- Dependency on Foreign Countries
- Hindrance in the Growth of Indigenous Industry
- Import of Unnecessary, Harmful and Luxury Goods
- Obstacles in Industrialization
- Dumping
- International Conflict
- Threats to Independence

Methods of Removing Barriers of Free Trade

 - Being Member of International and Regional Alliances
- Formation of Cartel
- Obey the Conditions Set by GATT or WTO
- Reduce Export and Import Tariff
- Remove Quota
- Increase Counter-Trade
- Reduce Red-Tapism

Week : 8

Lecture : 23-24

Chapter Four: The Nature of Multinational Enterprise

✔ Definition of MNE:

A multinational enterprise (MNE) is a company that is headquartered in one country but has
operations in one or more other countries.

Sometimes it is difficult to know if a firm is an MNE because multinationals often downplay the
fact that they are foreign held. For example, many people are unaware that Bata, the shoe
company, was founded in Czech Republic and now has headquarter in Switzerland; Nestlé, the
chocolate manufacturer, is a Swiss company.

✔ Characteristics of MNE:

There is a series of characteristics that are common to multinational enterprises. These include:

(a) affiliated firms that are linked by ties of common ownership,

(b) a common pool of resources

(c) a strategic vision that guides all the affiliates.

✔ The Internationalization Process

Internationalization is the process by which a company enters a foreign market.

In this internationalization process the firm regards foreign markets as risky due to the fact that,
as these markets are unknown to it, the firm faces export marketing costs. To avoid such
information costs and risk, its strategy is to go abroad at a slow and cautious pace, often using
the services of specialists in international trade outside the firm.

Over time, familiarity with the foreign environment will reduce the information costs and help to
reduce the perceived risk of foreign involvement. There is a “learning” effect as firms become
familiar with a foreign market. The following figure illustrates the internationalization process.

✔ Forms of Multinational Business:

1. Exporting: Exporting means producing/procuring in the home market and selling in the

foreign market. Exporting is not an activity just for large multinational enterprises; small
firms can also make money by exporting. In recent days, exporting has become easier
though it remains a challenge for many firms.
2. Licensing: A licensing is an agreement whereby a licensor grants the rights to intangible
property (patents, intentions, formulas, processes, designs, copyrights and trademarks) to
another entity (licensee) for a specified period and in return the licensor receives a
royalty/fee from the licensee.
3. Franchising: Franchising is basically a specialized form of licensing in which the
franchiser not only sells intangible property to the franchisee but also insists that the
franchisee agrees to abide by strict rules as to how it does business.
 4. Joint venture: A joint venture entails joining of two or more independent firms out of
mutual need and to share risk in achieving a common objective.
5. Management Contracts: A firm in one country agrees to operate facilities or provide
other management services to a firm in another country for an agreed upon fees.
6. Turnkey projects: In a turnkey project, the contractor agrees to handle every details of
the project for a foreign client, including the training of operating personnel. At
completing of the contract the foreign client handles the ‘key’ of a plant that is ready for
full operation
7. Mergers and Acquisitions: Mergers is the combination of two companies to form one,
while Acquisitions is one company taken over by the other.
8. Direct foreign investment: Foreign direct investment (FDI) is equity funds invested in
other nations by setting up operations in foreign markets or by acquiring businesses there.

Why Firms Become Multinational Enterprise

Companies become MNEs for a number of reasons, including

(a) a desire to protect themselves from the risks and uncertainties of the domestic business cycle.

(b) a growing world market for their goods or services.

(c) a response to increased foreign competition.

(d) a desire to internalize in order to reduce costs.

(e) a desire to overcome tariff barriers.

(f) the chance to take advantage of technological expertise by manufacturing goods directly
rather than allowing others to do it under a license agreement.
Week : 9

Lecture : 25-27

Chapter Five: Foreign Exchange Rate

Definition of Foreign Exchange Rate:

- Foreign exchange rate is the exchange rate at which one currency will be exchanged for
another. It is also regarded as the value of one currency in relation to another currency.
- Exchange rate indicates the external purchasing power of money.

Equilibrium Exchange rate:

Equilibrium exchange rate is the exchange rate at which the supply for a currency meets the
demand of the same currency. As foreign exchange rates are affected by a number of factors, the
equilibrium exchange rate in turn, also are influenced by its supply and demand.

In broad, equilibrium exchange rate is the specific rate at which export revenue and import
spending are equal.

Hence, equilibrium is achieved when a currency’s demand is equal to its supply.

Those in favor of a floating exchange rate regime argue that allowing exchange rates to float will
enable trade to balance more quickly.
Determinants of Exchange Rate:

- Inflation Rate
- Interest Rate
- Country’s Current Account/Balance of Payments
- Government Debt
- Terms of Trade
- Political Stability and Performance
- Recession
- Speculation

Real Exchange Rate and Nominal Exchange Rate:

- Real exchange rate is a rate which measures how many times an item of goods
purchased locally can be purchased abroad. So, it indicates the ratio of an item purchased
in domestic market to the item purchased in the foreign market. It is a complex and
difficult method to calculate the real exchange rate. In short, real exchange rate measures
the power of domestic currency to the foreign currency at a prevailing time.

- The formula of real exchange rate:

(Nominal Exchange Rate × Domestic Price) / Foreign Price

For example: If the price of 1 KG Tea in Bangladesh is 200 Taka and suppose the price
for the same unit in the Dubai is 15 Dirham. The exchange rate is 1 Dirham = 17.48.
Hence, the real exchange rate is: (17.48 × 15)/200: 2.622.
 - Nominal exchange rate is also used to buy and sell the goods and services in the
international market. Nominal exchange rate means a rate by which you can exchange
your domestic currency with foreign currency at any financial institution like Bank,
NBFC and so on.
- There is no particular formula to calculate the nominal exchange rate. If you go to a
foreign country, it is obvious that you will require the domestic currency of that country.
So, you may go to the bank and demand the foreign currency by giving the Bangladeshi
currency and the rate at which it is exchanged is called the nominal exchange rate.

Types of Exchange Rate System:

i) Fixed Exchange Rate: In a fixed exchange rate system, the exchange rate between
two currencies is set at fixed rate by the government policy. It is also known as
pegged exchange rate as the rate is pegged or linked to another currency or asset
(often gold) to derive its value. A fixed exchange rate is well protected against the
rapid fluctuations in inflation. Some countries following fixed exchange rate include:
Denmark, Hong Kong, Saudi Arabia and so on.
ii) Floating Exchange Rate: In a floating exchange rate system, the rate of a currency is
determined by the market forces of the demand and supply. Here, the government and
central banks do not participate in the market for foreign exchange. This exchange
rate system is more preferable since it absorbs the shocks of a global crisis and
automatically adjusts to arrive at an equilibrium.
iii) Managed Float System: Government and central banks often seeks to increase or
decrease their exchange rates by buying or selling their own currencies. In this
system, exchange rates are still free to float, but governments attempt to influence
their values.
iv) Forward Rate: A forward rate is the one that is determined as per the terms of a
forward contract. It stipulates the purchase or sale of a foreign currency at a
predetermined ate at some date in the future.
v) Spot Rate: The spot rate is the current exchange rate for any currency. It is the rate at
which your currency will be converted if you decided to execute a foreign transaction
“right now”. They represent the day to day exchange rate and vary by a few basis
points every day.

Appreciation and Depreciation of Currencies

- Currency Depreciation is the loss of value of a country’s currency with respect to one
or more foreign reference currencies. Depreciation of a country’s currency make the
foreign goods less competitive in the domestic market as the prices of foreign goods go
up. However, depreciation of a currency tends to beneficially affect a country’s balance
of trade by improving the competitiveness of the domestic goods in foreign markets.
 - Currency Appreciation is an increase in the value of the currency. When a country’s
currency appreciates in relation to foreign currencies, foreign goods become cheaper in
the domestic market and there are overall downward pressures on domestic prices. In
contrast, the prices of domestic goods paid by the foreigners go up, which tends to
decrease the foreign demand for domestic products.

Causes of Appreciation and Depreciation of Currencies:

- In a floating exchange rate, the currency’s value goes up (or down) if the demand for it
goes up more (or less) than the supply does. In the short run, this can happen
unpredictably for a variety of reasons, including the balance of trade, speculation or other
factors in the international capital market.
- Another cause of appreciation or depreciation of a currency is speculative movements of
funds in the belief that a currency is over or under valued.
- A longer trend of appreciation (or depreciation) is likely to be caused by home country
inflation being lower (or higher) on average than inflation in other countries.

Balance of Payment

- Balance of payment (B.O.P) is the systematic record of all the economic transactions
between its residents and the residents of foreign countries over a defined period of time
such as a quarter or a year. B.O.P reflects the clear economic position of a country.

Characteristics of Balance of Payments

- Balance of payment is a systematic record of receipts and payments of a country with

other countries.
- It is a statement of accounting pertaining to a given period of time, usually one year.
- Balance of payment includes all the three items i.e. visible, invisible, capital transfers.
- Balance of payment is recorded on the basis of double entry system which means the
total debits must equal to total credits. Debit side shows the use of total foreign exchange
acquired in a particular period whereas the credit side shows the sources from which the
foreign exchange is acquired during a particular period.
- Whenever there is any difference in the total receipts and payment, a need for necessary
adjustment is felt. In case of unfavorable balance of payment, government will have to
take foreign loans or promote foreign investment so as to meet the differences.

Elements of Balance of Payments

Balance of payment is generally grouped under the following heads

 - Current Account: Capital account is a record of all merchandise exports, imports,
services, and unilateral transfer of funds.
- Capital Account: Capital account can be defined as a record of direct investment,
portfolio investment, and short term capital movements to and from countries. It includes
the flow of items such as borrowing, lending, financial securities trading, and direct
investment.
- Official Reserves Account: Official reserves account may be defined as the exports and
imports of goods, increases or decreases in foreign exchange, and liabilities to foreign
central banks.

Week : 10-11

Lecture : 29-33

Chapter Six:Global Marketing Strategies

✔ Standardized Global Marketing

Standardized global marketing strategy is an international marketing strategy for using basically
the same marketing strategy in all the company’s international markets.

Some global marketers believe that technology is making the world a smaller place and that
consumers need around the world are becoming more similar. This paves the way for “global
brands” and standardized global marketing. This standardization results in greater brand power
and reduced costs from economies of scale.

✔ Adapted Global Marketing

Adapted global marketing is an international marketing strategy for adjusting the marketing
strategy and mix elements to each international target market, bearing more costs but hoping for
a larger market share and return. Marketing programs will be more effective if they are tailored
to the unique needs of each target group because consumers in different countries have widely
different cultural backgrounds. They increasingly differ in their needs and wants, spending
power, product preferences and shopping patterns.
Hence, marketers must adapt their products, prices, channels and promotions to fit the
consumers’ desires in each country.

✔ SRC and Associated Ethnocentrism

The primary obstacles to adapted global marketing are a person’s self-reference criterion (SRC)
and associated ethnocentrism.

SRC is an unconscious reference to one’s own cultural values, experiences and knowledge as a
basis for decisions.

Ethnocentrism, on the other hand, is the notion that people in one’s own company, culture or
country know best how todo things.

✔ Global Marketing Mix Strategies:

Marketing mix consists of a set of controllable marketing programs such as product, price, place,
and promotion that a marketer can use to create value in the marketplace.

Let’s explore the marketing mix strategies from the perspective of a global marketer:

1. Global Product Strategies

Some global marketers can use Straight product extension strategy which basically means
marketing a product in a foreign market without any change. For example, Kellogg cereals,
Gillette razors, Heineken Beer are sold successfully all the around the world in the same form.

Sometimes, Product adaptation strategy is taken by the marketers by changing the product to
meet local conditions or wants. For example, McDonald’s comes up with several menus
(BigMac for USA, Mac Maharajah for India) for several countries.

Product invention consists of creating something new for a specific country market

• Maintain or reintroduce earlier products

• Create new products

For example, Nestle introduced Zeera(cumin) and Pudina (mint) yogurt in Pakistan as people in
the Indian subcontinent are fond of yogurt in this form and it goes with spicy food.

2. Global Promotion Strategy

Companies can either adopt the same communication strategy they use at home or change it for
each market.

Some companies use standardized advertising theme around the world. However, in most cases,
some adjustments might be required for language or cultural differences. Colors are also changed
to avoid taboos in other countries. For example, since purple is associated with death in Latin
America, White is mourning color in Japan, Green is associated with jungle sickness in
Malaysia, marketers must be careful in using these colors in the said countries.

Even brand names have to be adjusted in some cases. Microsoft’s operating system “Vista”
turned out to be a disparaging term for a frumpy woman in Latvia.

Some companies fully adapt their advertising message to local markets. Kellogg ads in US
promote taste and nutrition of Kellogg cereals versus competitive brands whereas in India where
many consumers eat heavy, fried breakfasts, Kellogg’s advertising attempts to convince buyers
to switch to a lighter breakfast diet.

3. Global Pricing Strategy

A company may face many considerations in setting its international prices. It can set a uniform
pricing by charging the same price in all markets but this strategy does not consider income or
wealth. As a result, the price may be too high in some countries or not high enough in other
markets

International marketers may also use market-based pricing by charging the price the market
can pay but this strategy does not consider actual costs from country to country.

Finally, standard markup pricingisanother option wherethe price will be based on a percentage
of cost but can cause problems in countries with high costs.

Regardless of how countries go about pricing their products, their foreign prices will probably
differ from their domestic prices because of the following reasons:

- Price Escalation:It refers to an increase in price that occurs when a good is exported to
foreign markets due to transportation costs, tariffs, importer’s margin, wholesaler’s
margin, retailer’s margin and so on.
- Dumping: Dumping occurs when a company either charges less than its costs or less than
it charges in the home market.

4. Global Distribution Strategy

The international company must take a whole channel view of distributing products to the
ultimate consumers.

There must be Seller’s headquarters organization to supervise the channel and should also be
a part of the channel.

Channels between nationsmust be in place tomove the products to the borders of the foreign
nations

Most importantly,Channels within nationsmust be there tomove the products from their foreign
point of entry to the final customers

✔ Assignment/Group Discussion in the Class: The Impact of Cultural Differences Across

Nations on International Marketing Strategies.

Week : 10-11

Lecture : 29-33

Chapter Six: Global Marketing Strategies

✔ Regional Free Trade Agreements

Regional free trade agreements or economic communities can be defined as an agreement of a

group of nations organized to work toward common goals in the regulation of international trade.

Some of the noteworthy free trade agreements are as follows:

1. The European Union:Formed in 1957, the European Union set out to create a single
European market by reducing barriers to the free flow of products, services, finances and
labor among member countries and by developing trade policies with nonmember
nations. Today, it is one of the largest single markets, with 27 member countries. It has a
common currency, the euro, and more than 495 million consumers, accounting for more
than 37 percent of the world’s exports. Still, companies marketing in Europe face 23
different languages, 200 years of historical and cultural differences and a daunting mass
of local rules.
2. NAFTA: In 1994, the North American Free Trade Agreements(NAFTA) established a
free trade zone among United States, Mexico, and Canada. The agreement has created a
single market of 447 million people who produce and consume over $16 trillion worth of
goods and services annually. As it is implemented over a 15-year period, NAFTA will
eliminate all trade restrictions among the three nations. Thus far, the agreement has
allowed trade between the countries to flourish. In the dozen years following the
establishment, trade among NAFTA nations has risen 198 percent. U.S merchandise
exports to NAFTA partners grew 157 percent compared with exports to the rest of the
world at 108 percent. Canada and Mexico are now the first and second trading partners of
U.S.
3. CAFTA: Following the success of NAFTA, in 2005, the Central American Free Trade
Agreement (CAFTA) established a free trade zone between the United States and Costa
Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. And
talks have been underway since 1994 to investigate establishing a Free Trade Area of the
American (FTAA). This mammoth free trade zone would include 34 countries stretching
from the Bering Strait to Cope Horn, with a population of more than 800 million and a
combined GDP of about 18.5 trillion.
4. ASEAN: The Association of Southeast Asian Nations (ASEAN) was formed in 1967 by
Indonesia, Malaysia, the Philippines, Singapore and Thailand. Brunei joined it in 1984,
Vietnam in 1995, Laos and Myanmar in 1997 and Cambodia in 1998. It officially formed
the ASEAN Free Trade Area(AFTA) in 1993, according to which tariff on intra-region
trade was to be cut to 5 percent by 2007.
5. APEC: The Asia Pacific Economic Cooperation(APEC) was formed in 1989. It covers
21 countries of Asia and the pacific region including Australia, Brunei, Canada, Chile,
China, Hong Kong, Indonesia, Japan, Malaysia, Mexico, New Zealand, Papua New
Guinea, the Philippines, Singapore, South Korea, Taiwan, Thailand and United States.
6. SAARC: The success of European economic community and NAFTA made the south
Asian countries to think of coming together to boost economy and commercial
cooperation. To improve the employment opportunities, to increase the income level,
standard of living, and to promote the overall economy, and development of the member
countries, theSouth Asian Association for Regional Cooperation(SAARC) was formed.
India, Bangladesh, Bhutan, Pakistan, the Maldives, Nepal and Srilanka adopted a
declaration on SAARC in August 1983. All these nations agreed on five areas of
cooperation:
🡪Agriculture and Rural Development
� Telecommunications, Science, Technology and Metrology
� Health and Population Activities
� Transport
� Human Resource Development
 Afghanistan was added to the regional grouping at the behest of India on November 13,
2008, with the addition of Afghanistan, the total number of member states were raised to
eight (8). The people’s republic of China, The EU, the United States of America, South
Korea, Iran, Myanmar, Australia and Mauritius are observers to SAARC.

✔ International Monetary Fund (IMF)

International monetary fund (IMF) is an organization of 189 countries, working to foster global
monetary cooperation, secure financial stability, facilitate international trade, promote high
employment and sustainable economic growth and reduce poverty around the world.

Created in 1945, the IMF is governed by and accountable to 189 countries that up its near global
membership.

The IMF, also known as the Fund, was conceived at a UN conference in Bretton Woods in July
1944. The 44 countries at that conference sought to build a framework for economic cooperation
to avoid the repetition of competitive devaluations that had contributed to the Great Depression
of the 1930s.

The IMF plays three major roles in the global monetary system. The IMF surveys and monitors
economic and financial developments in various countries, lends funds to countries with balance
of payment difficulties