Topic 4 International Trade, Conflicts and Negotiations

Government Influence on Trade

A number of factors can have an influence on International trade and a few of them are policies created by government of countries to either safeguard or stimulate their economies. Economic policies of any government are important and some affects international trade. While government of countries encourages or promotes export (goods going out of the country), imports (goods coming into a country) in many cases are hit by protectionism or trade barriers.

International Trade Relations

When discussing international relations, we are looking at the peaceful co-existence that prevails among nations of the world which is governed by various factors, some of which are power politics, economic interdependence among states and social patterns that set in, due to various happenings in the course of the passing years. (Sabba Rao, 2012).

International Relations are governed by foreign policies of the governments in terms of social, technological, economic and political. Such policies greatly influence the international business dimensions.

International Economic Relations

When we discuss trade among nations, you will note that nations cooperate among themselves by establishing various economic organizations like banks, industries and over a period of years tend to lead to economic policies like tariffs policy, international cartel, inter-governmental commodity agreements, dumping and pre-emptive buying policies, quota, licences etc.

International Law and Business Firms

International law aims to maintain orderly system of international relations. It also aims at securing justice for human beings and deals with the rights, duties and interests of the nations. When you look at international law, it deals with rules and regulations governing the business of MNCs. International law focuses on;

·         International Customers

·         Treaties and Contracts

·         International arbitral tribunal and settlements

·         Jurisdiction issues

·         Negotiation and mediations

·         Intervention etc.

 Trade Policies

Managing any business strategically needs an understanding of the business policies. In the case of global companies, a greater understanding of trade policies is essential. International trade policies deal with the policies of national governments relating to exports of various goods and services to various countries either on equal terms and conditions or on discriminatory terms and conditions.

Trade Policies aims at protecting the domestic industry from the competition of advanced countries through imposing quotas. From time to time Governments announces trade policies through the following instruments; (Subba Rao, 2012:258)

·         Tariffs

·         Subsidies

·         Import Quotas

·         Voluntary Export Restraints

·         Local Content Requirements

·         Administrative Policies

Protectionism

Protectionism is a form of trade barriers and governments comes up with trade barriers to protect the domestic industries from foreign competitors, to promote indigenous research and development. To conserve foreign exchange resources of the country, to make balance of payments position favourable, to curb conspicuous consumption, to mobilise revenue for the government and discriminate against certain countries. 

There are a number of reasons for trade barriers; some of which are as follows;

·         Protection of infant industries

·         Diversification Argument

·         Improving the terms of Trade

·         Improving Balance of Payments

·         Anti-Dumping

·         Bargaining

·         Employment Argument

·         National Defence

·         Key Industry Argument

·         Keeping Money at Home

·         The Pauper Labour Argument

·         Size of Home market

·         Equalization of Cost of Product

·         Strategic Trade Policies

 Demerits of Protectionism

·         Protection is against the interest of consumers as it increases price and reduces variety and choice.

·         Protection makes producers and sellers less quality conscious.

·         It encourages domestic monopolies.

·         Even inefficient firms may feel secure under protection and its discourages innovation.

·         Protection leaves the arena open to corruption.

·         It reduces the volume of foreign trade.

·         Protection leads to un-economic utilization of world’s resources.

 Tariff Barriers

Two broad types of Trade Barriers

1.      Tariff Barriers - Tariffs in international Trade refer to the duties or taxes imposed on internationally traded goods when they cross the national borders.

2.      Non-Tariff Barriers - Non-Tariff Barriers (NTB) are new measures that have grown considerably since the 1980’s. There are two categories of NTB;

First categories of NTB’s are those that are generally used by developing countries to prevent foreign exchange outflows or result from their chosen strategy of economic development. These are mostly traditional NTB such as import licences, import quotas, foreign exchange regulation, and canalization of imports.

Second categories of NTB’s are those used by developed countries to protect domestic industries which have lost international competitiveness and or political sensitivity. Example of such a NTB is the Voluntary Export Restraint (VER).

There are other significant restrictive NTB such as import prohibition, quantitative restrictions, and non-automatic licencing

Brief accounts of the important of NTB are as follows;

·         Quotas – restriction on quantity of goods which are imported into a country.

·         Licensing – Doing business under an agreement using a license.

·         Voluntary Export Restraint – A voluntary export restraint is the opposite form of import quota. Exporting country imposes such restriction, mostly at the request of the importing country.

·         Administered Protection – the use of informal and formal policies to restrict imports and boost exports.

 Conflicts and Negotiation in International Business

Where there is international trade and businesses, you will come across conflicts. Conflicts may arise between foreign companies and host country; it may arise between foreign companies and domestic companies and may also arise between home country companies and governments. In most cases, conflicts arise due to conflict of interests with the different parties. Different factors may cause conflict and one such factor is the long term goals of most MNCs, such as maximizing profits.

Conflicts from the Point of Views of Host Country

Host countries normally prefer global companies to contribute to the economic and social development of the country. It also prefer MNCs to pay tax and discharge other obligations such as creating job for its citizens, trained it citizens in new skills etc.

Conflicts between Host Country and Transnational Company
Conflicts between national governments and MNCs may relates to the transfer of pricing policies, transfer of goods from one country to another through its subsidiaries and may also arise in conflicts through foreign exchange and other areas such as;

·         Macroeconomic Areas.

·         Production Areas.

·         Marketing Areas.

·         Finance Areas.

·         Human Resource Areas.

·         Social and Ethical Areas.

·         Environment Issues.

·         Competition Areas.

 When you look at the conflicts in Macroeconomic areas, the following factors are taken into account;

·         Structural factors - (issues of infrastructural and capital goods) to build economic competencies.

·         Exploitation of Natural Resources – Host countries expect the utilization of natural resources well and for the benefits of the future generation.

 Production Areas – In the less developing areas of the country in order to bring much needed development.

Marketing Areas – Conflicts in terms of promotional programs, pricing and locations.

Finance Areas – Division of profits between MNCs and local operations

Human Resources Areas – Contribution to the developments of host country human resources through employment and skills development.

Social and Ethical Issues – Social responsibilities against profit making.

Environmental Issues – Have environmental responsibilities in term of pollution and environment damages.

Competing Areas – Issues of collaboration against competitions.

 

Negotiations

When you look at negotiations, you will come across issues such as;

·         Negotiation Strengths.

·         Bargaining Process.

·         Behavioural Aspect in Negotiations.

·         Bilateral and Multilateral Agreements.

·         Corporate Citizenship

Negotiating Strengths; Government and Company

Government formulates regulations to control and prevent disputes and conflicts. You will note that foreign companies prefer political stability and this can be a positive environment for investors to invest in a country.

Companies also have bargaining powers which they tend to use to their advantages;

·         Technology.

·         Expertise; e.g. In Marketing.

·         Product diversity.

·         Joint Companies

Bargaining Process

Bargaining process sometimes takes place before MNCs comes in to invest and this is to avoid any future conflicts. Agreements between parties takes place if there are overlapping in certain areas of activities and responsibilities.

Behavioural Aspect of Negotiations

Taking into account cultural factors, and cultural differences need to be understood well before negotiation take place to avoid future conflicts. (Low vs High context culture).

Bilateral and Multilateral Agreements

Creation of bilateral agreements with MNCs in order to improve investment climate in the country. Sometimes, MNCs prefers host government to intervene in any dispute.

 

Corporate Citizenship

MNCs have realised the importance of being a good and responsible corporate citizen to minimise dispute and conflicts.

 Please read the relevant chapters per Subba Rao book; International Business 3^rd Revised Eidtion

 

Sources

F. Cherunilam, (2009) International Business Environment, Himalaya Publishing House.

Subba Rao, (2012) International Business 3^rd Revised Edition, Himalaya Publishing House