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WTO & Trade Issues - International Trade Environment.pptx

  1. International Trade Environment
  2. An Introduction • Trade is the concept of exchanging goods and services between two people or entities. International trade is then the concept of this exchange between people or entities in two different countries. People or entities trade because they believe that they benefit from the exchange. They may need or want the goods or services. While at the surface, this many sound very simple, there is a great deal of theory, policy, and business strategy that constitutes international trade. • In today’s world, no country remains isolated. Various components of the national economy like industries, service sectors, level of income and employment, and living standard — are linked to the economies of its trading partners. This linkage takes the form of international movements of goods- and services, labour, business enterprise, investment funds, and technology. In truth, national economic policies cannot be formulated without evaluating their probable impacts on the economies of other countries. • Certain important developments occurred in the post-Second World War period which led to growing interdependence among nations. Mention may be made in the context of the for- mation of the European Community (now known as the European Union) in the 1950s, the growing importance of multinational corporations in the 1960, and the increasing power in world oil markets enjoyed by the Organisation of Petroleum Exporting Countries (OPEC) in the 1970s. All these developments have resulted in the evolution of the world community into a complicated system based on a growing interdependence among nations. Source: Secondary Sources on Google
  3. An Introduction • In the past decade, the world’s market-based economies have been integrated as never before. Exports and imports as a share of national output have reached unprecedented levels for most industrial nations. But foreign investment and international lending have expanded more rapidly than would trade. In spite of this, demands have grown for protection against imports. For indus- trial nations, protectionist pressures have been strongest during periods of rising unemployment caused by economic recession. • Moreover, developing countries often maintain that the so-called liberalised trading system called for by industrial nations works to the disadvantage of developing nations. The main reason for this is that the prices of developing nations exports have not increased as much as the prices of developing nation imports over the 20th century as a whole. • Managers have to analyse the consequences of developments in the global economic environment because international economic forces, national government policies, international economic, financial and trading institutions affect management in complex and subtle ways Source: Secondary Sources on Google
  4. International Trade Theories • To better understand how modern global trade has evolved, it’s important to understand how countries traded with one another historically. Over time, economists have developed theories to explain the mechanisms of global trade. • The main historical theories are called classical and are from the perspective of a country, or country-based. • By the mid-twentieth century, the theories began to shift to explain trade from a firm, rather than a country, perspective. These theories are referred to as modern and are firm-based or company-based. Both of these categories, classical and modern, consist of several international theories. Source: Secondary Sources on Google
  5. Classical Country Based Theories • Mercantilism: Developed in the sixteenth century, mercantilism was one of the earliest efforts to develop an economic theory. This theory stated that a country’s wealth was determined by the amount of its gold and silver holdings. In it’s simplest sense, mercantilists believed that a country should increase its holdings of gold and silver by promoting exports and discouraging imports. In other words, if people in other countries buy more from you (exports) than they sell to you (imports), then they have to pay you the difference in gold and silver. The objective of each country was to have a trade surplus, or a situation where the value of exports are greater than the value of imports, and to avoid a trade deficit, or a situation where the value of imports is greater than the value of exports. Although mercantilism is one of the oldest trade theories, it remains part of modern thinking. Countries such as Japan, China, Singapore, Taiwan, and even Germany still favor exports and discourage imports through a form of neo-mercantilism in which the countries promote a combination of protectionist policies and restrictions and domestic-industry subsidies. Source: Secondary Sources on Google
  6. Classical Country Based Theories • Mercantilism: Nearly every country, at one point or another, has implemented some form of protectionist policy to guard key industries in its economy. While export-oriented companies usually support protectionist policies that favour their industries or firms, other companies and consumers are hurt by protectionism. Taxpayers pay for government subsidies of select exports in the form of higher taxes. Import restrictions lead to higher prices for consumers, who pay more for foreign- made goods or services. Free-trade advocates highlight how free trade benefits all members of the global community, while mercantilism’s protectionist policies only benefit select industries, at the expense of both consumers and other companies, within and outside of the industry. Source: Secondary Sources on Google
  7. Classical Country Based Theories • Absolute Advantage: The concept of absolute advantage was developed by Adam Smith in his book "Wealth of Nations" to show how countries can gain from trade by specializing in producing and exporting the goods that they can produce more efficiently than other countries Trade between countries shouldn’t be regulated or restricted by government policy or intervention. Smith stated that trade should flow naturally according to market forces. In a hypothetical two-country world, if Country A could produce a good cheaper or faster (or both) than Country B, then Country A had the advantage and could focus on specializing on producing that good. Similarly, if Country B was better at producing another good, it could focus on specialization as well. By specialization, countries would generate efficiencies, because their labor force would become more skilled by doing the same tasks. Production would also become more efficient, because there would be an incentive to create faster and better production methods to increase the specialization. Smith’s theory reasoned that with increased efficiencies, people in both countries would benefit and trade should be encouraged. His theory stated that a nation’s wealth shouldn’t be judged by how much gold and silver it had but rather by the living standards of its people. Source: Secondary Sources on Google
  8. Classical Country Based Theories • Comparative Advantage: The challenge to the absolute advantage theory was that some countries may be better at producing both goods and, therefore, have an advantage in many areas. In contrast, another country may not have any useful absolute advantages. To answer this challenge, David Ricardo, an English economist, introduced the theory of comparative advantage in 1817. Ricardo reasoned that even if Country A had the absolute advantage in the production of both products, specialization and trade could still occur between two countries. Comparative advantage occurs when a country cannot produce a product more efficiently than the other country; however, it can produce that product better and more efficiently than it does other goods. The difference between these two theories is subtle. Comparative advantage focuses on the relative productivity differences, whereas absolute advantage looks at the absolute productivity. Source: Secondary Sources on Google
  9. Classical Country Based Theories • Comparative Advantage: Let’s look at a simplified hypothetical example to illustrate the subtle difference between these principles: Miranda is a Wall Street lawyer who charges $500 per hour for her legal services. It turns out that Miranda can also type faster than the administrative assistants in her office, who are paid $40 per hour. Even though Miranda clearly has the absolute advantage in both skill sets, should she do both jobs? No. For every hour Miranda decides to type instead of do legal work, she would be giving up $460 in income. Her productivity and income will be highest if she specializes in the higher-paid legal services and hires the most qualified administrative assistant, who can type fast, although a little slower than Miranda. By having both Miranda and her assistant concentrate on their respective tasks, their overall productivity as a team is higher. This is comparative advantage. A person or a country will specialize in doing what they do relatively better. In reality, the world economy is more complex and consists of more than two countries and products. However, this simplistic example demonstrates the basis of the comparative advantage theory. Source: Secondary Sources on Google
  10. Classical Country Based Theories • Heckscher-Ohlin Theory (Factor Proportions Theory) The theories of Smith and Ricardo didn’t help countries determine which products would give a country an advantage. Both theories assumed that free and open markets would lead countries and producers to determine which goods they could produce more efficiently. In the early 1900s, two Swedish economists, Eli Heckscher and Bertil Ohlin, focused their attention on how a country could gain comparative advantage by producing products that utilized factors that were in abundance in the country. Their theory is based on a country’s production factors—land, labour, and capital, which provide the funds for investment in plants and equipment. They determined that the cost of any factor or resource was a function of supply and demand. Factors that were in great supply relative to demand would be cheaper; factors in great demand relative to supply would be more expensive. Their theory, also called the factor proportions theory, stated that countries would produce and export goods that required resources or factors that were in great supply and, therefore, cheaper production factors. In contrast, countries would import goods that required resources that were in short supply, but higher demand. For example, China and India are home to cheap, large pools of labor. Hence these countries have become the optimal locations for labor-intensive industries like textiles and garments. Source: Secondary Sources on Google
  11. Classical Country Based Theories Leontief Paradox In the early 1950s, Russian-born American economist Wassily W. Leontief studied the US economy closely and noted that the United States was abundant in capital and, therefore, should export more capital-intensive goods. However, his research using actual data showed the opposite: the United States was importing more capital-intensive goods. According to the factor proportions theory, the United States should have been importing labour-intensive goods, but instead it was actually exporting them. His analysis became known as the Leontief Paradox because it was the reverse of what was expected by the factor proportions theory. In subsequent years, economists have noted historically at that point in time, labour in the United States was both available in steady supply and more productive than in many other countries; hence it made sense to export labour-intensive goods. Over the decades, many economists have used theories and data to explain and minimize the impact of the paradox. However, what remains clear is that international trade is complex and is impacted by numerous and often-changing factors. Trade cannot be explained neatly by one single theory, and more importantly, our understanding of international trade theories continues to evolve. Source: Secondary Sources on Google
  12. Modern or Firm Based Trade Theories In contrast to classical, country-based trade theories, the category of modern, firm-based theories emerged after World War II. The firm-based theories evolved with the growth of the multinational company (MNC). The country-based theories couldn’t adequately address the expansion of either MNCs or intra industry trade, which refers to trade between two countries of goods produced in the same industry. For example, Japan exports Toyota vehicles to Germany and imports Mercedes-Benz automobiles from Germany. Unlike the country-based theories, firm-based theories incorporate other product and service factors, including brand and customer loyalty, technology, and quality, into the understanding of trade flows. Source: Secondary Sources on Google
  13. Modern or Firm Based Trade Theories • Country Similarity Theory Swedish economist Steffan Linder developed the country similarity theory in 1961, as he tried to explain the concept of intra industry trade. Linder’s theory proposed that consumers in countries that are in the same or similar stage of development would have similar preferences. In this firm-based theory, Linder suggested that companies first produce for domestic consumption. When they explore exporting, the companies often find that markets that look similar to their domestic one, in terms of customer preferences, offer the most potential for success. Linder’s country similarity theory then states that most trade in manufactured goods will be between countries with similar per capita incomes, and intra industry trade will be common. Source: Secondary Sources on Google
  14. Modern or Firm Based Trade Theories • Product Life Cycle Theory Raymond Vernon, a Harvard Business School professor, developed the product life cycle theory in the 1960s. The theory, originating in the field of marketing, stated that a product life cycle has three distinct stages: (1) new product, (2) maturing product, and (3) standardized product. The theory assumed that production of the new product will occur completely in the home country of its innovation. It has also been used to describe how the personal computer (PC) went through its product cycle. The PC was a new product in the 1970s and developed into a mature product during the 1980s and 1990s. Today, the PC is in the standardized product stage, and the majority of manufacturing and production process is done in low-cost countries in Asia and Mexico. The product life cycle theory has been less able to explain current trade patterns where innovation and manufacturing occur around the world. For example, global companies even conduct research and development in developing markets where highly skilled labour and facilities are usually cheaper. Even though research and development is typically associated with the first or new product stage and therefore completed in the home country, these developing or emerging-market countries, such as India and China, offer both highly skilled labour and new research facilities at a substantial cost advantage for global firms. Source: Secondary Sources on Google
  15. Modern or Firm Based Trade Theories • Global Strategic Rivalry Theory Global strategic rivalry theory emerged in the 1980s and was based on the work of economists Paul Krugman and Kelvin Lancaster. Their theory focused on MNCs and their efforts to gain a competitive advantage against other global firms in their industry. Firms will encounter global competition in their industries and in order to prosper, they must develop competitive advantages. The critical ways that firms can obtain a sustainable competitive advantage are called the barriers to entry for that industry. The barriers to entry refer to the obstacles a new firm may face when trying to enter into an industry or new market. The barriers to entry that corporations may seek to optimize include:  research and development,  the ownership of intellectual property rights,  economies of scale,  unique business processes or methods as well as extensive experience in the industry, and  the control of resources or favourable access to raw materials. Source: Secondary Sources on Google
  16. Modern or Firm Based Trade Theories • Porter’s National Competitive Advantage Theory In the continuing evolution of international trade theories, Michael Porter of Harvard Business School developed a new model to explain national competitive advantage in 1990. Porter’s theory stated that a nation’s competitiveness in an industry depends on the capacity of the industry to innovate and upgrade. His theory focused on explaining why some nations are more competitive in certain industries. To explain his theory, Porter identified four determinants that he linked together. The four determinants are: Source: Secondary Sources on Google
  17. Modern or Firm Based Trade Theories • Porter’s National Competitive Advantage Theory  Local market resources and capabilities (factor conditions) Porter recognized the value of the factor proportions theory, which considers a nation’s resources (e.g., natural resources and available labor) as key factors in determining what products a country will import or export. Porter added to these basic factors a new list of advanced factors, which he defined as skilled labor, investments in education, technology, and infrastructure. He perceived these advanced factors as providing a country with a sustainable competitive advantage.  Local market demand conditions. Porter believed that a sophisticated home market is critical to ensuring ongoing innovation, thereby creating a sustainable competitive advantage. Companies whose domestic markets are sophisticated, trendsetting, and demanding forces continuous innovation and the development of new products and technologies. Many sources credit the demanding US consumer with forcing US software companies to continuously innovate, thus creating a sustainable competitive advantage in software products and services. Source: Secondary Sources on Google
  18. Modern or Firm Based Trade Theories • Porter’s National Competitive Advantage Theory  Local suppliers and complementary industries To remain competitive, large global firms benefit from having strong, efficient supporting and related industries to provide the inputs required by the industry. Certain industries cluster geographically, which provides efficiencies and productivity.  Local firm characteristics Local firm characteristics include firm strategy, industry structure, and industry rivalry. Local strategy affects a firm’s competitiveness. A healthy level of rivalry between local firms will spur innovation and competitiveness. In addition to the four determinants of the diamond, Porter also noted that government and chance play a part in the national competitiveness of industries. Governments can, by their actions and policies, increase the competitiveness of firms and occasionally entire industries. Porter’s theory, along with the other modern, firm-based theories, offers an interesting interpretation of international trade trends Source: Secondary Sources on Google
  19. Trade Barriers No country however rich or large can make everything it needs or has all the resources it requires for its manufacturing industries. Yet, some countries are against free trade. They believe that free trade is bad for their economies and hurts growth and employment. So, what are the arguments used to impose trade barriers? Let’s look at some of the reasons why government are for trade barriers: • To protect domestic jobs from “cheap” labour abroad • To improve trade deficit: Trade barriers make imports more expensive, and as a result, they also decrease the demand for imports. However, in retaliation trade partners can do the same and increase prices for exports • To protect “infant industries”: Countries want to give newly developing industries (known as infant industries) time to grow and become competitive. This is a reasonable argument for imposing trade barriers. However, in some cases, government protection never ends • Protection from “Dumping”: Dumping is when an importer sells products at a below-average cost of production. Dumping is hard to prove, yet nonetheless, sometimes countries impose anti- dumping duties just because it is competing against a locally manufactured product • To earn more revenue: Governments gain extra revenue from tariffs Source: Secondary Sources on Google
  20. Trade Barriers Types of Trade Barriers • Voluntary Export Restraints (VERs): They are agreements between an exporting and an importing country that limits the quantity businesses can export during a period. Even though the term says the agreement is voluntary, it is usually not. By reducing the quantity exported, the exporting country can increase prices and total revenue • Regulatory Barriers: Any “legal” barriers that try to restrict imports. These include things like safety standards, pollution standards, product standards that specify that the product should meet or exceed standards set by the local government. For example, car manufacturers often have to pass certain safety ratings to sell the car in the importing country • Anti-Dumping Duties: Dumping happens when the exporting producer sells goods below cost. The government then can impose a duty on the good till the World Trade Organization decides the issue • Subsidies: Governments offer subsidies to help make firms more competitive by lowering their costs Source: Secondary Sources on Google
  21. Trade Barriers Types of Trade Barriers • Quotas: A quota, a type of trade barrier, is a restriction on the quantity that can import into a country • Tariffs: A tariff is a type of trade barrier that acts as a tax on imports. Tariffs raise the price of the imported good to lowers their consumption. This price increase encourages consumers to pick the local option Source: Secondary Sources on Google
  22. Tariffs – An Overview • A tariff is a duty or tax imposed by the government of a country upon the traded commodity as it crosses the national boundaries. Tariff can be levied both upon exports and imports • The tariff or duties imposed upon the goods originating in the home country and scheduled for abroad are called as the export duties. Countries, interested in maximising their exports generally avoid the use of export duties. Tariffs have, therefore, become synonymous with import duties • The import duties or import tariffs are levied upon the goods originating from abroad and scheduled for the home country • Sometimes a country may also resort to what is called as a transit duty. It is imposed upon the goods originating in the foreign country and scheduled for a third country crossing the borders of the home country. For instance, if India imposes tariffs on goods that Bangladesh exports to Nepal through the Indian Territory, these will be called as transit duties Source: Secondary Sources on Google
  23. Types of Tariffs There are several types of tariffs that a government can employ. Let’s discuss common types of tariffs: • 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. • 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. In the most common application of ad valorem taxes, which are municipal property taxes, the real estate of property owners is periodically assessed by a public tax assessor to determine its current value. The assessed value of the property is used to compute a tax annually levied on the property owner by a municipality or other government entity. Source: Secondary Sources on Google
  24. Types of Tariffs There are several types of tariffs that a government can employ. Let’s discuss common types of tariffs: • Compound Tariff: The compound tariff is a combination of specific and ad valorem tariff. The structure of compound tariff includes specific duty on each unit of the commodity plus a percentage of ad valorem duty. • Sliding Scale Tariff: The import duties which vary with the prices of the commodities are termed as sliding scale duties. These may either be on specific or ad valorem basis. Source: Secondary Sources on Google
  25. Trade Agreements Countries negotiate mutually beneficial agreements with each other to simplify trade between nations, eliminate tariff and non-tariff barriers, recognize each other’s standards, etc. There are 2 types of international trade agreements: • Multilateral (or Regional) Agreements: They set rules of trade between several countries. Multilateral agreements shape international trade unions, such as WTO (World Trade Organization), EU (European Union), NAFTA (The North American Free Trade Agreement), etc. For example, WTO is regulated by General Agreement on Trade and Tariffs. European Union is regulated by several treaties • Bilateral Agreements: They set rules of trade between two countries. For example, there are Canada-Peru, EU-South Africa, US-Australia and other free trade agreements. The agreements may be limited to certain goods and services or certain types of market entry barriers. Source: Secondary Sources on Google
  26. Trade Agreements When choosing countries for export or import consider following benefits of international trade agreements: Source: Secondary Sources on Google
  27. General Agreement on Tariffs and Trade (GATT) • The General Agreement on Tariffs and Trade (GATT), signed on Oct. 30, 1947, by 23 countries, was a legal agreement minimizing barriers to international trade by eliminating or reducing quotas, tariffs, and subsidies while preserving significant regulations. • The GATT was intended to boost economic recovery after World War II through reconstructing and liberalizing global trade. • The GATT went into effect on Jan. 1, 1948. Since that beginning it has been refined, eventually leading to the creation of the World Trade Organization (WTO) on January 1, 1995, which absorbed and extended it. By this time 125 nations were signatories to its agreements, which covered about 90% of global trade. • One of the key achievements of the GATT was that of trade without discrimination. Every signatory member of the GATT was to be treated as equal to any other. This is known as the most-favored-nation principle, and it has been carried through into the WTO. A practical outcome of this was that once a country had negotiated a tariff cut with some other countries (usually its most important trading partners), this same cut would automatically apply to all GATT signatories. Escape clauses did exist, whereby countries could negotiate exceptions if their domestic producers would be particularly harmed by tariff cuts Source: Secondary Sources on Google
  28. World Trade Organization • The Uruguay round* of GATT (1986-93) gave birth to World Trade Organization. The members of GATT singed on an agreement of Uruguay round in April 1994 in Morocco for establishing a new organization named WTO. (The Uruguay Round was the 8th round of multilateral trade negotiations (MTN) conducted within the framework of the General Agreement on Tariffs and Trade (GATT), spanning from 1986 to 1993 and embracing 123 countries as "contracting parties“) • It was officially constituted on January 1, 1995 which took the place of GATT as an effective formal, organization. GATT was an informal organization which regulated world trade since 1948. • Contrary to the temporary nature of GATT, WTO is a permanent organization which has been established on the basis of an international treaty approved by participating countries. • The WTO has nearly 153 members accounting for over 97% of world trade. Around 30 others are negotiating membership. Decisions are made by the entire membership. This is typically by consensus. Source: Secondary Sources on Google
  29. Objectives of World Trade Organization • To improve the standard of living of people in the member countries • To ensure full employment and broad increase in effective demand • To enlarge production and trade of goods • To increase the trade of services • To ensure optimum utilization of world resources • To protect the environment • To accept the concept of sustainable development Source: Secondary Sources on Google
  30. Functions of World Trade Organization • To implement rules and provisions related to trade policy review mechanism • To provide a platform to member countries to decide future strategies related to trade and tariff • To provide facilities for implementation, administration and operation of multilateral and bilateral agreements of the world trade • To administer the rules and processes related to dispute settlement • To ensure the optimum use of world resources • To assist international organizations such as, IMF for establishing coherence in Universal Economic Policy determination Source: Secondary Sources on Google
  31. GATT vs WTO – Let’s Understand the Difference!! • It is probably best to be clear from the start that the General Agreement on Tariffs and Trade (GATT) was two things: (1) an international agreement, i.e. a document setting out the rules for conducting international trade, and (2) an international organization created later to support the agreement. The text of the agreement could be compared to law, the organization was like parliament and the courts combined in a single body. As its history shows, the attempt to create a fully fledged international trade agency in the 1940s failed. But GATT's drafters agreed that they wanted to use the new rules and disciplines, if only provisionally. Then government officials needed to meet to discuss issues related to the agreement, and to hold trade negotiations. These needed secretarial support, leading to the creation of an ad hoc organization — that continued to exist for almost half a century. • GATT, the international agency, no longer exists. It has now been replaced by the World Trade Organization. Source: Secondary Sources on Google
  32. GATT vs WTO – Let’s Understand the Difference!! • What Happened? When GATT was created after the Second World War, international commerce was dominated by trade in goods. Since then, trade in services — transport, travel, banking, insurance, telecommunications, transport, consultancy and so on — has become much more important. So has trade in ideas — inventions and designs, and goods and services incorporating this "intellectual property". The General Agreement on Tariffs and Trade always dealt with trade in goods, and it still does. It has been amended and incorporated into the new WTO agreements. The updated GATT lives alongside the new General Agreement on Trade in Services (GATS) and Agreement on Trade- Related Aspects of Intellectual Property Rights (TRIPS). The WTO brings the three together within a single organization, a single set of rules and a single system for resolving disputes In short, the WTO is not a simple extension of GATT. It is much more. While GATT no longer exists as an international organization, the GATT agreement lives on. The old text is now called "GATT 1947". The updated version is called "GATT 1994". As the more mature WTO developed out of GATT, you could say that the child is the father of the man. Source: Secondary Sources on Google
  33. Implication of WTO on International Marketing • Growth in Merchandise Exports: The exports of developing countries like India, Brazil, etc., have increased since the setting up of WTO. The increase in exports of developing countries is due to reduction in trade barriers — tariff and non-tariff • Growth in Services Exports: The WTO has also introduced an agreement on services called GATS. Under this agreement, the member nations have to liberalise the services sector. Certain developing countries like India would benefit from such an agreement • Foreign Direct Investment: As per the TRIMs (Trade Related Investment Measures) agreement, restrictions on foreign investment have been withdrawn by member nations of WTO including developing countries. Therefore, the developing countries have been benefited by way of foreign direct investment as well as by Euro equities and portfolio investment • Benefits of TRIPs Agreement: The TRIPs (Trade-Related Aspects of Intellectual Property Right) agreement has benefited the developing countries like Brazil, India, China, and others. The firms in developing countries have also developed new products and got them patented Source: Secondary Sources on Google
  34. Implication of WTO on International Marketing • Textiles and Clothing: At the Uruguay Round, it was agreed upon by member countries to phase out MFA (Multifiber Arrangement) by 2005. Under MFA, the developed countries like France, USA, UK, Canada, etc. used to import quotas on the amount of clothing & textile exports from developing countries to developed countries. The MFA has been withdrawn w.e.f. 1.1.2005, and therefore, it would benefit the developing countries including India by way of increase in export of textiles and clothing. Source: Secondary Sources on Google
  35. Overview of India’s International Trade Source: Secondary Sources on Google
  36. Overview of India’s International Trade a) Pre-Independence Phase: • India, historically, has a global trading background for past many centuries. India was carrying out trade with far-off lands in West Asia and beyond. During this period India had trade surplus with whole world which used to be settled by inflow of gold. • During Mughal period, there was satisfactory progress of trade and industry. • During the period, 1780-1860, India changed from being an exporter of processed goods for which it received payment in bullion, to being an exporter of raw materials and a buyer of manufactured goods. • By the second quarter of the 19th century, India’s exports were mainly of raw materials like raw cotton. • Starting in the 1830s, British textiles began to appear in the Indian markets, with the value of the textile imports growing from £5.2 million 1850 to £18.4 million in 1896 • In the British era, India’s trade included heavy exports of textiles and heavy imports of bullion into India through the East India Company. Source: Secondary Sources on Google
  37. Overview of India’s International Trade a) Pre-Independence Phase: • After British rule, India’s international trade was concentrated in the countries of British Empire Before 2nd world war, India was exporting more than imports on account of unilateral transfer of payments to Britain, to arrange for salaries and pensions of British officers • Second World War (1939-1945) changed nature of India’s foreign trade. The British Government commandeered from poverty-stricken people of India large supplies of foodstuffs, leather-ware besides iron and steel. During this period India had a positive trade balance with Britain • World trade and economy was severely affected by world war (1914-1918), the great depression period (1929-1933) and 2nd world war (1939 -1945). Between 1919- 1939, both imports and exports of India declined • Systematic planning was started in India after independence Source: Secondary Sources on Google
  38. Overview of India’s International Trade b) Post-Independence Phase: • During the first decade and a half after independence India’s export earnings remained stagnant. Exports as a percentage of world exports declined sharply from 2.5% in 1947 to 0.9% in 1966. This lack of performance on the export front was policy induced and not due to independent external factors beyond India’s control • The stagnation in exports from the country continued till the early 1970’s, followed by significant growth in the rest of the decade. Two factors paved the way for a return to liberalization in the late 1970s. First, industrialists came to feel the adverse effect of the tight import restrictions on their profitability and began to lobby for liberalization of imports of the raw materials and machinery for which domestically produced substitutes did not exist. Second, improved export performance and remittances from overseas workers in the Middle East led to the accumulation of a healthy foreign exchange reserve, raising the comfort level of policymakers with respect to the effect of liberalization on the balance of payments • From 1985-86, export growth picked up significantly and continued till 1989-90, however it was reduced during the economic crisis of 1991 to 1993 Source: Secondary Sources on Google
  39. Overview of India’s International Trade c) Post-Liberalization Phase: • India initiated series of economic reforms in 1991 aimed at establishing macro-economic balance, economic growth and regain external credit worthiness. The liberalisation was aimed at decreasing the government intervention in the business, thereby pushing economic growth through reforms. The policy opened up the country to global economy. It discouraged public sector monopoly and paved the way for competition in the market • The Asian financial crisis of 1997-99 laid India low, yet it proved far more resilient than other Asian nations. Soon after came two droughts (in 2000 and 2002), the dot-com collapse and global recession of 2001, and the huge global uncertainty created in the run-up to the invasion of Iraq in 2003. The Indian economy sputtered in those difficult years but then followed the global boom of 2003-08, spearheaded by China, which lifted all boats across the world. India's GDP growth soared during 2005-08 • The euphoria of those days then dimmed. Many serious problems arose: the economy slowed plus the anticorruption public mood led to the crushing defeat of the Congress Party-led coalition in the 2014 election after a decade of mostly successful rule • The new government of BJP has sought to tackle some of the worst problems, and growth has picked up to an estimated 7.5 percent in 2015-16 Source: Secondary Sources on Google