Changes in the Political Environment

MN1 3701 TUTORIAL QUESTIONS: 1

20 July – Chapters 1 – 3

1. Discuss the drivers of globalisation.

Changes in the political environment

Creation of global economic/ trade regulatory bodies (GATT)

GATT served as conduit through which int trade negotiations & arrangements were conducted (only regarding goods)

Then disbanded & became WTO (World Trade Org) which now covers trade in services & intellectual property as well

2. Collapse of communism

State owns & controls all res & assets incl production & distr of goods (Marxism is political & economic ideology)

Main goal was to bridge gap btwn rich capitalists & poor working class

After collapse of Soviet Union, largest communist protagonist, acted as catalyst for spread of capitalism & realisation of trade liberalisation

Essential features of communism are in 10 ideological pillars

1. Abolition of private property & confiscation of privately owned property to become public property

2. Heavy progressive/ graduated income tax

3. Abolition of all rights of inheritance

4. Confiscation of property of all emigrants & rebels

5. Centralisation of capital market under exclusive control of state

6. State ownership & control of communication & transport

7. State ownership of factories & agriculture, full use of state res

8. Absolute state control of labour, majority to agriculture

9. Economic integration of agriculture & manuf, equitable distr of social amenities & eradication of rural areas

10. Free education for all children in public schools & abolition of child labour

Changes in the technological environment

1. Email & video conferencing – email makes it easier to comm & share info, cost saving, quicker, saves time, vid con allows brainstorming in virtual env irrespective of geog, saves money & time

2. Internet & www – monitor & respond to competition, reduce prices, advertise easier, aid consumerism, improved health care coz of more access to info

3. Company intranets & extranets – intranet is internet network for org to share info & access data (less paperwork & admin), extranet lets suppl replenish inv when req which saves time, money & is more efficient

4. Changes in transportation tech - innovations facilitating long distance travel in short time period with comfort & safety eg air travel & speed rail (telephone tech has decr need to travel)

2.Fully discuss the various international trade theories.

Mercantilism

 Proposes benefits of export promotion at expense of importation

 Use of states power & res to build up industry, incr surplus of exports over imports & to accumulate stocks of precious metals

 Centred on nation state which was viewed as being in competitive struggle with other nations

 Aim was ensuring states security & prosperity

Absolute advantage (Adam Smith)

 Believed real wealth of nation lies in quality of life of its citizens

 Contr to practical application of division of labour to explain absolute adv

 Each country should specialise in 1 prod for which it is uniquely suited so can produce more prods in total & trade in goods that were cheaper than those produced locally

Comparative adv (Ricardo)

Country should specialise in production of goods it produces most efficiently & import those it produces less efficiently, even if could produce them more efficiently than another country

Potential world production is greater with unrestricted free trade

Cons in all nations can consume more if no trade restrictions

Heckscher-Ohlin factor proportions theory of comparative adv

 Supports concept of factors of production & their availability in given country

 Country exports prods that use its abundant factors, & imports prods that use its scarce factors

 Assumes same tech/ production process is used for same goods in all countries, so it’s not diffs in efficiency of production that will det trade relations

Leontief paradox (contradiction)

 Since USA was relatively abundant in capital compared to other countries, they should export capital intensive goods, but found that USA exports were less capital intensive than their imports

 This result was at variance with predictions of theory, hence the paradox

Prod life cycle (Vernon)

 Focuses on USAs contradictory trading patterns, based on size & wealth of US market

 Demand for prods in USA leads to new prod dev, demand in other countries ltd to high income groups

 As demand in other countries grows, USA sets up production facilities in these growing markets

 Price becomes main competitor, foreign producers start exporting to USA

 Developing countries become more cost competitive & start producing for other advanced countries & USA (USA provided the catalyst)

 USA switches from being exporter of prod to being an importer

New trade theory

 Economists question assumption of diminishing returns to specialisation

 Argued that incr returns to specialisation may exist in certain industries & that economies of scale may not be attainable inside borders of country, but across national borders

 Implies that specialisation in manuf of goods, for which economies of scale aren’t achievable in country, is generally reliant on gov subsidiaries egmanuf of aircrafts

National competitive adv (Porter)

 Innovations are driving & sustaining forces of competitiveness

 Success of nations is closely linked to success of their indivbusn orgs

 National comp adv originates from internationally successful orgs that innovate & cont improve

 National comp adv is det by 4 attributes shaping competitive env which either promote/ inhibit innovation & creation of comp adv

Porter’s diamond of national comp adv

1. Factor cond – nations position regarding production factors like skilled labour & dev infrastructure enabling firms to compete in industry

Basic factor cond – natural res, climate, basic skills

Advanced factor cond – high-level skills, infrastructure, advanced tech

2. Demand cond – degree of healthy competition in local market, strengthened by strong & sophisticated local demand (primary drivers of innovation, quality improvement & competitiveness)

3. Related & supporting industries – presence/ absence of supplier & related industries that are locally & globally competitive, presence helps firms attain incr comp adv through innovation & quality improvement

4. Firm strat, structure & rivalry – cond in home industry that hinder/ aid firms ability to create, org & M domestic & int rivalry (likely to do well if strong rivalry, M strats are closely aligned to industry source of comp adv - strat M)

oRole of gov & chance events (newly added) – gov uses trade policy to enhance/ restrict trade, chance events eg tsunamis have disastrous effects

Original 4 attributes need to be positive & support e/o to create ideal busn climate for internationalisation

 National prosperity is created through national values, culture, economic structures, inst & histories (diffs in these factors form basis of comp adv)

3.Suppose South African Breweries (SAB) decides to take advantage of trading relationships between South Africa and Iran and plans to expand its business to Iran. As an international strategist, how would you advise SAB, using the PESTEL model, to successfully penetrate the Iranian market?

4.List and discuss the types, effects and benefits of economic integration.

4. List and discuss the types, effects and benefits of economic integration.

Economic integration manifests at three levels, namely global, regional and bilateral

Global economic integration – is facilitated by the rules and regulations of the institutions such as the WTO and IMF and the World Bank. These organisations establish rules and adjudicate trade-related disputes across the world. Promote global trade and investment through treaties that are ratified by member nations, thereby providing a platform for fair trade and investment

Regional - countries that are on the same geographical region. Membership is enabled through a treaty also validated by members. It benefits the nations by having the tariffs removed but there are light barriers that can still be imposed as long as they don’t contravene the treaty agreement.

Bi-lateral – trade relations and agreements between 2 countries, this facilitates preferential treatment between the 2 states

• Adam Smith’s absolute advantage – a country will benefit by manufacturing more output of a product than other countries if it has the required input materials that are used in the production process of the particular product. The input material could, for example, be specific expertise in the production process that improves production efficiency, thereby reducing the overall production cost.
• David Ricardo’s comparative advantage – according to him, countries and people(firms) should specialize in the production of goods for which their advantages over others are the largest – meaning rational producers should seek a comparative production cost advantage over competitors

5.Fully describe the major trade blocs (We need to work this one out as this answer is so looong!)

Europe (2)

European Union (EU)

 EU single market is result of decisions & actions of indep European gov, to eliminate all internal trade barriers & control measures among them (27 member countries)

 European Central Bank is indepinst whose decisions can't be infl by govs, they frame & implement European monetary policy, conduct foreign exchange & ensure smooth operation of EU payment system

 Euro plays same role as $ in US, imagine each country having its own currency! It helps streamline trade & is binding factor to creating greater EU economic & political integration

European Free Trade Association (EFTA)

 Int trade group est to foster economic growth & dev through trade liberalisation among member nations

 Activities of EFTA divided into 3 areas

oMonitor & M relatsbtwn EFTA states

oResp for dev relations with non-EU countries (3rd country relations)

oMember states structured their relations with EU in form of agreement on European Economic Area (EEA) to participate in EU single market

America (6)

North American Free Trade Agreement (NAFTA)

 US signed agreement with Canada & Mexico aimed at removing most barriers to trade & investment btwn member countries

 Agreement is NB coz

oThere were considerable trade barriers

oEconomists predicted it would incr trade, encourage economic growth, create job opp, incr personal income & eliminate agricultural trade barriers

 Achievements of NAFTA

1. Incr investments & flow of trade btwn members

2. Incr integration of productive processes

3. Incr knowledge of national legislation regarding labour & env

4. Safe legal framework for resolution of trade & inv disputes

5. Healthy exchange of knowledge & exp

Southern Common Market (MERCOSUR)

 Largest trade bloc in Latin America, created by pact btwn Brazil & Argentina aimed at modest reduction in tariffs & quotas btwn them

 Aim of the common market is to incr regional economic cooperation

Treaty provided for elimination of customs duties & tariff barriers, & common external tariff against 3rd parties

Andean Common Market (ANCOM)

 6 Latin American countries to foster EI

 Grew from its predecessor, Latin American Free Trade Association (LAFTA)

 Initiatives to rectify probs of LAFTA

1. Strong political & inst support by members

2. Catalysing industrialisation process of members

3. Automatic tariff reductions with few exceptions

Central American Common Market (CACM)

 Made advances towards EI, trade btwn members had incr, imports doubled & common tariff was est for non-members

Latin American Integration Association (LAIA)

 Took over duties of LAFTA which was created to est common market for members to eliminate tariff barriers by given deadline

 LAIA had goal of encouraging free trade with no deadline for inst a common market

Caribbean Community Common Market (CARICOM)

 Haven’t yet est common external tariff as step towards EI

Asia (6)

South Asia Association for Regional Cooperation (SAARC)

 Goal is to accelerate economic & social dev in member states through joint action in greed areas of cooperation

 Reasons for promoting regional cooperation

1. Reduce danger of external intervention

2. Reduce political, military & economic tensions

3. Expand trade in larger market formed by reduction of trade barriers

4. Coordinate measures for mutual benefit in diverse areas

5. Improve close cultural links

Association of South East Asian Nations (ASEAN)

 Key obj is to incr competitive edge as production base geared for world market

 Achieved through eliminating intraregional non/tariff barriers to make manuf sectors more efficient & competitive (economies of scale & FDI would also incr)

Asia Pacific Economic Cooperation (APEC)

 Aim is to promote EI around Pacific Rim & sustain economic growth

 Played NB role in promoting trade & liberalisation of investment

Cairns Group

 Coalition of countries with a commitment to reforming agricultural trade

 Main obj is global agricultural trade reforms that incl cuts to tariffs & removal of tariff escalation, elimination of trade-distorting domestic subsidies, elimination of export subsidies & rules to prevent export subsidy commitments

 Uruguay Round of GATT – Cairns Group proposed worldwide liberalisation of trade in agricultural prods, requested rights for developing countries to protect farmers against foreign competition

 WTO – reforms proposed by Cairns Group at Uruguay Round are set out in WTO Agreement on Agriculture

Cooperation Council for the Arab States of the Gulf (Gulf Cooperation Council - GCC)

 Economic & political policy coordinating forum for its members

 It can't impose trade policies on members but each can enforce its own trade laws

Indian Ocean RIM Association for Regional Cooperation (IOR-ARC)

 Obj is to build & expand understanding & mutually beneficial cooperation through consensus-based evolutionary & non-intrusive approach

 Key obj are to improve market access through trade liberalisation & enhance flows of goods, services & investment

 Adv of the open regionalisation encouraged by WTO

1. Initiative for regional & global cooperation through free trade

2. Counters risk of marginalisation without substantial economic grouping

3. Means for closer relations & greater access to Indian market

4. Encompasses wider concerns beyond trade & investment

Africa (4)

African, Caribbean & Pacific Group (ACP)

 Unified negotiating body consisting of all countries that have aid, trade & dev relations with EU

 Triregional economic grouping formally linked to EU by convention with benefit of tariff-free access to EU markets for export prods

 Lome convention – governed cooperation & relations btwn EU & ACP

 Cotonou agreement – replaced Lome convention, partnership agreement to enable relations btwn EU & ACP (rights, obligations & fin support), said to be key component of EUs development cooperation & external policy, has 3 interactive pillars (political dimension, development strats, economic & trade cooperation)

Common Market of East & Southern Africa (COMESA)

 21 countries & occurred from 3 major developments

oCollapse of federations that reduced political cooperation

oDestabilisation of economies by apartheid (needed economic counterweight)

oNo alt to reducing traditional economic dependence on industrialised countries, could only be done through self-sustaining dev

 Characteristics – largest regional economic community in Africa, target is to remove all internal trade barriers & probs tend to be civil war & political instability

Southern African Development Community (SADC)

 Created to foster closer cooperation among govsppl in southern Africa

 Policies aimed at economic liberalisation & integrated dev of national economies

 Obj is to create southern African common market dedicated to idea of free trade, free movement of ppl, single currency, democracy & respect for human rights

 SADC treaty is legally binding doc enabling countries to coordinate, harmonise & rationalise policies for sustainable dev

 *Obj of SADC

1. Promote sustainable & equitable economic growth & socioeconomic dev to ensure poverty alleviation & eradication, enhance std & quality of life of ppl in southern Africa & support socially disadv through regional integration

2. Promote common political values & systems which are transmitted through inst that are democratic, legitimate & effective

3. Consolidate, defend & maintain democracy, peace, security & stability

4. Promote self-sustaining dev on basis of collective self-reliance & interdep of member states

5. Achieve complementarity btwn national & regional strats

6. Promote & maximise productive employment & use of res

7. Achieve sustainable use of natural res & protection of env

8. Strengthen & consolidate long-standing historical, social & cultural links

9. Combat HIV/AIDS & other deadly diseases

10. Ensure poverty eradication is addressed in all SADC activities

11. Mainstream gender in process of community building

Southern African Customs Union (SACU)

 Oldest customs union in the world

 Aim is to maintain free interchange of goods btwn member countries

 Provides common external tariff & common excise tariff for common customs area

 All customs & excise duties collected are paid into SAs national revenue fund & shared among members according to revenue-sharing formula

6.Refer to Oct 2014 exam question B1.3and May 2015 exam Question B1.2.

2015 exam B1.2

1. Anti-dumping:
2. Product sold overseas at a lower price than it would have been sold in the country of origin.
3. If products cause material injury to the domestic manufacturer of similar products, they ca appliy to their trade remedies authority for the initiation of an ant-dumping investigation.

If favourable, result in imposition of a definitive anti-dumping duty

• Free Trade Area.

Initial stage of economic integration – allows for customs duty free movement of goods between contracting parties

Euro Zone:

• The euro zone is made up of at least 12 EU member countries. It is also the official currency of former overseas territories of EU member countries
• It is also linked officially to 14 African francophone countries
• Apart from the US, 14 countries have their currencies officially linked to the dollar, and 13 countries partially linked. There are also 3 which have floating currencies, but ‘dollarised’ economies
• Expressed in the euro, the GNP of the dollar zone is only slightly higher than that of the euro-zone

7.Explain what free trade agreements are and possible implications for South African businesses

Free trade: Treaty (such as FTAA or NAFTA) between two or more countries to establish a free trade area where commerce in goods and services can be conducted across their common borders, without tariffs or hindrances but (in contrast to a common market) capital or labor may not move freely. Member countries usually impose a uniform tariff (called common external tariff) on trade with non-member countries.