INTERNATIONAL TRADING ENVIRONMENT

            The international trading environment consists of trading strategies, trade barriers, trade agreements, trading blocs, cartels and multinational trade negotiations.

1.  Trade Strategies:

            The governments approach towards international business is called as trade strategies.  It can be of two types

a.  Outward oriented trade strategy

b.  Inward oriented trade strategy

a.  Outward oriented trade strategy:

            It is a type of policy in which there in no discrimination between domestic market and international market.  It assumes that purchase of domestic goods and foreign goods are one and the same.

b.  Inward oriented trade strategy:

            This is a type of policy which favours domestic production against foreign trade.  Protection of domestic industries from foreign competition is an essential feature of the inward oriented strategy.  It encourages import of raw materials and is against foreign trade.

PROTECTION

            Protection refers to the measure taken by the government to protect domestic industries from foreign.

Objectives of protection:

A  To protect domestic industries from foreign competition

A  To promote indigenous research and development.

A  To conserve foreign exchange resources of the country.

A  To discriminate against certain countries.

1.  Arguments for protection:

            There are a number of arguments put forward in favour of protection.  They are as follows

Infant Industry:

            This argument for protection in formed by Alexander Hamilton and Frederick list.  According to the infant industry argument, the infant industry with potential comparative advantage may not get started in a country unless it in given temporary protection against foreign competition.  However, if infant industry is made to compete with powerful foreign competitor, it will be a competition between unequal and this would result in the ruin of infant industry.  The intention in not to give protection forever but only for a period to enable the new industry to overcome its troubles.

2.  Diversification:

            A strong economy usually has a very powerful diversified industrial structure.  An economy that depends on a very limited number of industries is subjected to many risks.  A depression or recession in these industries will seriousely affect the economy.  Hence a diversified industrial structure is necessary to maintain stability and acquire strength.  Hence to develop diversified industries it is very essential to protect domestic markets against foreign competition.

3.  Improving the terms of trade:

It is argued that the terms of trade can be improved by imposing import duty or quota.  By imposing tariff, the country expects to obtain large quantities of imports for a given amount of exports.  Hence revenue generated by exporting goods becomes more when compared to import of goods.  This improves balance of payments.

            However, the foreign country retaliate by imposing counter tariffs and quotas.

4.  Improving balance of payments:

            This is a very common ground for protection.  By restricting imports, a country may try to improve its balance of payments position.  It can generate more revenue on exports rather than import of goods.  This may put the country towards favorable balance of payments.

5.  Anti – Dumping:

            Protection is an important anti-dumping measure.  Dumping means selling the goods in foreign market at a rate which is far less its original price.

Dumping of goods is done by foreign countries to run the domestic markets.  Once the domestic market is destroyed, the foreign firm will obtain monopoly powers and exploit the home market.  Sometimes, dumping represents a transmission of the recession aboard to the home country.  These factors point out the need to protect the domestic industries against dumping.

6.  Employment:

Protection has been allocated also as a measure to simulate domestic economy and expand employment opportunities.  Restriction of imports will stimulate import competing industries and its spread effects will help the growth of other industries these, naturally create more employment opportunities.

7.  Key industries:                

It is also argued that a country should develop its own key industries like Iron and steel, telecommunications, oil and natural gas etc.  The economy of the nation greatly depends on the output from these industries. Hence, if we do not have our own source of supply of key inputs, we would be placing ourselves at the mercy of the foreign suppliers. Hence the key industries should be given protection for their growth and survival.

8. Keeping money at Home:

            This argument is well expected in the form of a remark falsely attributed to Abraham Lincoln.

“I do not know much about the tariff, but I know this much: when we buy manufactured goods abroad we get the goods and the foreigner gets the money. When we buy manufactured goods at home we get both the goods and the money” Hence protection of domestic industries helps to keep the money at home.

Demerits of protection:

            The following demerits are generally attributed to protection.

A  Protection sabotages the interest of consumers. The protection reduces the variety and choice of selection of products by consumer.

A  Protection makes producers and sellers less quality conscious.

A  Protection encourages domestic monopolies.

A  Even inefficient firms may secure under protection and it discourages innovation.

A  Protection reduces the volume of foreign trade.