International Marketing

Unit 01 - Introduction to International Marketing and Trade

(A) INTERNATIONAL MARKETING

Q1. MEANING AND DEFINATION OF INTERNATIONAL MARKETING:

Marketing includes domestic and external or international. International marketing in simple words means
marketing activities in between different countries. It is also called global marketing. It involves marketing
activities conducted between different countries of the world. All countries participate in international
marketing and secure varied benefits. Here, the principles of marketing are made applicable to trade beyond
national boundaries..

International marketing includes

 Trade in goods
 Trade in services (banking, insurance, transport, tourism, etc.).

International marketing is possible by directly importing or exporting goods. It is also possible through joint
ventures, foreign collaborations, licensing arrangements, turnkey projects and so on.

DEFINITION OF INTERNATIONAL MARKETING:

"The term international marketing refers to exchanges across national boundaries for satisfaction of human
needs and wants."2- Subhash C. Jain

Q2. FEATURES/NATURE OF INTERNATIONAL MARKETING:

(1) Large Scale Operations: International marketing transactions are always conducted in large quantities.
This is necessary for securing the advantages of large-scale operations as regards transportation, handling
and warehousing.
(2) International Restrictions and Presence of Trading Blocs: International marketing is not free like
internal marketing. There are various trade restrictions (tariff and non-tariff) because of the protective
policies of different countries. Such trade restrictions reduce the volume of global trade.
(3) Importance of use of Advanced Technology: International marketing is dynamic and highly
competitive. Here, an enterprise must be able to sell the best quality articles at competitive prices. Countries
like the USA dominate international marketing because of the use of advanced technology in production and
marketing of goods.
(4) Subject to foreign exchange regulations: Countries impose foreign exchange regulations which are
applicable to inflow and outflow of funds in between countries. Strict exchange restrictions affect free flow
of goods in between countries. International marketing is subject to foreign exchange regulations imposed
practically by all countries.

(5) Keen and Acute Competition: International marketing is highly competitive. This stiff competition is
between developed and developing countries which are unequal partners. Scanning of the international
marketing environment in a regular and continuous manner is essential in order to face global competition
effectively.
(6) Regulated by international organisations: International marketing activities are conducted as per the
trade agreements made by international organisations such as WTO or UNCTAD. At present, global trade is
as per the agreement signed by 125 countries (in 1994) after Uruguay Round of Negotiations.
(7) Importance of marketing research: Marketing research of global character is a must in international
marketing due to its highly competitive nature. Goods can be made attractive, agreeable and competitive
through continuous research projects.
(8) International marketing is risky: International marketing is profitable but risky. The risks relate to
transportation and payment for the goods sent. Long distances, flexible political environment, changes in
the economic and trade policies of countries, etc. create risk and uncertainty in international trade/marketing.
Q3. NEED OF INTERNATIONAL MARKETING (WHY INTERNATIONAL MARKETING IS
NEEDED 1 REQUIRED?):
The following points justify the need of international marketing:
(1) International interdependence of countries: There is international interdependence because of which
every country has to import certain goods and also to export some others in order to pay for the imports.
(2) Absence of uniform geographic and climatic conditions: Geographic conditions and climatic factors
are not uniform in all countries. No country is in a position to produce all goods required by it.
(3) Comparative cost benefits: International marketing is needed as the cost of production is not uniform
in all countries. Every country can produce certain commodities with low cost due to certain favourable
factors. Exchange of commodities on comparative cost advantage is always beneficial.
(4) Need of closure economic and cultural cooperation: International marketing is needed for developing
closer economic and cultural relations between different countries. This is the way by which the
available global resources will be utilised fully at the international level.
(5) Problem of surplus/shortage of production in countries: Some countries have huge unused
production capacity while others have no capacity to meet even their domestic needs. This situation
suggests the need for international marketing. Even price rise is a cause for large scale imports from abroad.
(6) Need of economic growth and world peace: International marketing is needed for rapid growth and
development of all countries. According to Late Shri Dinesh Singh, Ex- Minister for Commerce, "There
can be no greater guarantee of world peace than a prosperous world in which nations depend on each other
for their prosperity."

Q4. DRIVERS OF INTERNATIONAL MARKETING:

Expansion of business/marketing is a natural need and expansion is necessary for survival and growth.
There are various factors that encourage companies to expand business beyond national boundaries. Such
factors are also called motivators/drivers of international marketing.
The drivers of international marketing are as briefly explained below:
(1) Cost Factors: As overseas markets have specific requirements of goods and services, export firms
spend a lot of money on R & D. In this sense, product development cost is very high in relation to capital
investments in plants and machinery. Some companies outsource manufacturing to reduce prices.
(2) Competition: International marketing is known to provide intense competition. An export firm has to
face three tier competition viz.,
 exporters of its own country,
 exporters of the other countries
 producers of importer countries.
This situation makes competition more intense in international marketing.
(3) Technological developments: As technology gets more and more advanced and the world continues to
become smaller and smaller, exporters who market their products and services effectively will take
advantage of the huge growth potential that international markets offer. International marketing has
received a tremendous boost because of the development of fast means of transportation and
communications. Sleek products with limited life are highly in demand.
(4) Information Revolution: Information revolution has influenced every aspect of business and human
life. Introducing new methods of information dispersal based on computer technology has speeded up
business and payment services to reach all continents. The new information revolution is truly
transforming international markets into a single global market. No country of the world is inaccessible.
(5) Higher profits: International marketing is known to provide opportunities to earn higher profits.
More particularly, the western buyers have higher purchasing power. They are prepared to pay more
provided they get the right quality products.
(6) Economies of scale: Exporting is an excellent way to expand business with products that are more
widely accepted around the world. Internationalisation can help companies achieve greater scales of
economy, especially for companies from smaller domestic markets. There is opportunity to market not
only manufactured products but also intellectual property such as brand, service model or patented
products. Adjustment to local markets can be an added advantage.
Participation in the "lead market" would be a pre-requisite for qualifying as a global leader. Lead markets
include the US for software, Japan for consumer electronics, Italy for fashion, Germany for automobiles,
India for cotton garments and so on.
(7) Government Incentives: Our government provides a large number of incentives to exporters so as to
earn valuable foreign exchange. This results in many companies entering overseas markets they would
otherwise not have entered. Exporters are advised to remain in touch with Export Promotion Councils to get
familiar with numerous incentives and how they can be benefitted. Indian exporters often face problems due
to high cost of production. Incentives neutralise the price imbalance.
(8) Global Presence: Today we consider the world as a single market. Globalisation has shrunk the size of
the world market. The virtual market has rapidly taken over a large chunk of international marketing.
Many Indian companies such as Tata, Wipro, ONGC, Bharat Forge, Mahindra and Mahindra, Dabur have
become flagship Indian companies having noteworthy global presence. It is estimated that among top 40
IT companies of the world 35 belong to India with Tata Consultancy Services (TCS) leading the list.

Q5. PROCESS OF INTERNATIONAL MARKETING:

Entry in international marketing involves lengthy planning and follow-up steps. It is a lengthy process
involving many steps which need to be completed in a systematic manner. Here, planning, decision-making
and financial support are required.

The process of international marketing involves following broad steps:

(1) To conduct situational analysis: Situation analysis is done in a better way when internal and external
environments are considered. The internal environment will consist of a micro environment and the external
environment will consist of a macro environment. Situation analysis should consider past, present and future
aspects. It must trace how the situation evolved to its present form, and forecasts are made through analysis.
In case situation analysis points out gaps between what consumers want and what currently is offered to
them, then it is required to provide better products to satisfy customers. Situation analysis presents a
summary of problems and opportunities.

(2) To determine marketing objectives: Marketing objectives are goals set by a business when promoting
its products or services to potential consumers that should be achieved within a given time frame. Marketing
objectives in international marketing should be specific, measurable, achievable, realistic and time specific. It
is also called the SMART approach to marketing objectives.

(3) To prepare/plan appropriate marketing strategy: Marketing strategy is sorting out who are potential
buyers and what do they care about. What message can you deliver that is true and meets consumer needs? It
is a difficult task to understand how overseas buyers behave. Marketing research can be very handy to collect
specific market information to rightly select the target market segment and optimally position the products.
Marketing strategy involves deciding about:
(a) Segmentation.
(b) Targeting.
(c) Positioning the products.
(d) Value proposition to the target market.

(4) To collect and analyse information: As overseas markets are different in their characteristics and
composition, it is advisable to collect information/data based on primary and secondary sources. It will
provide a clear picture about business viability in those markets. Information can be collected on the types of
buyers, competition, existing and potential demand, government regulations, and political situation and so
on. Information thus collected must be analysed to know which market to enter and which market to avoid.

(5) To select target markets: The firm has taken all the precautions to rightly select markets. In order to
meet local conditions and preferences, the firm has to incur adaptation costs. With extensive ad campaigns, it
is necessary to develop a positive attitude of buyers towards our products. The firm must look for long term
association because with passing of time the cost of marketing will come down.
(6) To execute and control the business decisions: Having analysed the information, the firm will now
proceed to short list the markets based on potentiality of good returns. Now the marketing plan is developed
and the product is launched. As the business environment keeps changing, the results of the marketing effort
should be monitored closely. The firm has to regularly adjust the marketing mix to accommodate the
changes.
Small changes in consumer wants can be handled through advertising and publicity. In case of major
changes, a product redesign or introducing a new product must be considered. Business decisions need to
remain under control to help in the achievement of marketing objectives.

(7) To enter overseas markets: Export firms finally decide to enter overseas markets. Exporters would
concentrate upon strategic goals and look for a match in the markets at hand. Exporters could look at close
competitors or similar domestic companies that have already entered the market to collect cost data in
relation to market entry. Depending on the nature of business exporters can collect more information which
could help them in decision making in this regard. Firms must ensure that all legal formalities are complied
with before entering the market.

(8) To take follow-up measures: Follow-up is key to business success. Buyers purchase from outlets they
know and trust. - Export firms must ensure they get things right the first time. Be careful to comply with
shipping and mailing requirements and be liberal with email. Review of performance in each overseas market
should be conducted on a regular basis. If performance is not picking up in any one market, the firms should
concentrate on other markets that are responding well. Such follow-up steps/measures are necessary and
useful for successful entry in foreign markets for long term marketing.

Q6. PHASES OF INTERNATIONAL MARKETING:

The phases in the evolution and growth of international marketing are as briefly explained below:
(1) Absence of international marketing: At this stage, the firm does not get involved in international
marketing. It concentrates on domestic marketing. If the business is well established in the domestic market,
it can support overseas establishments because of its financial soundness in the home country.
Although the business is not directly exporting, its products may indirectly enter international
marketing through:
(i) Tourists when visiting India may buy the products.
(ii) The firm may sell to any export house in the domestic market which eventually exports it.
(iii) NRIs may place the orders from abroad and thus obtain the supply.

(2) Temporary foreign marketing: A firm may decide temporarily to sell its surplus to foreign buyers.
Alternatively, the firm faces the problem of excess capacity and may decide temporarily to sell its products
overseas. This line of thinking will materialise when the firm finds a similar market as home in terms of
socio-economic, cultural and geographic factors. Surplus supply can be disposed-off in this manner resulting
in infrequent foreign marketing.

(3) Regular foreign marketing: At this stage, the firm takes over the complete process of
internationalisation. The firm completes all formalities to execute foreign orders. International marketing
becomes a commitment. Now products are manufactured as per the specific requirements of foreign buyers.
An existing product is adapted or altogether a new product is manufactured. All efforts are made to succeed
in international marketing.

(4) International Marketing: Now foreign marketing is taken on a regular basis. The firm has well
established business both in the domestic and foreign markets. Gradually, it may decide to set-up production
units in different countries. It will have a separate marketing plan for each target market and accordingly
work out prices, quality of product, advertising message, promotion campaign and so on. MNCs are known
to follow such planning e.g., Unilever, Nestle, Philips, Samsung, Nike, etc. These firms are fully committed
to international marketing. They seek markets all over the world.

(5) Global Marketing: Global marketers consider the world as their market and markets of different
countries as components of this world market. Global marketing is affected by economic, political, cultural,
financial and regulatory environment. Diversification of business increases market size and enhances
economies of scale. Global marketing influences product choice, standard of living and job opportunities.
Global marketing faces increasing complexities i.e. policies designed for one country affect the performance
of others. Market segments are defined by income levels, usage patterns, buyer behaviour, consumer attitude
and other factors that often span countries and regions. in view the whole population of the world e.g., Apple,
Google, Coca Cola, IBM, Mc Donald, Amazon, American Express, etc.

Q7. IMPORTANCE / BENEFITS / ADVANTAGES OF INTERNATIONAL MARKETING:

(1) International marketing provides a higher standard of living: International marketing provides better
life and welfare to people by making available goods which cannot be produced in the home country. It also
creates employment opportunities in different countries for large scale production and marketing.
(2) Ensures optimum utilisation of resources: Rational allocation of resources and the best use of the
resources available at the international level are two major advantages of international marketing.
(3) Brings rapid industrial growth: International marketing creates new demand. This facilitates industrial
activities and brings industrial development in many countries. Indian firms can look forward to market their
goods and services beyond national borders.
(4) Provides benefits of comparative costs: International marketing provides the benefits of comparative
cost difference as suggested in the theory of comparative costs. Companies in global marketing are
specialised in the production and marketing of few products. This enables them to reduce production cost and
supply goods at competitive prices to consumers.
(5) Ensures international cooperation and world peace: International marketing brings countries closer
and develops cordial relations among them. This ensures world peace.
(6) Facilitates cultural exchanges: Social and cultural exchanges at the global level are possible due to
international marketing. This is possible as fashions move along with goods. This leads to cultural integration
at global level.
(7) Bridges the technological gaps: International marketing facilitates the process of technological
development in developing countries. It facilitates the import of modern technology for production purposes.
(8) Ensures better utilisation of surplus production: Effective utilisation of surplus production,
improvement in the quality of production and promotion of mutual co-operation among countries are the
benefits of international marketing.
(9) Provides foreign exchange: Easy availability of foreign exchange for import of capital goods,
technology and other requirements is possible due to international marketing.
(10) Ensures survival of domestic firms: In this era of globalization, international competition is not a
matter of choice. In fact, it could be the reason for survival of domestic firms. Export-oriented firms having
ISO 9000 registration are better placed to make inroads in the overseas markets.
(11) Miscellaneous benefits of International Marketing:
(a) Increased revenues.
(b) Easier cash flow management.
(c) Better risk management.
(d) Broaden customer base.
Conclusion :- The benefits noted above suggest the importance of international marketing. It gives benefits
to all participating countries and also promotes global growth. The companies engaged in international
marketing also secures benefits. This suggests its importance. Free and fair international marketing will be
useful to all participating countries.

Q8. CHALLENGES IN INTERNATIONAL MARKETING:

(1) Challenge relating to Payment for Imports and Exports: Payment for imports and exports is one
important critical problem in export marketing because different currency
systems are used in different countries. Variations in exchange rates create problems before importers and
exporters. In addition, foreign exchange regulations exist in every country including India. These factors
create payment problems in global marketing.
(2) Challenges relating to long distances and risk in transportation: There is a risk of loss or damage of
goods as they are exposed to uncertainties in transportation. Even political and commercial risks are
involved. This makes export marketing risky. Long distances create difficulties (high risks and uncertainties)
in export marketing. Such difficulty is common before exporters of all countries including India. Inadequate
infrastructure is one more challenge before participants of international marketing.
(3) Government restrictions and foreign exchange regulations: The Government restrictions compel the
exporters to follow certain rules and regulations in the form of licences, quotas, and customs formalities. Due
to such restrictions, new problems develop before the exporters. Even trade restrictions in foreign countries
create challenges before exporters. International marketing is subject to domestic and foreign rules and
regulations.
(4) Challenges in communication: The export marketing activity is carried on between people of different
language groups, traditions, nationalities and socio-systems. Moreover, direct contact between the parties is
not possible. This creates difficulties before the exporters while completing export procedures. In addition,
use of different weights and measures creates some more difficulties before traders in global marketing.
Effective communication in foreign trade is necessary but traders face many difficulties in their
communication.
(5) Time difficulty: There is a wide time gap in international marketing transactions. There is a possible
delay in receiving the delivery of goods due to complicated procedures and long distances. This creates
financial problems before Indian exporters as payments are delayed. This affects the flow of goods as well as
money. Government restrictions on trade also affects international marketing.
(6) Lengthy customs formalities: Customs formalities are involved in export trade transactions. Duties are
payable while exporting goods and duties are also collected by the importing country. A lot of information is
required to be submitted for this purpose. In brief, lengthy customs formalities constitute one challenge in
export marketing.

(7) Difficulties in documentation formalities: The exporters have to prepare various documents for the
benefit of the importers and also for the collection of export incentives. This work is lengthy, complicated
and difficult before all exporters including Indian exporters. Frequent changes in documentation formalities
create new problems and challenges in international marketing.

(8) Severe competition in global marketing: Export marketing is highly competitive. This competition
relates to price, quality, production cost and sales promotion techniques used. Indian exporters face three
faced competition while exporting. This includes competition from domestic exporters, competition from
local producers where the goods are being exported and finally competition from producers of competing
countries at global level. Such severe competition is one serious challenge before the exporters of
poor/developing countries. Indian exporters face this problem of limited competitive capacity in global
marketing.

(9) Trade barriers: Such barriers include tariff and non-tariff. Countries impose such barriers for revenue
collection or for the protection of home industries. This creates artificial restrictions on the exports of other
countries. Trade barriers constitute one special problem in export marketing. Trade barriers are increasing in
the case of developed countries leading to trade wars which create challenging situations for developing
countries.

(10) Trading blocs: Trade blocs are formed for the benefits of members of the bloc. However, such blocs
create problems before non-members as imports are restricted from non- members. Trade blocs create
difficulties before non-members. They are harmful to the growth of free and fair international trade.

Q9. DIFFERENT ORIENTATIONS OF INTERNATIONAL MARKETING (EPRG

FRAMEWORK):
Different attitudes towards a company's involvement with the international marketing process are
called international marketing orientations.

EPRG FRAMEWORK addresses the way strategic decisions are made and how the relationship between
headquarters and its subsidiaries is shaped. Orientations are related with the process through which a firm
internationalises its business activities to expand domestic as well as foreign markets so that better market
position might be established. EPRG scheme is commonly mentioned among the approaches describing the
different orientations that evolve in a company in different stages of international marketing.
There are four broad types of orientation of a firm which are as noted and explained below:
1) Ethnocentric Orientation. (2) Polycentric Orientation. (3) Regiocentric Orientation.
(4) Geocentric Orientation.

(1) Ethnocentric Orientation: Under ethnocentric orientation, an exporter views international marketing as
secondary to domestic operations. It views international marketing as a means to dispose of "surplus"
domestic production. The exporting firm considers that the product, marketing strategies and techniques
applied in domestic market can also be applied in overseas marketing. Precisely, international marketing is
viewed as an extension of the domestic market. e.g., Unilever released Surf Super concentrate washing
powder in Japan based on this orientation.

Characteristics/Features of Ethnocentric Orientation:

(i) Domestic techniques and personnel are considered competent to handle overseas operations.
(ii) Domestic business is taken care of with priority.
(iii) It is thought that products that sell well in the domestic market will sell well abroad also.
(iv) Marketing mix is not adapted differently to suit overseas markets.
(v) Attempt is made to identify such markets that are similar to the domestic market.
(vi) Overseas marketing is fully handed over to the foreign agents.
(vii) As such firms look for similar business, they are not in a position to benefit from opportunities in other
foreign markets.
(viii) This orientation is suitable to small firms trying to enter into foreign markets.

(2) Polycentric Orientation: Under polycentric orientation, an exporting firm believes that every country is
unique and needs a different approach to match cultural and social norms. Hence, the firm uses a country-
specific business. Its marketing strategy revolves around developing and building its presence in each
country. Multinational corporations are polycentric companies. When a firm assumes a polycentric
orientation, it adapts its products, marketing and support functions for each country it operates in.
Multinational corporations give authority to their managers to suitably alter product and marketing strategy
to meet the local conditions.

Characteristics of Polycentric Orientation:

(i) Differences in overseas markets are recognised.
(ii) Separate marketing strategies are prepared for each country.
(iii) Marketing mix is adapted to meet local conditions.
(iv) In order to manage overseas markets better, firms establish subsidiaries that are independent to follow
their own objectives and plans.
(v) In formulating marketing strategies top priority is given to local laws, customs and culture.
(vi) Control is decentralised to serve the market better.
vii) Adaptation strategy is most commonly adopted to meet specific needs of each market.
(viii) This orientation is suitable for firms that attempt to have long-term stay in overseas markets and is ably
supported by adequate resources.

3) Regiocentric Orientation: Regiocentric orientation is a transitional phase between polycentric and

geocentric orientations. Firms adopt a regional marketing policy covering a group of countries which have
comparable market characteristics. Operational strategies are prepared on the basis of entire region rather
than individual countries. Firms review the similarities and dissimilarities between regions. The entire region
is served with effective economy of operations and close control and coordination. This orientation can be
used as a transitional step where the MNCs wish to develop from a purely ethnocentric or polycentric
approach to a geocentric approach. It shows some level of sensitivity towards local conditions in the host
country. It helps the interaction between executives transferred from the parent company to the regional
headquarters. Nike Inc., the world's largest athletic-shoe maker has reorganized its brand into six
geographies:

(i) North America (iv) Central Europe

(ii) Western Europe (v) Greater China
(iii) Eastern Europe (vi) Japan and Emerging Markets
Characteristics/Features of Regiocentric Orientation:
(i) Different markets are seen as a region.
(ii) A region is treated as a single market.
(iii) Common marketing characteristics such as age, income, language, culture are considered to establish a
single market.
(iv) Production and distribution facilities are created to serve the entire region.
(v) Negotiations between headquarters and regional offices decide the business objectives.
(vi) Firms develop a common marketing strategy to serve the region.
(vii) Region is considered as a single market but markets are segmented.
(viii) When regional expertise is needed there are natives of the region who can be hired.

(4) Geocentric Orientation: Geocentric Orientation has global orientation. The entire world is a single
market that can be effectively trapped by standardised marketing strategy. In a global enterprise,
management establishes manufacturing and processing activities around the world. This decision helps to
serve national or regional markets through a well- coordinated system of production and distribution
network. Governance is mutually negotiated at all levels of organisation. The best of the talents are pooled
from across the world. Microsoft and Nokia have adopted geocentric orientation.
Characteristics of Geocentric Orientation:
(i) The entire world is treated as a single market.
(ii) Standardised marketing mix is prepared, to give a uniform image of product and company for the global
market its operations.
(iii) Firms adopt a worldwide approach to marketing and
(iv) Manufacturing and processing activities are established around the world.
(v) Prospective buyers with similar needs are identified to develop a standardised marketing plan.
(vi) Market planning and marketing mix are based on a global perspective.
(vii) Firms enjoy economies of large scale production.
(viii) Costs of production and marketing become highly competitive.

Q10. Entering International Market

Details of Entry Methods / Options / Channels:
Alternative methods available for entering international markets are as briefly explained below

1) EXPORTING:

There are two extensively used methods of exporting. These are:

(A) Direct exporting, and
(B) Indirect exporting.

(A) Direct Exporting (What is Direct Exporting?) Meaning of Direct Exporting:

Direct exporting means exporting the products by the manufacturer himself i.e., without using the services of
middlemen like merchant exporters, export houses etc. In direct exporting, the firm may look after the export
trade transactions through its export department. The department may collect orders and dispatch goods to
foreign buyers as per the terms agreed. Direct exporting is also possible by establishing sales branches or
subsidiaries in foreign countries.

Advantages/Merits of Direct Exporting:

(1) High profit margin: The profit margin is more in direct marketing as the sale price can be kept at a
reasonable level because deductions due to commission etc., are absent. A manufacturer exporter can earn
higher prices/profit if he is exporting directly. i.e. without using the services of intermediaries. The margin
payable to intermediaries is also avoided.
(2) Intensive use of the selected market: Intensive use of the selected foreign market is possible as exports
are made directly. This gives larger sales and popularity in the market.
(3) Full benefit of government incentives: The exporter can secure direct and full benefits of various export
incentives and concessions (duty drawback, income tax exemption, refund of excise duty, etc.) offered by the
government due to direct exporting.
(4) Absence of dependence on middlemen: The exporting firm is not at the mercy of the middlemen for
exporting purpose. It can export independently and regularly through its marketing network.
(5) Optimum use of production capacity: A manufacturer selling in domestic as well as overseas markets
can utilise his production capacity fully as wide market area is available. Excess production can be exported
through special measures.
(6) Spreading of marketing risks: A manufacturer-exporter may supply his products in many overseas
markets. This is in addition to selling in domestic markets. Due to wide marketing area, the risks in
marketing is divided in the wider area. As a result, actual marketing risk is minimised.
(7) Market goodwill: Due to direct contact with consumers, the firm can establish close relationship with the
consumers and create goodwill/reputation in the market.
(8) Effective control: The exporter can exercise effective control over export operations including the selling
price, after-sales service and credit policy due to direct exporting. He can maintain direct as well as effective
control over export > marketing.
(9) Reliable market information: The manufacturer-exporter gets first hand and reliable information on the
requirements and expectations, preferences, likes and dislikes, etc. and adjust his product and sales
promotion strategy accordingly.
(10) Market standing: A manufacturer-exporter exporting directly has market standing/reputation in the
domestic as well as in the foreign markets. He has his independent status and is regarded as financially sound
exporter/export organisation. He can bring adequate flexibility and adoptability in his export operations.

Limitations/Demerits of Direct Exporting:

(1) Huge investment: The exporter needs more capital investment, suitable organisation structure, more
marketing efforts and effective supervision and control as the entire responsibility of marketing is shared by
the exporter himself.
(2) Unsuitable to small firms: A small manufacturer with limited exporting capacity may not use such
direct exporting as it is not profitable. Moreover, it is not possible for small firms to export directly due to
financial difficulties.
(3) Heavy business risk: The risk involved in direct exporting is more as the entire risk is undertaken by the
exporter himself, Indirect exporting reduces the risks in export marketing.
(4) High overheads: A manufacturer-exporter has to bear the production overheads as well as marketing
overheads as he is engaged in production and exporting.
(5) Absence of specialisation: There is absence of specialisation in the business as the manufacturer-
exporter looks after the production as well as exporting.

(B) Indirect Exporting (What is Indirect Exporting?): Meaning of Indirect Exporting:

Indirect exporting is an alternative to direct exporting which may not be possible in the case of all exporters.
In indirect exporting, the exporting firm will prefer to export to the target market through marketing
middlemen such as merchant exporter, export houses, trading houses or through co-operative/ government
agencies. In India, indirect exporting is possible through merchant exporters or other specialised
organisations such as export houses and trading houses. Such houses buy the manufacturer's product and sell
it abroad on their own. All procedural aspects are handled by the export houses on behalf of the exporting
firm.

Advantages of Indirect Exporting:

(1) Less/Limited investment: Indirect exporting facilitates exporting with less capital investment and
botheration as the marketing process comes to an end when goods are supplied to middlemen within the
home country only.
(2) Relief from actual exporting: Indirect exporting gives relief to the manufacturing firm from the
botheration about actual export marketing. The firm concentrates all attention on the manufacturing
activities.
(3) Benefit of services of middlemen: The middlemen take keen interest in marketing and also in sales
promotion. This gives benefit to the middlemen as well as manufacturing firm.
(4) Limited business risk: The risk in the exporting is minimum as it is shared partly by the middlemen. The
expenditure on marketing is also less as opening of the foreign branches, etc., is not necessary in indirect
exporting.
(5) Specialisation: A manufacturer specialises on production activities due to indirect exporting. He
concentrates his attention on production activities only. He is relieved from the botheration of
marketing/exporting.
(6) Less overheads: The indirect exporter has to share overheads relating to production activities only as he
is not concerned with marketing. An indirect exporter will have less burden of overheads as compared to
direct exporter.
(7) Suitable to small firms: Small firms prefer indirect exporting due to their financial and other difficulties.
It serves as an easy and economical method of exporting.
Limitations/Disadvantages of Indirect Exporting:
(1) Non-availability of middlemen: Merchant exporters or other middlemen may not be easily available for
exporting to all foreign markets. Moreover, the manufacturer is at the mercy of middlemen for exporting his
product.
(2) Sales target may not be achieved: In indirect exporting, the expected sales results may not be available
as the agents appointed may not take adequate interest in exporting. This may bring down the profit of the
exporting firm.
(3) Dependence on middlemen: In indirect exporting, the export operations will be looked after by the
middlemen and the export organization will not have any 'say' once the product goes in the hands of the
middlemen. The manufacturer will not have direct control on pricing, packaging and so on.
(4) No benefits of export incentives: The exporting firm may not get the benefits of various incentives and
facilities provided since he is not involved directly in the promotion of exports.
(5) Non-availability of reliable market information: In indirect exporting, information relating to export
markets will be available from the intermediaries. Such information may not be reliable and complete as it is
the second hand information. This may affect his product planning and development.
(6) Lower prices: An indirect exporter gets lower price as compared to direct exporter. Here, the exporter
has to pay commission to the intermediaries. As a result, actual price available to him will be lower.

(2) LICENSING METHOD OF ENTERING INTERNATIONAL MARKET/MARKETING:

Meaning of Licensing:
Licensing method/channel can be used for entry in the foreign market. Here, the manufacturer (licensor)
enters into an agreement with licensee (firm in the importing country) and this gives him the right to use the
manufacturing process, a patent design or a trademark. For such permission, fee/royalty needs to be paid.
Here, the manufacturer, with developed technology will enter in foreign market through licensing
agreements. The producers in foreign markets get the right to use the reputed firm's license in exchange for
royalty. This gives opportunity to the manufacturer to make entry in foreign market.

Advantages of Licensing Method:

(1) It is a simple method for entry in foreign markets.
(2) The licensor gets guaranteed income in the form of fees.
(3) The licensee gets profit through marketing the product which is already popular in the market.
(4) It is a cheaper alternative to direct and indirect exporting.
(5) Trade restrictions have no effect on licensing as products are manufactured and sold in the target market
itself.

Disadvantages/Limitations of Licensing Method:

(1) In licensing, the profit earned by the licensee is more as compared to the fees or royalty payment.
(2) The licensor may suffer loss on long term basis. Licensee may not renew the license after its expiry. He
may even start his own manufacturing activity and become a formidable competitor of the licensor himself.
(3) Licensing as a technique for entry in foreign market is available only to reputed firms possessing
something unique as regards technology, brand name, etc.
(4) Licensor has limited control on the licensee as regards production and marketing.

(3) FRANCHISING METHOD OF ENTERING

Franchising is a form of licensing. The franchisor exercises more control over the franchisee. The franchisor
not only supplies the product but also provides services such as brand name, trademarks, product, operating
systems, technical know-low etc. In India, Domino's Pizza, KFC, McDonalds, Barista and Costa Coffee are
common examples of franchising. It also provides support systems like advertising, training employees,
quality assurance and exchange programmes to help franchisees to run business in a better way. Franchising
is the fastest growing global business.
Franchising can take several forms such as:
(a) Manufacturer - retailer systems e.g., automobile dealership
(b) Manufacturer - wholesaler systems e.g., soft drink companies
(c) Service firm - retailer system e.g., travel and tourism; chain of coffee shops

Franchising is the most common type of contractual relationship where the franchisor links several stages in
the production-distribution process. In franchising, there is a contractual association between the franchisor
(manufacturer) and franchisee (independent business) who buy the right to own and operate the newly
established business. In order that franchising becomes successful, it is necessary that the concerned product
or service should be unique, enjoying goodwill among the consumers.

Advantages of Franchising Method:

(1) Franchising provides managerial advice to the franchisees and promotes global business. (2) The
franchisor earns profits without investing high capital.
(3) The franchisees have access to the franchisor's R&D and runs business with improved technology.
(4) The franchisees get readymade goodwill because of the established name of the franchisor.
(5) The franchisor gets first-hand information about the culture, customs, beliefs and unique conditions
prevailing in the country of the franchisee.
(6) The franchisee invests money, time and effort and becomes self-employed entrepreneur with autonomy in
business.
(7) The franchisor provides an established product or service which already enjoys widespread brand
recognition. The franchisee gets the benefit of pre-sold customers.

Disadvantages of Franchising Method of Entry:

(1) The franchisee gets limited independence because he is expected to operate the business according to the
procedures and restrictions included in the franchise agreement.
(2) In case of franchisor runs into unforeseen problem, the franchisees also suffer.
(3) It is difficult to introduce motivation products through franchising because the franchisees may have their
own ideas.
(4) It is not easy to retain trade secrets leading to conflicts and misunderstanding between the parties.
(5) The inefficient and incompetent franchisees may spoil the fair name of the franchisor.
(6) The franchisor has to disclose confidential information to the franchisees which is risky to the business.
(7) When the franchise agreement terminates, the franchisor has already obtained all relevant information
about the local market for business purpose.

(4) MERGER AND ACQUISITION AS METHODS OF ENTRY IN FOREIGN MARKET:

(A) MEANING OF MERGER:
In merger, two companies come together but only one company survives and the other goes out of existence.
This means the merging company goes out of existence but the merged company operates with its original
name. Shareholders of merging company are given the shares of merged company. In merger, the acquiring
company takes over the shares of another company called acquired company. After merger, the acquired
company losses its identity permanently.
Advantages of Merger:
(1) Economies of scale are the cost benefit that a company obtains from merger. Economies of scale can be
in the form of technical economies, financial economies, organisational economies and bulk buying
economies.
(2) Merger helps companies to grow and expand their business activities.
(3) The combined assets of the merged company help to increase creditworthiness and bargaining power.
(4) When a profit making company takes a loss-making company, the merged company gets tax benefits.
(5) Merger helps the merged company to face competition. (6) Merger helps in increasing the market share of
the merged company.
(7) Merger improves R&D activities of the merged company.
(8) Merger improves goodwill in the market by increasing the confidence of the shareholders of the merged
company.
Disadvantages of Merger:
(1) Merger can lead to less choice for consumers.
(2) Merger can result in reduced job opportunities.
(3) After merger the new bigger company may lack the same degree of control and motivation to workers.
(4) With reduced competition and greater market share, the merged company can increase prices for
consumers.
(5) Merging into another company in a foreign country is a complex and complicated procedure.

(B) MEANING OF ACQUISITION/TAKEOVER:

In acquisition/takeover, one company (acquirer) gets control over the other company (acquired). Such
acquisition may be for cost saving, for revival and expansion or for going global. A corporate takeover does
not result in the automatic dissolution of the company whose shares have been acquired. The identity of the
company taken-over is retained. Some examples of such takeovers are as noted below:

Acquisition is possible by different methods such as

(i) purchase of assets without purchasing the company as a whole.
(ii) acquiring controlling interest but retaining the identity of the acquired unit (as a separate company) or
(iii) acquiring controlling interest and merging the acquired company with the acquirer company. The
acquisition/takeover may be friendly or even hostile.

There is a minor difference between acquisition and takeover. In acquisition, both the partners/companies are
willing to merge. In a takeover, the willingness is absent in the seller's management. Takeover is with force
i.e. without the consent while acquisition is with mutual consent and persuasion.

In India, takeovers have been increasing since 1990. This is due to dilution of MRTP Act 1989 relating to
regulation of monopolies and economic reforms. Even steps taken towards globalisation are favourable to
quick takeovers.

Advantages of Takeover/Acquisition:
(1) Acquisition often leads to an increased value generation for the company.
(2) It can result in higher revenue through market share gain.
(3) It helps companies to face adverse market situations.
(4) It creates economies of scale and also generates cost efficiency.
(5) It helps in financial leveraging, obtaining administrative efficiency and introducing new products.
(6) It enables companies to lower the cost of operation.

Disadvantages of Takeover/Acquisition:
(1) Acquisition may result into cultural clashes because the acquired company may have different style of
managing the business.
(2) It may face high cost of operation because of duplication of work.
(3) Two companies were operating independently until the acquisition and they may have conflicting
objectives.
(4) When a company borrows money to acquire a company, the entry is made in its books of accounts
resulting in an increase. debt.
(5) When a competitive company is acquired, the business may face market saturation.

(5) JOINT VENTURE METHOD OF ENTERING INTERNATIONAL MARKET:

Meaning of Joint Venture:

Joint venture is one more method available for entry in the foreign market through manufacturing/marketing
activities or both. A joint venture involves capital partnership between a foreign company and a local
company. It is a partnership of two or more participating companies. It is useful to foreign company for easy
entry in the new market. The foreign company brings finance and technical know-how and the domestic
company provides marketing facilities. Joint venture takes place when:

(i) The domestic investor buys an interest in a manufacturing unit situated in a foreign country.
(ii) A domestic investor and an investor of a foreign country jointly start a new venture in that foreign
country.

Advantages of Joint Venture Method of Exporting:

(1) Joint ventures are useful to developing countries for improving industrial growth through the inflow of
foreign capital, machinery and technology
2) Foreign firms participating in joint ventures benefit from the foreign exchange earned through dividends.
(3) Joint ventures promote exports and reduce imports.
(4) Business risks are shared between the participants.
(5) Joint ventures facilitate the import of technology and technical services to countries with limited
investment.
(6) Joint ventures help to bring together varied resources like human technical, marketing, financial, R&D,
etc.
(7) They allow companies to enter into new geographic markets or gain new technological knowledge.
(8) Joint ventures end in a sale by one partner to the other.

Disadvantages of Joint Venture Method:

(1) Joint ventures face the problem of poor integration and cooperation because of difference in management
styles and cultures.
(2) There is an imbalance in levels of expertise, investment or assets brought into the venture by the different
partners.
(3) They face unforeseen problems due to changes in government policies.
(4) They are known to face conflicts between the partners.
(5) The signing of joint venture agreements is a lengthy procedure.
(6) Terms and conditions of JV agreement may not be fair to both the parties.

(6) STRATEGIC ALLIANCE METHOD OF ENTERING

INTERNATIONAL MARKET: MEANING OF STRATEGIC ALLIANCE:

Under strategic alliance agreement for cooperation is entered between two or more independent firms to
work together towards common goals. Strategic alliance can help a company to develop more effective
process, expand into a new market or develop an advantage over a competitor. Strategic alliance can take
several forms such as cross-licensing of proprietary information, production sharing, joint R&D and
marketing of each other's products using existing distribution channels. Strategic alliance is one of the means
of expanding internationally.
The basis of strategic alliance is cooperation among firms. Strategic alliance must clearly decide on
(a) Selection of partners
(b) Deciding on ownership forms and
(c) Evaluating joint management concerns. Strictly, strategic alliance is used as a market entry strategy. It is
also used as a competitive strategy.

SCOPE/TYPES OF STRATEGIC ALLIANCE:

(1) Comprehensive alliance: Comprehensive alliance involves an agreement by participants to perform all
the relevant functions right from production to marketing. Such alliance is the result of joint ventures. MNCs
are known to follow this form of alliance. Comprehensive alliance is complex in nature because a large
number of activities have to be undertaken. Some of the common examples include Nestle, Philips, Proctor
and Gamble, GE, General Mills and so on.
(2) Functional alliance: For each functional area of business there is possibility of entering into strategic
alliance. As the alliance refers to one functional area therefore its scope is narrow. In order to execute
functional alliance, there is no need to have joint venture. Under functional alliance, the following are the
main ones:
Who
(a) Production alliance: Two or more firms manufacture products or provide services in a common or
shared facility e.g., automobile and computer industry.

(b) expertise or services: Quite likely, one partner enters the market where the other partner already has its
presence, The established firm helps the newcomer in exchange for a fee.

(c) Financial alliance: Every alliance partner is interested to cut down its financial risks associated with the
project, As a practice, alliance partners contribute finances towards the projects. This contribution is shared
or a partner provides bulk of the amount while the other partner provides expertise.

(d) R&D alliance: Ordinarily, partners undertake joint research to develop new products or services. New
technology has limited life span and R & D costs have increased. R & D takes the form of cross-licensing.

Benefits/Advantages of Strategic Alliance:

(1) Ease of market entry: When a firm tries to enter international market it finds strategic alliance a
convenient means. This alliance facilitates rapid entry while keeping costs down. It also helps to win over
regulations imposed by the host government regarding entry modes. Strategic alliance enables the firm to
collect information relating to customer attitude and behaviour, distribution networks, presence of
competitors and support from suppliers.

(2) Shared risk: As strategic alliance is composed of two or more firms which work together, risk is shared.
The risk is shared in specified functional areas such as planning, production, marketing, finance, human
resource, R & D etc. Strategic alliances work best if the companies' portfolio complement each other but do
not directly compete.

(3) Shared knowledge: Sharing skills, product and technical knowledge is of great utility to the alliance as
compared to single resource of a particular company. Managerial
personnels can take advantage of exchange programmes so as to learn new skills and information.

(4) Competitive advantage: As the pace of global business increases, customers continually become more
demanding. Firms are finding the competitive landscape dramatically changing. Strategic alliances offer a
means for companies to access new markets, expand geographic reach, obtain cutting- edge technology and
complement competencies. Strategic alliances have allowed firms to cope with increasing expectations of
international markets.

(5) Accessibility: Alliance partners can help each other by giving access to resources such as manpower,
finance, technology etc. It enables firms to produce products of better quality by keeping cost under control.
Collaboration with a local partner is the easiest way to enter a specific market. When firms pool their
resources with accessibility to manufacturing capabilities they achieve economies of scale.

Limitations/Disadvantages of Strategic Alliance:

(1) Incompatibility of partners: One of the major causes of failure in strategic alliance is incompatibility
among partners. If the alliance partners have not discussed carefully and analysed the pressure of business, in
future the alliance will face problems. Alliance may not succeed if there is no written agreement regarding
alliance strategy, how it is to be organised or staffed, the alliance may face problems.
(2) Access to information: Alliance partners may face problems if they do not disclose information to each
other. This will certainly adversely affect the business. Lack of information release may result in uneven
alliance. The weaker partner may be force to act according to the will of the more powerful partner.

(3) Conflicts over distributing earnings: Profit sharing ratio between the alliance partners should be clearly
spelt out to remove suspicion and conflicts. Distribution of earnings should be mentioned in the original
agreement. If the alliance has not taken care to clearly state proportion of earnings to be reinvested, transfer
pricing and accounting procedures, problems may arise.

(4) Loss of autonomy: Loss of autonomy is a potential drawback of strategic alliance. Most attempts to
introduce new products or services change the way the alliance does business. Changes of any kind to be
introduced may it be organisational or marketing, it must first be discussed and negotiated between the
alliance partners. Many organisations include a clause in the contract that if even the joint venture terminates
the partners cannot enter each other's markets for a fixed period.

(5) Creating competitor: If a partner gets benefitted from the alliance one day it will do business
independently and emerge as a competitor. Alliance is terminated by a partner and he starts operating in the
same market segment. As he has already worked in the same market he is familiar with the production and
strategies of his earlier partner. He can come up with new strategies to defeat the partner. Dispute settlement
legally is very costly which both parties try to avoid.

(7) WHOLLY-OWNED SUBSIDIARIES METHOD:

A firm interested in exporting may establish a subsidiary manufacturing unit in a foreign country. The
marketing firm will be the exclusive owner and controller of the subsidiary. Such subsidiary is the result of
direct investment in a foreign country. The subsidiary will manufacture and market the products in the
foreign country but the benefits will be available to the home investors. Sometimes, the branches/subsidiaries
may purchase raw materials from the foreign market and send them to the manufacturer who will
manufacture the products and send back to branches for distribution to consumers. The branches opened may
differ in their operations but are ultimately controlled by the head office. Subsidiaries are different from
branches as subsidiaries are separate companies and follow the instructions of their holding company.

CONTRACT MANUFACTURING METHOD OF ENTERING INTERNATIONAL MARKET:

Contract manufacturing is a popular method of entry in international marketing. In contract manufacturing a

company doing international marketing contracts with firms in foreign countries to manufacture or assemble
remains responsible to market the product. Common examples of contract manufacturing include Park Davis
and HUL in India. In the service sector, contract manufacturing offers ample opportunities in the form of
Business Process Outsourcing (BPO) and Knowledge Process Outsourcing (KPO). Developed countries are
becoming end users of the outsourced products and services from developing countries. Nike procures its
athletic footwear from Southeast Asia. Marks and Spencer has one contract manufacturing arrangement in
India. Under this contract, the company need not establish its production facilities, hence there is no risk of
investing in foreign countries.
Advantages of Contract Manufacturing:
(1) Contract manufacturing is a kind of outsourcing.
(2) It enables businesses to increase the production capacity, acquire new products or reduce their production
cost.
(3) It is an economical form of business because companies that outsource do not have to pay for machinery,
tools, staff training, hire consultants, etc.
(4) It is possible to obtain high quality products from the best sources.
(5) It enables companies to receive the finished goods much faster ensuring proper time management.
(6) It is a mutually beneficial business.
Disadvantages of Contract Manufacturing:
(1) Contract manufacturing faces the problem when both the companies are not equally efficient and
competent.
(2) It creates the problem of lack of control over the outsourced companies.
(3) The manufacturing companies are independent business. They can handle production assignments of
competitors also.
(4) The company has to rely on contract manufacturer to get quality goods.
(5) Contract manufacturing gives rise to intellectual property loss. Employees can download information and
steal trade secrets.
(6) Contract manufacturing is done with low cost countries bringing about language barriers, cultural
differences and long lead time.

(9) TURNKEY PROJECTS METHOD INTERNATIONAL MARKETS:

Meaning of Turnkey Projects:

Turnkey projects take place between a technologically advanced country and an industrially backward
country. The country providing advanced technology is involved from inception to completion. It takes up
responsibility to supply capital, skilled manpower, and erection of plant, installation, trial run and
commissioning of the project. The supplier gets a fixed payment or cost plus profits. Turnkey projects are
common in the fields of airports, power plants, dams, highways, railway lines, refineries and steel plants. In
case the turnkey contractor is able to achieve economy in completion before time or saving in finances
without sacrificing quality, it enables him to increase his profitability.
Advantage of Turnkey Projects
(1) Turnkey projects enjoy the benefit of integrated approach i.e. "one project and one project team".
(2) A uniform safety policy and procedure is applied to the entire project.
(3) It gives the client opportunity to ensure high class maintenance.
(4) It allows use of alternative contractors.
(5) It ensures increased efficiency and meeting of minds.
(6) A company can earn higher profits particularly in countries where FDI is limited.

Disadvantages of Turnkey Projects:

(1) A company that enters into turnkey project does not have long term interest in the country.
(2) There is possibility of giving away the secrets to the foreign company to the advantage of rival
competitors.
(3) The suppliers of turnkey projects often fall back on their own monopoly position in the international
market.

CONCEPT OF GLOBALISATION:
MEANING OF GLOBALISATION:

Globalisation is a wider term and treats the world as one economy. Globalisation leads to integration of
economies of different countries in a new global economic order. Globalisation of business is the process of
linking a country's economy with the world economy. In this order, large scale manufacturing activities will
be undertaken for meeting the needs of local people and also for promoting exports. Similarly commercial
activities will cover the entire world due to efficient transport and communication facilities.

Globalisation is a reality in the present world. The entire world is behaving as if it were a part of a single
market with independent production consuming similar goods and responding to the same impulses.

BENEFITS/ADVANTAGES OF GLOBALISATION:

(1) Globalisation leads to integration of countries of the world for business purpose.
(2) Globalisation provides opportunities to participating countries to grow and expand production and
marketing activities also, can expand their exports and earn more profits.
(3) Globalisation facilitates easy transfer of capital from one country to the other due to free convertibility. It
encourages joint ventures and foreign collaborations at the business level. This facilitates transfer of
technology, finance and skilled labour.
(4) Globalisation leads to expansion of world trade and the benefits of such expansion are available to all
participating countries and participating enterprises.
(5) Globalisation enable countries to use untapped resources fully with the co-operation of other countries.
This leads to employment generation in countries for social welfare.

(B) INTERNATIONAL TRADE

Trade includes internal/domestic and external/international. Internal trade is carried within the
physical/geographical boundaries of one country. It plays a useful role in meeting the needs of people and in
raising their welfare. Domestic trade of a country is substantially more in volume as compared to its foreign
trade. Internal trade provides employment and source of income to millions of people directly and indirectly.
Infrastructure facilities are necessary and useful for the promotion of internal trade.

International trade is the extension of internal trade. Here, many countries participate and it is conducted
between large numbers of countries spread throughout the world. International trade is, now, called as global
trade or international marketing. International trade is exchange of goods and services across international
borders. It has a long history of centuries and is growing in different directions.
DEFINITION OF INTERNATIONAL TRADE:

(1) Encyclopaedia Britannica: "International trade may be defined simply as the exchange of goods and
services among nations".

Q11. FEATURES/NATURE OF INTERNATIONAL TRADE:

(1) International trade involves transfer/exchange of goods and services: Countries export and import
goods including raw materials, machinery, industrial goods and agricultural produce. The services like
banking, insurance tourism, consultancy, etc. are exported and imported under international trade. The share
of services in international trade is increasing in recent periods. USA, China and India export services on a
large scale.
(2) International trade is in large volume and also highly competitive: As a result, developed countries
reap huge benefits of international trade. Quality products with low production cost dominate international
trade.
(3) Developed countries and MNCs dominate international trade and earn huge profits.
(4) International trade offers benefits (earning of foreign exchange, profitable use of surplus production,
employment generation, full utilisation of available material and human resources) to participating countries.
(5) International trade is not free and fair due to trade restrictions introduced practically by all countries on
one ground or the other. There are tariffs and non-tariff restrictions on international trade. Countries can
restrict imports by imposing heavy tariffs on imports.
(6) Trading blocks, tariff restrictions, non-tariff barriers, protectionism, etc. create negative impact on the
growth of international trade. Global economy is affected due to decline in international trade.
(7) Free trade agreements, trade related agreements of WTO and reduction in trade barriers by countries are
favourable factors for the growth of international trade. However, recession, oil crisis, currency crisis, etc.
affect its growth. International trade in goods and services is growing gradually.
(8) International trade leads to development of poor and developing countries. Such countries get the benefits
of inflow of foreign capital, foreign technology and foreign collaboration, etc. This leads to development of
poor and developing countries in terms of foreign exchange, employment generation, industrial growth,
increase in the competitive capacity of domestic industries and so on.
(9) International trade brings countries closer for commercial and cultural purposes. It also promotes
production of good and services as well as employment opportunities in many countries.
(10) International trade leads to world peace, cordial relations among countries and co-operation for a new
international economic order which will be favourable to all trade partners in international trade.
ADVANTAGES / IMPORTANCE OF INTERNATIONAL TRADE:

International trade is important to all countries, particularly to developing countries as it offers following
benefits/advantages:
(1) Earning foreign exchange through exports and solving the balance of payments problem.
(2) Creating employment and raising industrial production within the country.
(3) Helping hand to tertiary sector and facilitating imports for economic and industrial growth.
(4) Promoting economic development which again provides better life and welfare to domestic population.
(5) Reputation as developed country and participation in international co-operation for peace and
development in the world.

Q12. (A) TRADE BARRIERS - MEANING OF TRADE BARRIERS

International trade means trade in between different countries of the world. It includes trade in goods and
services. International trade is growing and is becoming highly competitive. It is not free and fair to all
countries. There are different restrictions on international trade. Such trade restrictions are called trade
barriers. They are barriers as they restrict imports and exports of countries.

Trade barriers are imposed/artificial obstacles or restrictions in the free flow of goods and services among the
countries in the world. Various types of restrictions are imposed by different countries on international
marketing activities. Such imposed restrictions on imports and exports are called trade barriers. They are
treated as instruments of trade policy. Such barriers may be monetary or non-monetary in nature. Trade
barriers are for the protection of interests of a country/nation.

OBJECTIVES OF BARRIERS:

(1) To protect domestic industries from foreign competition by increasing the cost of imported goods. In
India, such tariffs are imposed to protect domestic industries such as sugar industry, cement industry, steel
industry and so on.
(2) To promote new industries and R&D activities by providing a home market to home industries. In
addition, to make home industries globally competitive
(3) To maintain a favorable balance of trade and balance of payments position by restricting imports.
(4) To conserve foreign exchange reserves by restricting imports. In addition, to earn foreign exchange
through export promotion.
(5) To remove the deficit in the balance of trade and balance of payments through large scale exports.
(6) To make country strong and self-reliant.
(7) To protect national economy from dumping by other countries with surplus production.
(8) To mobilize revenue by imposing heavy duties on imports.
(9) To counteract trade barriers imposed by other countries.
(10) To encourage the use of domestic production in the domestic market and thereby to make the country
strong and self-sufficient.

Q12. TYPES OF TRADE BARRIERS:

Different trade barriers are broadly classified into the following two categories: .
(A) Tariff Barriers, and
(B) Non-Tariff Barriers.
(A) TARIFF BARRIERS - MEANING OF TARIFF BARRIERS:

Tariffs, in international trade, refer to the taxes/customs duties and other levies imposed on internationally
traded commodities when they cross the national boundaries. Tariff is a tax/import duty on the goods which
are being imported from aboard. Tariffs are in the form of customs duties (imposed by the importing
country) and operate through price mechanism.

CLASSIFICATION OF TARIFFS/TYPES OF TARIFF BARRIERS:

(A) On the basis of origin and destination of the goods:

(1) Export Duty: An export duty is a tax imposed on a commodity originating from the duty levying country
designed for use in some other country. Such duty is levied for revenue purpose. It is normally imposed on
the primary products in order to conserve them for domestic industries.
(2) Import Duty: An import duty is a tax imposed on a commodity originated in a foreign country designed
for duty levying country. The purpose of heavy import duty is to earn revenue, to make imported goods
costly and to provide protection to domestic industries.
(3) Transit Duty: Transit duty is a tax imposed on a commodity while crossing the national frontier
originating from, and designed for other countries. Countries with favourable
geographical location are in a position to collect, substantial revenue by imposing transit duties.

(B) On the basis of quantification of the tariffs:

(1) Specific Duty: A specific duty is a flat sum per physical unit (quantity) of the commodity imported.
Here, the rate of duty is fixed on the weight or measurement of a commodity and is collected on each unit
imported. For example, 5 per metre of cloth or 500 on each TV set or washing machine imported. Such duty
is collected at the time of entry of goods in the home country. Such duty discourages imports to certain
extent. Specific duties are easy to decide and also easy to administer.

(2) Ad-Valorem Duty: Ad-Valorem duties are imposed at a fixed percentage on the value of a commodity
imported. Invoice is as a base for this purpose. This duty is imposed on the goods whose value cannot be
easily determined e.g., work of art, rare manuscript, antiques, etc. Here, the weight, size or volume of
commodity is not considered while calculating duty but only the value of a commodity is taken into
consideration. Ad-Valorem duty is convenient in the case of goods like costly works of art, paintings, etc.
(3) Compound Duty: Tariff is referred to as compound duty when a commodity is subject to both specific
and ad-valorem duties. Such duty may also be called mixed or combined duty as it is a combination of the
specific duty and ad- valorem duty. For example, on the cloth imported, 15 per cent duty may be charged on
the FOB value and in addition 2 may be charged per each meter of cloth imported.

(C) On the basis of purpose:

(1) Revenue tariff: Revenue tariff-aims at collecting substantial revenue to the government. Here, the duty is
imposed on items of mass consumption even though the rate of duty may be low. Duty is also imposed on
luxury articles where demand comes from the rich class. Revenue duties give income to the government but
do not obstruct the flow of imports.
(2) Protective tariff: The stiff competition to domestic goods from imported goods is minimized through
protective tariff. A very high import duty is imposed. As a result, imports are discouraged or imported goods
are made very costly. High protective duties may harm consumers as imports will be stopped and there will
be shortages in the consumer market. Smuggling and other anti-social activities are encouraged due to high
tariffs.
(3) Anti-dumping duties: Dumping is a commercial practice of selling goods in foreign markets at a price
below their normal price or even below their marginal cost. Dumping when followed by large number of
countries is called international dumping. The purpose is to capture foreign markets initially at a loss and
then to have good profit in the long run by raising prices. It is one harmful practice to less developed
countries. Heavy duties (penalty duties) imposed to remove the effects of dumping are called anti-dumping
duties. They defeat the very purpose of dumping and also give substantial revenue to the importing country.
Dumping is an unfair practice for entry in a foreign market. It is an unfair unethical practice.
(4) Countervailing duties: Countervailing duties are imposed in order to nullify the benefits offered through
cash assistance or subsidy by the foreign country to its manufacturers. The rate of such duty will be
proportional to the cash assistance or subsidy granted.
(D) On the basis of trade relations:
(1) Single column tariff: Under single column tariff system, the tariff rates are fixed for various
commodities and the same rates are made applicable to imports from all countries. These rates are uniform
for all countries as discrimination is not made as regards the rates of duty.
(2) Double column tariff: Under double column tariff system, two rates of duty on all or on some
commodities are fixed... The lower rate is made applicable to a friendly country or to a country with bilateral
trade agreement. The higher rate is made applicable to all other countries.
(3) Triple column tariff: Under triple column tariff, three different rates of duty are fixed. These are: (a)
general rate, (b) international rate and (c) preferential rate. The first two rates are similar to lower and higher
rates while the preferential rate is substantially lower than the general rates and is applicable to friendly
countries.

BENEFITS / ADVANTAGES OF TARIFFS / TARIFF BARRIERS TO IMPOSING COUNTRY:

(1) Discourage imports: Imports from abroad are discouraged even eliminated to a considerable extent. Or
(2) Protection to home industries: Protection is given to home industries and manufacturing activities.
Business is provided to ancillary industry, servicing, etc.
(3) Reduction of consumption of foreign goods: Consumption of foreign goods reduces to a considerable
extent and the attraction for imported goods is brought down considerably.
(4) Revenue to government: Tariffs give substantial revenue to the government through higher duties
imposed on imported goods. However, consumers have to pay higher price for imported goods.
(5) Removal of deficit: Tariffs remove/reduce the deficit in the balance of trade and balance of payments of
a country.
(6) Encouragement to R&D activities: Tariffs encourage research and development activities within the
country. They facilitate the updating of domestic industries as regards quality and cost.
(7) Job creation in the home country.
Q14. (B) NON-TARIFF BARRIERS

MEANING OF NON-TARIFF BARRIERS (NTBs):

Along with tariff barriers, other quantitative restrictions are imposed by countries called non-tariff barriers.
Non-tariff barriers are treated as new protectionism measures introduced by countries. There is considerable
increase in such non-tariff barriers in recent years. The export growth of many developing countries is
adversely affected due to NTBS by developed countries. Such restrictions are also called invisible tariffs.
Any measure (other than tariff) introduced for restricting the entry of foreign goods can be treated as non-
tariff barrier. These barriers do not affect the price of imported goods, but restrict their entry and
reduce quantity of imported item. However, the net effects of tariffs and non-tariff barriers are more or less
identical. However, the impact of non- tariff barriers is direct and quick whereas non-tariff barriers
require longer period for expected results.

TYPES OF NON-TARIFF BARRIERS (NTBS):

(1) Quota System: Under quota system, the country fixes in advance, the limit of import quantity of a
commodity (called quota) that would be permitted from various countries during a given period. Such quotas
are usually administered by requiring importers to have licences. Imports are not allowed over and above a
specific limit. Tariffs restrict imports indirectly while quotas restrict imports directly.
Types of Quotas:
(a) Tariff quota (Quota system): A tariff quota combines the features of the tariff as well as the quota.
Here, the imports of a commodity upto a specified volume are allowed duty free or at a special low rate duty.
Imports in excess of this limit are subject to a higher rate of duty.
(b) Unilateral quota: In unilateral quota system, a country on its own fixes a ceiling on quantity of the
import of a particular commodity.
(c) Bilateral quota: In a quota, negotiations are made between the importing country and a country and the
import of quantity is decided. supplier
(d) Mixing quota: Under the mixing quota, the producers are obliged to utilise domestic raw materials upto
a certain proportion to manufacture finished product.

(2) Import Licensing and Domestic Content Requirements: Quota regulations are normally administered
by means of licensing. Here, the prospective importers are obliged to obtain a license from the licensing
authorities. Licensing is used as a powerful device for controlling the quantity of imports. The basic purpose
of licensing is to restrict imports upto a specific limit decided by the government from time-to- time. Import
licensing is an alternative to quota system. Here, imports are allowed under license i.e. permission from the
government. Foreign exchange for imports are provided against such license issued.
(3) Consular Formalities: Some countries impose strict rules regarding consular documents necessary for
importing goods. They include import certificates, certificate of origin and certified consular invoice.
Penalties are provided for non- compliance of such documentation formalities.
(4) Preferential treatment through Trading Blocs: Some countries form small regional groups and offer
special concessions and preferential treatment to member countries. As a result, trade develops among the
member countries and gives benefits to participating members only.
(5) Customs Regulations: Customs regulations as well as administrative regulations are made complicated
in many countries and are used as invisible tariffs for discouraging imports.
(6) State Trading: State trading is useful for restricting imports from abroad as final decisions about imports
are always taken by the government. The role of state trading is declining due to economic liberalization in
many countries.
(7) Foreign Exchange Regulations: Countries impose various restrictions on the use of foreign exchange
earned through exports. The objectives are: (a) to restrict the demand for foreign exchange, (b) to check the
flight of capital, (c) to maintain overvalued exchange rates.
(8) Fixing Product Standards: Many countries (mainly rich and developed) have imposed product
standards for imports. The products which are below such standards are not allowed to be imported. Such
standards are decided for medicines, agricultural products, food items, fruits and so on.
(9) Prior Import Deposits: The importers are asked to deposit even 100 per cent of import value of goods in
advance with a specified authority (normally the Central Bank). Thereafter, the importers are given
permission to import goods.
(10) Health and Safety Regulations and Product Labelling: Many countries have their specific rules
regarding health and safety regulations applicable to imports from aboard. Such measures are mainly
applicable to raw materials and food items.
(11) Miscellaneous Non-tariff Barriers: Such barriers include embargoes and import restrictions as per
environmental regulations, anti-dumping regulations and canalisation of imports of some commodities,
customs, technical and administrative regulations, packaging requirements, preferential arrangements and so
on. Exports from developing countries face many issues in developed countries. Such issues include the use
of child and sweat labour and other environmental issues.

Q15. EFFECTS / IMPACT OF INTERNATIONAL TRADE:

(A) Positive Impact of Trade Barriers on Imposing Country:
(1) Protection to Domestic Industries: Trade barriers give protection to domestic industries by reducing
competition and by restricting liberal imports from abroad. Domestic industries get easy market and
opportunity to expand their production activities.
(2) Additional Revenue to Government: High tariffs give additional revenue to the government and also
restricts imports. Government gets huge revenue through import duties, etc. This improves the financial
position of the government and enables government to spend more money on industrial growth,
infrastructure development, health, education and social welfare.
(3) Improvement in the Balance of Trade and Balance of Payments: Trade barriers reduce imports from
other countries. As a result, the deficit in the balance of trade will reduce. The outflow of foreign exchange
will be less due to limited imports. Thus, trade barriers improve country's position relating to balance of trade
and balance of payments.
(4) Conservation of foreign exchange: Due to restricted imports, the foreign exchange will be saved and
will be available for meeting other important purposes.
(5) Accelerates growth process: Trade barriers will reduce imports and will also provide additional revenue
to the government. This revenue can be used for industrial/ economic development. As result growth process
accelerates.

(B) Negative Impact/Implications of Trade Barriers on International Trade:

Trade barriers are artificial restrictions on the free movement of goods among countries. Such trade barriers
create harmful/ negative effects on international/global trade. As a result, participating countries suffer. Even
the volume of world trade reduces due to trade barriers.

(1) Trade barriers restrict free movement of goods among the countries. Such situation is harmful to all
participating countries. Trade barriers are not supportive to the growth of international trade. They, in fact
restrict the growth of global trade.
(2) The volume of world trade reduces considerably due to different types of trade barriers.
(3) Countries are artificially kept away from each other due to trade barriers.
(4) Countries with surplus production are unable to utilise it fully due to trade restrictions. They are unable to
export and earn foreign exchange for the import of other goods from other countries.
(5) Developing countries and poor countries are not self- sufficient. They have to import many items for their
survival. Trade barriers affect poor and developing countries more severely as compared to developed
countries.
(6) Global integration of countries is adversely affected due to trade barriers. Even cultural exchanges are
reduced considerably due to trade barriers.
(7) Production activities in many countries are adversely affected due to trade barriers. Such countries are not
in a position to utilise their natural resources fully as they are unable to export their surplus production
(8) The benefits of comparative cost advantage are not available to different countries due to trade barriers.
(9) Global free trade is an ideal situation and beneficial to all participating countries. This ideal situation is
difficult to create due to trade barriers introduced by different countries,

In short, trade barriers lead to many disadvantages for global trade. Efforts should be made at the global level
for removing/ reducing trade barriers. Here, developed countries are expected to take lead and special
initiatives. This will lead to "Free World Trade" which is an ideal economic situation for all countries.

Q16. (B) TRADING BLOCS

Trading bloc or regional economic grouping is the formation of group of countries for mutual benefits. It is a
voluntary grouping of countries of a specific region for common benefits. Trading blocs indicate regional
economic integration of nations for mutual benefits. However, the degree of integration is not uniform. It is
decided mutually by countries which form a trading bloc. Free trade agreement, customs union, etc. are
different examples of economic integration but the degree of integration is not identical. Countries have to
decide jointly the degree of integration among them.
Economic integration among countries is visible in the following forms:

(a) Free Trade Area

(b) Customs Union.
(c) Common Market
(d) Economic Union

In short, trading blocs are groups of countries formed geographical basis for self-protection and self-
development through mutual support and co-operation. They are useful for solving trade related problems of
member nations. They also bring regional development through common policies acceptable to all member
countries. on

Q17. OBJECTIVES OF TRADING BLOCS:

(1) To reduce/eliminate trade barriers among the member countries of the group/bloc.
(2) To promote growth of the region as a whole through the co- operation of member countries and also
through mass production and marketing of goods.
(3) To promote free trade among the member countries and also to promote free transfer of factors of
production (labour, capital, technology, etc.) within the trade bloc.
(4) To strengthen political, economic, social and cultural relations/ties among the member countries.
(5) To bargain collectively with non-members and to impose uniform tariff and non-tariff barriers on non-
members.
(6) To provide assistance to member countries of the economic group in all possible ways so as to solve their
current economic problems and provide better life and welfare to consumers in member nations.
(7) To promote economic growth and to generate employment opportunities in the region through collective
efforts including mass production, large scale marketing of goods and free movement of capital and labour
within the member countries of the group.
(8) To promote competition among firms of member countries, to encourage free movement of labour,
capital and other factors of production among member countries and to maintain cordial relations (political,
economic, social and cultural) among the group members.

Q18. FEATURES OF TRADING BLOCS:

(1) In every trading bloc, countries facing identical problems come together for mutual benefits. These blocs
are purely voluntary in character.
(2) Operational details of trading bloc are decided through mutual negotiations among the member countries..
(3) Trading blocs are regional in character. It is an attempt for collective self-reliance of a group of countries
located in a particular geographical region of the world.
(4) Trading blocs have divided the world economy into divisions based on political considerations.
(5) Trading blocs go out of existence when their existence is not useful (e.g., CMEA). In addition, new trade
blocs may be formed by countries when found necessary and useful.
(6) Economic integration among nations of the trading bloc may be at the lowest or at the highest level. In
economic union, there is highest degree of integration. Members of trading bloc keep their freedom above the
economic agreement. They are free to leave the trading bloc as per their desire. Recently, England left
membership of powerful trading bloc called "European Union (EU)".

Q19. A NOTE ON SAARC

SAARC is an economic association of South Asian Countries for regional cooperation, for mutual help and
collective growth. Seven members of Indian sub-continent formed this association in 1985. India, Pakistan,
Sri Lanka, Bangladesh, Nepal, Bhutan and Maldives are the members of this group. In 2007, Afghanistan
joined this group as its 8th member-nation. SAARC accounts for over one-fifth of the world population but
has only about 3.3 per cent of world's land area. The density of population is very high and a major share of
the world's poor lives in the SAARC member countries. SAARC is an example of economic integration of
developing countries for mutual benefits of member countries.
Objectives of SAARC:
(1) To develop cooperation among the member countries in the areas such as agriculture, rural development,
telecommunication, postal services, transport, science and technology, meteorology, tourism and sports.
(2) To accelerate economic growth, to promote welfare of the people of the region, to promote collective
self-reliance through regional co-operation.
(3) To promote active collaboration and mutual assistance in economic, social and cultural fields for social
progress and cultural development.
(4) To co-operate for water resource development in the region.
(5) To contribute to mutual trust, understanding and appreciation of each other's problems.
(6) To strengthen co-operation among member nations at international forums on matters of common
interest.
(7) To co-operate with international and regional organisations with similar objectives.
(8) To strengthen co-operation with other developing countries.
(9) To promote welfare of the people of the region and to improve the quality of life.

The Council of Ministers of SAARC is the highest policy- making body of SAARC. The council is
represented by the heads of the government of the member countries. The council meets twice a year and
more times, if necessary. The Council of Ministers is assisted by the Standing Committee. The SAARC
secretariat is located in Nepal.

Q20. A NOTE ON ASEAN

The Association of South East Asian Nations (ASEAN) is a regional economic grouping of South East Asian
countries and is now emerging as a major force in the world trade. It was established on 8th August, 1967 at
Bangkok through Bangkok Declaration signed by the Foreign Ministers of ASEAN countries on August 8,
1967. The members of the group are: Indonesia, Malaysia, Philippines, Singapore, Thailand and Brunei
Darussalam (joined the group on January 7, 1984). Thereafter, other countries such as Vietnam, Laos and
Myanmar joined the group. Cambodia joined ASEAN in 1999. The headquarters of ASEAN is at Jakarta,
Indonesia. Initially, the aim of ASIAN was to preserve peace among member nations and to face collectively
the threat from China. Initial focus of ASIAN was political and now (since 1976) ASIAN is for economic co-
operation among member nations. They have formed ASEAN Free Trade Area (AFTA) is September, 1994.
for developing inter-ASEAN trade.
Objectives of ASEAN:
(1) To accelerate economic growth, social progress and cultural development of member countries.
(2) To promote active collaboration and mutual assistance in matters of common interest.
(3) To maintain close cooperation with the existing international and regional organisations with similar
aims.
(4) To ensure the stability of the South East Asian region.
Q21. A NOTE ON NAFTA

The North American Free Trade Agreement (NAFTA) is the most powerful trade bloc of the world. The
members of the bloc are: USA, Canada and Mexico. The NAFTA agreement was signed in 1992 but the bloc
came into operation in 1994 as a free trade area with custom union between USA, Canada and Mexico. The
NAFTA is basically a trade and investment agreement with a I view to reducing barriers on the flow of
goods, services and people among the three countries. NAFTA requires member countries to remove all
tariffs and barriers to trade. NAFTA has side agreements on environment and labour standards making it the
first US trade accord to be formally linked to such commitments. NAFTA has eliminated all trade and tariff
barriers on 1st Jan, 2008 for trade promotion among member nations.
Objectives of NAFTA:

(1) Substantial tariff reductions over a ten year period by member countries.
(2) More and easy access to financial services among the member countries.
(3) Protection to investments in member countries.
(4) Lowering of trade barriers and facilitate easy movement of goods and services.
(5) Formation of a US-Mexico border environmental commission for avoiding all types of pollution and
cleaning of toxic waste dumps.
(6) Creation of a North American Development Bank.
(7) To develop industries in Mexico and to assist Mexico in earning more foreign exchange to meet its
foreign debt burden.
(8) To develop social and cultural relations among member countries of NAFTA.

(9) To negotiate collectively with non-members on foreign trade matters.

Q22. A NOTE ON EU

European Union (EU) (formerly called European Common Market (ECM)) originally consisted of six
countries namely, Belgium, France, Federal Republic of Germany, Italy, Luxembourg and Netherlands. It
came into existence on 1st January, 1958 by the Treaty of Rome, 1958. The headquarters of EU is at Brussels
(Belgium). The aim of the Treaty of Rome was to create a customs union with a common external tariff and
no tariffs and quotas on intra-community trade.

European Council is the main administrative body of the EU. Each member country is represented by a
minister in this council. Each member country holds presidency of the council for six- monthly period by
rotation. The membership of EU is quite large.

The objectives of EU are similar to the objectives of any trade bloc.

The important objectives of EU are:

(1) To eliminate trade barriers on member nations and to assist member nations during emergencies.
(2) To develop political, social and cultural relations among members and to encourage free transfer of
capital and labour among member nations.
(3) To impose common external barriers on non-members and to bargain collectively with non-members on
trade related issues by means of collective strength.

Q23. THE ORGANIZATION OF PETROLEUM EXPORTING COUNTRIES (OPEC)

OPEC is an organisation of twelve oil-producing countries that control 61% of the world's oil exports and
hold 80% of the world's proven oil reserves. OPEC's share in oil production dropped from 44.5% in 2012 to
41.8% in 2014. During this period, oil prices fell from $108.5 in April, 2012 to $34.72 in December, 2015
(per barrel).
OPEC countries produce oil more cheaply as compare to US. OPEC countries avoid production cut as it
wants to avoid cut in its market share. Since December 2015, OPEC raised its production quota to 31.5
million barrels per day (MBPD). The OPEC countries earn enormous oil revenue year after year. In fact, oil
export is the only major source of revenue to OPEC countries. OPEC is a permanent inter-governmental
organisation, created in Baghdad in September, 1960. Its membership includes Iran, Iraq, Kuwait, Saudi
Arabia and so on. Its headquarters are in Vienna, Austria. Russia, China and US are large oil producers but
are not the members of OPEC.

OBJECTIVES OF OPEC:
(1) OPEC's objective is to manage the world's supply of oil to keep prices stable. It makes sure that its
members get what they consider a good price for their oil. Consumers normally base their buying decisions
on price quoted as oil is a fairly uniform quality commodity.
(2) OPEC's other objective is to reduce oil price volatility. It is in the OPEC's best interests to keep world oil
prices stable. This will enable OPEC member countries to continue with oil extraction continuously. If the
prices are too high, the non- OPEC supply will increase. If the prices are too low, the earning capacity of
OPEC countries will reduce.

Q24. IMPLICATIONS/ EFFECTS OF TRADING BLOCS ON INTERNATIONAL TRADE:

Trading blocs and free international trade do not go together. In fact, trading blocs are against the growth of
free global trade. They adversely affect the process of trade liberalisation at the global level. However,
trading blocs are also useful for integration of economies of member countries. Trading blocs is a mixed
blessing.

The positive and negative implications/effects of trading blocs are:

(A) Positive Effects/Impact of Trading Blocs on International Trade/Marketing:
(1) Expansion of markets: Trading blocs bring economic co- operation among the member countries and
remove trade and other restrictions (tariff and non-tariff barriers). This leads to broadening the scope of
regional markets. Trading blocs lead to increase in trade within the region. It leads to regionalism which
gives benefits to member countries of the group. EU, for example, has converted the whole of Europe into
one integrated market. It has also brought economic development of the member countries and promoted free
movement of goods, labour and capital within the region. This has given benefits to all member countries.
Trading blocs promote prosperity of the region and ensure higher living standards to people of the region.
(2) Growth and development of the region: Trading blocs bring integration of economies of member
countries. This provides growth opportunities to all member countries. Large scale production for bigger
markets is conducted. This is how trading blocs facilitate economic growth of the whole.
(3) Increase in Exports and Imports: Trading blocs bring economic development to member countries.
Large production is conducted for meeting domestic needs and also for exports. They bring expansion of
imports and exports of
all member countries within the region and also outside the region.
(4) Benefits to consumers of member countries: Consumers get low priced products due to mass
production and free movement of goods. Trading blocs promote regional growth which is beneficial to
member countries and consumers of the region.
(5) Mobility to factors of production: Members of the bloc are given freedom in regard to transfer of
factors of production. This leads to mass scale production at low cost. Large scale employment opportunities
are also created within the region.
(6) Cordial relations: Trading blocs bring economic, political and cultural integration of member countries.
This develops cordial economic and political relations among the member countries. This avoids disputes,
ensures peaceful relations and promotes co-operation among member countries. Such blocs promote
international peace.

(B) Negative Effects of Trading Blocs on International Trade/ Marketing:

(1) Competition is restricted: Regional trade growth is harmful to free and fair competition at the
international level. There is a reduction of competition among member countries. However, non-member
countries have to face competition from members of the bloc and that too in a collective manner. There are
adverse effects of trading blocs on competition scenarios. Due to collective bargaining power of trading bloc
countries, the non-member nations stand at a disadvantage.
(2) Problems before non-members and global trade associations: Trading blocs are harmful to non-
members. Non-members have to face many problems (high tariffs, import restrictions, etc.). Trading blocs
lead to trade diversion and not trade creation or trade development. They also impose pressure on
organisations. On WTO and other global trade
(3) Collective bargaining by member countries: Members of a trading bloc act as one single group while
negotiating trade
matters with non-members. They bargain collectively with non-members as regards trade relations.
(4) Harmful effect on international trade: Trading blocs create obstacles in the growth of free global trade.
They artificially restrict the growth of international trade. This is the most disturbing and discouraging effect
of regional economic groupings. The flow of international trade is adversely affected even when trade within
member nations of groupings increases. Non-members face adverse effects of trading blocs in terms of trade
barriers, etc.
(5) Conflict between multilateralism and regionalism: The regional trade arrangements are undesirable.
Arrangements are an exception to the MFN principle which is such the essence of the WTO rules. Economic
groupings are harmful to poor and developing countries. Countries of trading blocs do not take much interest
in multilateralism. Regionalism leads to lack of interest in multilateralism.

In conclusion, it can be said that trading blocs promote trade and other economic activities among member
nations. However, they restrict trade with non-member nations which are large in number. As a result,
trading blocs do not promote free international trade but create obstacles in the growth process. Regional
approach in international-trade should be discouraged as it is harmful to the growth of free and fair
international trade. Regionalism in trade should be replaced by multilateralism.