Influences on International Trade

Question 1

1. Explain the role of the World Trade Organisation (WTO)

Answer 1

The World Trade Organisation (WTO) is an international organisation consisting of 160 member countries who agree to work on reducing and eliminating barriers to international trade. As advocates of freer and fairer trade, member states resolve trade disputes through the WTO. The WTO was formed in 1995 and is the first international organisation with powers to enforce trade agreements across the world. WTO have had a profound impact on average import duties, with average tariff rates decreasing from 45% in 1949 to 2.5% in 2010.

Question 2

2. Outline FOUR functions of the WTO

Answer 2

 Arguably the most important feature of the WTO, is its role in settling disputes between countries. The WTO plays the role of trade tribunal, where members may file complaints against other members who fail to abide by the principles of international trade.

 The WTO promotes multilateralism – trying to persuade all countries to reduce or remove their trade barriers together. Trade liberalisation is achieved by removing or reducing any restrictions which limit trade in goods and services.

 One of the key principles of the WTO trading system is that trade should be conducted free of discrimination. This means that member countries cannot discriminate between their trading partners – all countries should be treated equally. This principle is known as the ‘most-favoured-nation’ (MFN) treatment. For example, if Australia improves the benefits that it given to one trading partner, it has to give the same treatment to all the other WTO members. There are some exceptions, such as countries can set up a free trade agreement that applies only to goods traded within the group (e.g. European Union).

 National treatment. This means that imported goods and services should be treated the same as domestic goods and services. There should be no discrimination between foreign goods and domestic goods, once the foreign goods have entered the country. Notice that this does not prevent a country from applying a tariff to an imported good or service before the good enters the market.

Question 3

3. Explain TWO impacts of globalisation on jobs in developing countries and TWO impacts on jobs in developed countries.

Answer 3

DEVELOPING
 Open economies lead to more and better-paying jobs, which ultimately result in better standards of living for developing countries.

 It entrenches the use of child labour, as businesses strive to minimise costs, which is ethically and morally unfair to developing countries. There is a legitimate concern that participation in world markets may be associated with an increase in child labour. This is known to have a detrimental effect on child welfare, both in the short term and in the longer term, through reduced schooling and education.

DEVELOPED

 In Australia, the car industry has greatly deteriorated due to it not being competitive with low-cost foreign companies. The input costs in Australia for car production (cost of resources) and cost of labour is significantly higher than countries such as China and India, which translates into higher prices for Australia’s cars. This makes Australia’s car manufacturing industry uncompetitive with foreign car manufacturers such as Hyundai, Mitsubishi, Toyota, Mazda etc. This results in increasing unemployment in developed countries such as Australia, as they are unable to compete with low-cost foreign competitors. As a direct consequence of globalisation, the Australian car manufacturing industry has effectively ceased to exist, with both Holden and Ford ceasing to manufacture cars.

 As globalisation continues to impact developed countries, there is increasing competition between people applying for jobs, meaning that there is a higher expectation of qualifications/degrees to distinguish yourself between other applicants. This reduces the rate at which unemployment decreases.

 Many services such as IT (information technology) have been outsourced to countries such as India and Philippines, meaning that people in developed countries, possess skills that are no longer required in these countries. This is because it is no longer efficient for developed countries to be producing these services, when they can be produced for a much lower cost and at greater efficiency in foreign countries. This also contributes to unemployment.

Question 4

4. Define tax havens and explain how a business may use them to reduce their tax liability.

Answer 4

Defn: Any country that has very low or non-existent tax rates and allow other businesses to channel profits or income through this country to avoid tax.
A tax haven is a country that offers foreign individuals and businesses little or no tax liability in a politically and economically stable environment. Tax havens also provide little or no financial information to foreign tax authorities. Individuals and businesses that do not reside a tax haven can take advantage of these countries’ tax regimes to avoid paying taxes in their home countries. Tax havens do not require that an individual reside in or a business operate out of that country in order to benefit from its tax policies.
• Free Flow of capital (deregulation driving globalisation)
• Bank secrecy
• Little or no rules about setting up (allows businesses to be freely created)
• Tax exemptions

Question 5

5. Explain TWO impacts that globalisation has had on skills and technology.

Answer 5

MNCs have introduced new skills and technology in production processes to host countries. This concept is known as technology transfer. For example, Japanese firms introduced the models of quality circles and kaizen to Western economies. With new ideas in management thinking and technology transfer, the efficiency of production in the host country is raised.

Globalisation also promotes continued innovation, which has a significant impact on technology. Airbus A380, result of growing demand for passenger travel.

Question 6

6. Provide a definition of each of the following and explain at least one way in which they impact upon global business: CUSTOMS

Answer 6

Customs = refers to what is ‘normal day to day practice’ in a particular country/economy. E.g. ‘Tipping ‘ (adding extra $ when paying a bill) is not a custom in Australia, whereas it is overseas.

Question 7

6. Provide a definition of each of the following and explain at least one way in which they impact upon global business: COMMUNICATION PROCOLS

Answer 7

Communication protocols = relates to business communication and what is appropriate for a given market. E.g. formal greetings must be used in some countries, whereas email is sometimes considered an appropriate means of communication. A fairly recent technological advancement of ‘face to face’ conversation using technology, allows business to communicate more efficiently, however may be considered informal in some countries. Some countries/economies may believe that a phone/face to face conversation is required and this must be respected.

Question 8

6. Provide a definition of each of the following and explain at least one way in which they impact upon global business: LEVELS OF EDUCATION

Answer 8

Levels of education = the extent to which a country, population or group of people have received schooling, tertiary education and access to university. If a country has high levels of education amongst its population, this will benefit the success and efficiency of its workforce.

Question 9

6. Provide a definition of each of the following and explain at least one way in which they impact upon global business: RELIGIOUS BELIEFS, CELEBRATIONS, HOLIDAYS

Answer 9

Religious beliefs/celebrations/Holidays = Religion is a large influence on consumer choices and a significant influence on businesses. Many world religions (e.g. Buddhism, Christianity, Islam, Hinduism). Each of these religions influences its followers to adopt certain values and abide by a particular moral and behavioural code. Religion affects the kinds of work people feel comfortable doing, the way people and businesses operate, the relationship of the business to the environment and its employees.

For example, Christian employees would not work on Sundays, Jewish employees would not work on Saturdays and Muslim employees would be given time to pray during the day. Another example is operational constraints during Ramadan, as people do not eat or drink on this day.

Question 10

6. Provide a definition of each of the following and explain at least one way in which they impact upon global business: BUSINESS ETIQUETTE

Answer 10

Business Etiquette = each nation has a set of morals, or cultural norms, which dictate and influence what is deemed to be acceptable business practice. Businesses operating overseas must be aware of the differences in business practices and etiquette. E.g. it has been well publicised that many businesses engage in the practice of giving gifts in order to speed up approvals and getting past regulations in foreign countries. In some countries, this practice may be legitimate (e.g. China), although in many instances these payments are appropriately viewed as bribes and therefore unethical.

Question 11

7. Define environmental sustainability.

Answer 11

The maintenance of the factors and practices that contribute to the quality of environment on a long-term basis. Ensuring that current activity does not compromise the prosperity for future generations (e.g. land developments).

Question 12

8. Explain at least TWO ways a business can become more environmentally sustainable.

Answer 12

Replace outdated appliances and machinery with their greener counterparts (e.g. air conditions, computers, lighting - LED). This is complemented by creating an environmentally aware workforce, who turn off appliances such as computers and lighting when not being used.

Becoming more digitally orientated by reducing paper-usage and instead using email or other digital sources as a way of transferring information.

Question 13

9. Explain at least TWO impacts on a business of becoming environmentally sustainable.

Answer 13

Improved public image - as consumers become increasingly aware of businesses commitment to environmental sustainability, there is increasing pressure for businesses to adapt. By showing its consumers that it is dedicated to environmental sustainability, public image will improve.

Increased costs in the short term - replacing outdated equipment with new ‘energy efficiency equipment’ can be costly, meaning that businesses will experience increased costs, however in the long term, this commitment to environmental sustainability will allow the business to prosper.

Question 14

10. Outline TWO examples of government grants to Australian business as an incentive to trade internationally.

EXPORT MARKET DEVELOPMENT GRANT

Answer 14

The Export Market Development Grant (EMDG) scheme is a key Australian Government financial assistance program for aspiring current exporters. Administered by Austrade, the scheme supports a wide range of industry sectors and products, including inbound tourism and the export of intellectual property and know-how outside Australia.

The EMDG scheme;
• Develop industries that Australia has traditionally underperformed in.
• Encourages small and medium sized Australian businesses to develop export markets.
• Reimburses up to 50% of eligible export promotion expenses above $5,000 provided that the total expenses are at least $15,000.
• Prvides up to eight (8) grants to each eligible applicant.
• Exports bring an injection of funds into the economy.
To be eligible, the business must have:
• Income of not more than $50 million in the grant year.
• Incurred at least $15,000 of eligible export expenses under the scheme.
• Principal status for the export business.
• Promotes/creates brand identity for Australian goods.

Question 15

10. Outline TWO examples of government grants to Australian business as an incentive to trade internationally.

TARIFF EXEMPTION SCHEME

Answer 15

Tariff Exemption Scheme, also known as the “Enhanced Project By-Law Scheme” (EPBS) provides a 5% tariff relief of all qualifying imported goods. This reduction in import duties was designed and implemented to give Australian business greater opportunities to compete globally for lucrative contracts with international competitors. These federal policies reduce the costs of doing business for any company involved in product imports.

Question 16

11. State the role and purpose of Free Trade Agreements (FTAs)

Answer 16

DFN: Free Trade Agreement refers to an agreement between two or more trading nations where there are no trade barriers between trading nations.
• FTAs foster freer trade flows and create stronger ties with our trading partners.
• FTAs don’t just eliminate tariffs, they also address behind-the-border barriers that impede the flow of goods and services between parties, encourage investment, enhance cooperation, and can address other issues, such as intellectual property, e-commerce and government procurement.
• FTAs can increase Australia’s productivity and contribute to higher GDP growth by allowing domestic businesses access to cheaper inputs, introducing new technologies, and fostering competition and innovation.
• FTAs promote regional economic integration and build shared approaches to trade and investment, including through the adoption of common Rules of Origin and through broader acceptance of product standards.
• FTAs can enhance the competitiveness of Australian exports in the partner market, and add to the attractiveness of Australia as an investment destination.
• FTAs can deliver enhanced trading opportunities that contribute to the sustainable economic growth of less-developed economies.
• FTAs can continue to provide benefits to parties as the agreements are implemented, including through phase-ins and in-built agendas that encourage ongoing domestic reform and trade liberalisation.

FTAs in Australia provide:
• better Australian access to important markets.
• an improved competitive position for Australian exports.
• more prospects for increased two-way investment
• reduced import costs for Australian businesses and consumers alike.

Question 17

12. State FOUR features of a) AANZFTA

Answer 17

AANZFTA – Australia-New Zealand Free Trade Agreement

a) Extensive tariff reduction and elimination commitments.
b) Regional rules of origin will provide new opportunities for Australian exporters to tap into international supply chains in the region.
c) Promotes greater certainty for Australian service suppliers and investors, including through certain legal protections for investment in ASEAN (The Association of Southeast Asian Nations) territories.
d) Provides a platform for ongoing economic engagement with ASEAN through a range of built-in agendas, economic cooperation projects and business outreach activities.

Question 18

12. State FOUR features of b)ANZCERTA

Answer 18

ANZCERTA – Australia-New Zealand Closer Economic Relations Trade Agreement

a. strengthen a wider relationship between Australia and New Zealand
b. develop closer economic associations between the Member States through an equally beneficial expansion of free trade between New Zealand and Australia
c. eliminate barriers and tariffs to trade between Australia and New Zealand in a gradual and progressive manner under an agreed timetable and with a minimum of disruption
d. develop trade between New Zealand and Australia under conditions of fair competition

Question 19

13. Explain the FOUR benefits and FOUR challenges to Australian business associated with FTA’s.

Answer 19

 New Zealand’s geographical location to Australia is close compare to many other countries. Due to location many benefits arise for Australia and the economy. Exporting goods to New Zealand becomes cost efficient for Australia because of how close the two countries are. When exporting goods or services to New Zealand prices don’t increase as much because less fuel is needed to be payed for. Furthermore in relation to the geographical location, businesses are able to receive goods imported quicker than what they would compare to importing goods from a European country. This then benefits the business as there income continues and then consumes also benefit as they have the variety of goods or services in which Australia would not have without New Zealand.

 New Zealand imports a large quantity of goods and service from Australia. With what is exported to New Zealand, Australia then gains foreign investments. From this money which is hopefully a profit, Australia can compensate for goods or services in which they import.

 A significant aspect presented in ANZCERTA is competitive advantage. If another country was trying to sell a good or service to New Zealand, they would have to decide who to buy from. In a situation like this, Australia would have an advantage due the agreement and the price of what is wanted to be bought.

 On the other hand there are also disadvantages to ANZCERTA. The free trade agreement disables adding tariffs (tax) on products in which New Zealand export to Australia. This means more people will buy products from New Zealand rather than from locally made products. This may result in local Australian companies to shut down.

Question 20

14. Explain what is meant by the exchange rate.

Answer 20

Exchange rate is simply the price of one country’s currency in terms of another country’s currency. Examples of factors that influence the exchange rate include;

	Interest rates
	Inflation rate
	Trade Balance
	Political Stability
	General state of economy
	Quality of governance.
Exchange rates are not stable, with the value of different currencies fluctuating greatly over time.  In fact, the exchange rate markets are considered the most volatile of the international financial markets.

Question 21

15. Explain a depreciation and an appreciation of the exchange rate.

Answer 21

Changes in the value of one currency against others (or changes in exchange rates) are referred to as appreciations or depreciations. A currency appreciates when its value rises relative to another currency, and depreciates when its value falls relative to another currency. Appreciations or depreciations in the value of a currency will have a market influence on businesses using that currency for trade.

Question 22

16. Explain the impact of an appreciation of the AU$ on a) an AU importer, b) an AU exporter.

Answer 22

 An appreciation of the AU$ on a) an AU importer – would result in reduced costs of imports (as the dollar is worth more), leading to increased demand.
 An appreciation of the AU$ on b) an AU exporter – would result in increased cost of exports, ultimately resulting in decreased demand for sales globally.

Question 23

17. Explain the impact of a depreciation of the AU$ on a) an AU importer, b) an AU exporter.

Answer 23

 A depreciation of the AU$ on a) an AU importer –would result in increased costs of imports (as dollar is worth less), leading to decreased demand.
 A depreciation of the AU$ on b) an AU exporter – would result in reduced costs of exports, ultimately leading to increased demand.

Question 24

18. Explain the significance of exchange rates to a business taking out overseas loans.

Answer 24

When business (or governments) have overseas loans then whenever there are changes in the value of the currency/exchange rate it will affect their repayments.

This is known as the ‘valuation effect’. Typically the rule is that when a currency appreciates , the business will repay less , and alternatively when there is a depreciation the business will pay back more.

Below is a simple example.

Assume a business took out a loan from HSBC bank in Singapore and received $500,000 SD

When bringing these funds into Australia , the rate of exchange will determine how much money they will have to use.

Assuming the $AUD and $SD were on parity (equal) – this would mean the business would have $500,000 AUD

If we imagine that the loan repayment or servicing is $10,000 per month, the following scenarios may take place when the currency fluctuates:

REFER TO CAN DO LIST

Question 25

19. What is meant by the interest rate

Answer 25

The price of borrowing or the return on savings. The general level of interest rates in an economy is determined by the central bank – for example, the Reserve Bank of Australia (RBA). These central banks will alter the level of interest rates in the economy by changing the ‘official’ level of interest rates. In response, banks and other financial institutions will alter their interest rates, roughly following the trend in the official interest rate.

The changing of interest rates to influence economic activity is known as monetary policy. Interest rates have an important influence on the level of spending and investment in an economy. If a central bank wished to stimulate an economy, it would lower the general level of interest rates in the economy by lowering the official rate. Lower interest rates encourage more businesses to borrow and invest, and allow consumers to spend more as they now pay less interest on their mortgages, credit cards or personal loans.

Alternatively, interest rates could be raised to have the reverse effect of slowing the economy down. Businesses that have borrowed money from overseas countries must be aware of possible interest rate rises in that country.

Question 26

20. Explain THREE impacts on consumers of a) rising interest rates, b) falling interest rates

Answer 26

Higher interest rates have various economic effects, including;

1. Increases the cost of borrowing. Interest payments on credit cards and loans are more expensive. Therefore this discourages people from borrowing and saving. People who already have loans will have less disposable income because they spend more on interest payments. Therefore other areas of consumption will fall.
2. Increase in mortgage interest payments. Related to the first point is the fact that interest payments on variable mortgages will increase. This will have a big impact on consumer spending. This is because a 0. 5% increase in interest rates can increase the cost of a £100,000 mortgage by £60 per month. This is a significant impact on personal discretionary income.
3. Increased incentive to save rather than spend. Higher interest rates make it more attractive to save in a deposit account because of the interest gained.
4. Reduced confidence. Interest rates have an effect on consumer confidence. A rise in interest rates discourages investment; it makes consumers less willing to take out risky investments and purchases.

Falling interest rates have various economic effects, including;

1. The lower the interest rate, the more willing people are to borrow money to make big purchases, such as houses or cars. When consumers pay less in interest, this gives them more money to spend, which can create a ripple effect of increased spending throughout the economy.
2. When the Fed cuts interest rates, consumers usually earn less interest on their savings. Banks will typically lower rates paid on cash held in bank certificates of deposits, money market accounts and regular savings accounts.
3. Increased consumer confidence. A decrease in interest rates encourages investment; it makes consumers more willing to take out risky investments and purchases.

Question 27

21. Explain THREE impacts on a business of a) rising interest rates, and b) THREE impacts of falling interest rates.

Answer 27

Higher interest rates have various effects on business, including;
1. Business planning
An increase in interest rates can likely have an impact on an owner’s ability to grow a business. When interest rates rise, banks charge more for business loans. While small business owners with fixed rate loans may not be affected immediately when interest rates rise, company owners with loans that have fluctuating interest rates may find their loans more difficult to repay. Higher loan payments may lead to a reduction in profitability, which can make securing future funding more difficult. Without these loans, businesses may be forced to rededicate their resources away from innovation and reinvestment.

2. Cash flow
   Small businesses tend to operate with limited cash flow, so when interest rates rise, the additional cash needed to repay loans can be scarce. In addition, short-term loans to cover cash flow gaps may be difficult to qualify for or too pricey to afford. This could cause a host of issues. Business owners may have to delay paying their receivables, or put off investment and expansion plans, which can further slow the growth of the company.
3. Customer spending and saving
   Changing customer spending habits triggered by rising interest rates may also reduce cash flow. When consumers have to pay higher interest on personal loans, including mortgages and auto loans, they have less disposable income to buy goods and services. In a rising rate environment, consumer-driven businesses often see a reduction in sales, further squeezing cash flow. In addition, higher interest rates make it more attractive for both consumers and businesses to save excess cash rather than spend it.
4. Firms that make luxury goods are hit hardest when interest rates rise. This is because most customers cut back on non-essentials when their incomes fall as a result of interest rate rises.

Falling interest rates also have various effects on business, including;

1. Businesses also benefit from lower interest rates, as it encourages them to make large equipment purchases due to the low cost of borrowing. This creates a situation where output and productivity increase. When interest remains low, businesses may borrow more readily. Low-interest loans can fund business growth and increase profitability.
3. When interest rates remain low, customers have more cash after they pay their loan payments, and they can spend this cash with businesses.