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CHAPTER 2
INTERNATIONAL TRADE FRAMEWORKS AND POLICY
Chapter Outline
A. The Historical Dimension
1. Global Division
B. Transnational Institutions Affecting World Trade
C. Trade Positions Compared
1. A Diagnosis of the U.S. Trade Position
D. The Impact of Trade and Investment
1. The Effect of Trade
Chapter Objectives
The chapter begins by discussing how trade has influenced human history. Recent trade
developments are presented together with the role played by international institutions to regulate
Suggestions for Teaching
We find it very useful to spend some time on the historical dimension. An in-class discussion of
additional impacts of international marketing on our history is usually very stimulating,
When reviewing policy developments, it would be a good idea to initiate a discussion on how
policymakers have to trade off conflicting priorities, e.g., domestic unemployment vs.
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Chapter Summary
A. The Historical Dimension
One of the major world powers in ancient history, the Roman Empire, placed primary
emphasis on encouraging international business activities. The principal approaches used
to implement this emphasis were the Pax Romana, or the Roman Peace, and the common
coinage. Rome developed a systematic law, central market locations, and an excellent
communication system—measures that contributed to the functioning of the international
One can interpret the evolution of European feudalism to be a function of trade and
marketing. Profits from the spice trade through the Middle East created the wealth of
Venice and other Mediterranean ports. Western European merchants in turn exported
timber, arms, and woolen clothing. A remaining legacy of this trade is found in the many
English and French words of Arabic origin, such as divan, bazaar, artichoke, orange, jar,
and tariff.
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1. Global Division
After 1945, the Soviet Union developed the Council for Mutual Economic
Assistance (CMEA or COMECON), and the United States, in turn, created “Pax
B. Transnational Institutions Affecting World Trade
1. World Trade Organization
The World Trade Organization (WTO) has its origins in the GATT. GATT began in
In spite of making impressive gains, GATT became less effective over time as duties
had already been drastically reduced and further reductions were unlikely to have a
• The WTO is responsible for the General Agreement on Trade in Services
(GATS), agreements on trade-related aspects of intellectual property
rights (TRIPS), and trade-related investment measures (TRIMS) and a
broad variety of international trade and investment accords.
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2. International Monetary Fund
The IMF, conceived in 1944, was designed to provide stability for the international
monetary framework. It obtained funding from its members and these funds were to
be used to provide countries with protection against temporary fluctuations in the
value of their currency. It was the original goal of the IMF to provide for fixed
exchange rates between countries.
Over time, the IMF system has experienced substantial pressures. Major currency
3. World Bank
The World Bank was formed in 1944 to aid countries suffering from the destruction
of war. Since then, it has taken on the task of aiding world development. It has made
major efforts to assist fledgling economies to participate in a modern economic trade
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4. Regional Institutions
Regional changes have taken place based on the notion that trade between countries
needs to be encouraged. Of particular importance was the formation of economic
blocs that integrated the economic and political activities of nations. The European
Union (EU) now represents a formidable market size internally and market power
externally, and the well-being of all EU members has increased substantially since
the bloc’s formation.
C. Trade Positions Compared
Over the years, international trade positions have changed substantially when measured in
terms of world market share. U.S. export growth was not able to keep pace with total
world export growth as other trade partners entered the picture and aggressively obtained
a larger world market share.
countries.
1. A Diagnosis of the U.S. Trade Position
The U.S. pursued a policy of continuing effort to aid countries abroad in their
economic development while at the same time; no particular attention was paid to
U.S. domestic firms. This policy was well conceived and well intentioned and
resulted in spectacular successes.
D. The Impact of Trade and Investment
1. The Effect of Trade
Exports are important in terms of balancing the trade account. Exports can affect
currency values and the fiscal and monetary policies of governments, shape public
perception of competitiveness, and determine the level of imports a country can
afford. The steady erosion of the U.S. share of total world exports has resulted in a
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2. The Effect of International Investment
International direct investment activities can be crucial to a firm’s success in new
and growing markets. Foreign direct investment is extensive in many U.S. industries.
Almost one of every seven U.S. manufacturing employees works for a foreign
affiliate. As a result of foreign investment, some individuals and policymakers may
grow concerned about dependency on foreign owners even though firm proof for the
validity of such concern has been difficult to establish.
E. Policy Responses to Trade Problems
The word policy implies that there is a coordinated set of continuous activities in the
legislative and executive branches of government to attempt to deal with U.S.
international trade. Policy responses have consisted mainly of political ad hoc reactions,
which over the years have changed from deep regret to protectionism.
1. Restrictions of Imports
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2.3.
• One typical method consists of “voluntary” import restraints that are
applied selectively against trading partners. Voluntary restrictions are
intended to aid domestic industries to reorganize, restructure, and
recapture their trade prominence of years past.
• If countries do not use the subtle mechanism of voluntary agreements,
2. Export Promotion Efforts
Many countries provide export promotion assistance to their firms. Key reasons for
such assistance are:
• the national need to earn foreign currency
• the encouragement of domestic employment
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competitive products.
F. A Strategic Outlook for Trade and Investment Policies
The importance and visibility of international trade and investment policies have grown
dramatically as international trade and investment flows have become more relevant to
the well-being of most countries.
1. A U.S. Perspective
The United States needs a positive trade policy rather than reactive, ad hoc responses
U.S. trade policy does need to change. It must be recognized that domestic economic
performance mainly determines global competitiveness.
• First, the nation must improve the quality and amount of information
government and business share to facilitate competitiveness.
• Second, policy must encourage collaboration among companies in such
2. An International Perspective
From an international perspective, trade and investment negotiations must continue.
Bilateral negotiations are carried out mainly between two nations, while multilateral
negotiations are carried out among a number of nations.
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Key Terms
Pax Romana: Translated as ‘Roman Peace’ in Latin, Pax Romana in historical terms refers to the
period of peace and stability under the Roman Empire that facilitated trading activities.
Economic Bloc: Economic blocs consist of nations tied together by common trade agreements
that aim at facilitating free trade and reducing trade barriers. Economic blocs integrate the
Foreign Direct Investment: Capital funds flow from abroad; company is held by noncitizens;
foreign ownership is typically undertaken for longer-term participation in an economic activity.
Foreign Affiliate: A firm in which at least 10 percent is owned by foreign entities.
Nontariff Barrier: Barriers to trade that restricts imports through subtler means other than
tariffs, for example, these barriers may be government or private–sector “buy domestic”
campaigns, preferential treatment of domestic bidders over foreign bidders, or the establishment
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Multilateral Negotiation: Trade agreement carried out among a number of nations.
Questions for Discussion
1. Why is international trade important to a nation?
International trade offers a larger market and potential for larger profits and growth than
domestic trade. It also allows a country to buy needed imports which must be funded by gold
or foreign capital if there are no compensating exports.
2. How did the GATT lead to the creation of the WTO?
The World Trade Organization (WTO) has its origins in the GATT. GATT began in 1947 as
a set of rules for nondiscrimination, transparent procedures, and settlement of disputes in
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Also, the GATT, which was founded by 24 like-minded governments, was designed to
operate by consensus. As membership grew, this consensus rule often led to a stalemate of
many GATT activities. After many years of contentious negotiations, the Uruguay Round
3. What is the current status of the Doha Round of multilateral trade negotiations? Is the agreement
moving forward?
Past negotiations of the Doha round have been marked by disagreement between developed
and developing economies. The most divisive issues continue to be agricultural tariffs and
subsidies in the EU and United States, and tariffs on merchandise goods in developing
countries.
4. How do consumer preferences for different products affect a country’s trade position?
Consumer demand abroad has stimulated foreign companies to increase their competitively
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5. What are the different roles of the WTO, the IMF, and the World Bank?
The WTO was created for overseeing the implementation of all the multilateral agreements
negotiated in the Uruguay Round and those that will be negotiated in the future. The WTO is
responsible for the General Agreement on Trade in Services (GATS), agreements on trade-
related aspects of intellectual property rights (TRIPS), and trade–related investment measures
(TRIMS) and administers a broad variety of international trade and investment accords. Its
core mission is the facilitation of international trade and investment, while ensuring that an
effective forum exists to afford a hearing and subsequent achievements for concerns
The World Bank was formed to aid countries suffering from the destruction of war. Since
then, it has taken on the task of aiding world development. It has made major efforts to assist
fledgling economies to participate in a modern economic trade framework. The bank has
begun to participate actively with the IMF to resolve the debt problems of the developing
6. Should countries restrict foreign direct investment in their domestic industries?
International direct investment activities can be crucial to a firm’s success in new and
growing markets. As a result of foreign investment, some individuals and policymakers may
Internet Exercises
1. What are the five major branches of the World Bank, and what are their missions? (Use
information from www.worldbank.org.)
The five major branches of the World Bank are:
o The International Bank for Reconstruction and Development (IBRD). Its
2. For the latest year, what are the five leading country exporters of world merchandise? What
are the five leading country exporters of commercial services? (Use data from
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3. What countries are negotiating to join the Trans Pacific Partnership (TPP)? What countries
may be interested in joining this group? (Use information from http://ustr.gov and the
international trade agencies of other TPP negotiating countries.)