Chapter 4

The international
trade
environment
 Lecture Overview

• Introduction
• Nature and importance of international trade
• Structure, composition and patterns of
international trade
• The role of international trade organisations
• Regional economic integration
• Major trade blocks and free trade areas
• International trade agreements
• Market regions
• Summary
 Learning Outcomes

• Define the key concepts related to international

trade
• Explain the importance of international trade in the
global economy
• Identify and describe the role of international trade-
related organisations in world trade in general, and
trade liberalisation in particular
• Define regional economic integration and describe
the major regional trade blocs, free trade areas, and
trade agreements that influence world trade
 Learning Outcomes (continued)

• Describe the broader macro-environmental impact

on international trade and countries across the globe
• Describe how you would develop international
marketing and export strategies with reference to
specific regions and markets.
 Introduction

• This chapter focuses on the international trade

environment as an invaluable frame of reference for
the development of international marketing and
export strategies.
• Knowledge requirements in this regard includes
information on:
– the nature and importance of international trade
– the regulation of international trade
– economic integration, free trade areas and trade
agreements
– major market regions
 The nature and importance of
international trade

• International trade occurs when firms export goods and

services to consumers in another country.
• Exporting and importing are two sides of the same
transaction and, in combination, referred to as 'world
trade’ or 'global trade’
• Free trade implies that governments do not attempt to
influence what its citizens can buy from another country,
or what they can produce or sell to citizens of another
country
 The nature and importance of
international trade (continued)

• Three categories or levels of 'freedom' in international

trade:
– restricted trade
– managed free trade or managed trade
– Unbridled free trade (the ideal)
• The General Agreement on Tariffs and Trade (GATT)
introduced in 1947 as a set of rules to govern and
promote free trade internationally through the phasing
out of barriers to trade
 The nature and importance of
international trade (continued)
• Exporting plays a vital role in the economic
development of most countries
• For many countries agriculture remains a key
element of their export trade
• South Africa is expected to be ranked 7th globally in
terms of its real growth rate between 2009 and 2050
• The E7 emerging economies are predicted to
overtake the G8 before 2020 if GDP is measured
using purchasing power parity.
Structure, composition and patterns of
international trade

• International trade comprises two main

categories:
– trade in goods or merchandise
– trade in services

• Trade in goods:
– Agricultural products
– Mining products
– Manufactured products
Structure, composition and patterns of
international trade (continued)

• Goods and services are further distinguished into

consumer and industrial goods and services
• Trade in goods falls under GATT
• Trade in services falls under the General agreement
on Trade in Services (GATS)
 Composition of international trade

• The perception exists that trade in world commercial

services is growing faster than trade in manufactured
goods
• The most dynamic sub-categories include office,
telecoms and electronic equipment (1998 – 2009)
• The shares of mining and agricultural products
decreased markedly in this period
• Growth in information communication technology was
the main driving force in new areas of international
trade
 Patterns of international trade
• Less industrialised countries were traditionally
regarded as being exporters of agricultural and
primary products
• This has changed and they have increased their
importance as exporters of manufactured products
• The overall poor performance of the less developed
countries is still a major concern
• Rwanda has emerged with a focus towards growth
– considered to be the worlds top reformer
• Services have become increasingly important over
the past two decades
 Further key issues to be considered

• Natural or ecological environment

– Natural resource and land acquisition crucial
in Africa
• Establishing the green economy across the globe
– Balancing development and growth with the
environment
• Corporate governance and ethics across the globe
– Issues like bribery and corruption need
urgent attention
 Structure, composition and patterns of
international trade (continued)

• High-income countries imported 76,5% of all world

• exports in 2005
• High-income countries imported 56,2% of all exports
from other high-income countries, and only 23,5 of all
exports from low- and middle-income countries
• Low- and middle-income countries imported 23,5% of
all world exports, with 17,1% from high-income
countries, and only 6,4% from other low- and
middle-income countries.
The role of international trade organisations

• The international trade environment is characterised by

a complex set of political and regulatory issues on
which the international marketer must be informed:
– international organisations
– international agreements
– economic integration
– government legislation and political risk of individual
countries.
• It is important to understand their role and the
implications for international trade and international
marketing.
The role of international trade organisations

• Emanating from the United Nations (UN), the most

important organisations are:
– World Trade Organisation (WTO)
– International Bank for Reconstruction and
Development (IBRD), better known as the World
Bank (WB)
– International Monetary Fund (IMF)
– United Nations Commission on Trade and
Development (UNCTAD)
The role of international trade organisations

Three others organisations of note are:

– Organisation for Economic Co-operation and
Development (OECD)
– United States International Trade Commission
(USITC)
– International Trade Centre (ITC)

All these organisations operate according to a charter

 The United Nations (UN)
• A political organisation with 192 member states, and
more than 80 affiliated agencies
• The UN is involved in political, economic and social
development, human rights, and security and peace-
keeping issues worldwide
• Six principle organs:
– General assembly
– Security council
– Economic and social council
– Trusteeship council
– International court of justice
– Secretariat.
 The United Nations (continued)

Major UN agencies of importance include:

•The IMF
•The World Bank
•The WTO
•The World Intellectual Property Organisation (WIPO)
•The International Telecommunications Union (ITU)
•UNCTAD
•The International Civil Aviation Organisation (ICAO)
•The Universal Postal Union (UPO)
 UN millennium development goals
• Eradicate extreme poverty
• Achieve universal primary school education
• Promote gender equity
• Reduce child mortality
• Improve maternal health
• Combat HIV/AIDs, malaria and other diseases
• Ensure environmental sustainability
• Develop a global partnership for development.
 The World Trade Organisation

• The WTO was established in 1995 to supersede and

administer the GATT, and has 153 member countries
(2011)
• Many WTO rules including the 'most-favoured-nation'
and 'national treatment' clauses, hold important
implications for international marketers.
 The World Trade Organisation
(continued)
The functions of the WTO, which deals with rules of
trade between nations on a global level, are:
– administering trade agreements (non-discrimination,
most-favoured-nation clauses)
– a forum for trade negotiations
– handling trade disputes
– monitoring national (country) trade policies
– assisting less industrialised countries in trade policies
and technical assistance
– cooperating with other international organisations.
 The World Trade Organisation
(continued)

Important WTO arrangements include:

• Administering the GATT for trade in goods

• Administering the GATT for trade in services
• Protecting intellectual property internationally
through the agreement of TRIPS
• Monitoring international investments through the
agreement on Trade-Related Investment
Measures (TRIMS)
 The World Trade Organisation
(continued)

• The WTO has the power to force member countries

to comply with its rules in promoting freer trade and
investment worldwide.
• The remaining international trade organisations
play a peripheral role with regard to international
marketing (primarily developmental and research-
related).
 International monetary fund (IMF)

• Key component of the framework for international

economic co-operation and ensuring stability in the
finance system.
• Specific objectives include:
– Promotion of international monetary co-operation
– Facilitation of the balanced growth in international trade
– Promotion of exchange rate stability
– Assisting in the establishment of a multilateral system of
payments
– Making resources available to member countries
encountering balance of payment problems
International bank for reconstruction and
development – World Bank
Consists of five organisations:
– International Bank for Reconstruction and Development
(IBRD)
– International Development Association (IDA)
– International Finance Corporation (IFC)
– Multilateral Investment Guarantee Agency (MIGA)
– International Centre for Settlement of Investment Disputes
(ICSID)
United Nations commission for trade
and development (UNCTAD)

Has three key functions:

– Serve as a forum for intergovernmental deliberations to
build consensus
– Undertake policy research analysis and data collection for
debates involving government and other experts
– Provide technical assistance for the specific requirements
of less industrialised countries.
The International Trade Centre (ITC)
• Supports developing and transition economies
• Specific goals include:
– Facilitate integration of its clients into the world trading
system
– Support national efforts to implement trade development
strategies
– Strengthen key trade support services
– Improve export performance in sectors of critical
importance and opportunity
– Foster international competitiveness of SMEs.
 Regional economic integration

• Regional economic integration (REI) involves the

political and economic agreements among countries in
a geographic region to reduce, and ultimately remove,
tariff and non-tariff barriers to the free flow of goods,
services, and factors of production between each
other.
• REI has generally become an important driving force
of globalisation.
Regional economic integration (continued)

• REI typically evolves through the following five

stages or levels to form trade blocs or regions:
– Free trade area (FTA)
– Customs Union
– Common Market
– Economic Union
– Political Union
 Economic motives for REI

• The main motive for regional economic integration (REI)

is to encourage greater production and trade worldwide
by elimination of trade restrictions.
• Economic motive for REI
– to exploit the potential gains from cross-border trade and
investment through the lowering or elimination of trade and
investment barriers among member countries in a
geographic area.
 Political motives for REI

• Political motives for REI

– greater dependence between member countries,
enhancing political cooperation among them
– countries 'linked' by REI have a stronger 'voice' in the
international business arena
• The case against REI is that it could encourage trade
diversion (a negative consequence) instead of trade
creation (a positive consequence).
Regional economic integration (continued)

Characteristics of successful regional trade blocs

include:
– geographical proximity of member countries
– extent and availability of natural and human
resources
– infrastructural and transportation capabilities
– labour, manufacturing skills and technology
– entrepreneurial abilities
– treaty arrangements that exist between member
countries.
Regional economic integration (continued)

REI holds important implications for international

marketing in that:
– trade blocs and FTAs are typically characterised by
greater efficiency, increasing competitive pressures
between firms within trade blocs and FTAs
– trade blocks and FTAs still have common tariff barriers
toward non-member countries.
Major trade blocs and free trade areas
(FTAs)
• Many regional trade blocs and free trade areas have
emerged over the past few decades
• It is important for the international marketer to be
aware of them their implications
• Important regional trade blocs in Europe are the
European Union (EU) and European Free Trade
Association (EFTA).
Major trade blocs and free trade areas
(FTAs)
The EU is
– an economic union (except that only 12 of its 27 members
have a common currency – the euro)
– the most important trade bloc in the world, with its 27
member countries having in excess of 450 million people,
constituting a huge regional market
– partner to a free trade agreement with South Africa – the
Trade, Development and Co-operation Agreement (TDCA)
– which is extremely important from a South African
marketing perspective.
Major trade blocs and free trade areas
(FTAs)

EFTA is
•a relatively loose cooperative association between Switzerland,
Norway, Iceland and Liechtenstein
•None of these countries are members of the EU.
Major trade blocs and free trade areas
(FTAs)
Important regional trade blocs in North America, Latin
America and the Caribbean include:
– North American Free Trade Agreement (NAFTA)
– Southern Common Market (MERCOSUR)
– Andean Common Market (ANCOM)
– Latin American Integration Association (LAIA)
– Caribbean Community and Common Market (CARICOM)
– Free Trade Area of the Americas (FTAA)
Major trade blocs and free trade areas
(FTAs)
• Of these, NAFTA and MERCOSUR are the more
important from an international trade and
marketing perspective.
• NAFTA, comprising the United States, Canada
and Mexico, was established in 1992, creating a
regional market in excess of 413 million people,
with annual growth in trade of 11% since 1992.
 Major trade blocs and free trade areas
(FTAs)

ASEAN and APEC are the most prominent trade blocs

in this region
– ASEAN comprises 10 Asia-Pacific member countries with a
market of approximately 500 million people
– APEC comprises 21 member countries, including Asia-
Pacific countries as well as Australia, Canada, China, New
Zealand, Russia, and the united States – with the potential
of becoming a major trade bloc.
Major trade blocs and free trade areas
(FTAs)
• The Cairns Group and the IOR-ARC have made
some headway in recent years
• Major trade groups in Africa are:
– Community of West African States (ECOWAS)
– Common Market of Eastern and Southern Africa
(COMESA)
– Southern African Development Community (SADC)
– Southern African Customs Union (SACU)
• ECOWAS consists of 16 West African states, and
still faces some development challenges.
 African Union

• The AU was founded in 2002

• The values to guide and govern the functioning
and operations of the AU are:
– Respect for diversity and teamwork
– Think Africa above all
– Transparency and accountability
– Integrity and impartiality
– Efficiency and professionalism
– Information and knowledge sharing

Guided by the principle of integration through trade and

investment
Major trade blocs and free trade areas
(FTAs)
• COMESA comprises 21 member countries, of which
only nine were actively pursuing its common goals
by 2005
• The SADC had 14 members in 2005, including South
Africa, with the goal to foster closer economic and
social cooperation between the governments and the
people of the member countries – with a potential
market of some 130 million people
Major trade blocs and free trade areas
(FTAs)
• SACU, comprising South Africa and the BLNS
countries was established in 1910, and is the oldest
customs union in the world, (BLNS) – Botswana,
Lesotho, Namibia and Swaziland)
• Marketing management should be fully informed on
the benefits, costs, and risks when trading with firms
or servicing markets located in trade blocs or FTAs
(e.g. South African firms trading with the EU under
the auspices of the TDCA)
International trade agreements

Regional trade blocs and FTAs:

•Define the size of the market
•Define the rules under which trade takes place
•Provide attractive foreign locations for the
establishment of off-shore operations
•Provide the benefit of free flow of production factors
within the region
•Provide new market opportunities within the region
Important international trade agreements
for SA:
• The TDCA
– regulates tariff reductions on industrial products, and deals
with tariffs on agricultural products
– allows 95% of South African exports to the EU to enter the
EU duty-free, and 86% of EU exports to SA to enter SA
duty-free.

• The TDCA has two main marketing advantages:

– Creates a SA partnership with a major trading bloc
– Opens up the EU market for SA exports
Important international trade agreements
for SA:
• AGOA offers incentives to 37 African countries in
terms of preferential export access into the United
States
• AGOA allows these countries to export 6 400
products at zero import duty to the United States
under the Generalised System of Preferences
• Can significantly contribute to the long term
development of trade relations between the US and
Africa
International trade agreements (continued)

AGOA offers incentives to these African countries

to expand their international business, to open up
their economics, and develop freer markets by:
– reinforcing African reform efforts
– providing improved access to US technical expertise,
credit and markets
– establishing a high level dialogue on trade and
investment.
 Market regions
Potential benefits of trade with or investment in another
country is largely determined by:
– Market size of the country or region (size of the
population)
– Current wealth of the country or region (purchasing power
of the population)
– Future economic growth prospects of the country or
region.
 Market regions (continued)
• A regional and ultimately a country-by-country
breakdown of global trade data and trends is
necessary from an international marketing
perspective
• The following three major regions, the so-called
‘triad’, are expected to dominate trade, investment,
and socio-economic development in the future:
– Europe
– North America
– Asia
 Market regions (continued)
• By 2005, the triad accounted for 86,15% of the
total world export value of merchandise and
commercial services
– Europe 44,56%
– Asia 26,45%
– North America 15,14%
• Intra-regional trade has become dominant,
constituting:
– 62,1% of all EU exports
– 55,7% of all NAFTA exports
– 55,7% of all Asian exports
 Market regions (continued)
• The affiliation of South African and other non-triad
firms to a triad region may become a prerequisite
for future success in international marketing.
• South Africa is already favourably positioned
because it:
– has entry into the EU through the TDCA
– benefits from its association with the EU – Africa,
Caribbean and Pacific (ACP) preferential trade agreement
– is a member of the IOR – ARC arrangement, where some
member countries are also members of ASEAN and
APEC
– is one of the 37 countries benefiting from AGOA.
 Market regions (continued)

• Concerning Latin American markets and regions,

LAIA and MERCOSUR represent a combined
population of 480 million people
• With regard to Asia-Pacific, ASEAN has a
population of 520 million people and APEC a
combined population of 2 582 million people, with
some overlap between the two trade blocs
 Market regions (continued)
As far as market regions in Africa are concerned:
•ECOWAS had a total GDP in excess of US $50 billion in 2002
•SADC had a combined GDP of US $214,3 billion, and a
combined population of some 130 million people in 2003
•SADC is developing into one of the strong regional groups in
Africa
•The proportion of African living on less than $1.25 a day fell from
58% in 1996 to 50% in 2009 (before the economic crisis)
 Market regions (continued)
• For successful international marketing and export
strategies, international marketers need to:
– understand the dynamic international trade environment in
terms of major trends and events
– be informed on industry and market trends relevant to the
firm's products and services in foreign regions and country
markets.
• International product and service markets need to be
appropriately segmented, and analysed in terms of
costs, benefits and risks.
 Market regions (continued)
• Relevant international industry, competitor and
market analyses are required inputs when
developing international marketing and export
strategies.

• The challenges for international marketing

management lie in capitalising on continuing trade
liberalisation, increasing regionalism and global
networking and new opportunities in emerging
economy markets.
 Summary

• The international trade environment as discussed in

this chapter should serve as an invaluable frame of
reference for development of international marketing
and export strategies.
• In the context of continuing globalisation, the role of
trade-related international organisations, increasing
regional economic integration, and the rapidly-
growing global information and knowledge society
reflect both the challenges and opportunities for
international marketers.