GITAM University B.Tech V Sem IOE010: International Business Study
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This document is a comprehensive study material for an Introduction to International Business course, likely for a B.Tech program at GITAM University. It covers key concepts such as globalization, international business environment, and the definition and scope of international business. The material traces the historical evolution of international business, highlighting the impact of industrial revolutions, trade barriers, and international organizations like the IMF, World Bank, and WTO. It delves into the factors influencing international business, including profit maximization, production capacity expansion, competition, technology, market share, economic development, tariffs, living standards, and socio-economic welfare. The study material also explores the benefits of international business, such as wider markets, economies of scale, and cultural transformation. It defines globalization, discusses its components (globalization of markets and products), and touches upon the debate of whether globalization is a boon or a bane. The document provides a detailed overview of the subject matter, making it a valuable resource for students.
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GITAM
(Deemed to be university)
B. Tech: Computer Science and Engineering
Semester: V
OPEN ELECTIVE
COURSE CODE: IOE010
COURSE TITLE: INTRODUCTION TO INTERNATIONAL BUSINESS
STUDY MATERIAL
Dr.P.GIRIBABU
UNIT-I
GLOBALIZATION AND INTERNATIONAL BUSINESS ENVIRONMENT
DEFINITION AND SCOPE OF INTERNATIONAL BUSINESS
Introduction
The origin of international business goes back to human civilization. Historically periods of
greater openness to trade have been characterized by stronger but lopsided global growth.
The concept of international business - a broader concept relating to the integration of
economies societies, dates back to the 19th century. The first phase of globalization began
around 1870 and ended with the world war1 (1919) driven by the industrial revolution in UK,
Germany and the USA. The import of raw materials by colonial empires from their colonies
and exporting finished good to their overseas possessions was the main reason for the sharp
increase in the trade during this phase. The ratio of trade to GDP was as high as 22.1 in
1913. Later various governments initiated and imposed a number of barriers to trade to
protect their domestic production that led to decline in the ratio of trade to GDP to 9.1 during
the 1930’s.The international trade between two world wars has been described as “vast game
of beggar-my-neighbour” Advanced countries experienced a severe setback consequent upon
the imposition of trade barriers as they produced in excess of domestic demand and a decline
in the volume of international trade. Added to this, the breakdown of the gold standard
resulted in vacuum in the field of international trade. Then the world nations felt the need for
international cooperation in global trade and balance of payment affairs. These efforts
resulted in the establishment of the International Monetary fund (IMF) and the International
Bank for Reconstruction and development (IBRD -popularly known as the World Bank).
The prolonged recession before the World War 2 in the west, led to an International
consensus after the World War 2 that a different approach towards international trade was
required. Consequently, 23 countries conducted negotiations in 1947 in order to prevent the
protectionist’s policies and to revive the economies from recession aiming at the
establishment of the international trade organization. This attempt of the advanced countries
ended with the General Agreement of Trade and Tariffs (GATT) that provided a framework
for a series of ‘round’ of negotiations by which tariffs were reduced. Efforts to convert the
General Agreement on trade and Tariffs (GATT) into World Trade Organization (WTO)
were intensified during 1980’s and ultimately GATT was replaced by the WTO on 1 st
January.1995, envisaging trade liberalization. The efforts of IMF, World Bank and WTO
(Deemed to be university)
B. Tech: Computer Science and Engineering
Semester: V
OPEN ELECTIVE
COURSE CODE: IOE010
COURSE TITLE: INTRODUCTION TO INTERNATIONAL BUSINESS
STUDY MATERIAL
Dr.P.GIRIBABU
UNIT-I
GLOBALIZATION AND INTERNATIONAL BUSINESS ENVIRONMENT
DEFINITION AND SCOPE OF INTERNATIONAL BUSINESS
Introduction
The origin of international business goes back to human civilization. Historically periods of
greater openness to trade have been characterized by stronger but lopsided global growth.
The concept of international business - a broader concept relating to the integration of
economies societies, dates back to the 19th century. The first phase of globalization began
around 1870 and ended with the world war1 (1919) driven by the industrial revolution in UK,
Germany and the USA. The import of raw materials by colonial empires from their colonies
and exporting finished good to their overseas possessions was the main reason for the sharp
increase in the trade during this phase. The ratio of trade to GDP was as high as 22.1 in
1913. Later various governments initiated and imposed a number of barriers to trade to
protect their domestic production that led to decline in the ratio of trade to GDP to 9.1 during
the 1930’s.The international trade between two world wars has been described as “vast game
of beggar-my-neighbour” Advanced countries experienced a severe setback consequent upon
the imposition of trade barriers as they produced in excess of domestic demand and a decline
in the volume of international trade. Added to this, the breakdown of the gold standard
resulted in vacuum in the field of international trade. Then the world nations felt the need for
international cooperation in global trade and balance of payment affairs. These efforts
resulted in the establishment of the International Monetary fund (IMF) and the International
Bank for Reconstruction and development (IBRD -popularly known as the World Bank).
The prolonged recession before the World War 2 in the west, led to an International
consensus after the World War 2 that a different approach towards international trade was
required. Consequently, 23 countries conducted negotiations in 1947 in order to prevent the
protectionist’s policies and to revive the economies from recession aiming at the
establishment of the international trade organization. This attempt of the advanced countries
ended with the General Agreement of Trade and Tariffs (GATT) that provided a framework
for a series of ‘round’ of negotiations by which tariffs were reduced. Efforts to convert the
General Agreement on trade and Tariffs (GATT) into World Trade Organization (WTO)
were intensified during 1980’s and ultimately GATT was replaced by the WTO on 1 st
January.1995, envisaging trade liberalization. The efforts of IMF, World Bank and WTO
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along with the efforts of individual countries due to economic limitations of the closed
economies led to globalization of business. Globalization gave fill up to international
business particularly during 1990’s.
Definition and Meaning:-International business is the process of focusing on the resources
of the globe and objectives of the organization on global business opportunities and threats,
in order to produce, buy, sell or exchange of goods/services worldwide.
Nature and Scope of International Business
We have discussed the characteristic feature off international business and the precautions
that the multinational companies should take while operating in foreign countries. Now, we
study the factors affecting international business.
A. To achieve higher rates of profits: As we have discussed in various courses/subjects like
principles and practice of management, managerial Economics and Financial Management
that the basic objective of the business firms is to earn profits. When the domestic markets do
not promise a higher rate of profits, business firms search for foreign markets that hold
promise for the higher rates of profits. Thus, the objective of profit affects and motivates the
business to expand its operation to foreign countries. For example, Hewlett Packard in US
earned 86.2 % of its profits from the foreign markets compared to that of domestic markets in
2007. Apple earned US$ 730 million as net profit from the foreign markets and only US $620
million as net profit from its domestic markets in 2007.
B. Expanding the production capacities beyond the demand of the domestic country:
Some of the domestic companies expanded their production capacities more than the demand
for the product in the domestic countries. These companies, in such case, are forced to sell
their excess production in foreign developing countries. Toyota of Japan is an example.
C. Severe competition in the home country: The countries oriented towards market
economies since 1960s experienced severe competition from other business firms in the home
countries. The weak companies which could not meet the competition of the strong
companies in the domestic country started entering the market of developing countries.
D. Availability of technology and competent human resources: Availability of advanced
Technology and competent human resources in some countries act as pulling factors for
business firms from the home country. The developed countries due to these reasons attract
companies from the developing world. In fact, American and European companies, in recent
years, depended on Indian companies for software products and services through their
business process outsourcing.
E. To increase market share: Some of the large-scale business forms would like to enhance
their market share in the global market by expanding and intensifying their operations in
various foreign countries. Companies that expand internally tend to be ‘oligopolistic’.
Smaller companies expand internationally for survival while the larger companies expand to
increase the market share. For example, Ball Corporation, the third largest beverage cans
manufacture in the USA, bought the European packaging operation of continental can
company. Then it expanded its operations to Europe and met the Europe demand which is
200% more than that of the USA. Thus, it increased its global market share of soft drink cans.
F. To achieve higher rate of economic development: International business helps the
governments to achieve higher growth rate of economy, increase the total and per capita
GDP, industrial growth, employment and income levels.
economies led to globalization of business. Globalization gave fill up to international
business particularly during 1990’s.
Definition and Meaning:-International business is the process of focusing on the resources
of the globe and objectives of the organization on global business opportunities and threats,
in order to produce, buy, sell or exchange of goods/services worldwide.
Nature and Scope of International Business
We have discussed the characteristic feature off international business and the precautions
that the multinational companies should take while operating in foreign countries. Now, we
study the factors affecting international business.
A. To achieve higher rates of profits: As we have discussed in various courses/subjects like
principles and practice of management, managerial Economics and Financial Management
that the basic objective of the business firms is to earn profits. When the domestic markets do
not promise a higher rate of profits, business firms search for foreign markets that hold
promise for the higher rates of profits. Thus, the objective of profit affects and motivates the
business to expand its operation to foreign countries. For example, Hewlett Packard in US
earned 86.2 % of its profits from the foreign markets compared to that of domestic markets in
2007. Apple earned US$ 730 million as net profit from the foreign markets and only US $620
million as net profit from its domestic markets in 2007.
B. Expanding the production capacities beyond the demand of the domestic country:
Some of the domestic companies expanded their production capacities more than the demand
for the product in the domestic countries. These companies, in such case, are forced to sell
their excess production in foreign developing countries. Toyota of Japan is an example.
C. Severe competition in the home country: The countries oriented towards market
economies since 1960s experienced severe competition from other business firms in the home
countries. The weak companies which could not meet the competition of the strong
companies in the domestic country started entering the market of developing countries.
D. Availability of technology and competent human resources: Availability of advanced
Technology and competent human resources in some countries act as pulling factors for
business firms from the home country. The developed countries due to these reasons attract
companies from the developing world. In fact, American and European companies, in recent
years, depended on Indian companies for software products and services through their
business process outsourcing.
E. To increase market share: Some of the large-scale business forms would like to enhance
their market share in the global market by expanding and intensifying their operations in
various foreign countries. Companies that expand internally tend to be ‘oligopolistic’.
Smaller companies expand internationally for survival while the larger companies expand to
increase the market share. For example, Ball Corporation, the third largest beverage cans
manufacture in the USA, bought the European packaging operation of continental can
company. Then it expanded its operations to Europe and met the Europe demand which is
200% more than that of the USA. Thus, it increased its global market share of soft drink cans.
F. To achieve higher rate of economic development: International business helps the
governments to achieve higher growth rate of economy, increase the total and per capita
GDP, industrial growth, employment and income levels.
G. Tariffs and import Quotas: It is quite common before the globalization that the
governments imposed tariffs or duty on imports to protect the domestic company. Sometimes
government also fixes import quotas in order to reduce the competition to the domestic
companies from the competent foreign companies. These practices are prevalent not only in
developing countries but also in advanced countries.
H. High living standards: Comparative cost theory indicates that the companies which have
the advantage of raw materials , human resources , natural resources and climatic conditions
in producing particular goods can produce the products at low cost and also of high quality.
Customers in various countries can buy more products with same amount of money. In turn,
it can also enhance the living standards of the people through enhanced purchasing power and
by consuming high quality products.
I. Increased socio-economic Welfare: International business enhances consumption level,
and economic welfare of the people of the trading countries. For example, the people of
China are now enjoying a variety of products of various countries than before as China has
been actively involved in international business like Coca-Cola, McDonald’s range of
products, electronic products of Japan and coffee from Brazil. Thus, the Chinese
consumption levels and socio-economic welfare are enhanced.
J. Wider Market: International business widens the market and increases the market size.
Therefore, the companies need not depend on the demand for the products in a single country
or customer’s tastes and preferences of a single country. Due to that enhanced market the Air
France, now, mostly depends on the demand for air travel of the customers from countries
other than France. This is true in case of most of the MNCs like Toyota, Honda, Xerox and
Coca-Cola.
K. Large-scale economies: multinational companies due to the wider and larger markets
produce large quantities, which provide the benefit of large scale economies like reduced cost
of the production, availability of expertise, quality etc.
L. Provides the opportunity For and challenge to domestic business: International
business firms provides the opportunities to the domestic companies. These opportunities
include technology, management expertise, market intelligence, product developments etc.
For example, Japanese firms operating in the US provide these opportunities to the US
companies. This is more evident in the case of the developing countries like India, African
countries and Asian countries.
M. Economic growth of the world: Specialization, division of labour, enhancement of
productivity, posing challenges, development to meet them, innovations and creations to meet
the competition lead to overall economic growth of the world nations. International business
particularly helped the Asian countries Like Japan, Taiwan, Korea, Philippines, Singapore,
Malaysia, and the United Arab emirates.
N .Optimum and proper utilization of world resources:
International business provides for the flow of raw materials, natural resources and human
resources from the countries where they are in excess supply to those countries which are in
short supply or need most. For example, flow of human resources from India, consumer
goods from UK, France, Italy and Germany to developing countries. This, in turn, helps in
the optimum and proper utilization of world resources.
governments imposed tariffs or duty on imports to protect the domestic company. Sometimes
government also fixes import quotas in order to reduce the competition to the domestic
companies from the competent foreign companies. These practices are prevalent not only in
developing countries but also in advanced countries.
H. High living standards: Comparative cost theory indicates that the companies which have
the advantage of raw materials , human resources , natural resources and climatic conditions
in producing particular goods can produce the products at low cost and also of high quality.
Customers in various countries can buy more products with same amount of money. In turn,
it can also enhance the living standards of the people through enhanced purchasing power and
by consuming high quality products.
I. Increased socio-economic Welfare: International business enhances consumption level,
and economic welfare of the people of the trading countries. For example, the people of
China are now enjoying a variety of products of various countries than before as China has
been actively involved in international business like Coca-Cola, McDonald’s range of
products, electronic products of Japan and coffee from Brazil. Thus, the Chinese
consumption levels and socio-economic welfare are enhanced.
J. Wider Market: International business widens the market and increases the market size.
Therefore, the companies need not depend on the demand for the products in a single country
or customer’s tastes and preferences of a single country. Due to that enhanced market the Air
France, now, mostly depends on the demand for air travel of the customers from countries
other than France. This is true in case of most of the MNCs like Toyota, Honda, Xerox and
Coca-Cola.
K. Large-scale economies: multinational companies due to the wider and larger markets
produce large quantities, which provide the benefit of large scale economies like reduced cost
of the production, availability of expertise, quality etc.
L. Provides the opportunity For and challenge to domestic business: International
business firms provides the opportunities to the domestic companies. These opportunities
include technology, management expertise, market intelligence, product developments etc.
For example, Japanese firms operating in the US provide these opportunities to the US
companies. This is more evident in the case of the developing countries like India, African
countries and Asian countries.
M. Economic growth of the world: Specialization, division of labour, enhancement of
productivity, posing challenges, development to meet them, innovations and creations to meet
the competition lead to overall economic growth of the world nations. International business
particularly helped the Asian countries Like Japan, Taiwan, Korea, Philippines, Singapore,
Malaysia, and the United Arab emirates.
N .Optimum and proper utilization of world resources:
International business provides for the flow of raw materials, natural resources and human
resources from the countries where they are in excess supply to those countries which are in
short supply or need most. For example, flow of human resources from India, consumer
goods from UK, France, Italy and Germany to developing countries. This, in turn, helps in
the optimum and proper utilization of world resources.
O. Cultural transformation:
International business benefits are not purely economic or commercial; they are even social
and cultural. These days, we observe that the west is slowly tending towards the east and vice
versa. It does mean that the good cultural factors and values of the east are acquired by the
west and vice versa. Thus, there is close cultural transformation and integration.
GLOBALIZATION
Globalization involves removing restrictions on foreign trade and foreign investment so as to
leverage the benefits of comparative advantage in terms of capital, technology and skilled
labour. International business as a separate subject is also gaining importance day by day as
trade between nations is taking place at a very fast pace. Even small scale industries have
started to look for foreign markets. Apart from this, with the relaxation in the exchange
control regulations by many countries, capital flows, both foreign direct investment and
foreign portfolio investment, are common as compared to yesteryears. Exchange rates also
play a vital role in the transactions.
Globalization of the economy means integrating the economy with the global economy. This
involves dismantling of high tariff walls, i.e., reduction of import duties, thereby facilitating
the transition from a protected economy to an open economy, removal of non – tariff
restrictions on trade such as exchange control, import licensing, quotas, allowing Foreign
Direct Investment (FDI) and Foreign Portfolio Investment (FPI), permitting companies to
raise capital abroad, and encouraging domestic companies to grow beyond national
boundaries. In the process of globalization, national economies are integrated in several
fundamental ways – through trade, finance, production, and a growing web of global treaties
and institutions. Both foreign investment and international trade volume have grown rapidly
over the last few years.
Globalization refers to the shift towards a more integrated and independent world economy. It
has two main components – the globalization of markets and the globalization of products.
The former refers to the fact that in many industries historically distinct and separate national
markets are merging into one huge global marketplace. It has been argued that the tastes and
preferences of customers in different nations are converging on some global norm, thereby
helping to create a global market. By offering a standardized product worldwide, companies
are helping to create a global market. Very few significant differences in consumer tastes and
preferences among national markets still remain in many industries. Particularly, for a
number of consumer products, these differences frequently require that marketing strategies
and product features be customized to local conditions. The globalization of products refers
to the tendency among many firms to source goods and services from different locations
around the globe in an effort to take advantage of national differences in the cost and quality
of the factors of production.
GLOBALIZATION: BOON OR BANE?
Is the shift toward a more integrated and independent global economy a good sign? Many
influential economists, politicians, and business leaders seem to think so. They argue that
falling barriers to international trade and investment are the twin engines driving the global
economy toward greater prosperity. They contend that increased international trade and
International business benefits are not purely economic or commercial; they are even social
and cultural. These days, we observe that the west is slowly tending towards the east and vice
versa. It does mean that the good cultural factors and values of the east are acquired by the
west and vice versa. Thus, there is close cultural transformation and integration.
GLOBALIZATION
Globalization involves removing restrictions on foreign trade and foreign investment so as to
leverage the benefits of comparative advantage in terms of capital, technology and skilled
labour. International business as a separate subject is also gaining importance day by day as
trade between nations is taking place at a very fast pace. Even small scale industries have
started to look for foreign markets. Apart from this, with the relaxation in the exchange
control regulations by many countries, capital flows, both foreign direct investment and
foreign portfolio investment, are common as compared to yesteryears. Exchange rates also
play a vital role in the transactions.
Globalization of the economy means integrating the economy with the global economy. This
involves dismantling of high tariff walls, i.e., reduction of import duties, thereby facilitating
the transition from a protected economy to an open economy, removal of non – tariff
restrictions on trade such as exchange control, import licensing, quotas, allowing Foreign
Direct Investment (FDI) and Foreign Portfolio Investment (FPI), permitting companies to
raise capital abroad, and encouraging domestic companies to grow beyond national
boundaries. In the process of globalization, national economies are integrated in several
fundamental ways – through trade, finance, production, and a growing web of global treaties
and institutions. Both foreign investment and international trade volume have grown rapidly
over the last few years.
Globalization refers to the shift towards a more integrated and independent world economy. It
has two main components – the globalization of markets and the globalization of products.
The former refers to the fact that in many industries historically distinct and separate national
markets are merging into one huge global marketplace. It has been argued that the tastes and
preferences of customers in different nations are converging on some global norm, thereby
helping to create a global market. By offering a standardized product worldwide, companies
are helping to create a global market. Very few significant differences in consumer tastes and
preferences among national markets still remain in many industries. Particularly, for a
number of consumer products, these differences frequently require that marketing strategies
and product features be customized to local conditions. The globalization of products refers
to the tendency among many firms to source goods and services from different locations
around the globe in an effort to take advantage of national differences in the cost and quality
of the factors of production.
GLOBALIZATION: BOON OR BANE?
Is the shift toward a more integrated and independent global economy a good sign? Many
influential economists, politicians, and business leaders seem to think so. They argue that
falling barriers to international trade and investment are the twin engines driving the global
economy toward greater prosperity. They contend that increased international trade and
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investment will result in lower prices for goods and services. They believe that globalization
stimulates economic growth, raises the incomes of consumers and helps create jobs in all
countries that choose to participate in the global trading system. There are a few good reasons
to believe that declining barriers to international trade and investment do simulate economic
growth, create jobs and raise income levels. Considerable empirical evidence lends support to
the predictions of this theory. However, despite the existence of a wide band of supporters,
the process of globalization has its fierce critics.
The phenomenon of globalization may be traced to innovations taking place at a
revolutionary pace in all facets of technology and in all fields, including ‘communication’
and ‘transportation’. Innovations in basic and applied technology generate new products and
processes, either for an already existing or identified application or for an altogether new
application. Innovations in communication technology catalyze the process of spreading the
information and knowledge about product and process innovations taking place in different
parts of the world. Innovations in the area of transportation make the new product or process
available to all those interested in the same, irrespective of their geographical locations. A
combination of all these innovations is the global challenge for business today.
The globalization drive, it is assumed, would help the country achieve higher levels of
efficiency, international competitiveness and industrial growth. In its most general sense,
globalization refers to a process that ensures unfettered cross-national flows of capital,
technology and commodities. The rationale of globalization attempts in a developing country
rests on the view that it contributes to foreign exchange reserves, supplements domestic
savings and is associated with substantial technology diffusion and stimulation of
competition.
Even though many aspects of globalization- capital flows, labor standards, environmental
problems, etc. have captured world-wide attention, the driving force behind the global
integration has been liberalization of trade in goods and services. The trade liberalization and
industrial production can be analyzed as follows: First, when tariffs are lowered, relative
prices change and resources are reallocated to production activities that raise industrial
output. Second, larger long-run benefits accrue as economies adjust to technological
innovation, new production structures and changing patterns of competition. With the
establishment of World Trade Organization (WTO) on 1st January 1995, and its ongoing
attempts to promote free trade, exports and imports have become most dynamic factors in the
process of industrialization of the developing countries.
Imports have become a necessity in the process of industrialization in the developing
countries. The programmes of industrialization make a heavy demand for capital goods,
equipment, machinery and raw materials, which have to be imported from advanced
industrialized countries. Hence, a positive relationship can exist between imports and
industrial production. Exports play dual role in a developing country like India. First, exports
are related to income through foreign trade multiplier. Second, foreign exchange earnings
obtained from exports facilitate expansion of imports.
stimulates economic growth, raises the incomes of consumers and helps create jobs in all
countries that choose to participate in the global trading system. There are a few good reasons
to believe that declining barriers to international trade and investment do simulate economic
growth, create jobs and raise income levels. Considerable empirical evidence lends support to
the predictions of this theory. However, despite the existence of a wide band of supporters,
the process of globalization has its fierce critics.
The phenomenon of globalization may be traced to innovations taking place at a
revolutionary pace in all facets of technology and in all fields, including ‘communication’
and ‘transportation’. Innovations in basic and applied technology generate new products and
processes, either for an already existing or identified application or for an altogether new
application. Innovations in communication technology catalyze the process of spreading the
information and knowledge about product and process innovations taking place in different
parts of the world. Innovations in the area of transportation make the new product or process
available to all those interested in the same, irrespective of their geographical locations. A
combination of all these innovations is the global challenge for business today.
The globalization drive, it is assumed, would help the country achieve higher levels of
efficiency, international competitiveness and industrial growth. In its most general sense,
globalization refers to a process that ensures unfettered cross-national flows of capital,
technology and commodities. The rationale of globalization attempts in a developing country
rests on the view that it contributes to foreign exchange reserves, supplements domestic
savings and is associated with substantial technology diffusion and stimulation of
competition.
Even though many aspects of globalization- capital flows, labor standards, environmental
problems, etc. have captured world-wide attention, the driving force behind the global
integration has been liberalization of trade in goods and services. The trade liberalization and
industrial production can be analyzed as follows: First, when tariffs are lowered, relative
prices change and resources are reallocated to production activities that raise industrial
output. Second, larger long-run benefits accrue as economies adjust to technological
innovation, new production structures and changing patterns of competition. With the
establishment of World Trade Organization (WTO) on 1st January 1995, and its ongoing
attempts to promote free trade, exports and imports have become most dynamic factors in the
process of industrialization of the developing countries.
Imports have become a necessity in the process of industrialization in the developing
countries. The programmes of industrialization make a heavy demand for capital goods,
equipment, machinery and raw materials, which have to be imported from advanced
industrialized countries. Hence, a positive relationship can exist between imports and
industrial production. Exports play dual role in a developing country like India. First, exports
are related to income through foreign trade multiplier. Second, foreign exchange earnings
obtained from exports facilitate expansion of imports.
DIFFERENCES BETWEEN DOMESTIC BUSINESS AND INTERNATIONAL
BUSINESS:
Basically, domestic business and international business operate on similar lines. But therewas
are certain differences between these two businesses. The significant differences between
these two emerge from foreign exchange, quotas, tariffs regulations of a number of
governments, wide variations in culture and the like.
S.No Domestic business International business
1. Approach: Domestic business’s
approach is ethnocentric. It does mean
that domestic companies formulate
strategies, product design etc. towards the
national markets, customers and
competitors.
International business approach can be
Can be polycentric or Regio centric or
geocentric. International business under
polycentric approach and enters foreign
markets by establishing foreign
subsidiaries. Under the Regio centric,
they export the product to the neighboring
countries of the host country. Under the
geocentric approach they treat the entire
world as a single market for the
production, marketing, investment and
drawing various inputs.
2. Geographic scope: Domestic business
geo graphic scope is within the national
boundaries of domestic country
Geographic scope of the international
business varies from the national
boundaries of a minimum of two
countries up to a maximum of the entire
globe.
3. Operating Style: Domestic business
operating style including production,
marketing, investment, R&D etc. is
limited to the domestic country.
Operating style of international business
can be spread to the entire globe.
4. Environment: Domestic business mostly
analyses and scans the domestic
environment.
International business analyses and scans
the relevant International environment.
5. Quotas: The quotas imposed by various
countries on the exports and imports not
directly and significantly influence
domestic business.
The International business has to operate
with the quotas imposed by various
countries on their imports and exports.
6. Tariffs: The tariff rates of various
countries do not directly and significantly
affect the domestic business.
The tariffs rates of various countries
directly and significantly influence the
international business.
BUSINESS:
Basically, domestic business and international business operate on similar lines. But therewas
are certain differences between these two businesses. The significant differences between
these two emerge from foreign exchange, quotas, tariffs regulations of a number of
governments, wide variations in culture and the like.
S.No Domestic business International business
1. Approach: Domestic business’s
approach is ethnocentric. It does mean
that domestic companies formulate
strategies, product design etc. towards the
national markets, customers and
competitors.
International business approach can be
Can be polycentric or Regio centric or
geocentric. International business under
polycentric approach and enters foreign
markets by establishing foreign
subsidiaries. Under the Regio centric,
they export the product to the neighboring
countries of the host country. Under the
geocentric approach they treat the entire
world as a single market for the
production, marketing, investment and
drawing various inputs.
2. Geographic scope: Domestic business
geo graphic scope is within the national
boundaries of domestic country
Geographic scope of the international
business varies from the national
boundaries of a minimum of two
countries up to a maximum of the entire
globe.
3. Operating Style: Domestic business
operating style including production,
marketing, investment, R&D etc. is
limited to the domestic country.
Operating style of international business
can be spread to the entire globe.
4. Environment: Domestic business mostly
analyses and scans the domestic
environment.
International business analyses and scans
the relevant International environment.
5. Quotas: The quotas imposed by various
countries on the exports and imports not
directly and significantly influence
domestic business.
The International business has to operate
with the quotas imposed by various
countries on their imports and exports.
6. Tariffs: The tariff rates of various
countries do not directly and significantly
affect the domestic business.
The tariffs rates of various countries
directly and significantly influence the
international business.
7. Foreign exchange rates: Foreign
exchange rates and their fluctuations do
not directly and significantly affect the
domestic business.
Foreign exchange rates and their
fluctuations directly and significantly
affect the international business.
8. Culture: Mostly, domestic culture of the
country affects the business operations
including product design.
Mostly, culture of various countries
affects the business operations including
product design of international business.
9. Export-import procedures: Domestic
business is not normally influenced by
the export -import procedures of the
country.
International business is significantly
influenced by export-import procedures
of various countries. They need to follow
those procedures.
10. Human Resources: Domestic business
normally employs the people from the
same country. Therefore, the task of
human resources management is not
much complicated.
International business normally employs
the people from various countries.
Therefore, the task of human resources
management is much complicated.
11. Markets and customers: Domestic
companies meet the needs of the
domestic markets and customers. As
such, it would be appropriate for them to
understand the domestic markets and
customers.
International business should understand
markets and customers of various
countries.
INTERNATIONAL TRADE THEORIES
1. MERCANTILISM:
Mercantilism is the oldest international trade theory that formed the foundation of the
economic thought during about 1500 to 1800. According to this theory, the holdings of the
country’s treasure primarily in the form of gold constituted its wealth. This theory specifies
that countries should export more than they import and receive the value trade surplus in the
form of gold form those countries which experience trade deficits.
2. ADAM SMITH: “THEORY OF ABSOLUTE COST ADVANTAGE”-
Adam Smith, the Scottish economist view that the mercantilism weakens a country. He
advocated free trade among countries to increase a country’s wealth. Free trade enables a
country to provide a variety goods and services to its people by specializing in production of
some goods and services and importing others. Which goods should a country produce and
which goods it should import? Adam Smith proposed a theory to answer this question.
Adam Smith proposed Absolute cost advantage of theory of international trade (1776)
based on the principle of division of labour. According to him application of this principle to
exchange rates and their fluctuations do
not directly and significantly affect the
domestic business.
Foreign exchange rates and their
fluctuations directly and significantly
affect the international business.
8. Culture: Mostly, domestic culture of the
country affects the business operations
including product design.
Mostly, culture of various countries
affects the business operations including
product design of international business.
9. Export-import procedures: Domestic
business is not normally influenced by
the export -import procedures of the
country.
International business is significantly
influenced by export-import procedures
of various countries. They need to follow
those procedures.
10. Human Resources: Domestic business
normally employs the people from the
same country. Therefore, the task of
human resources management is not
much complicated.
International business normally employs
the people from various countries.
Therefore, the task of human resources
management is much complicated.
11. Markets and customers: Domestic
companies meet the needs of the
domestic markets and customers. As
such, it would be appropriate for them to
understand the domestic markets and
customers.
International business should understand
markets and customers of various
countries.
INTERNATIONAL TRADE THEORIES
1. MERCANTILISM:
Mercantilism is the oldest international trade theory that formed the foundation of the
economic thought during about 1500 to 1800. According to this theory, the holdings of the
country’s treasure primarily in the form of gold constituted its wealth. This theory specifies
that countries should export more than they import and receive the value trade surplus in the
form of gold form those countries which experience trade deficits.
2. ADAM SMITH: “THEORY OF ABSOLUTE COST ADVANTAGE”-
Adam Smith, the Scottish economist view that the mercantilism weakens a country. He
advocated free trade among countries to increase a country’s wealth. Free trade enables a
country to provide a variety goods and services to its people by specializing in production of
some goods and services and importing others. Which goods should a country produce and
which goods it should import? Adam Smith proposed a theory to answer this question.
Adam Smith proposed Absolute cost advantage of theory of international trade (1776)
based on the principle of division of labour. According to him application of this principle to
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international scenario helps the countries to specialize in production of those goods in which
they have cost advantage over other countries.
According to Adam Smith, every country should specialize in producing those products
which it can produce at less cost than that of other countries and exchange these products
with their products produced cheaply by other countries. Trade between two countries takes
place when one country produces one product at less cost than that of another country and the
other country has an absolute cost advantage over the first country in producing in other
product.
A. skilled labour and specialization advantage:
Countries have absolute cost advantage due to the following reasons.
1. Suitability of the skill of the labour of the country in producing certain products.
2. Specialization of labour in producing certain products leads to higher productivity and
less labour cost per unit of output.
3. Economies of scale would reduce the labour cost per unit of output.
B. Natural advantage: In addition to the skilled labour and specialization advantage,
countries do also have natural advantage in producing certain products due to climatic
conditions access to certain natural resources, etc. For example, Indian climate suits the
production of sweets, mangoes, coconuts, cotton and cashew nuts. Sri Lankan climate suits
the production of tea, rubber, etc. The USA climate supports the production of wheat.
Countries with a natural advantage produce specific products at low cost. Indian soil and
tropical climate in southern India are suitable for growing cashew nuts in India. As such,
India’s cashew nuts exports accounted for 65% (US $208 million) of the global cashew
exports. The skill of Indian labour helped the country to process the cashew skilfully and
produce higher grade cashew and compete with Mozambique, Indonesia and south East
Asian countries. Indian farmers use fewer fertilizers than those of Brazil, which gives Indian
nuts a better flavour and consequently better price in the global market. But the cashew yield
in Brazil is nearly three times higher than that of India. Vietnam has been growing as a close
competitor to Indian by processing the nuts of its own and also to India by processing the
nuts of its own and also from the neighbouring countries. Now, the cashew fruit is used in
producing candy, jams, juice, wine etc.…. in India. The unfavourable climates conditions in
other countries have also been helping India to remain as the leading exporter of cashew.
C. Acquired advantage
In addition to the skilled labour and natural advantages, countries also acquired advantages
to technology and skilled development. Japan acquired advantage in steel production through
the imports of both iron and coal. The reason for this success is that japan acquired labour
saving and material saving technology. Denmark exports silver table ware due to the ability
of Danish companies in developing distinctive products. Technologically advanced countries
acquired abilities to develop substitute products for a number of natural products. Thus,
countries have absolute advantages in producing certain products as discussed above. For
example, England had the absolute advantage in producing textiles, whereas France had the
absolute advantage in producing wine. Similarly, India has the absolute advantage in
producing pens and Japan has the absolute advantage in producing audio tape recorders.
they have cost advantage over other countries.
According to Adam Smith, every country should specialize in producing those products
which it can produce at less cost than that of other countries and exchange these products
with their products produced cheaply by other countries. Trade between two countries takes
place when one country produces one product at less cost than that of another country and the
other country has an absolute cost advantage over the first country in producing in other
product.
A. skilled labour and specialization advantage:
Countries have absolute cost advantage due to the following reasons.
1. Suitability of the skill of the labour of the country in producing certain products.
2. Specialization of labour in producing certain products leads to higher productivity and
less labour cost per unit of output.
3. Economies of scale would reduce the labour cost per unit of output.
B. Natural advantage: In addition to the skilled labour and specialization advantage,
countries do also have natural advantage in producing certain products due to climatic
conditions access to certain natural resources, etc. For example, Indian climate suits the
production of sweets, mangoes, coconuts, cotton and cashew nuts. Sri Lankan climate suits
the production of tea, rubber, etc. The USA climate supports the production of wheat.
Countries with a natural advantage produce specific products at low cost. Indian soil and
tropical climate in southern India are suitable for growing cashew nuts in India. As such,
India’s cashew nuts exports accounted for 65% (US $208 million) of the global cashew
exports. The skill of Indian labour helped the country to process the cashew skilfully and
produce higher grade cashew and compete with Mozambique, Indonesia and south East
Asian countries. Indian farmers use fewer fertilizers than those of Brazil, which gives Indian
nuts a better flavour and consequently better price in the global market. But the cashew yield
in Brazil is nearly three times higher than that of India. Vietnam has been growing as a close
competitor to Indian by processing the nuts of its own and also to India by processing the
nuts of its own and also from the neighbouring countries. Now, the cashew fruit is used in
producing candy, jams, juice, wine etc.…. in India. The unfavourable climates conditions in
other countries have also been helping India to remain as the leading exporter of cashew.
C. Acquired advantage
In addition to the skilled labour and natural advantages, countries also acquired advantages
to technology and skilled development. Japan acquired advantage in steel production through
the imports of both iron and coal. The reason for this success is that japan acquired labour
saving and material saving technology. Denmark exports silver table ware due to the ability
of Danish companies in developing distinctive products. Technologically advanced countries
acquired abilities to develop substitute products for a number of natural products. Thus,
countries have absolute advantages in producing certain products as discussed above. For
example, England had the absolute advantage in producing textiles, whereas France had the
absolute advantage in producing wine. Similarly, India has the absolute advantage in
producing pens and Japan has the absolute advantage in producing audio tape recorders.
Assumptions of the theory:
Adam Smith proposed the absolute cost advantage theory based in the following
assumptions:
1. Trade is in between two countries.
2. Only two commodities are traded.
3. Free trade exists between the countries.
4. The only element of cost of production is labour.
Now, we discuss the absolute cost advantage through a numerical example. We explain the
absolute advantage using two countries and two products. In this example, the countries are
India and Japan and the commodities are pens and audio tape recorders. We treat the cost of
production in terms of labour input.
3. DAVID RICARDO’S - THEORY OF COMPARATIVE COST ADVANTAGES
As indicated earlier, absolute cost advantage theory fails explain the situation when one
country has absolute cost advantage in producing many products. David Ricardo a British
economist-expanded the absolute cost advantage theory to clarify this situation and
developed the theory of comparative cost advantage.
Comparative cost advantage theory states that a country should produce and export those
products for which it is relatively more productive than that of other countries and import
those goods for which other countries relatively more productive than it is.
The comparative cost advantage theory is based on relative productivity differences and
incorporates the concept of opportunity cost.
Assumptions of the theory
The assumptions of the comparative cost advantage theory include.
1. There exists full employment.
2. The only element of cost of production is labour .production is the subject to the law of
constant returns.
3. There are no trade barriers.
4. Trade is free from cost of production.
5. Trade takes place is only between two countries.
6. Only two products are traded.
7. There are no costs of transport, etc.
GATT AND WTO
GATT (General Agreement on Tariffs and Trade) is established on 30th October 1947 is a
legal agreement conference between many countries, whose overall purpose was to promote
international trade by reducing the trade barriers such as tariffs and quotas. GATT was signed
by 23 nations in Geneva on 30th October 1947 and took effect on 1st January 1948.
The main objectives of GATT are
1. To raise standard of living
2. To ensure full employment and growing volume of real income.
3. To develop the full use of the resources of the world
4. To expand production and international trade
Adam Smith proposed the absolute cost advantage theory based in the following
assumptions:
1. Trade is in between two countries.
2. Only two commodities are traded.
3. Free trade exists between the countries.
4. The only element of cost of production is labour.
Now, we discuss the absolute cost advantage through a numerical example. We explain the
absolute advantage using two countries and two products. In this example, the countries are
India and Japan and the commodities are pens and audio tape recorders. We treat the cost of
production in terms of labour input.
3. DAVID RICARDO’S - THEORY OF COMPARATIVE COST ADVANTAGES
As indicated earlier, absolute cost advantage theory fails explain the situation when one
country has absolute cost advantage in producing many products. David Ricardo a British
economist-expanded the absolute cost advantage theory to clarify this situation and
developed the theory of comparative cost advantage.
Comparative cost advantage theory states that a country should produce and export those
products for which it is relatively more productive than that of other countries and import
those goods for which other countries relatively more productive than it is.
The comparative cost advantage theory is based on relative productivity differences and
incorporates the concept of opportunity cost.
Assumptions of the theory
The assumptions of the comparative cost advantage theory include.
1. There exists full employment.
2. The only element of cost of production is labour .production is the subject to the law of
constant returns.
3. There are no trade barriers.
4. Trade is free from cost of production.
5. Trade takes place is only between two countries.
6. Only two products are traded.
7. There are no costs of transport, etc.
GATT AND WTO
GATT (General Agreement on Tariffs and Trade) is established on 30th October 1947 is a
legal agreement conference between many countries, whose overall purpose was to promote
international trade by reducing the trade barriers such as tariffs and quotas. GATT was signed
by 23 nations in Geneva on 30th October 1947 and took effect on 1st January 1948.
The main objectives of GATT are
1. To raise standard of living
2. To ensure full employment and growing volume of real income.
3. To develop the full use of the resources of the world
4. To expand production and international trade
WTO (World Trade Organization)
Governments of the member countries of GATT concluded the Uruguay round negotiations,
the ministers expressed their political support to the outcome of the meeting by signing the
Final Act in Marrakesh, Morocco on 15th April 1994. According to Marrakesh declaration,
the results of the Uruguay round would “strengthen the world economy and lead to more
trade, investment, employment, and income growth throughout the world. According to final
Act of Marrakesh the World Trade Organization came into force from on 1 st January 1995.
WTO’s membership increased from 104 as on 1st January 1995 to 159 countries as on 31 st
march 2014.
The World Trade Organization (WTO) is global international organization dealing with the
rules of trade between nations.
Functions of WTO
1. WTO examines regularly the trade regime of industrial member countries. Thus it
acts as a watch dog of international trade.
2. It provides a forum for negotiations and for settling disputes.
3. WTO acts as a Management consultant for world trade.
4. Technical co-operation and training to developing countries.
5. WTO cooperates with other international institutions and like IMF, ILO, World
Bank involved in global economic policy making.
WTO: IMPORTANT PROVISIONS AND AGREEMENTS
1) AGREEMENT ON AGRICULTURE (AOA)
The original GATT did apply to agriculture trade, but it contained loopholes. Agricultural
trade became highly distorted, especially with the use of export subsidies which would not
normally have been allowed for industrial products.
The Uruguay round Agreement was a significant first step towards fair competition, and a
less distorted sector. The least developed countries do not need have to make commitments to
reduce tariffs or subsidies. Although the reductions in agriculture subsidies were agreed in the
Uruguay Round, only the figures for cutting export subsidies appear in the Agreement.
The main objective of Agriculture Agreements is to reform trade in the sector and to make
policies more market oriented.
New Rules and Commitments
1) Developing countries do not have to cut their subsidies or lower their tariffs as
much as developed Countries, and they are given extra time to complete their obligation.
2) The new rule for market access in agriculture products is “tariffs only”. Before
Uruguay round, some agricultural imports were restricted by quotas and other non-tariff
measures. These have been replaced by tariffs that provide more – or – less equivalent levels
of protection. If in previous policy domestic prices were 75 % higher than world prices, the
new tariff could be around 75 %.
3) The Uruguay round participants agreed that developed countries would cut the
tariffs by an average of 36 % in equal steps over six years, and developing countries would
make 24 % cuts over 10 years.
Under the Agriculture Agreement, WTO members have to reduce their subsidized
exports. But some countries have been highly dependent on supplies of cheap, subsidized
Governments of the member countries of GATT concluded the Uruguay round negotiations,
the ministers expressed their political support to the outcome of the meeting by signing the
Final Act in Marrakesh, Morocco on 15th April 1994. According to Marrakesh declaration,
the results of the Uruguay round would “strengthen the world economy and lead to more
trade, investment, employment, and income growth throughout the world. According to final
Act of Marrakesh the World Trade Organization came into force from on 1 st January 1995.
WTO’s membership increased from 104 as on 1st January 1995 to 159 countries as on 31 st
march 2014.
The World Trade Organization (WTO) is global international organization dealing with the
rules of trade between nations.
Functions of WTO
1. WTO examines regularly the trade regime of industrial member countries. Thus it
acts as a watch dog of international trade.
2. It provides a forum for negotiations and for settling disputes.
3. WTO acts as a Management consultant for world trade.
4. Technical co-operation and training to developing countries.
5. WTO cooperates with other international institutions and like IMF, ILO, World
Bank involved in global economic policy making.
WTO: IMPORTANT PROVISIONS AND AGREEMENTS
1) AGREEMENT ON AGRICULTURE (AOA)
The original GATT did apply to agriculture trade, but it contained loopholes. Agricultural
trade became highly distorted, especially with the use of export subsidies which would not
normally have been allowed for industrial products.
The Uruguay round Agreement was a significant first step towards fair competition, and a
less distorted sector. The least developed countries do not need have to make commitments to
reduce tariffs or subsidies. Although the reductions in agriculture subsidies were agreed in the
Uruguay Round, only the figures for cutting export subsidies appear in the Agreement.
The main objective of Agriculture Agreements is to reform trade in the sector and to make
policies more market oriented.
New Rules and Commitments
1) Developing countries do not have to cut their subsidies or lower their tariffs as
much as developed Countries, and they are given extra time to complete their obligation.
2) The new rule for market access in agriculture products is “tariffs only”. Before
Uruguay round, some agricultural imports were restricted by quotas and other non-tariff
measures. These have been replaced by tariffs that provide more – or – less equivalent levels
of protection. If in previous policy domestic prices were 75 % higher than world prices, the
new tariff could be around 75 %.
3) The Uruguay round participants agreed that developed countries would cut the
tariffs by an average of 36 % in equal steps over six years, and developing countries would
make 24 % cuts over 10 years.
Under the Agriculture Agreement, WTO members have to reduce their subsidized
exports. But some countries have been highly dependent on supplies of cheap, subsidized
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food imported from the major industrialized nations. They include some of the poorest
countries, and although their farming sector might receive a boost from higher prices, they
might need temporary assistance to make the necessary adjustments to deal with higher
priced imports, and eventually to export. A special ministerial decision sets out objectives,
and certain measures, for the provision of aid for food and agricultural development. It also
refers to the possibility of assistance from the IMF and World Bank to finance commercial
food imports.
2) AGREEMENT ON TEXTILES AND CLOTHING (ATC)
Before the Agreement took effect, a large portion of textiles and clothing exports from
the developing countries to the industrialized countries was subject to quotas under a special
regime the normal GATT rules up to the end of the Uruguay round, textiles and clothing
quotas were negotiated by the rules of Multitier Agreement (MFA). This provided for the
application of selective quantitative restrictions when surges in imports of particular products
caused, or threatened to cause, serious damage to the industry of the importing country. The
Multifiber Agreement was a major departure from the basic GATT rules. On 1st January
1995, it was replaced by the WTO Agreement on Textiles and Clothing.
The ATC built on the following Key elements
a) The product coverage basically encompassing yarns, fabrics, made – up textile
products and clothing.
b) A special safeguard mechanism to deal with new cases of serious damage or threat
there for domestic producers during the transition period.
c) Establishment of a textiles Monitoring Body (TMB) to supervise the
implementation of the Agreement and ensure that the rules are faithfully followed.
3) GENERAL AGREEMENT ON TRADE IN SERVICES (GATS)
The General Agreement on Trade in Services (GATS) is the first ever set of
multilateral, legally enforceable rules covering international trade in services. A WTO
Council for trade in services overseas the operation of Agreement. Negotiations and
commitments have taken place after the Uruguay round. GATS require more negotiations.
The goal is to take the liberalization process further by increasing the level of commitments
in schedules. The Agreement covers all internationally traded services. It includes all the
different ways of providing an international services – GATS defines four
1. Services supplied from one country to another (e.g. international telephone calls)
officially known as cross – border supply.
2. Consumers or firms making use of a service in another country (e.g. tourism),
officially known as consumption abroad.
3. Individuals travelling from their own country to supply services in another (e.g.
fashion models or consultants), officially known as presence of natural persons.
4. A foreign company setting up subsidiaries or branches to provide services in
another country (e.g. foreign banks setting up operations in a country), officially termed as
commercial presence.
4) AGREEMENT ON RULES OF ORIGIN
“Rules of Origin” are the criteria used to define the where a product was made. They
are an essential part of trade rules because a number of policies discriminate between
countries, and although their farming sector might receive a boost from higher prices, they
might need temporary assistance to make the necessary adjustments to deal with higher
priced imports, and eventually to export. A special ministerial decision sets out objectives,
and certain measures, for the provision of aid for food and agricultural development. It also
refers to the possibility of assistance from the IMF and World Bank to finance commercial
food imports.
2) AGREEMENT ON TEXTILES AND CLOTHING (ATC)
Before the Agreement took effect, a large portion of textiles and clothing exports from
the developing countries to the industrialized countries was subject to quotas under a special
regime the normal GATT rules up to the end of the Uruguay round, textiles and clothing
quotas were negotiated by the rules of Multitier Agreement (MFA). This provided for the
application of selective quantitative restrictions when surges in imports of particular products
caused, or threatened to cause, serious damage to the industry of the importing country. The
Multifiber Agreement was a major departure from the basic GATT rules. On 1st January
1995, it was replaced by the WTO Agreement on Textiles and Clothing.
The ATC built on the following Key elements
a) The product coverage basically encompassing yarns, fabrics, made – up textile
products and clothing.
b) A special safeguard mechanism to deal with new cases of serious damage or threat
there for domestic producers during the transition period.
c) Establishment of a textiles Monitoring Body (TMB) to supervise the
implementation of the Agreement and ensure that the rules are faithfully followed.
3) GENERAL AGREEMENT ON TRADE IN SERVICES (GATS)
The General Agreement on Trade in Services (GATS) is the first ever set of
multilateral, legally enforceable rules covering international trade in services. A WTO
Council for trade in services overseas the operation of Agreement. Negotiations and
commitments have taken place after the Uruguay round. GATS require more negotiations.
The goal is to take the liberalization process further by increasing the level of commitments
in schedules. The Agreement covers all internationally traded services. It includes all the
different ways of providing an international services – GATS defines four
1. Services supplied from one country to another (e.g. international telephone calls)
officially known as cross – border supply.
2. Consumers or firms making use of a service in another country (e.g. tourism),
officially known as consumption abroad.
3. Individuals travelling from their own country to supply services in another (e.g.
fashion models or consultants), officially known as presence of natural persons.
4. A foreign company setting up subsidiaries or branches to provide services in
another country (e.g. foreign banks setting up operations in a country), officially termed as
commercial presence.
4) AGREEMENT ON RULES OF ORIGIN
“Rules of Origin” are the criteria used to define the where a product was made. They
are an essential part of trade rules because a number of policies discriminate between
exporting countries, quotas, preferential tariffs, anti – dumping actions, countervailing duty
and more. Rules of Origin are also used to compile trade statistics. This first – ever
agreements on the subject requires WTO members to ensure their rules of origin are
transparent, that they do not have restricting, distorting or disruptive effects on international
trade, that they are administrated in a consistent, uniform, impartial and reasonable manner
and that they are based on a positive standard for the longer term, that Agreement aims at
common rules of origin among all WTO members.
5) AGREEMENT ON TRADE RELATED INVESTMENT MEASURES (TRIMS)
The agreement on the Trade Related Investment Measures calls for introducing
national treatment of foreign investment and removal of quantities restrictions. These are
measures which are imposed on the foreign investors the obligation to use local inputs, to
produce for export as a condition to obtain imported goods as inputs, to balance foreign
exchange outgo on importing inputs with foreign exchange earnings through export and not
to export more than a specified proportion of the local production. TRIMS are rules that
restrict preference of domestic firms and thereby enable international firms to operate more
easily within foreign markets.
TRIMS may include requirements to:
1. Achieve a certain level of local content
2. Produce locally.
3. Export a given level / percentage of goods.
4. Balance the amount / percentage of imports with the amount / percentage of
exports.
5. Transfer of technology or property business information to local persons.
These requirements may be mandatory conditions for investment, or can be attached
to fiscal or other incentives. The TRIMS agreement does not cover services.
6. AGREEMENT ON ANTI – DUMPING
If a company exports a product at a price lower than the price it normally charges on
its own home market, is said to be dumping the product. The WTO Agreement allows
governments to act against dumping where there is genuine injury to the competing domestic
industry. In order to do that, the government has to be able to show that dumping is taking
place, calculate the extent of dumping (how much lower the export – price compared to the
exporters have market price) and how that dumping is causing injury.
The WTO Anti – dumping Agreement introduces the following modifications:
1. The detailed rules for calculating the amount of dumping.
2. More elaborate procedures for initializing and conducting anti – dumping
investigations.
3. Rules on the implementation and duration (normally five years) of anti –
dumping measures.
4. Particular standards for dispute settlement panels to apply in ant – dumping
disputes.
and more. Rules of Origin are also used to compile trade statistics. This first – ever
agreements on the subject requires WTO members to ensure their rules of origin are
transparent, that they do not have restricting, distorting or disruptive effects on international
trade, that they are administrated in a consistent, uniform, impartial and reasonable manner
and that they are based on a positive standard for the longer term, that Agreement aims at
common rules of origin among all WTO members.
5) AGREEMENT ON TRADE RELATED INVESTMENT MEASURES (TRIMS)
The agreement on the Trade Related Investment Measures calls for introducing
national treatment of foreign investment and removal of quantities restrictions. These are
measures which are imposed on the foreign investors the obligation to use local inputs, to
produce for export as a condition to obtain imported goods as inputs, to balance foreign
exchange outgo on importing inputs with foreign exchange earnings through export and not
to export more than a specified proportion of the local production. TRIMS are rules that
restrict preference of domestic firms and thereby enable international firms to operate more
easily within foreign markets.
TRIMS may include requirements to:
1. Achieve a certain level of local content
2. Produce locally.
3. Export a given level / percentage of goods.
4. Balance the amount / percentage of imports with the amount / percentage of
exports.
5. Transfer of technology or property business information to local persons.
These requirements may be mandatory conditions for investment, or can be attached
to fiscal or other incentives. The TRIMS agreement does not cover services.
6. AGREEMENT ON ANTI – DUMPING
If a company exports a product at a price lower than the price it normally charges on
its own home market, is said to be dumping the product. The WTO Agreement allows
governments to act against dumping where there is genuine injury to the competing domestic
industry. In order to do that, the government has to be able to show that dumping is taking
place, calculate the extent of dumping (how much lower the export – price compared to the
exporters have market price) and how that dumping is causing injury.
The WTO Anti – dumping Agreement introduces the following modifications:
1. The detailed rules for calculating the amount of dumping.
2. More elaborate procedures for initializing and conducting anti – dumping
investigations.
3. Rules on the implementation and duration (normally five years) of anti –
dumping measures.
4. Particular standards for dispute settlement panels to apply in ant – dumping
disputes.
INTELLECTUAL PROPERTY RIGHTS
The term ‘Intellectual Property’ has come to be internationally recognized as covering
patents, industrial designs, copyright, trademarks, know-how and confidential information.
Patents, designs and trademarks used to be considered as different types of industrial
property. But when copyright and confidential information are included, the term ‘intellectual
property’, though a little high sounding, is a more appropriate description for this class of
property. Although the creation of trademark has very little to do with intellectual creativity,
it cannot be doubted that patents, designs and copyright are the product of intellectual effort
and creative activity in the field of applied arts or technology and fine arts. In the information
age, Intellectual Property Rights (IPRs), protection takes on a pivotal role.
Intellectual Property Rights are supposed to help protect investments into research and
development and stimulate innovation by providing incentives to invent, progress, develop,
etc. Yet, there are criticism that the way intellectual property rights related texts have
developed, they put more emphasis on protecting one’s creations and stifling other’s ability to
compete. Intellectual Property Rights are integral to the progress of mankind and an
indispensable element in economic development in a global environment, and so it is
essential that its utilization also assures protection of basic human values and environment. It
should also address major human problems of food and disease. Benefits of Intellectual
Property (IP) should accrue evenly to creators and users without distinction or discrimination
of any kind, and the deployment of resources should be directed in such a manner as to
ensure equal opportunity among nations to enjoy the fruits of knowledge-based progress.
TRADE RELATED INTELLECTUAL PROPERTY RIGHTS (TRIPS)
The agreement on the Trade Related Aspects of the Intellectual Property Rights (TRIPS) of
the WTO, which came into effect on 1 January 1995, is to date the most comprehensive
multilateral agreement on intellectual property. WTO and TRIPS set the minimum level of
protection of intellectual property protection and enforcement provision, every member
country must provide to right holder. TRIPS add a substantial number of additional
obligations on matters where the pre-existing conventions are silent or are seen as being
inadequate. The TRIPS Agreement is sometimes referred to as a Paris-Plus Agreement.
Significantly, Intellectual property rights have been recognized as vital to free trade. All
countries that are a part of GATT/WTO have to comply with the TRIPS text. Under Article
65.2 of TRIPS, India as a developing country has fallen under the WTO commitments after 1
January 2000.
A. Patents
Patents are one of the oldest forms of intellectual property protection and the aim of a patent
system is to encourage economic and technological development by rewarding intellectual
creativity. Patent under the Act is grant from the Government to inventor, for a limited period
of time, the exclusive right to make, use exercise and vend invention. The purpose of patent
is to provide a form of technological advances. The patent protection provides a reward not
only for the creation of an invention, but also for the development of an invention to the point
at which it is technologically feasible and marketable, and this type of an incentive promotes
additional creativity and encourages companies to continue their development of new
technology to the point at which it is marketable, useful to the public, and desirable for the
The term ‘Intellectual Property’ has come to be internationally recognized as covering
patents, industrial designs, copyright, trademarks, know-how and confidential information.
Patents, designs and trademarks used to be considered as different types of industrial
property. But when copyright and confidential information are included, the term ‘intellectual
property’, though a little high sounding, is a more appropriate description for this class of
property. Although the creation of trademark has very little to do with intellectual creativity,
it cannot be doubted that patents, designs and copyright are the product of intellectual effort
and creative activity in the field of applied arts or technology and fine arts. In the information
age, Intellectual Property Rights (IPRs), protection takes on a pivotal role.
Intellectual Property Rights are supposed to help protect investments into research and
development and stimulate innovation by providing incentives to invent, progress, develop,
etc. Yet, there are criticism that the way intellectual property rights related texts have
developed, they put more emphasis on protecting one’s creations and stifling other’s ability to
compete. Intellectual Property Rights are integral to the progress of mankind and an
indispensable element in economic development in a global environment, and so it is
essential that its utilization also assures protection of basic human values and environment. It
should also address major human problems of food and disease. Benefits of Intellectual
Property (IP) should accrue evenly to creators and users without distinction or discrimination
of any kind, and the deployment of resources should be directed in such a manner as to
ensure equal opportunity among nations to enjoy the fruits of knowledge-based progress.
TRADE RELATED INTELLECTUAL PROPERTY RIGHTS (TRIPS)
The agreement on the Trade Related Aspects of the Intellectual Property Rights (TRIPS) of
the WTO, which came into effect on 1 January 1995, is to date the most comprehensive
multilateral agreement on intellectual property. WTO and TRIPS set the minimum level of
protection of intellectual property protection and enforcement provision, every member
country must provide to right holder. TRIPS add a substantial number of additional
obligations on matters where the pre-existing conventions are silent or are seen as being
inadequate. The TRIPS Agreement is sometimes referred to as a Paris-Plus Agreement.
Significantly, Intellectual property rights have been recognized as vital to free trade. All
countries that are a part of GATT/WTO have to comply with the TRIPS text. Under Article
65.2 of TRIPS, India as a developing country has fallen under the WTO commitments after 1
January 2000.
A. Patents
Patents are one of the oldest forms of intellectual property protection and the aim of a patent
system is to encourage economic and technological development by rewarding intellectual
creativity. Patent under the Act is grant from the Government to inventor, for a limited period
of time, the exclusive right to make, use exercise and vend invention. The purpose of patent
is to provide a form of technological advances. The patent protection provides a reward not
only for the creation of an invention, but also for the development of an invention to the point
at which it is technologically feasible and marketable, and this type of an incentive promotes
additional creativity and encourages companies to continue their development of new
technology to the point at which it is marketable, useful to the public, and desirable for the
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public good. By international agreement, patents are available for inventions in all areas of
technology. The process for developing or making things can be patented. Patents are
intended for breakthroughs in technology, but they are also intended for small technological
increments. There are few things which cannot be patented, for example human genes cannot
be patented. A perpetual motion machine, which goes against the laws of nature, cannot be
patented unless someone can show it working.
B. Copyright
Copyright means the exclusive right to do or authorize others to do certain acts in relation to
literacy, dramatic, musical and artistic works, cinematography, and sound recordings. The
nature of the act varies according to the subject matter. Basically, copyright is the right to
copy or reproduce the work in which copyright subsists. The various acts for which
copyrights extends are listed in Section 14 of the Act. Copyright does not extend to any right
beyond the scope of Section 14. The exclusive right for doing the respective acts extends not
only to the whole of the work but to any substantial part thereof or to any translation or
adaptation thereof where applicable. The term of copyright is the life of the author or work,
plus 60 years with certain exceptions. Copyright is a kind of intellectual property, the
importance of which has increased enormously in recent times due to the rapid technological
development in the field of printing, music, communication, and entertainment and computer
industries. Consequent upon India signing the GATT and entering the global market
economy, a number of changes have been made in the Copyright Act of 1957 by the
Amending Act of 1994. This has been done in order to give effect to the obligations arising
from the signing of the GATT and to make Indian law more in line with the present law in
many developed countries.
C.Trademark
Patents, registered designs and copyright are protected only for a limited period. On the other
hand, in general, a registered trademark can be protected in perpetuity, subject only to the
condition that it is used and renewed periodically and the registered proprietor takes prompt
action against infringes. For the first time in international intellectual property law, the
section of trademarks of the TRIPS Agreement gives a clear definition of what constitutes a
trademark and lays down, some detail, the do’s and don’ts of such protection.
Under modern business conditions, a trademark performs four functions, viz., it
1. Identifies the product and its origin,
2. Guarantees its unchanged quality,
3. Advertises the product, and
4. Creates an image for the product
The concept of identifying the source of manufacture by a mark is an ancient one. But its
importance in trade and commerce was recognized only after the industrial revolution, which
enabled large-scale production and distribution of goods and publicity through the printing
media.
D.Industrial Design
The object of design registration is to see that others applying it to their goods without
permission do not deprive the originator of a profitable design of his reward. Design means
only the features of shape configuration, pattern or ornament applied to any article by any
industrial process which, in the finished article, appeals to and is judged solely by the eye and
technology. The process for developing or making things can be patented. Patents are
intended for breakthroughs in technology, but they are also intended for small technological
increments. There are few things which cannot be patented, for example human genes cannot
be patented. A perpetual motion machine, which goes against the laws of nature, cannot be
patented unless someone can show it working.
B. Copyright
Copyright means the exclusive right to do or authorize others to do certain acts in relation to
literacy, dramatic, musical and artistic works, cinematography, and sound recordings. The
nature of the act varies according to the subject matter. Basically, copyright is the right to
copy or reproduce the work in which copyright subsists. The various acts for which
copyrights extends are listed in Section 14 of the Act. Copyright does not extend to any right
beyond the scope of Section 14. The exclusive right for doing the respective acts extends not
only to the whole of the work but to any substantial part thereof or to any translation or
adaptation thereof where applicable. The term of copyright is the life of the author or work,
plus 60 years with certain exceptions. Copyright is a kind of intellectual property, the
importance of which has increased enormously in recent times due to the rapid technological
development in the field of printing, music, communication, and entertainment and computer
industries. Consequent upon India signing the GATT and entering the global market
economy, a number of changes have been made in the Copyright Act of 1957 by the
Amending Act of 1994. This has been done in order to give effect to the obligations arising
from the signing of the GATT and to make Indian law more in line with the present law in
many developed countries.
C.Trademark
Patents, registered designs and copyright are protected only for a limited period. On the other
hand, in general, a registered trademark can be protected in perpetuity, subject only to the
condition that it is used and renewed periodically and the registered proprietor takes prompt
action against infringes. For the first time in international intellectual property law, the
section of trademarks of the TRIPS Agreement gives a clear definition of what constitutes a
trademark and lays down, some detail, the do’s and don’ts of such protection.
Under modern business conditions, a trademark performs four functions, viz., it
1. Identifies the product and its origin,
2. Guarantees its unchanged quality,
3. Advertises the product, and
4. Creates an image for the product
The concept of identifying the source of manufacture by a mark is an ancient one. But its
importance in trade and commerce was recognized only after the industrial revolution, which
enabled large-scale production and distribution of goods and publicity through the printing
media.
D.Industrial Design
The object of design registration is to see that others applying it to their goods without
permission do not deprive the originator of a profitable design of his reward. Design means
only the features of shape configuration, pattern or ornament applied to any article by any
industrial process which, in the finished article, appeals to and is judged solely by the eye and
which is not a mere mechanical device. A design, in order to be registrable, must be new or
original not previously published in India. A design may be incorporated in the article itself
as in the case of a shape or configuration which is three dimensional in nature or it may be
represented two dimensionally on a piece of paper in such a way that the article to which it is
applied could be visualized. The shape and configuration are three dimensional, e.g. the
shape of the bottle, vase and so on; while patterns or ornaments are two dimensional as in the
case of patterns for textiles, wallpaper, etc., which serve the purpose of decoration. A design
must have individuality of appearance, which makes it not merely visible but also noticeable.
Industrial design is different from a trademark. If, after the expiry of the monopoly period,
the other traders do not use the design, then in due course of time, it becomes distinctive of
the goods of the original proprietor and acquires significance as a trademark.
INTELLECTUAL PROPERTY RIGHTS - INDUSTRY TRENDS
Increased focus on R&D. major domestic players in pharma industry such as
Ranbaxy, Dr. Reddy’s Labs, Cipla, Nicholas Primal and Lockhart are aggressively
investing in R&D. Dr. Reddy’s Lab and Ranbaxy have already discovered one new
chemical entity (NCE) and are in Phase II and Phase I of the clinical trials,
respectively. Wockhardt is also expected to come out with a new molecule shortly.
Marketing tie-ups. Domestic players and MNCs have entered into marketing
arrangements to increase market penetration and further strengthen their position in
respective therapeutic segments. For example, Ranbaxy has tied up with Cipla, Glaxo
and Hoechst Marion Russell (HMR) for products in specific therapeutic segments,
and HMR has tied up with Nicholas Primal.
Product rationalization / Brand acquisition / Company acquisition. Most of the top
pharmaceutical companies are consolidating their position in the domestic market
either through product rationalization (e.g. Glaxo) or brand or company acquisitions
(e.g. Nicholas primal and Cadila Pharmaceuticals are actively acquiring companies).
HMR, Glaxo, Wockhardt and Ranbaxy have cut down their product portfolio in order
to be more focused. Similarly, companies such as Sun Pharmaceuticals, Nicholas
Piramal and Dr. Reddy’s Labs have opted for brand / company acquisitions to
increase market penetration.
Increasing the market penetration through enhanced distribution channels. This
would both increase the geographical reach in the domestic market and facilitate the
licensing of products from MNCs in the forthcoming product patent regime.
Upgrading manufacturing facilities. Most of these companies have already upgraded
their manufacturing facilities and have approval or are in the process of getting
approval from the US FDA, UK MCA, authorities and other international agencies.
This is the basic requirement for access to the high margin but highly regulated
developed markets of Europe and the US.
Software
The software industry has maintained an impressive growth rate and India has the potential of
becoming an IT superpower, raising our software exports from $ 2 billion to $ 50 billion in
the next 10 years. If this has to happen then, then we will have to reduce the content of body
original not previously published in India. A design may be incorporated in the article itself
as in the case of a shape or configuration which is three dimensional in nature or it may be
represented two dimensionally on a piece of paper in such a way that the article to which it is
applied could be visualized. The shape and configuration are three dimensional, e.g. the
shape of the bottle, vase and so on; while patterns or ornaments are two dimensional as in the
case of patterns for textiles, wallpaper, etc., which serve the purpose of decoration. A design
must have individuality of appearance, which makes it not merely visible but also noticeable.
Industrial design is different from a trademark. If, after the expiry of the monopoly period,
the other traders do not use the design, then in due course of time, it becomes distinctive of
the goods of the original proprietor and acquires significance as a trademark.
INTELLECTUAL PROPERTY RIGHTS - INDUSTRY TRENDS
Increased focus on R&D. major domestic players in pharma industry such as
Ranbaxy, Dr. Reddy’s Labs, Cipla, Nicholas Primal and Lockhart are aggressively
investing in R&D. Dr. Reddy’s Lab and Ranbaxy have already discovered one new
chemical entity (NCE) and are in Phase II and Phase I of the clinical trials,
respectively. Wockhardt is also expected to come out with a new molecule shortly.
Marketing tie-ups. Domestic players and MNCs have entered into marketing
arrangements to increase market penetration and further strengthen their position in
respective therapeutic segments. For example, Ranbaxy has tied up with Cipla, Glaxo
and Hoechst Marion Russell (HMR) for products in specific therapeutic segments,
and HMR has tied up with Nicholas Primal.
Product rationalization / Brand acquisition / Company acquisition. Most of the top
pharmaceutical companies are consolidating their position in the domestic market
either through product rationalization (e.g. Glaxo) or brand or company acquisitions
(e.g. Nicholas primal and Cadila Pharmaceuticals are actively acquiring companies).
HMR, Glaxo, Wockhardt and Ranbaxy have cut down their product portfolio in order
to be more focused. Similarly, companies such as Sun Pharmaceuticals, Nicholas
Piramal and Dr. Reddy’s Labs have opted for brand / company acquisitions to
increase market penetration.
Increasing the market penetration through enhanced distribution channels. This
would both increase the geographical reach in the domestic market and facilitate the
licensing of products from MNCs in the forthcoming product patent regime.
Upgrading manufacturing facilities. Most of these companies have already upgraded
their manufacturing facilities and have approval or are in the process of getting
approval from the US FDA, UK MCA, authorities and other international agencies.
This is the basic requirement for access to the high margin but highly regulated
developed markets of Europe and the US.
Software
The software industry has maintained an impressive growth rate and India has the potential of
becoming an IT superpower, raising our software exports from $ 2 billion to $ 50 billion in
the next 10 years. If this has to happen then, then we will have to reduce the content of body
shopping and move on to innovative IT products, which will need IP protection. The Indian
IT industry has not so far cared for this, but it will have to pay an increasing attention to this
aspect. The lack of sufficient IPR protection will discourage content providers to invest in
innovative services and their delivery. Data protection and privacy in legal treatment of
electronic transactions will be crucial in generating public confidence about using new
services. Software produced in India is actually registered and credited to this country on
account of inadequate protection of Intellectual Property Rights (IPRs). Whereas India’s
share of world trade in information technology (IT) and computer software is officially
placed at less than 1% - 0.72% - it is estimated that as much as 8 % of international
production of software is actually being created in India. In other words, barely one-tenth of
the software production that comes out of India gets formally registered and shows up in
government statistics.
Biotechnology
Under a suitable framework and active cooperation between the private and public sectors,
biotechnology could provide India better healthcare, improved agricultural productivity, more
food and better affordability to the increasing population. India needs to change in managing
its traditional and highly resourceful biological and intellectual capital resources. The country
has a rich biodiversity and a strong system of indigenous knowledge and technology in areas
such as healthcare and agricultural practice. A revision of the international legislation on
protection of IPR to include protection of indigenous knowledge has been developed. The
changing Indian patent law will attract foreign investment in biotechnology by the private
sector. By 2005, India is expected to make comprehensive amendments in patent laws in
compliance with the WTO Agreement. The Indian patent law, particularly for biotechnology,
at the same time, must create a harmony between the global laws and national laws.
WTO: DISPUTE SETTLEMENT BODY (DSB)
One of the main roles of WTO is to provide for effective enforcement of its rules and
agreements through a Dispute Settlement System, the results of which are binding on all
parties. It provides for consultations, panels and, if necessary, Appellate Body proceedings.
WTO members have agreed that if they believe fellow members are violating trade rules,
they will use the multilateral system of settling dispute bodies instead of taking action
unilaterally. This means abiding by the agreed procedures and respecting rulings.
The rules are set out in the WTO Dispute Settlement Understanding (DSU). The DSU
emphasizes that prompt settlement of disputes is essential if the WTO is to function
effectively. It sets out in considerable detail the procedures and timetables to be followed in
resolving disputes. Rulings are automatically adopted unless there is a consensus to reject a
ruling-any country wanting to block a ruling has to persuade all other WTO members
(including its adversary in the case) to share its view. Although much of the procedure
resembles a court or tribunal, the preferred solution is for the countries concerned to discuss
their problems and settle the dispute between themselves.
IT industry has not so far cared for this, but it will have to pay an increasing attention to this
aspect. The lack of sufficient IPR protection will discourage content providers to invest in
innovative services and their delivery. Data protection and privacy in legal treatment of
electronic transactions will be crucial in generating public confidence about using new
services. Software produced in India is actually registered and credited to this country on
account of inadequate protection of Intellectual Property Rights (IPRs). Whereas India’s
share of world trade in information technology (IT) and computer software is officially
placed at less than 1% - 0.72% - it is estimated that as much as 8 % of international
production of software is actually being created in India. In other words, barely one-tenth of
the software production that comes out of India gets formally registered and shows up in
government statistics.
Biotechnology
Under a suitable framework and active cooperation between the private and public sectors,
biotechnology could provide India better healthcare, improved agricultural productivity, more
food and better affordability to the increasing population. India needs to change in managing
its traditional and highly resourceful biological and intellectual capital resources. The country
has a rich biodiversity and a strong system of indigenous knowledge and technology in areas
such as healthcare and agricultural practice. A revision of the international legislation on
protection of IPR to include protection of indigenous knowledge has been developed. The
changing Indian patent law will attract foreign investment in biotechnology by the private
sector. By 2005, India is expected to make comprehensive amendments in patent laws in
compliance with the WTO Agreement. The Indian patent law, particularly for biotechnology,
at the same time, must create a harmony between the global laws and national laws.
WTO: DISPUTE SETTLEMENT BODY (DSB)
One of the main roles of WTO is to provide for effective enforcement of its rules and
agreements through a Dispute Settlement System, the results of which are binding on all
parties. It provides for consultations, panels and, if necessary, Appellate Body proceedings.
WTO members have agreed that if they believe fellow members are violating trade rules,
they will use the multilateral system of settling dispute bodies instead of taking action
unilaterally. This means abiding by the agreed procedures and respecting rulings.
The rules are set out in the WTO Dispute Settlement Understanding (DSU). The DSU
emphasizes that prompt settlement of disputes is essential if the WTO is to function
effectively. It sets out in considerable detail the procedures and timetables to be followed in
resolving disputes. Rulings are automatically adopted unless there is a consensus to reject a
ruling-any country wanting to block a ruling has to persuade all other WTO members
(including its adversary in the case) to share its view. Although much of the procedure
resembles a court or tribunal, the preferred solution is for the countries concerned to discuss
their problems and settle the dispute between themselves.
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Dispute Solving Process
The approximate periods for each stage of a dispute settlement procedure are target figures-
the Agreement is flexible. In addition, the countries can settle their disputes themselves at any
stage. Totals are also approximate.
60 days - Consultations, meditation, etc.
45 days - Panel set-up and panelists appointment
6 months - Final panel report to parties
3 weeks - Final panel report to WTO members
60 days - Dispute Settlement Body adopts report (if no appeal)
Total = 1 year (without appeal)
60-90 days Appeals report
30 days Dispute Settlement Body adopts appeals report
Total = 1 year, 3 months (with appeal)
Settling disputes is the responsibility of the Dispute Settlement Body. The Dispute Settlement
Body has the sole authority to establish “panels” of experts to consider the case, and to accept
or reject the panel’s findings or the results of an appeal. It monitors the implementation of the
rulings and recommendations, and has the power to authorize retaliation when a country does
not comply with a ruling.
First stage: Consultation (up to 60 days). Before taking any other actions the countries in
dispute have to talk to each other to see if they can settle their differences by themselves. If
that fails, they can also ask the WTO Director General to mediate or try to help in any other
way.
Second stage. The Panel (up to 45 days for a panel to be appointed, plus 6 months for the
panel to conclude). If consultations fail, the complaining country can ask for a panel to be
appointed. The country “in the dock” can block the creation of a panel once, but when the
DSB meets for a second time, the appointment can no longer be blocked (unless there is a
consensus against appointing the panel). Officially, the panel is helping the DSB make
rulings or recommendations. But because the panel’s report can only be rejected by DSB by
consensus, its conclusions are difficult to overturn. The panel’s findings have to be based on
the agreement cited.
The panel’s final report should normally be given to the parties to the dispute within six
months. In cases of urgency, such as those concerning perishable goods, the deadline is
shortened to three months.
The Agreement describes in detail how the panels are to work. The main stages are the
following:
Before the first hearing. Each side in the dispute presents its case in writing to the panel.
First hearing: the case for the complaining country and defense. The complaining
country (or countries), the responding country, and those that have announced they have an
interest in the dispute, make their case at the panel’s first hearing.
Rebuttals. The countries involved submit written rebuttals and present oral arguments at the
panel’s second meeting.
Experts. If one side raises scientific or other technical matters, the panel may consult experts
or appoint an expert review group to prepare an advisory report.
Appeals
The approximate periods for each stage of a dispute settlement procedure are target figures-
the Agreement is flexible. In addition, the countries can settle their disputes themselves at any
stage. Totals are also approximate.
60 days - Consultations, meditation, etc.
45 days - Panel set-up and panelists appointment
6 months - Final panel report to parties
3 weeks - Final panel report to WTO members
60 days - Dispute Settlement Body adopts report (if no appeal)
Total = 1 year (without appeal)
60-90 days Appeals report
30 days Dispute Settlement Body adopts appeals report
Total = 1 year, 3 months (with appeal)
Settling disputes is the responsibility of the Dispute Settlement Body. The Dispute Settlement
Body has the sole authority to establish “panels” of experts to consider the case, and to accept
or reject the panel’s findings or the results of an appeal. It monitors the implementation of the
rulings and recommendations, and has the power to authorize retaliation when a country does
not comply with a ruling.
First stage: Consultation (up to 60 days). Before taking any other actions the countries in
dispute have to talk to each other to see if they can settle their differences by themselves. If
that fails, they can also ask the WTO Director General to mediate or try to help in any other
way.
Second stage. The Panel (up to 45 days for a panel to be appointed, plus 6 months for the
panel to conclude). If consultations fail, the complaining country can ask for a panel to be
appointed. The country “in the dock” can block the creation of a panel once, but when the
DSB meets for a second time, the appointment can no longer be blocked (unless there is a
consensus against appointing the panel). Officially, the panel is helping the DSB make
rulings or recommendations. But because the panel’s report can only be rejected by DSB by
consensus, its conclusions are difficult to overturn. The panel’s findings have to be based on
the agreement cited.
The panel’s final report should normally be given to the parties to the dispute within six
months. In cases of urgency, such as those concerning perishable goods, the deadline is
shortened to three months.
The Agreement describes in detail how the panels are to work. The main stages are the
following:
Before the first hearing. Each side in the dispute presents its case in writing to the panel.
First hearing: the case for the complaining country and defense. The complaining
country (or countries), the responding country, and those that have announced they have an
interest in the dispute, make their case at the panel’s first hearing.
Rebuttals. The countries involved submit written rebuttals and present oral arguments at the
panel’s second meeting.
Experts. If one side raises scientific or other technical matters, the panel may consult experts
or appoint an expert review group to prepare an advisory report.
Appeals
Either side can appeal against a panel’s ruling. Sometimes both sides do so. Appeals have to
be based on points of law such as legal interpretation- they cannot re-examine existing
evidence or examine new members.
Three members of a permanent seven-member Appellate Body set up by the DSB and
broadly representing the range of WTO membership hear each appeal. Members of the
Appellate Body have four-year terms. They have to be individuals with recognized standing
in the field of law and international trade, not affiliated with any government. The appeal can
uphold, modify or reverse the panel’s legal findings and conclusions. Normally, appeals
should not last more than 60 days, with an absolute maximum of 90 days. The Dispute
Settlement Body has to accept or reject the appeals report within 30 days-and rejection is
only possible by consensus.
Areas of Disputes
The six years of WTO are replete with disputes involving various types of alleged agreements
violations and breach of understanding by different countries. An analysis of these areas of
dispute brings out that some of them are more frequently subjects of dispute than others.
1. Subsidies
Subsidies are very often the basis of disputes. They often take form which is difficult
from normal business practices. For this reason, the verdict of the panel and the
Appellate Bodies is halting.
2. Customs Duties
Customs duties practices are yet another area of dispute. Many a time they have come
up before the DSB for settlement. Restrictions on imports of textiles by various
countries have frequently been taken up by the DSB and often successful and just
rulings have been passed. For instance, let us consider the case when the US restricted
the import of women’s and girl’s woolen coats and woven shirts and blouses from
India. At one point, India requested for a panel on the issue. The US contended that
these items from India violated the safeguard provisions of the WTO Agreement on
Textiles and Clothing (ATC). The Textiles Monitoring Body (TMB) ruled that the US
had failed to demonstrate serious damage by imports of these wool coats for women
and girls.
3. Sanitary and Phytosanitary
Agreements on Sanitary and Phytosanitary (SPS) measures are popular with
complaints. The Agreement cover areas exposed to risks to animals or plant life or
health, from diseases and pests and “risks arising from additives, contaminants, toxins
or disease carrying organisms in food, beverages or foodstuffs”. It appears that the
SPS measures are the villain in disturbing DSB peace. In this regard Australia seems
to be very sensitive. It invokes its quarantine rules to erect non-tariff barriers. By its
nature it takes long time to evaluate risks from fruit imports. Mango, banana and
pineapple were caught in the dispute between Philippines and Australia. The dilatory
tactics adopted by Australia allowed the case to linger on. Finally, in desperation
Philippines imposed a 20 % cut in cattle imports from Australia and after tortuous
negotiations cut the quarantine time by conducting tests simultaneously and not
successively. In addition, Philippines have approached the DSB against the Australia
practice of quarantine tests of its fruits.
be based on points of law such as legal interpretation- they cannot re-examine existing
evidence or examine new members.
Three members of a permanent seven-member Appellate Body set up by the DSB and
broadly representing the range of WTO membership hear each appeal. Members of the
Appellate Body have four-year terms. They have to be individuals with recognized standing
in the field of law and international trade, not affiliated with any government. The appeal can
uphold, modify or reverse the panel’s legal findings and conclusions. Normally, appeals
should not last more than 60 days, with an absolute maximum of 90 days. The Dispute
Settlement Body has to accept or reject the appeals report within 30 days-and rejection is
only possible by consensus.
Areas of Disputes
The six years of WTO are replete with disputes involving various types of alleged agreements
violations and breach of understanding by different countries. An analysis of these areas of
dispute brings out that some of them are more frequently subjects of dispute than others.
1. Subsidies
Subsidies are very often the basis of disputes. They often take form which is difficult
from normal business practices. For this reason, the verdict of the panel and the
Appellate Bodies is halting.
2. Customs Duties
Customs duties practices are yet another area of dispute. Many a time they have come
up before the DSB for settlement. Restrictions on imports of textiles by various
countries have frequently been taken up by the DSB and often successful and just
rulings have been passed. For instance, let us consider the case when the US restricted
the import of women’s and girl’s woolen coats and woven shirts and blouses from
India. At one point, India requested for a panel on the issue. The US contended that
these items from India violated the safeguard provisions of the WTO Agreement on
Textiles and Clothing (ATC). The Textiles Monitoring Body (TMB) ruled that the US
had failed to demonstrate serious damage by imports of these wool coats for women
and girls.
3. Sanitary and Phytosanitary
Agreements on Sanitary and Phytosanitary (SPS) measures are popular with
complaints. The Agreement cover areas exposed to risks to animals or plant life or
health, from diseases and pests and “risks arising from additives, contaminants, toxins
or disease carrying organisms in food, beverages or foodstuffs”. It appears that the
SPS measures are the villain in disturbing DSB peace. In this regard Australia seems
to be very sensitive. It invokes its quarantine rules to erect non-tariff barriers. By its
nature it takes long time to evaluate risks from fruit imports. Mango, banana and
pineapple were caught in the dispute between Philippines and Australia. The dilatory
tactics adopted by Australia allowed the case to linger on. Finally, in desperation
Philippines imposed a 20 % cut in cattle imports from Australia and after tortuous
negotiations cut the quarantine time by conducting tests simultaneously and not
successively. In addition, Philippines have approached the DSB against the Australia
practice of quarantine tests of its fruits.
4. Patent Protection
The DSB is often faced with the complicated area of patent protection. Problems in
resolving the patent disputes arise due to difference in patent laws and in the concept
of “patent”. In some countries there are no patents at all, where it is taken for granted
that a person or a place has a proprietary right by sheer lapse of time. In some others
the practice is to patent a product while in some others the process is patented. The
WTO TRIPS Agreement, taking cognizance of this situation, provides for transitional
patent arrangements. For example, recently India challenged the patenting of Basmati
rice and turmeric and neem products by some US firms. In the case of Basmati rice,
the US firms has applied for patent under US law of Basmati rice by the name of
Taxmati and Kansmati. After India protested, the US firms withdrew their claim.
These are some of the examples to illustrate the nature of complaints brought before
the DSB. Though the DSB has laid down a time-bound procedure for the settlement
of disputes, a large number of cases are still pending before them. There is also a
feeling among complainants that rulings are influenced by political considerations. In
some cases where rulings are handed down, they are not capable of precise
interpretation.
Doha Developments
In the recent Doha developments, many issues were raised such as child labor, environment,
subsidies, textiles and clothing, investment, competition and government procurement. The
developing countries were not quite hopeful that these concerns would be properly addressed
and, moreover, India was not in favour of rising core labor standard and environmental
issues.
One good thing that happened at Doha was the accession of China to WTO. India shares most
of its concerns with China, like child labor, environment and patents. India should expect
substantial support from China at the Ministerial Conferences. However, Indian
manufacturers will now have to over-run their markets, for which a beginning has already
been made a couple of years back. India enjoys cost advantage over goods from developed
countries; so does China. If the developments at Doha are any indication, the WTO dispute
redressal mechanism should expect to come under heavier strain in the years to come. The
use of insidious neo-protectionism measures, to which it is apprehended the developed
countries would now resort to a greater extent, pose grave risk to the healthy functioning of
the WTO.
The DSB is often faced with the complicated area of patent protection. Problems in
resolving the patent disputes arise due to difference in patent laws and in the concept
of “patent”. In some countries there are no patents at all, where it is taken for granted
that a person or a place has a proprietary right by sheer lapse of time. In some others
the practice is to patent a product while in some others the process is patented. The
WTO TRIPS Agreement, taking cognizance of this situation, provides for transitional
patent arrangements. For example, recently India challenged the patenting of Basmati
rice and turmeric and neem products by some US firms. In the case of Basmati rice,
the US firms has applied for patent under US law of Basmati rice by the name of
Taxmati and Kansmati. After India protested, the US firms withdrew their claim.
These are some of the examples to illustrate the nature of complaints brought before
the DSB. Though the DSB has laid down a time-bound procedure for the settlement
of disputes, a large number of cases are still pending before them. There is also a
feeling among complainants that rulings are influenced by political considerations. In
some cases where rulings are handed down, they are not capable of precise
interpretation.
Doha Developments
In the recent Doha developments, many issues were raised such as child labor, environment,
subsidies, textiles and clothing, investment, competition and government procurement. The
developing countries were not quite hopeful that these concerns would be properly addressed
and, moreover, India was not in favour of rising core labor standard and environmental
issues.
One good thing that happened at Doha was the accession of China to WTO. India shares most
of its concerns with China, like child labor, environment and patents. India should expect
substantial support from China at the Ministerial Conferences. However, Indian
manufacturers will now have to over-run their markets, for which a beginning has already
been made a couple of years back. India enjoys cost advantage over goods from developed
countries; so does China. If the developments at Doha are any indication, the WTO dispute
redressal mechanism should expect to come under heavier strain in the years to come. The
use of insidious neo-protectionism measures, to which it is apprehended the developed
countries would now resort to a greater extent, pose grave risk to the healthy functioning of
the WTO.
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