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MGT520 - International Business - Lecture Handout 25

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THE POLITICAL ECONOMY OF INTERNATIONAL TRADE

THE POLITICAL ENVIRONMENT:

The political environment can have a dramatic impact on the operations of a firm. U.S. managers may be accustomed to a stable political system and a relatively homogenous population. This is often not true in other countries. A political system integrates the parts of a society into a viable, functioning unit. Sometimes that is a very difficult task. A country’s political system influences how business is conducted domestically and internationally.

THE IMPACT OF THE POLITICAL SYSTEM ON MANAGEMENT DECISIONS:

Political Risk:

Political risk occurs when there is a possibility that the political climate in a foreign country will change in such a way that the operations of international companies in that country will deteriorate.

  • Types and causes of political risk: Types of political risk include government takeovers of property, operating restrictions, and agitation that damages the company’s performance. Such problems can be caused by changing opinions of political leadership, civil disorder, and changes in external relations (such as animosity between the home and host country governments.
  • Macro and micro political risks: If political actions are aimed only at specific foreign investments (e.g., a single foreign company), they are considered micro political risks. If they are aimed at a broad spectrum of foreign investors (e.g., when all foreign-owned private property was taken over by Cuba), they are considered macro political risks.

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MGT601 - SME Management - Lecture Handout 39

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WORLD TRADE ORGANIZATION (WTO)

Introduction

The emergence of World Trade Organization (WTO) in 1995, as a result of Uruguay Round of negotiations of GATT, marks a watershed in the history of international trade. GATT, the predecessor of WTO, was established by 23 countries in 1948, which liberalized the trade and created an environment that enabled the evolution of WTO is much wider as compared to GATT. It encompasses areas like textile, agriculture, services and intellectual property etc. that were excluded in the GATT.

The main guiding principles of WTO are: non-discrimination among the members in stipulation of favours regarding market access and tariff reductions provision of national treatment to foreign investors, imported goods and services stability and predictability of international trade patterns to promote confidence of investors and businesses by bounding the tariffs and market access for services; and promotion of economic development by encouraging reforms in the less developed and transition economies.

To ensure that trade is as fair as possible and as free as practical WTO has a large number of agreements that are the result of negotiations among member states. The current sets of agreements are the outcome of 1986-94 Uruguay Round negotiations. Through these agreements WTO members operate a non-discriminatory trading system that spells out their rights and obligations. Important agreements are of goods, agriculture, textile and clothing, subsidies and countervailing measures, antidumping, safeguard measures, TRIMs, customs valuation, dispute settlement, technical barriers to trade, sanitary and phytosanitary measures, GATS and TRIPs.

These agreements resulted in considerable reduction in tariffs in member countries and increased market access for developing and developed countries.

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