GATT, WTO, Globalization, and FDI

GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT)/WORLD TRADE ORGANISATION (WTO)

  • GATT:
    • Established in 1948 to liberalize trade.
    • Guided international trading system.
    • Transformed into WTO in 1995.
    • Multilateral treaty with 96 governments.
  • Objectives of GATT:
    • Expansion of production activities and foreign trade liberalization.
    • Ensuring economic prosperity and raising living standards.
    • Ensuring full employment and optimum resource use.
    • Growth in real income and effective demand.
  • GATT Principles:
    • Non-discrimination between members (Most Favored Nation).
    • Prohibition of quantitative restrictions on trade (with exceptions).
    • Resolving disagreements through consultations.

WORLD TRADE ORGANIZATION (WTO)

  • WTO was formed in January 1995, replacing GATT, with a more powerful role.
  • India is a founder member of both GATT and WTO.
  • Objectives of WTO:
    • Implement new world trade system.
    • Promote world trade that benefits every country.
    • Ensure developing countries benefit from trade expansion.
    • Demolish hurdles to open world trading system.
    • Enhance competitiveness among trading partners.
    • Increase production and productivity for employment.
    • Expand and utilize world resources sustainably.
    • Improve living standards and speed up economic development.
  • Functions of WTO:
    • Oversees implementation and administration of agreements.
    • Provides a forum for negotiations and settling disputes.
    • Reviews national trade policies, ensuring coherence and transparency.
    • Assists developing countries in adjusting to WTO rules.
    • Administers dispute settlement and trade policy review mechanisms.
    • Cooperates with IMF and World Bank.
  • Goals:
    • Raising living standards.
    • Ensuring full employment.
    • Ensuring growing real incomes and demand.
    • Expanding production and trade in goods and services.

PROS AND CONS OF WTO

  • Pros:
    • Promotes peace and cooperation among nations.
    • Handles disputes constructively.
    • Free trade cuts the cost of living.
    • Trade raises income and stimulates economic growth.
    • Rules make life easier for all trading nations.
    • Encourages greater competitiveness and economies of scale.
    • Shields governments from lobbying and encourages good governance.
  • Cons:
    • Undemocratic and lacks transparency.
    • Does not promote global justice; benefits favor developed countries.
    • Privatizes essential services and may harm the environment.
    • May hinder developing economies and trample labor and human rights.
    • TRIPS can come at the expense of health and human lives.

GATT v/s WTO

  • GATT:
    • Established in 1948, focusing on tariff reduction.
    • Multilateral agreement without institutional foundation.
    • Rules were temporary.
    • Dealt with trade in goods only.
  • WTO:
    • Formed in 1995 as a permanent institution.
    • Supervises and liberalizes international trade.
    • Enforces trade laws and resolves disputes.
    • Monitors trade in services and intellectual property rights.

GLOBALIZATION: MEANING AND NATURE

  • Globalization is the process of international integration through interchange of world views, products, ideas and culture.
  • Features:
    • Free mobility of managerial personnel and entrepreneurs.
    • Globally standardized products.
    • Liberalization; free trade.
    • Globalization of economic activities and connectivity.
    • Borderless globe; Composite process.
    • Multi-dimensional and top-down process.
  • Stages of Globalization:
    • Market Entry: Using business models similar to home markets.
    • Product Specialization: Transferring full production to a single, low-cost location.
    • Value Chain Disaggregation: Focusing each activity in the most advantageous location.
    • Value Chain Reengineering: Substituting lower-cost labor for capital.
    • Creation of New Markets: Focus on market expansion.

ADVANTAGES / BENEFITS OF GLOBALIZATION

  • Employment: Generates job opportunities and income.
  • Education: Facilitates the spread of education.
  • Product Quality: Enhances product quality due to competition.
  • Cheaper Prices: Brings fierce competition and affordable pricing.
  • Free Movement of Capital: Facilitates easy transfer of money and FDI.
  • Communication: Improves information access and exchange.
  • Transportation: Enhances connectivity and efficient logistics.
  • International Trade: Broadens trade horizons with outsourcing.
  • GDP: Increases Gross Domestic Product.

DISADVANTAGES/LIMITATIONS OF GLOBALIZATION

  • Health: Increases risks and threats for epidemics.
  • Loss of Culture: Leads to cultural conflicts and adaptation to foreign cultures.
  • Uneven Wealth Distribution: Increases the gap between rich and poor.
  • Environment Degradation: Puts a burden on the environment through industrial activities.
  • Disparity: Causes disparity in economic development and structural unemployment.
  • Cut-throat Competition: Affects local markets and domestic players.
  • Conflicts: Gives rise to terrorism and violence.
  • Monopoly: May lead to illegal and unethical practices.

FOREIGN MARKET ENTRY STRATEGIES

  • Factors to consider: market size, competition, infrastructure, government regulations, production and shipping costs, company objectives, availability of resources, the various components of business environment etc.
  • Joint Venture (JV):
    • Agreement to develop a new entity, sharing revenues, expenses and assets.
    • Objectives: market entry, risk/reward sharing, technology sharing, conforming to government regulations.
    • Advantages: More resources, access to new markets, improved technology.
    • Disadvantages: Time and efforts to form the right relationship, differing objectives, imbalance share of capital and different cooperation levels.
  • Exporting:
    • Selling goods/services produced in one country to others.
    • Direct Exports: Control over markets and better information feedback.
    • Indirect Exports: Fast market access and low financial commitment.
  • Licensing:
    • Granting foreign firms the right to manufacture a product for a fixed term.
    • Advantages: Extra income, new markets, quick expansion.
    • Disadvantages: Lower income, loss of control, competition risks.
  • Franchising:
    • Granting semi-independent business owners the right to market products or services.
    • Advantages: Low political risk, low cost, expansion into different regions.
    • Disadvantages: Franchisees may become competitors, demands may be unrealistic etc.
  • Turnkey Projects:
    • Clients pay contractors to design and construct new facilities and train personnel.
    • Advantages: Establishes a plant and earns profits in a foreign country.
    • Disadvantages: Risk of revealing secrets, no long-term interest in the country.
  • Wholly Owned Subsidiaries (WOS):
    • Greenfield Investment: Establishing a new wholly owned subsidiary.
    • Acquisition: Acquiring existing firms.
  • Strategic Alliance:
    • Cooperative agreement between firms for shared research or joint ventures.
    • Advantages: Technology exchange, global competition, economies of scale.

LPG MODEL

  • Liberalisation, Privatisation, Globalisation model introduced in India in 1991.
  • Liberalisation:
    • Slackening of government regulations and removal of restrictions to free trade.
    • New economic policy 1991, FEMA, reduction of import tariffs.
  • Privatisation:
    • Participation of private entities in businesses and transfer of ownership from public to private sector.
  • Globalisation:
    • Interactions and interdependence among countries.
    • Positive effects: Access to technology, growth of trade, increase in production, employment opportunities.
    • Negative effects: Inequalities within countries, financial instability, impact on workers and farmers.
  • Highlights of the LPG Policy:
    • Foreign Technology Agreements, Foreign Investment, Industrial Licensing.
  • Benefits of the LPG Model:
    • Opening areas reserved for the public sector to private sector.
  • Criticisms of the LPG Model:
    • Concentrates on the corporate sector, bypasses agriculture, emphasis on capital intensive pattern of development.

MULTINATIONAL COMPANIES (MNC)

  • Organizations operating in multiple countries.
  • Advantages for Host Country:
    • Increased investment, employment, income, and technology transfer.
    • Enhanced competitiveness and reduced monopolies.
  • Advantages for Home Country:
    • Opportunities for marketing products and creating employment.
    • Boost to industrial activities and favorable balance of payment.
  • Disadvantages for Host Country:
    • Outdated technology and threat to economic/political sovereignty.
    • Potentially kills domestic industry and depletes natural resources.
  • Disadvantages for Home Country:
    • Capital transfer and neglect of home country's industrial development.

FOREIGN DIRECT INVESTMENT (FDI)

  • Controlling ownership in a business enterprise in one country by an entity based in another.
  • Types of FDI:
    • Horizontal, Platform and Vertical.
  • Advantages of FDI:
    • Better infrastructure and product quality.
    • Decreased inflation rate and boosted economy.
  • Disadvantages of FDI:
    • Affects small scale businessmen and increases unemployment.
  • Factors Affecting / Determinants of FDI:
    • Market Size, Portfolio Diversification and Resource Location.
    • Foreign Exchange Reserves and Internationalization.
    • Government Regulations and Political Stability Tax Policies, Inflation.
    • Industrial Organization and The Level of External Indebtedness.
    • Foreign Exchange Rate.