A Literature Review on International Business
Engaging in international business is one of the most important factors that a businessman must consider in order to gain more financial strength and stability for his company. One reason of investing to other countries provides a much larger opportunity for growth. But the success of a business also depends on choosing the right country to transact with, and having the ability to negotiate with that country in terms of their rules and policies, in a fairly considerable way. To be able to do this would guarantee both countries’ relationship to be beneficial. On the other hand, most developed countries trade and invest with developing countries because of less competition in terms of quality and innovation. However, it’s not easy as it looks to deal with some of these countries because of the non-tariff barriers that they employ within their own territory. Non-tariff barriers is a legal means of implementing restrictive labeling requirements, health certifications and also discriminations on product standards; government subsidies and countervailing duties; quantitative restrictions, customs clearances and quotas. To make matters more complicated, some informal non-tariff barriers are also being practiced. These practices refer to unpleasant deals like bribes and unnecessary approvals that exist within a country’s import cycle. This might have resulted from poor management, or perhaps from corrupt government officials. Certain organizations and agreements regarding trade policies, like the World Trade Organization (WTO) and the General Agreements on Tariffs and Trade (GATT), have already been established to promote order in the trade industry. But because of non-tariff barriers, any country can perform informal non-tariff barriers for it is beyond the WTO’s scope of authority. Actions such as this can cause delays in business transactions that would eventually lead to unfavorable effects.
For decades, men have been dreaming to surpass their limitations by uniting the world spiritually, intellectually, emotionally, and economically. Spiritually, in a sense of spreading the gospels of each groups’ religion to convert as many as they can. Intellectually, in a sense of passing common knowledge to take away the naiveté of the world. Emotionally, by updating each other about the current situations to be able to sympathize or reach out to those countries in need. And finally, economically united, progressive and productive without the shackles of poverty and misery. As ambitious as the human beings can get, none of these dreams have been achieved yet. The world is still divided in all these forms perhaps because of men’s nature of individuality – especially in the battlefield of international business, where survival is a necessity.
When one says international business, what does one means? In the book “International Business: An Operational Theory,” by Richard A. Farmer and Barry M. Richman (1966), International Business (I.B.) is generally business operations of any sort by one firm which take place within or between two or more independent countries. Farmer and Richman (1966) also included that the general study of I.B. is subdivided into various branches of study (which will be later discussed) such as: The operation of domestic firm in domestic branches; export and import trade; comparative management; comparative economics system; and functional business analysis. A more recent definition of I.B. is that it consists of transactions and activities that occur between people or organizations from different countries, which take on various forms (Arpan, 1993). All in all, international business is usually defined as the transfer of factors of production owned by organizations across national borders, or the transfer of parts of that organization across national borders. (Agmon, 1989).
On the other hand, the government plays an important role in international business. Loasby (2001) states that the international business has a new agenda, which is based in four principles. The first is that the primary focus should not be on the specific attributes or policies of particular firms but on a general systems view. The second principle is that the primary determinants of the organizational structure of multinational enterprise are the volatility of the environment and the costs of acquiring the information needed for high-quality decisions. The third is to link the MNE and entrepreneurship, in particular by locating entrepreneurship within information networks. Finally the study of international business should be embedded within a broader psychological and social context, recognizing the importance of non-pecuniary objectives and social structures, which support high-trust relationships rather than opportunistic behavior.
Even though not all the nations are that progressive and productive economically, one can say through observation that the most significant alteration that the world economy has encountered during the second half of this century has been the internationalization of business. The global reform of industries and work has been particularly distinct within the last 25 years, as evidenced by the swift growth in the number of international business activities, worldwide and in the US. International business activity is predicted to increase at an even faster rate in the future. This rapid growth would have been impossible without its (I.B.) branches of study. As was mentioned earlier, these branches of study will be discussed. The branches of studies, according to Farmer and Richman (1966), are as follows: The operation of domestic firm in domestic branches; export and import trade; comparative management; comparative economics system; and functional business analysis.
The operation of domestic firm in overseas branches is one of the studies that should be taken to consideration in international business. One example of this is a Japanese firm can have its branch in other countries. Toyota of Philippines is considered as a domestic firm in an overseas branch. Farmer and Richman (1966) stated that this type of international business involves a management dimension in a foreign environment, and as such is one of the most complex and interesting types of international business studies. Firms cannot assume in this case that management problems will be identical to those faced at home.
The import and export trade is also an important branch in business internationally for it involves the purchasing of products by a local firm, like Bangladesh from other local firms in foreign countries, e.g. Australia and sell them in Bangladesh, or an that manufacturer may sell his domestically produced products abroad. Farmer and Richman (1966) stressed that this area of study has long been of interest to economists, since the flows of international trade have considerable impact on the development and operations of the local economy.
The comparative management in international business refers to “ the domestic firms owned and operated by nationals in different countries can be compared, analyzed, and studied (Farmer and Richards, 1966). Farmer and Richards have provided an example:
“Thus the Renault auto firm in France could be compared with the Rootes group in England or General Motors in the United States. Studies of this sort might cast light on the relative efficiency of similar firms in different environments and the impact of critical environmental factors on managerial performances.” (Farmer and Richards, 1966: 14)
The comparative economic system is important in order for a firm to decide strategically on the different economic environment of each country. The different environments such as the policies of a communist state in economics as compared to the policies of a democratic state, the different economic and political-legal constraints.
“It is possible to analyze such differences to determine how they influence the ownership, management, efficiency, and operations of firms. More subtle differences, such as between the United States and England, might also suggest insights into economic system changes for the better.” (Farmer and Richman, 1966)
Last but not the least is the functional basis analysis. According to Farmer and Richards (1966), it involves studies of international marketing, finance, and management are concerned with problems of these functional operations between different countries. This type of study may be unified with several of the above studies. Thus, an Australian manufacturer with a branch plant in Bangladesh may study marketing problems in Bangladesh or the Common Market, or an exporter may be interested in studying marketing systems in Saudi Arabia.
The business world of tomorrow will be fairly different from that of the past. Firms will obtain raw materials, parts and other inputs in different countries, gather and assemble them in another country, and then sell them in yet other countries around the world. For example, Reebok designs their products in the US, builds prototypes in Hong Kong, manufacture them in 40 locations around Asia, and sell them around the world. All firms will face competition from products and services that come from abroad. Products, services, managers and employees will all participate in a global business community.
Non – Tariff Barriers
When it comes to trade, every government on any nation has the right to implement the standard of ones country. In order to ensure the safety of its culture and people, a government must conduct some necessary measures other than the current written tariffs. These measures can be considered as the non – tariff barriers. The Consumer Unity and Trust Society (1999) based in India states that by definition, a non - tariff barrier means any government measure other than tariff that restricts trade flows. Non-tariff barriers are particularly pertinent with respect to trade in agricultural products. At the same time, they also exist in other product categories, e.g. textiles and clothing as well as applied against trade in services. It is a policy that restricts trade other than simple tariffs (Deardoff, 1999). In recent times, non-tariff barriers are, among others, emanating from social and environmental standards. Another definition is what Lincoln and Naumann (1991: 60) have cited. They state that nontariff barrier (NTBs) constitute a complex set of constraints that can frustrate and thwart the small business's international efforts. Recent literature has suggested that NTBs may now be the major obstacle faced by firms attempting to enter foreign markets (Czinkota, Rivoli, and Ronkainen 1989; Jeannet and Hennessey 1988).
The General Agreement on Tariff and Trade (GATT) envisions “Most Favored Nation (MFN)” treatment to be accorded by every member to all other members. Article II of the GATT Agreement prohibits levy of ordinary customs duties, any other duties or charges in excess of those set forth and provided for in the schedule of concessions relating to the importing country. The Agreement also requires such duties or charges to be levied on a non-discriminatory basis on imports originating from whatever source. (The Consumer Unity and Trust Society, 1999) For example, shrimps that will be exported to the United States have restrictive measures on banning shrimps harvested without turtle – excluder device. The same is applied on fishes exported to Europe. Restrictive measures in this country require regulation on process and production method such as breeding, water treatment system, packing, etc. Another example is the stringent regulations of Japanese on fruits and vegetables and the ban of hormones and livestock milk production in Europe. The Consumer Unity and Trust Society (1999) in comment to the previous examples, added that this is the case with India where the applied rates are mostly well below the ‘binding’ commitments. The only allowable exceptions to these bans and restrictions are those of preferential treatment under a Regional Trading Arrangement or any similar arrangement specifically permitted under the GATT.
The Consumer Unity and Trust Society (1999) cites an important related concept regarding non-tariff barriers:
“Another related concept is “water in the tariff”. This expression was used at the Uruguay Round negotiations on tariffication. Negotiators accepted that the conversion of non-tariff measures into tariff equivalents (i.e. tariffication) can never be completely accurate because of legitimate differences about the methodologies to be adopted. In many cases countries offered tariff equivalents which were inflated. The difference between a defensible tariff conversion and the one actually offered was described as “water in the tariff” or ‘dirty tariffication’.” (The Consumer Unity and Trust Society, 1999: 1)
GATT is one of the most important factor in the establishment of regulations and order in the world trade industry. The GATT’s roots can be traced towards the end of the Second World War, where a number of international organizations where set in motion in order to create institutional structures for the conduct of international relations in the post-world war. One of the most important negotiating processes at the time was the United Nations Conference on Trade and Employment, held in Havana, Cuba, in 1947, which led to the adoption of the Havana Charter. For many reasons, including the failure of the United States to ratify it, the Havana Charter never entered into force. As part of the negotiations on the Havana Charter, a group of countries engaged in tariff negotiations and in 1947 agreed on substantial tariff reductions. The entry of the Havana Charter was into pending, and with certain additions, converted it into the GATT. To bring the GATT into force quickly, a Protocol of Provisional Application was developed. Thus, the GATT was born, as a provisional agreement until such time as the Havana Charter would be ratified. The Protocol of Provisional Application stated that the governments involved would apply GATT’s parts I and III; however, part II (mostly on non-tariff barriers) would apply only to the fullest extent "not inconsistent with existing legislation". (WTO, 1997)
In light of the entry into force of the Marrakesh Agreement establishing the World Trade Organization (WTO) as of 1 January 1995 and its ratification by almost all GATT Contracting Parties, those parties decided to terminate the GATT 1947 as of 31 December 1995. The substance of GATT rules lives on since they are incorporated, with certain understandings, in the Marrakesh Agreement as GATT 1994. (WTO, 1997) The WTO, considered as a successor to the former GATT, retain most of GATT’s rules and focuses on new concepts such as providing the institutional framework for a unique system of rights and obligations for trade in goods and services and for certain aspects of intellectual property underpinned by rules and procedures for the settlement of disputes. (WTO, 1997)
There are many kinds of non-tariff barriers. Among them are: quantitative restrictions; import licensing; voluntary restraint agreement; and variable levies. The Consumer Unity and Trust Society (1999: 1) describe “the quantitative restrictions as the clearest example of non-tariff barriers. This limits or puts quota on the amounts of particular commodities that can be imported or exported during a given period. Article XI of the GATT prescribes the use of quantitative restrictions, subject to the specified exceptions listed in Article XX (general exceptions).”
Another kind of non-tariff barrier is the import licensing. “It means the need to obtain a permit to import a product. The administrative procedures require the submission of an application or other documentation to the relevant administrative body as a condition for importing (the WTO Agreement on Import Licensing Procedures)” (Consumer Unity and Trust Society 1999)
The voluntary restraint agreement refers to policy where a country agrees to limit its exports to another country to an agreed maximum within a certain period through the voluntary restraint agreement (VRA). The WTO Agreement on safeguards makes VRA illegal. (Consumer Unity and Trust Society 1999)
The last type of non-tariff barriers is the variable levies which is considered as a complex system of import supplement. “It intends to ensure that the price of a product in the domestic market remains unchanged regardless of price fluctuations in exporting countries. Variable levies are a feature of the Common Agricultural Policy of the European Union. The Uruguay Round Agreement stipulates that variable levies have to be converted to tariffs.” (Consumer Unity and Trust Society 1999)
Srivastava (1997) from India stated some facts about the discrimination of other countries to their country using the non-tariff barrier. Srivastava (1997: 1) stressed, “Many exports of India are handicapped on account of quantitative restrictions. In case of certain woollen garments, India had to go to the WTO for seeking redressal against the USA, which was duly granted in the absence of any solid reason.” In addition, “Countries like Switzerland have prohibited the participation of Indian made watches in their trade fairs on the ground that India has not yet fully freed its import regime for watches under the low tariff system.” Another point that Srivastava (1997: 1) stressed is the “indiscriminate use of anti-dumping measures have affected exports of many developing countries including India. According to WTO report, as on 30th June 1995, 805 anti-dumping actions were in operation. Of this, 305 were by the US, 178 by the EU, 91 by Canada, and 86 by Australia.” (p. 1), and that “a few countries are extending preferential treatment to some of their trading partners and are following discriminatory trade policies. For example, in case of horticulture products, while flowers from the EU are allowed duty-free in The Netherlands, the same flowers from a country like India attract an import duty of 18 to 20 percent.” (Srivastava, 1997: 1).
Another example is the Japanese’ rules on trade. Naka (1996) discusses that The 1989 National Trade Estimate Report lists more than thirty Japanese trade barriers, more than any of the other thirty-four nations and two regional trading bodies. These barriers include the complexity and rigidity of Japan's distribution system and the Large Store Law, keiretsu (an interlocking corporate grouping), patent protection, services, and market restrictions along with more traditional trade barriers such as tariffs, quotas, standards, and government procurement practices. In addition, The application of product regulations and standards is becoming increasingly contentious as an implicit nontariff barrier to trade. (Maskus, et al, 2000)
Management in the International Business
To have a successful business, especially in the international field, one must have an effective management strategy. According to Farmer and Richman (1966), “management of productive activity carries with it significant economic and political power, and much of the praise and objections to international activities…” (p. 20) A major determinant of success in international business is managerial commitment to international activities (Cavusgil and Nevin 1981). To overcome the array of important NTBs found in foreign markets, a small business must be strongly committed to international trade. (Lincoln and Naumann, 1991: 60). In international business, there are two types: the international business without foreign management, and the international business activities involving direct foreign management.
International business enterprises without foreign management are categorized as import, where, as Farmer and Richman (1966) stated, “a local buyer, who may be an independent businessman or a government body, merely buys from the foreign firm. Foreign goods enter, but, as mentioned above, relatively little managerial content is imported along with the goods. Such imports are restricted to goods, which can be moved,” or as export, where “a local firm sends goods abroad. As in the first case, managerial functions are not exported along with the goods.” (p. 20) It can also be categorized as portfolio investment, where an investor may buy stocks in foreign corporations or bonds issued by public or private agencies of a foreign country; licensing, where a firm may license a foreign company to utilize its trademarks, patents, processes, or other knowledge which may have proprietary value; and contracting, which involves in projects that requires contractor design as well as engineers. (Farmer and Richman, 1966) Another category is the turnkey projects, “where, a foreign firm may design and construct a factory or other system, carrying the project through its initial operations.” (Farmer and Richman, 1966)
An international business that involves direct foreign management is applied in situations where some types of international business activity require that the owners of the enterprise also provide managerial effort within the foreign country. Owners can still have the direct control over the company as long as they have the asset to do so. This kind of management is also called the exported management. Exported management involves major kinds of activities such as the sole-direct foreign investment, the joint venture, and the international service. (Farmer and Richman, 1966)
The sole-direct foreign investment is where a firm may completely own and operate a business in a foreign country. As noted by Farmer and Richman (1966), “all of the managers may be local citizens, but the owners provide ultimate management control. In such cases, local management must be carried on in the local environment including existing legal-political, educational, sociological, and economic situations, which may be unique within a given environment.” (p. 24) The joint ventures are activities of any type, which are performed by at least two firms from different countries in some type of partnership arrangement, (Farmer and Richman) and the international service, where firms were being provided by international transports, sale of insurance, stocks and bonds, and similar items across national frontiers.
Alvin G. Wint (1995), author of the book “Corporate Management in Developing Countries: The Challenge of International Competitiveness,” states that manager in developing countries, in public or private sector are constantly aware of the problems of the third world, or the underdeveloped. Wint also added other examples that depict the management strategy of the developing countries as ineffective. He also stated that managers in the public sector are aware of the problems typical of stagnating economies that are growing only slowly, if at all. Wint commented that managers and analysts in developing countries should consider carefully how foreign exchange markets operate and how exchange rates are determined in the particular context of the developing country environment. Similarly, public policymakers must consider carefully how exchange rate policies of developing country governments affect the competitiveness of the economies they manage. (p. 3)
Management has been internationalized. A was discussed earlier, local managers can manage an expansion of a firm in other countries and some corporation allows locals in the countries where they have their expansion to manage the firm. These activities happen, and vice-versa. Richard Peterson (1993), in his book entitled, “Managers and National Culture: A Global Perspective,” claims that the international business operations have changed rather dramatically in the latter years of the twentieth century. The first international presence of a German, American, or Japanese firm may have been through exporting a product or establishing a sales operation in another country. Later, the company may have established an international division to manage operations in a variety of countries. (p. 5) He commented that someday in the not so distant future, a company might be operating globally as Nestlé does. Nestlé's world headquarters is located in Switzerland, but it does not consider itself to be a Swiss company in terms of the thinking of its managers. Its managers are drawn from many countries. (p. 5) Back in 1995, Nestlé might have been the only company who practices this strategy, but now, almost all company do this especially fast food. Wint’s vision has already come to reality.
Each country all over the globe has different perspective on the
word “management.” Wint’s book provided the readers tables containing the
different perspective of some countries about management. In Malaysia, managers
are defined as “all administrative and managerial personnel in private and
organizations. The managerial class evolved out of the civil service class.” In China, they see managers as people who “include a great variety of people occupying supervisory positions in private and public sectors plus foreign staff in joint ventures.” In Hong Kong, managers “include owner-managers, entrepreneurs, and corporate leaders in both private and public sectors. Most business organizations are family-owned firms; many are characterized as autocratic, implicitly structured, paternalistic, and nepotistic.” South Koreans refers managers as “those individuals who are initially recruited to work as white-collar administrative employees and as technical engineering and scientific staff by major private sector firms upon completion of undergraduate and graduate studies, most of whom are later promoted to managerial positions.” Japanese see managers as a job position “including section chiefs, assistant department heads, assistant section chiefs, and department heads in large firms.” In Saudi Arabia, managers are people that “should have strong collective sense. Managers should have importance of honor, pride, and dignity in interpersonal relationships. They must also show loyalty to work group, focus on people rather than task, high-risk avoidance, centralized decision making, shame culture, strong influence of religion in work. Unions are also outlawed in this country.” In Israel, managers are not uniformly defined, but they “usually refer to those persons occupying middle to top-level organizational position in the private or public sector.” (p. 406 – 412)
Those were just some of the countries perspective on management that had been presented by Wint. In response to the perspectives that he has conducted, he provided analyses on the relationship of cultural values and managers. He concluded that there is a vast and important difference within a country like the United States, which has such a heterogeneous population. Other more heterogeneous populations in Wint’s sample include those in Britain, Israel, the CIS, and Malaysia. In contrast, Japan, Hong Kong, and Mainland China represent very homogeneous populations from which the managerial ranks are drawn. Wint cited some findings from Hofstede (1980) who identified four factors that differentiated the employee and managerial populations of a large American multinational corporation operating in approximately forty countries. Hoftede’s findings states that The United States, Britain, Germany, and Austria share more in common in terms of lower power distance, greater individualism, lower uncertainty avoidance, and stronger masculinity. The situation tends to reverse itself in countries like France and Saudi Arabia, except that individualism is given considerable weight in France. Wint cited another findings, this time from a research by Hall and Hall (1990) managers in countries like Britain, Germany, and the United States operate in low-context cultures where the language is clear and direct. On the other hand, French, Saudi Arabians, Japanese, Chinese, and Malaysians perform their duties within a high context culture in which language and mannerisms are much more indirect and complex.
With all the positive definitions of managers, it is ironic that those definitions would only be just as effective as they could be only when applied. It has been also a reality that some multinational firm crumbles because of poor management. Countries lose trade partners and decreases tourists because of poor management and cross-cultural blunder. Robert Maddox (1993), in his book “Cross-Cultural Problems in International Business: The Role of the Cultural Integration Function,” defines a cross-cultural as a decision affecting the foreign operations of a firm that results in a greater than necessary cost to the firm. He also added that the cost might be in direct dollars lost as the result of a poor decision or more indirectly in lost image or reputation. Basically, a firm blunders because of attitude deficiency and skills deficiency resulting from a poor management strategy.
Corruption and Bribe
To be able to do business with other countries requires border interventions that usually being met in the form of taxes or quotas. Hores (1992) declared that there are three major types of public measures altering trade patterns. One of them was already mentioned. The other two are macroeconomic policies, and commodity programs. The cost and benefits of border interventions are usually distributed in the form of taxes (tariffs), subsidies, and quotas. These policies can be applied to both exports and imports. Hores wrote that “a nation is a small-country case if the demand for its exports or supply of its imports is perfectly elastic (horizontal). A nation is a large-country case if the demand for its exports or supply of its imports is neither perfectly elastic nor perfectly inelastic. And a nation is a very-large-country case if the demand for its exports or supply of its imports is perfectly inelastic (vertical).
During the active days of GATT, their negotiations focused on reducing tariff barriers. The negotiations have been successful and as a result, the border interventions are currently dominated by non-tariff measures that often lead to bribe, delays, corruption and discrimination. Hores pointed out some unpleasant predicaments that have been brought about by non-tariff barriers. The examples were unofficial and unauthorized delays in processing import or export permits behave like quotas. The monopoly-like guild of wholesale merchants in Japan who frequently reject foreign merchandise also constitutes de facto quota behavior. Excessive packing requirements or shipping costs behave like taxes. Credit concessions provided by the United States and other exporters to foreign buyers of wheat are agricultural export subsidies. Also, The European Community imposes a variable levy on imports equal to the difference between the domestic support price and the world price. (p.77)
Phillip Nichols (1997: 1), in his journal entitled “Outlawing transnational bribery through the World Trade Organization,” reveals that every country in the world makes bribery of its own officials illegal. One major problem is the demands by foreign government officials that bribes be paid are considered by many businesspersons in Europe and the United States to be among the greatest problems afflicting international trade. He also exposes that “controlling the type of bribery that afflicts international commerce - transnational bribery - is particularly difficult because only half of the process is illegal; although every country in the world makes bribery of its own officials illegal, only two countries prohibit the payment of transnational bribes.”
The blame was usually on dishonest officials in developing countries because of the open secret that almost all of developing countries implements corrupt practices. According to Hores (1992: 1), of the “134 countries that attended the 9th International Anticorruption Conference organized by Transparency International in Durban last October, over a hundred were developing countries. More and more of these countries are expressing their resolve to combat corruption, echoing international initiatives, such as the OECD Convention.” Nichols (1992) depicted that corruption involves the misuse of authority or a position of authority for some self-interested purpose. Like corruption, bribery can be classified into four types: cost reducing, cost enhancing, benefit enhancing, and benefit reducing. Bribery, which is a transaction in which something of value is transferred by the bribe giver in exchange for a benefit from the bribe taker, can be further divided on the basis of whether die benefit conferred by die bribe taker is according to or against the rules. Care must be taken, however, that a definition of bribery reflects the distinction between bribery and extortion. Nichols also exposes that every country makes the bribery of its own officials illegal that include countries such as India, Indonesia, and Saudi Arabia. Successful foreign businessmen in these countries claimed this. Prevention of such activities led to the enactment of certain laws to prevent the widespread of such malpractices. India enacted the Prevention of Corruption Act, which punishes any civil servant who accepts bribes or habitually accepts gratuities for performing official functions. Indonesia also has a law specifically dealing with corruption in addition to its statutes prohibiting bribery. Saudi Arabia's current bribery law, which replaced an older law, took effect in 1992.
According to the book “Development in the Third World: From Policy Failure to Policy Reform,” by Hope (1996), widespread epidemic corruption has reached epidemic proportions in most Third World countries and is now regarded as a societal norm. The inability of the administrative machinery to comply with reform measures is symptomatic of the endemic nature of the negative ethical values that perpetuate and maintain a system of corrupt activities to the detriment of economic development irrespective of the form of government. (p. 129) Hope also claims that “the politicization of the bureaucracy allowed for the entrenchment of the use of favoritism and patronage as the means through which authority and influence were exercised. The politicians and the bureaucrats forged a dependent patron (politician)—client (bureaucrat) relationship through which administrative decision-making occurred. This process, inevitably, led to the abuse of public office for private and personal gains.” (p. 130)
Nichols (1992) pointed out a very interesting example of corruption in Nigeria:
“…a mass of letters from Nigeria attempting to lure foreign businesspersons into seemingly lucrative, but ultimately fraudulent, transactions requiring the use of the letter recipient's bank account. A typical letter begins by stressing that the recipient was chosen as someone who is "honest and reliable." In an apparent effort to establish the bona fides of the sender, the letter then goes on to describe the sender as part of a group of corrupt government officials who need the recipient's help to launder some money. It is telling that the authors of these letters believe that posing as corrupt government officials lends credibility to their proposal…” (Nichols 1992: 92)
Nichols (1997) also stated how harmful bribery is in trade. He stressed that corruption acts as a barrier to international trade and it blocks trade in two ways: by acting as a surcharge on goods or services, and by creating de facto monopolies. Corruption also distorts economies by distorting the market in a number of ways. Corruption causes the market system to work in a way other than the way it is supposed to work. One example is that corruption distorts relative prices by causing an excessive amount of money to flow into the government (with, it should be noted, no corresponding output by the government). Corruption is also different from taxation in a sense that it is being done in secrecy. Corruption also diverts resources from their most efficient uses. This occurs in three ways. First, resources are consumed in the effort to maintain secrecy and to cover up illegal transactions. Second, government officials are likely to hold back resources in an effort to increase the premium that they can extract from bribe givers and third, resources may be stolen by officials who will not put those resources to their most efficient use. Corruption imposes others cost as well. Corruption has a corrosive effect on societies in which it occurs at significant levels because of its illegality.
However, in contrast with the reality of corruption on trade restrictions, Anderson and Schmitt (2003) states that governments have no incentive to introduce nontariff barriers (NTBs) when they are free to set tariffs but they do when tariffs are determined cooperatively. Quotas are preferred to antidumping restrictions so that the model is consistent with a progression from using tariffs only to quotas and then to antidumping constraints (when quotas are eliminated). There is a corresponding narrowing of the range of industries affected by trade restrictions.
Trade Measures on Sanitary and Safety
GAAT, throughout the years that it has served the world through trade regulations, has made some rules on the application of sanitary and phytosanitary measures to improve the human health. Sykes (1995) elaborated that sanitary or phytosanitary measures include all relevant laws, decrees, regulations, requirements and procedures including, inter alia, end product criteria; processes and production methods; testing, inspection, certification and approval procedures; quarantine treatments including relevant requirements associated with the transport of animals or plants, or with the materials necessary for their survival during transport; provisions on relevant statistical methods, sampling procedures and methods of risk assessment; and packaging and labeling requirements directly related to food. (p. 208) The harmonization is the establishment recognition and application of common sanitary and phytosanitary measures by different Members. Risk assessment involves the evaluation of the likelihood of entry, establishment or spread of a pest or disease within the territory of an importing Member according to the sanitary or phytosanitary measures, which might be applied, and of the associated potential biological and economic consequences; or the evaluation of the potential for adverse effects on human or animal health arising from the presence of additives, contaminants, toxins or disease-causing organisms in food, beverages or feedstuffs. (p. 209) However, though measures have been established, Fredriksson (1999: 1) states that interest in the trade and environment debate has intensified as a result of international trade agreements and because many proposed solutions to the climate change problem have potential implications for the global trading system. Clearly more empirical work is needed to inform the debate, guide policymakers toward solutions, and help set priorities.
Nontariff barriers may prove to be a barricade among traders. But Gawande (1997: 425) states that these barriers are being used as a strategy to prevent illegal trades. He further states that Johnson (1953), Tower (1975), Riezman (1982), Kennan and Riezman (1988), Thursby and Jensen (1983), Chan (1988), and Baldwin (1990), among others, have made rich theoretical contributions to the subject of strategic trade barriers. (Gawande, 1997: 425). But the one he stresses is Baldwin’s (1990) Game-Theoretic Political Economy Model, which depicts that two countries, Home and Foreign, trade in n goods. Each good belongs to one of three types, categorized according to trade: goods with intraindustry trade, goods that are imported only by Home, and goods that are imported only by Foreign. This model illustrates the retaliatory purpose of nontariff barriers. Gawande (1997: 425), explains that Baldwin's idea is to use offensive trade barriers to discourage politically protectionist tariff formation in the foreign country. This imparts realism to the model, especially given the empirical validity of political economy models of trade barrier formation that has been established in the influential studies by Caves (1976), Ray (1981), Baldwin (1985), and Trefler (1993). From an empirical perspective, Baldwin's idea is attractive because it allows the decomposition of observed level of barriers into a politically determined protectionist component and a strategically determined offensive component. Another model in the spirit of Baldwin's model is analyzed in Grossman and Helpman (1995), who focus on a two-level game where bilateral trade barriers are determined at the international level but that must be consistent with the domestic political equilibrium where lobbying spending is an important determinant of trade barriers.
Fitting into place in the international business entails licensing and clearance stages. GATT recognizes that trade may be enforced by means of licensing. A separate Agreement on Import Licensing Procedures, which applies to all WTO Members, aims to strengthen general GATT obligations in this domain. The Agreement resembles closely the code on licensing that was negotiated in the Tokyo round. It establishes requirements to enhance transparency of licensing systems, including publication requirements, the right of appeal against decisions, and the length of license validity. (Sykes, 1995)
Sykes depicted the custom procedures from the guidelines of the World Customs Organization that:
“Custom valuation involves classifying and valuing imports for the purpose of levying tariffs and collecting statistics. Custom procedures might become NTBs if officials assign goods to an incorrect classification to which a higher tariff applies or assign goods a value greater than appropriate. An agreement to reduce and bind tariffs would be practically meaningless without a set of rules concerning the valuation and classification of imported goods. Arbitrary customs procedures could then be used to ensure that a government (or its officials) collect as much revenue as desired, independent of the formally negotiated tariff schedule. Import-competing industries might also bribe officials to harass importers. In many countries, custom authorities do not accept importer's invoices as the basis for tariff assessment. To reduce the likelihood that a country's published tariff schedule is not representative of the real nominal tariffs that apply, GATT establishes certain rules and principles regarding customs valuation.” (Sykes, 1995: 98)
Another principle that Sykes (1995) depicted in custom is that valuation should be based on the transaction or invoice value of the goods -- the price actually paid or payable for the goods (subject to adjustments concerning freight and several other charges). This method should be applied when: there are no special restrictions as to the disposal or use of goods; the buyer and seller are not related; no proceeds of the subsequent sales accrue to the exporter; the sale or price is not subject to special conditions that cannot be quantified. The agreement does not prescribe a uniform system regarding shipping, insurance, and handling charges. A country may opt for a cost, insurance, and freight (c.i.f.), a cost and freight, or a free-on-board (f.o.b.) valuation basis. If customs authorities have reason to believe that the transaction value is inaccurate, they are required to proceed sequentially through five alternative options: the value of identical goods; the value of similar goods; the so-called deductive method; the computed value method; and if all else fails method.3. Another rule that should be taken into consideration is the pre-shipment inspection. As the name suggests, pre-shipment inspection (PSI) consists of inspection of goods by specialized firms before they are shipped to the country of importation. Governments of importing countries usually decide to engage the services of PSI firms in order to reduce the scope for exporters and/or importers to engage in either over-invoicing or under-invoicing of imports. Over-invoicing may occur in contexts where there are foreign-exchange controls, this being a classic way to transfer capital outside the country. Subsidies are also important. Subsidization may pertain to import-competing industries or export industries that compete in international markets. To the extent that such subsidization is trade-distorting (i.e. expands or reduces trade above or below the free-trade level) it may threaten to offset market-opening commitments negotiated in an MTN. However, in certain circumstances subsidies may be a desirable form of government intervention, whether in the domestic economy or in international trade. On the other hand, employees in the customs are more capable of corruption because, according to Zuvich (1998: 51), tax directors, CFOs and other CPAs are being entrusted to make corporate decisions regarding customs and international trade matters. He explains that to be able to effectively make the "right call," these professionals must understand the consequences of their decisions and be informed. This holds true for some cases in Customs depicted its officials to be involve even in drug trafficking. (Dettmer, 1997)
Skud (1996) states that customs requirements that are redundant, unnecessarily complex, or cause delay are ignored in the presence of tariffs and remain as barriers after tariffs have been eliminated. The difference in customs requirements from country to country also impedes trade, as exporters are forced to comply with multiple import regimes. In trade, opportunities for corruption are scattered like dusts all over, most especially in Third World countries because of non-tariff barriers. Although the regulations of the GATT and WTO were being implemented fairly, unpleasant malpractices of officials are still hard to catch because of the vast opportunity to stealth what their doing. Another problem is that individual interest frequently triumphs over what is morally right. As tariffs on imports of manufactures have been reduced as a result of multi-lateral trade negotiations, interest in the extent to which existing nontariff barriers may distort and restrict international trade is growing. Accurate and reliable measures are needed in order to address the issues involving the use and impacts of nontariff barriers. (Deardoff and Stern, 2003)
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