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International Business has existed since historic times. The approach of Mercantilism marked the Pre-World War era. Nations aspired to achieve export surplus through colonization of countries. Thus, raw material imports would come in for free, and the finished goods could then be exported back to colonies in exchange for gold or other precious resources and to other Nations for added export surpluses, gold, and geopolitical domination. Soon colonies became an expensive proposition post World War II because of changes in currency-based economic dynamics. It also saw the massive disruption of economies and devastation that the West had to emerge from as their National priority.
However, we see traces of Neo-Mercantilism in modern economies where expansionist Nations want to control global business through captive export surpluses and unscrupulous use of Foreign Direct Investments to dominate the World Trade.
The Inter-World War period was also a witness to the great depression and pandemics. This combined turbulence led Nations to alter their Mercantile mindsets into space of Free Trade. The World War II ramifications saw the creation of Bretton Wood Twins, the United Nations, and IMF for recovering from the devastation and ensuring revitalization of economies. The conversation of a World Body for International Trade gave birth to GATT, which existed for half a century and evolved into WTO to include services and Intellectual Property apart from Trade in Goods (GATT). The WTO, born in 1995, essentially was formed on the Principles of Free Trade as under:
- Trade Without Discrimination
- Most Favored Nation: Equal Treatment to all members
- National Treatment: Fair and transparent policies same for local and imports
- Freer Trade gradually through negotiations: Providing market access
- Predictability through binding and transparency
- Promoting fair competition: Inhibiting distortion of markets
- Encouraging development and economic reforms
Thus, WTO became a set of negotiated rules for world trade though lengthy & complex but ensured free and fair trade and a dispute resolution mechanism to control any deviant policy.
As I see it, WTO is based on the Theories of free trade.
- Adam Smith’s theory of absolute advantage is based on the premise that a country’s wealth is an outcome of trade than gold reserves. Thus, he states that Nations must trade in goods and services where they have an absolute advantage.
- David Ricardo’s theory of Comparative Advantage that even if a Nation has an advantage in multiple areas, it must still trade in what it is the best at since it’s the best efficiency lies in that area and thus can optimize its output. This thought holds today even though Nations have developed competencies in various areas of business.
So, Nations trade in what they are best at and compete with imports internally to raise their specialization as markets will continually see disruptions as today’s specializations may become liabilities of tomorrow.
Thus, the above brings us to an entrepreneurial thought that Nations must become competitive and produce the best in a given time to remain relevant and must play a key role in International Trade. Protectionism will not work and result in market inefficiencies. The currency becomes strong when its demand increases, and that happens through exports. But if you don’t import, why would Nations want to trade with you? Thus, the balance of imports and exports becomes key.
GATT and WTO both lead to the formation of trade Blocs, which are essential from an International Business perspective. Free Trade Agreements (FTA), Regional Trade Agreements (RTA) became important as they provided the impetus to free trade amongst Nations in Agreement in line with WTO thought. They take various forms.
- Free Trade Area: No internal tariffs for member imports within the area
- Customs Union: No internal tariffs and common tariffs for non-members
- Common Market: It is a Customs Union that permits Free Mobility of Factors of production people, capital & technology within members
- Economic Union: Common Market with a common currency and central bank
- Political Union: Complete integration with a Common Parliament
These integrations have economic business opportunities within and non-members, too, owing to the following effects.
- Static Effects:
- Trade Creation
- Trade Diversion
- Dynamic Effect of Market expansion
The above effects lead to trade opportunities and investments from members and non-members in the form of Foreign Direct Investments to capitalize on Free Trade. Business expansion leads to the generation of profits and economies of scale and specialization. Businesses thus must keep a watch on the development of blocs. Today blocs will be based on Geo-Strategic importance like the Quad of Australia-Japan-India-USA to counter the Neo-Mercantile approach. NAFTA, ASEAN European Union, are important blocs while there are numerous blocs in the Americas and Africa. However, many of the blocs do fail while new ones keep emerging based on geopolitical situations. Power Groups like G7 focus on emerging from Global Crisis.
The above history reflects the fact that Global Trade is here to stay. It may go through its highs and lows but cannot be negated. Nations and Entrepreneurs thus must focus on going global for the following reasons.
- Become ready to compete with global players or become extinct
- Create specialization and efficient work methods
- Achieve economies of scale
- Smoothen the business cycle risk
- Enter into strategic partnerships
- Emerge as a preferred brand in the mind of the consumer
- Add to National wealth and prosperity
Businesses, thus owing to continual trade negotiations between countries, will have enormous opportunities provided they deliver quality and price. Countries with shared cultures and small sizes are significant opportunity areas. Large countries are natural opportunities owing to the consumer base. Thus, this new economic order is genuinely ripe for Global Businesses.
It will thus be a sin if Nations and Organizations do not go International. Technology has made our World truly borderless and opened up opportunities for international business. Global Enterprises shall thus be sustainable businesses. There is no choice.
Copyright 2020 Niket Karajagi International Business Blogs Series.