Year: 2020

A special economic zone (SEZ) is an area in which the business and trade laws are different from the rest of the country. SEZs are located within a country’s national borders, and their aims include increased trade balance, employment, increased investment, job creation and effective administration. To encourage businesses to set up in the zone, financial policies are introduced. These policies typically encompass investing, taxation, trading, quotas, customs and labour regulations. Additionally, companies may be offered tax holidays, where upon establishing themselves in a zone, they are granted a period of lower taxation.

The creation of special economic zones by the host country may be motivated by the desire to attract foreign direct investment (FDI). The benefits a company gains by being in a special economic zone may mean that it can produce and trade goods at a lower price, aimed at being globally competitive. In some countries, the zones have been criticized for being little more than labor camps, with workers denied fundamental labor rights.

Special Economic Zone (SEZ) is a specifically delineated duty-free enclave and shall be deemed to be foreign territory for the purposes of trade operations and duties and tariffs. In order words, SEZ is a geographical region that has economic laws different from a country’s typical economic laws. Usually the goal is to increase foreign investments. SEZs have been established in several countries, including China, India, Jordan, Poland, Kazakhstan, Philippines and Russia. North Korea has also attempted this to a degree.

SEZ in India

At present there are eight functional SEZs located at Santa Cruz (Maharashtra), Cochin (Kerala), Kandla and Surat (Gujarat), Chennai (Tamil Nadu), Visakhapatnam (Andhra Pradesh), Falta (West Bengal) and Noida (Uttar Pradesh) in India. Further an SEZ in Indore (Madhya Pradesh) is now ready for operation.

In addition 18 approvals have been given for setting up of SEZs at Positra (Gujarat), Navi Mumbai and Kopata (Maharashtra), Nanguneri (Tamil Nadu), Kulpi and Salt Lake (West Bengal), Paradeep and Gopalpur (Orissa), Bhadohi, Kanpur, Moradabad and Greater Noida (UP), Vishakhapatnam and Kakinada (Andhra Pradesh), Vallarpadam/Puthuvypeen (Kerala), Hassan (Karnataka), Jaipur and Jodhpur (Rajasthan) on the basis of proposals received from the state governments.

State governments will have a very important role to play in the establishment of SEZs. Representative of the state government, who is a member of the inter-ministerial committee on private SEZ, is consulted while considering the proposal. Before recommending any proposals to the ministry of commerce and industry (department of commerce), the states must satisfy themselves that they are in a position to supply basic inputs like water, electricity, etc.

Are SEZ’s controlled by the government?

In all SEZs the statutory functions are controlled by the government. Government also controls the operation and maintenance function in the seven central government controlled SEZs. The rest of the operations and maintenance are privatised.

Are SEZs exempt from labour laws?

Normal labour laws are applicable to SEZs, which are enforced by the respective state governments. The state governments have been requested to simplify the procedures/returns and for introduction of a single window clearance mechanism by delegating appropriate powers to development commissioners of SEZs.

Who monitors the functioning of the units in SEZ?

The performance of the SEZ units are monitored by a unit approval committee consisting of development commissioner, custom and representative of state government on an annual basis.

What are the special features for business units that come to the zone?

Business units that set up establishments in an SEZ would be entitled for a package of incentives and a simplified operating environment. Besides, no license is required for imports, including second hand machineries.

Will it be possible to supply to other units in SEZ?

Yes. Inter-unit sales are permitted as per the SEZ policy. A buyer procuring from another unit pays in foreign exchange.

How do SEZs help a country’s economy?

SEZs play a key role in rapid economic development of a country. In the early 1990s, it helped China and there were hopes (perhaps never very high ones, admittedly) that the establishment in India of similar export-processing zones could offer similar benefits — provided, however, that the zones offered attractive enough concessions.

Traditionally the biggest deterrents to foreign investment in India have been high tariffs and taxes, red tape and strict labour laws. To date, these restrictions have ensured that India has been unable to compete with China’s massively successful light-industrial export machine. India’s goods exports in 2004 were an estimated $68 bn compared with $594 bn for China, and the stock of inward FDI, at $42 bn, was less than a tenth of China’s $544 bn.

Real-World Example

In the case of China, mainstream economists agree that the country’s SEZs helped liberalize the once traditional state. China was able to use the SEZs as a way to slowly implement national reform that would have been otherwise impossible. Studies have also found that SEZs elsewhere increase export levels for the implementing country and other countries that supply it with intermediate products. However, there is a risk that countries may abuse the system and use it to retain protectionist barriers in the form of taxes and fees. SEZs also create an excessive bureaucracy that funnels money away from the system, which makes it less efficient.

As the economy grows slowly at home, your business may have to look at selling internationally to remain profitable. Before examining foreign markets, you have to be aware of the major trends in international business so you can take advantage of those that might favor your company. International markets are evolving rapidly, and you can take advantage of the changing environment to create a niche for your company.

Growing Emerging Markets

Developing countries will see the highest economic growth as they come closer to the standards of living of the developed world. If you want your business to grow rapidly, consider selling into one of these emerging markets. Language, financial stability, economic system and local cultural factors can influence which markets you should favor.

Population and Demographic Shifts

The population of the industrialized world is aging while many developing countries still have very youthful populations. Businesses catering to well-off pensioners can profit from a focus on developed countries, while those targeting young families, mothers and children can look in Latin America, Africa and the Far East for growth.

Speed of Innovation

The pace of innovation is increasing as many new companies develop new products and improved versions of traditional items. Western companies no longer can expect to be automatically at the forefront of technical development, and this trend will intensify as more businesses in developing countries acquire the expertise to innovate successfully.

More Informed Buyers

More intense and more rapid communications allow customers everywhere to purchase products made anywhere around the globe and to access information about what to buy. As pricing and quality information become available across all markets, businesses will lose pricing power, especially the power to set different prices in different markets.

Increased Business Competition

As more businesses enter international markets, Western companies will see increased competition. Because companies based in developing markets often have lower labor costs, the challenge for Western firms is to keep ahead with faster and more effective innovation as well as a high degree of automation.

Slower Economic Growth

The motor of rapid growth has been the Western economies and the largest of the emerging markets, such as China and Brazil. Western economies are stagnating, and emerging market growth has slowed, so economic growth over the next several years will be slower. International businesses must plan for profitability in the face of more slowly growing demand.

Emergence of Clean Technology

Environmental factors are already a major influence in the West and will become more so worldwide. Businesses must take into account the environmental impact of their normal operations. They can try to market environmentally friendly technologies internationally. The advantage of this market is that it is expected to grow more rapidly than the overall economy.

Marketing is defined as the set of activities which are undertaken by the companies to provide satisfaction to the customers through value addition and making good relations with them, to increase their brand value. It identifies and converts needs into products and services, so as to satisfy their wants. There are two types of marketing namely, domestic and international marketing. Domestic marketing is when commercialization of goods and services are limited to the home country only.

On the other hand, International marketing, as the name suggests, is the type of marketing which is stretched across several countries in the world, i.e. the marketing of products and services is done globally.

Domestic Marketing

Domestic Marketing refers to the marketing activities employed on a national scale. Marketing strategies were undertaken to cater customers of a small area, generally within the local limits of a country. It serves and influences the customers of a specific country only.

Domestic Marketing enjoys a number of privileges like easy to access data, fewer communication barriers, deep knowledge about consumer demand, preferences and taste, knowledge about market trends, less competition, one set of economic, social & political issues, etc. However, due to the limited market size, the growth is also limited.

International Marketing

International Marketing is when the marketing practices are adopted to cater the global market. Normally, the companies start their business in the home country, after achieving the success they proceed their business to another level and become a transnational company, where they seek to enter in the market of several countries. So, the company must be known about the rules and regulations of that country.

International marketing enjoys no boundaries, keeping the focus on the worldwide customers. However, some disadvantages are also associated with it, like the challenges it faces on the path of expansion and globalization. Some of which are socio-cultural differences, changes in foreign currency, language barriers, differences in buying habits of customers, setting and international price for the product and so on.

The significant differences between domestic and international marketing are explained below:

1. The activities of production, promotion, advertising, distribution, selling and customer satisfaction within one’s own country is known as Domestic marketing. International marketing is when the marketing activities are undertaken at the international level.
2. Domestic marketing caters a small area, whereas International marketing covers a large area.
3. In domestic marketing, there is less government influence as compared to the international marketing because the company has to deal with rules and regulations of numerous countries.
4. In domestic marketing, business operations are done in one country only. On the other hand, in international marketing, the business operations conducted in multiple countries.
5. In international marketing, there is an advantage that the business organisation can have access to the latest technology of several countries which is absent in case domestic countries.
6. The risk involved and challenges in case of international marketing are very high due to some factors like socio-cultural differences, exchange rates, setting an international price for the product and so on. The risk factor and challenges are comparatively less in the case of domestic marketing.
7. International marketing requires huge capital investment, but domestic marketing requires less investment for acquiring resources.
8. In domestic marketing, the executives face less problem while dealing with the people because of similar nature. However, in the case of international marketing, it is quite difficult to deal with customers of different tastes, habits, preferences, segments, etc.
9. International marketing seeks deep research on the foreign market due to lack of familiarity, which is just opposite in the case of domestic marketing, where a small survey will prove helpful to know the market conditions.

After digging the differences in the two subjects, we came to the conclusion that the world itself is a market, and that is why the guiding principles are versatile. It does not make any change that where the principles are applied i.e. in a local or a global market. The basic cause of the difference between domestic and international marketing is the area of its implication and the market conditions.

The attainment of business exercises monitoring, directing and controlling the channel of a company’s products and services to its customers at the global level to earn profit and satisfy the demands internationally is the motto of international marketing.

The advantages of international marketing

1. Provides higher standard of living

International marketing ensures high standard life style & wealth to citizens of nations participating in international marketing. Goods that cannot be produced in home country due to certain geographical restrictions prevailing in the country are produced by countries which have abundance of raw material required for the production and also have no restrictions imposed towards production.

2. Ensures rational & optimum utilization of resources

Logical allocation of resource & ensuring their best use at the international level is one of the major advantages of international marketing. It invites all the nations to export whatever is available as surplus. For example, raw material, crude oil, consumer goods & even machinery & services.

3. Rapid industrial growth

Demand for new goods is created through international market. This leads to growth in industrial economy. Industrial development of a nation is guided by international marketing. For example, new job opportunities, complete utilization of natural resources, etc.

4. Benefits of comparative cost

International marketing ensures comparative cost benefits to all the participating countries. These countries avail the benefits of division of labor & specialization at the international level through international marketing.

5. International cooperation and world peace

Trade relations established through international marketing brings all the nations closer to one another and gives them the chance to sort out their differences through mutual understanding. This also encourages countries to work collaboratively with one another. This thereby designs a cycle wherein developed countries help developing countries in their developmental activities and this removes economic disparities and technological gap between the countries.

6. Facilitates cultural exchange

International marketing makes social & cultural exchange possible between different countries of the world. Along with the goods, the current trends and fashion followed in one nation pass to another, thereby developing cultural relation among nations. Thus, cultural integration is achieved at global level.

7. Better utilization of surplus production

Goods produced in surplus in one country are shipped to other countries that have the need for the goods in international marketing. Thus, foreign exchange of products between exporting country & importing countries meets the needs of each other. This is only possible if all the participating countries effectively use surplus goods, service, raw material, etc. In short, the major advantages of international marketing include effective utilization of surplus domestic production, introduction of new varieties of goods, improvement in the quality of production & promotion of mutual co-operation among countries.

8. Availability of foreign exchange

International marketing eases the availability of foreign exchange required for importing capital goods, modern technology & many more. Essential imports of items can be sponsored by the foreign exchange earned due to exports.

9. Expansion of tertiary sector

International marketing promotes exports of goods from one country to another encouraging industrial development. Infrastructure facilities are expanded through international marketing. It indirectly facilitates the use of transport, banking, and insurance in a country ensuring additional benefits to the national economy.

10. Special benefits at times of emergency

Whenever a country faces natural calamities like floods & famines, it is supported by other countries in the international market. The international market provides emergency supply of goods and services to meet urgent requirements of the country facing the calamity. This distribution can only be facilitated by a country which has surplus imports.

A company exporting goods to other foreign countries earns substantial profit through export operation as domestic marketing is less profitable than international marketing. The loss a company suffers in domestic marketing can be compensated from the profit earned through exports in international marketing. Foreign exchange can be earned by exporting goods to foreign countries. Thus, the profit earned can be used for the import of essential goods, new machinery, technology, etc. This would further facilitate large-scale export in future.

Unless customers are buying a product directly from the company that makes it, sales are always facilitated by one or more marketing intermediaries, also known as middlemen. Marketing intermediaries do much more than simply take a slice of the pie with each transaction. Not only do they give customers easier access to products, they can also streamline a manufacturer’s processes. Four types of traditional intermediaries include agents and brokers, wholesalers, distributors and retailers.

In an age where it is easy for any company to set up shop with an e-commerce website, it may be tempting for a small business to eliminate intermediaries to maximize profit. For a scaling business, however, this can create a lot of work in logistics and customer support.

For example, if 1,000 customers were to buy a product directly from the producer in a single month, this would entail 1,000 separate shipments to 1,000 locations, and with a minimum of 1,000 customer interactions. If you added customer inquiries about the product, returns and after-sale support – and all the customers who initiate a purchase without following through – you would have several thousand interactions with customers for every 1,000 sales. Selling through three or four intermediaries with a weekly shipping schedule, the manufacturer would have only a dozen shipments to schedule each month with a fraction of the interactions.

1. Agents and Brokers

Agents and brokers are nearly synonymous in their roles as intermediaries. In fact, when it comes to real estate transactions, they are synonymous to any client, despite the differences in their roles in the industry. In most cases, however, agents serve as an intermediary on a permanent basis between buyers and sellers, while brokers do this on a temporary basis only. Both are paid in commission for each sale and do not take ownership of the goods being sold.

In addition to real estate, agents and brokers are also common in the travel agency. Companies routinely use agents and brokers when importing or exporting products across the border.

2. Merchant Wholesalers and Resellers

Merchant wholesalers, which are also simply called wholesalers, buy products from manufacturers in bulk and then resell them, usually to retailers or other businesses. Some carry an extensive range of different products, while others specialize in a few products but carry a large assortment. They may operate cash-and-carry outlets, warehouses, mail order businesses or online sales, or they may simply keep their inventories in trucks, and travel to their customers.

3. Distributors and Functional Wholesalers

Also called functional wholesalers, distributors do not buy products from the producers. Instead, they expedite sales between the manufacturer and retailers or other businesses. Like agents and brokers, they can be paid by commission, or they can be paid in fees from the manufacturer.

4. Traditional and Online Retailers

Whenever a consumer buys a product from anyone other than the company that makes it, the consumer is dealing with a retailer. This includes corner stores, shopping malls and e-commerce website. Retailers may buy directly from the producers or from another intermediary. In some markets, they may stock items and pay for them only after they make a sale, which is common for most bookstores today.

Any e-commerce website that’s not owned by the company that makes a product, which it then sells to a consumer, can also be called a retailer. However with companies such as Amazon, which make their own products and sell them directly to customers in addition to products made by other companies the line between producers and retailers is becoming increasingly blurry.

It emerges that international HRM practices have to be different from those of domestic HRM. It is characterized by more and varied HR activities, need for broader perspective, more involvement in employees’ personal lives, high emphasis on change in employee mix, high risk exposure, and more external influences. Let us go through the discussion of these characteristics and identify how international HRM differs from domestic HRM.

1. More and Varied HR Activities

As compared to domestic HRM, in international HRM, there are more and varied HR activities. In international HRM, the volume of the same HR activities which are relevant for domestic HRM too increases because these activities have to be performed in a different context.

For example, when employee is chosen for an international assignment, he needs additional training which would enable him to adjust in the new environment. This training will be in addition to training meant for skill development for performing the job effectively. There are many HR activities in which this type of situation emerges.

This will be taken up while going through the discussion of international HR activities. Variety in HR activities exists in international HRM because many activities are undertaken which are performed in international HRM only, for example, managing visa and completing various formalities which are necessary for an employee to perform job in an overseas location. There are several such activities.

2. Need for Broader Perspective

As compared to domestic HRM, international HRM requires much wider perspective in respect of almost all HR activities. It implies that HR managers have to consider a variety of factors in making decisions on any issue of international HRM. Many of these factors are not relevant in the case of domestic HRM.

For example, while fixing international compensation packages, HR managers have to take into account the cost of living of different international locations to bring some kind of parity among employees working at different locations. Similarly, fringe benefits have to be provided to suit conditions of different locations. There are many such activities which require much broader perspective.

3. More Involvement in Employees’ Personal Lives

As compared to domestic HRM, HR managers are required to have more involvement in employees’ personal lives in the case international HRM. This higher level of involvement is required to ensure that the employees are suitably placed in an international location with which they are not well familiar. This lack of familiarity may be on a number of factors like housing, health care practices, meeting of legal requirements of host country, etc.

In many cases, the number of such factors may be quite large. In order to take care of such factors, many organizations prefer to have a special unit in their HR department, known as ‘International Human Resource Service’. The basic logic behind creation of such a unit is to provide specialized service which is relevant only in the case of international HRM.

4. High Emphasis on Change in Employee Mix

In international HRM, high emphasis is placed on change in employee mix particularly in terms of nationality of employees. Very often, it happens that when an organization establishes a business in a foreign country, it recruits more number of employees from the country of its origin.

However, in order to have a favourable image in the country of its operations, it recruits and develops local (host country) personnel. As a result, over the period of time, the proportion of local employees becomes sizeable. This strategy is adopted by most of the multinationals. This process is taken on gradual basis.

5. High Risk Exposure

There is high risk exposure in international HRM as compared to domestic HRM. The risk involved may be of different types (political, regulatory, etc.) in an international business. However, HR-related risk may be in the form of lack of suitable HR practices meeting local requirements, social-cultural risk in the form of non-acceptance of parent country nationals as employees, etc.

Such risk may have serious consequences in many cases like social boycott of parent country nationals, kidnapping of employees or harassing them in other forms, and in extreme case, takeover of the business by the local government on the plea of not meeting local HR-related conditions. Therefore, HR managers have to be careful in making decisions on issues of international HRM.

6. More External Influences

A maxim of managing a business is- farther away a business goes, more influences it has to face. This is true for international HRM too. As compared to domestic HRM, international HRM activities are influenced by a variety of external factors. HR managers are required to deal with a new set of socio-cultural milieu, political and legal system, etc.

Not only they have to change their mind set to work in this new set but they have to train the employees to adjust with the new set. In fact, effectiveness of HR depends to a very great extent on the degree of such an adjustment.

Similarities between Domestic and International HRM

HRM plays a key role in virtually any organization. It is the core of commercial strategy as HRM may help company improve their performance, form ecological competitive advantages, and have a guiding role in the organization management.

‘General HRM refers to those activities undertaken by a business to effectively utilize its human resources’.

This concludes the first similarities between your two. As basic functions such as procurement, allocation, usage and motivation will be the same whether they are specific in one country or several countries. Both domestic and international HRM have same major functions and activities in HR planning, recruitment, performance management, training and development, compensation, and industrial relationships.

Another similarity relates to the environmental pushes that influence the function of HRM. These exterior constraints include political, economical, legal, and ethnic have significant impact how the HR functions are taken both in local as well as global environment.

Finally, both of them have similar basic individuals resource management objectives. Firstly of all, is to ensure corporation having maximum satisfaction in the real human resource requirements. Another objective is to ensure performance in the organization through interventions. And then is to market sustainable development of organizations by maximizing the introduction of internal and external human source of information management. The ultimate similar target is to keep up and encourage recruiting within the company to upgrade the actual individual capital.

Culture is the “acquired knowledge that people use to anticipate events and interpret experiences for generating acceptable social & professional behaviors. This knowledge forms values, creates attitudes and influences behaviors”. Culture is learned through experiences and shared by a large number of people in the society. Further, culture is transferred from one generation to another.

Core Components of “Culture”

• Power distribution: Whether the members of the society follow the hierarchical approach or the egalitarian ideology?
• Social relationships: Are people more individualistic or they believe in collectivism?
• Environmental relationships: Do people exploit the environment for their socioeconomic purposes or do they strive to live in harmony with the surroundings?
• Work patterns: Do people perform one task at a time or they take up multiple tasks at a time?
• Uncertainty & social control: Whether the members of the society like to avoid uncertainty and be rule-bound or whether the members of the society are more relationship-based and like to deal with the uncertainties as & when they arise?

Critical issues that generally surface in cross-cultural teams

• Inadequate trust: For example, on one hand a Chinese manager wonders why his Indian teammates speak in Hindi in the office and on the other hand, his teammates argue that when the manager is not around, why they can’t speak in English?
• Perception: For instance, people from advanced countries consider people from less-developed countries inferior or vice-versa.
• Inaccurate biases: For example, “Japanese people make decisions in the group” or “Indians do not deliver on time”, are too generalized versions of cultural prejudices.
• False communication: For example, during discussions, Japanese people nod their heads more as a sign of politeness and not necessarily as an agreement to what is being talked about.

Communication styles that are influenced by the culture of the nation

• ‘Direct’ or ‘Indirect’: The messages are explicit and straight in the ‘Direct’ style. However, in the ‘Indirect’ style, the messages are more implicit & contextual.
• ‘Elaborate’ or ‘Exact’ or ‘Succinct’: In the ‘Elaborate’ style, the speaker talks a lot & repeats many times. In the ‘Exact’ style, the speaker is precise with minimum repetitions and in the ‘Succinct’ style; the speaker uses fewer words with moderate repetitions & uses nonverbal cues.
• ‘Contextual’ or ‘Personal’: In the ‘Contextual’ style, the focus is on the speaker’s title or designation & hierarchical relationships. However, in the ‘Personal’ style, the focus is on the speaker’s individual achievements & there is minimum reference to the hierarchical relationships
• ‘Affective’ or ‘Instrumental’: In the ‘Affective’ style, the communication is more relationship-oriented and listeners need to understand meanings based on nonverbal clues. Whereas in the ‘Instrumental’ style, the speaker is more goal-oriented and uses direct language with minimum nonverbal cues.

Important nonverbal cues related to the communication among cross-cultural teams

• Body contact – This refers to the hand gestures (intended / unintended), embracing, hugging, kissing, thumping on the shoulder, firmness of handshakes, etc.
• Interpersonal distance – This is about the physical distance between two or more individuals. 18″ is considered an intimate distance, 18″ to 4′ is treated as personal distance, 4′ to 8′ is the acceptable social distance, and 8′ is considered as the public distance.
• Artifacts – This refers to the use of tie pins, jewelry, and so on.
• Para-language – This is about the speech rate, pitch, and loudness.
• Cosmetics – This is about the use powder, fragrance, deodorants, etc.
• Time symbolism – This is about the appropriateness of time. For example, when is the proper time to call, when to start, when to finish, etc. because different countries are in different time zones.

Epilogue

“Cross-cultural challenges in international business management”, has become a keenly followed topic in last two decades. There are enough examples of business failures or stagnation or failure of joint ventures, on account of the management’s inability to recognize cross-cultural challenges and tackle them appropriately. There are also examples of companies having compulsory training on culture management or acculturation programs for employees being sent abroad as or hired from other countries, to ensure that cross-challenges are tackled effectively.

The world is becoming smaller day-by-day and therefore, managers involved in the international businesses will have to become more sensitive to the challenges emanating from the cultural and ethnic landscape of the countries they work in.

Ignoring cultural challenges while managing internal businesses is a risky proposition because the stakes are high. It is cognate to the “Hygiene” factor of the “Dual-factor Motivation” theory developed by psychologist Frederick Herzberg in the mid 1960s. In management of the international business, embracing the cultural diversity of the country may or may not bring success, but not doing so will surely increase the chances of stagnation or failure.

Multinational Companies

The multinational or multi-domestic organization offers a very high degree of local responsiveness. It is a decentralized federation of local businesses, linked together through personal control by expatriates who occupy key positions abroad

Global Companies

Global organizations offer scale efficiencies and cost advantages. With global scale facilities, the global organization seeks to produce standardized products. It is often centralized in its home country, with overseas operations considered as delivery pipelines to tap into global market opportunities. There is tight control of strategic decisions, resources, and information by the global hub.

International Companies

International companies have the ability to transfer knowledge and expertise to overseas environments that are less advanced. They are coordinated federations of local businesses, controlled by sophisticated management systems and corporate employees. The attitude of the parent company seems to be parochial, fostered by the superior know-how at the center of the organization.

Transnational Companies

Global competition is forcing many businesses to shift to a transnational model. This organization combines local responsiveness with global efficiency and the ability to tranfer know-how better, cheaper, and faster. The transnational company is made up of a network of specialized or differentiated units, which focus on managing intgrative linkages between local businesses as well as with the center. The subsidiary becomes a distinctive asset, rather than simply an arm of the parent company. Manufacturing and technology development are located wherever it makes sense, an there is an explicit focus on leveraging local know-how in order to exploit worldwide operations.                                                  

The General Agreement on Tariffs and Trade (GATT) was created after World War II to aid global economic recovery through reconstructing and liberalizing global trade. GATT’s main objective was to reduce barriers to international trade through the reduction of tariffs, quotas and subsidies. It has since been superseded by the creation of the World Trade Organization (WTO).

The General Agreement on Tariffs and Trade (GATT) was formed in 1947 with a treaty signed by 23 countries, and signed into international law on January 1, 1948. GATT remained one of the focal features of international trade agreements until it was replaced by the creation of the World Trade Organization on January 1, 1995. By this time, 125 nations were signatories to its agreements, which covered about 90% of global trade.

The aim behind GATT was to form rules to end or restrict the most costly and undesirable features of the pre-war protectionist period, namely quantitative trade barriers such as trade controls and quotas. The agreement also provided a system to arbitrate commercial disputes between nations, and the framework enabled a number of multilateral negotiations for the reduction of tariff barriers. GATT was regarded as a significant success in the post-war years.

Key Achievement of GATT

One of the key achievements of GATT was that of trade without discrimination. Every signatory member of GATT was to be treated as equal to any other. This is known as the most-favored nation principle (and it has been carried through into the WTO). A practical outcome of this was that once a country had negotiated a tariff cut with some other countries (usually its most important trading partners), this same cut would automatically apply to all GATT signatories. Escape clauses did exist, whereby countries could negotiate exceptions if their domestic producers would be particularly harmed by tariff cuts.

Most nations adopted the most-favored nation principle in setting tariffs, which largely replaced quotas. Tariffs (preferable to quotas but still a trade barrier) were in turn cut steadily in rounds of successive negotiations. The average tariff rate fell from around 22% when GATT was first signed in Geneva in 1947, to around 5% by the end of the Uruguay Round (concluded 1993). The Uruguay Round also negotiated the creation of the WTO, a formal organization that has absorbed and extended GATT.

Structure and Basic Information

After World War II, the United Kingdom (UK) and the United States (US) submitted proposals to the Economic and Social Council (ECOSOC) of the United Nations regarding the establishment of an international trade body that was to be named the International Trade Organization (ITO). That is, perhaps, why the GATT is often referred to as a UN related body and its documents are sometimes mistakenly referred to as UN documents.

ECOSOC convened a conference, the United Nations Conference on Trade and Employment in 1946, to consider the UK and US proposals. A Preparatory Committee drafted the ITO Charter and it was approved in 1948 at the conference in Havana, Cuba. The Charter is often referred to as the Havana Charter or the ITO Charter.

The first round of trade negotiations took place while the Preparatory Committee was still working on drafting the Charter because the participants were anxious to begin the process of trade liberalization as soon as possible. Their results were incorporated into the General Agreement, which was signed in 1947.

Since the original signatory nations expected the agreement to become part of the more permanent ITO Charter, the text of the GATT contains very little “institutional” structure. This lack of detail within the agreement has created increasing difficulties as the GATT membership and rules governing trade between so many of the world’s nations have grown. The GATT has function as an international organization for many years even though it has never been formalized as such.

ECOSOC established an Interim Commission for the ITO that is referred to as ICITO. Unfortunately, when time came for the members to ratify the ITO Charter, the Congress of the United States refused and the ITO never became a reality.

The GATT survived, but remained intact only due to the Protocol of Provisional Application of the General Agreement of Tariffs and Trade which was concluded in 1947 and which came into force in 1948.

The GATT completed 8 rounds of multilateral trade negotiations (MTNs). The Uruguay Round (the 8th round) concluded with the signing of the Final Action April 15, 1994, in Morocco and produced the World Trade Organization (WTO) and it annexes.

The contracting party’s means:

(i) When you see: CONTRACTING PARTIES in capital letters it is referring to the members acting jointly.

(ii) When you see: contracting parties in lower case letters, it is referring to individual member states.

(iii) When you see the words: Contacting Parties, they will be in press releases or in published works concerning the GATT.

The Basic Functions of the GATT

1. Most-Favored-Nation (MFN) Treatment

This is the fundamental principle of the GATT and it is not a coincidence that it appears in Article 1 of the GATT 1947. It states that each contracting party to the GATT is required to provide to all other contracting parties the same conditions of trade as the most favourable terms it extends to any one of them, i.e., each contracting party is required to treat all contracting parties in the same way that it treats its “most-favoured nation”.

2. Reciprocity

GATT advocates the principles of “rights” and “obligations”. Each contracting party has a right, e.g. access to markets of other trading partners on a MFN basis but also an obligation to reciprocate with trade concessions on a MFN basis. In a way, this is closely associated with the MFN principle.

3. Transparency

Fundamental to a transparent system of trade is the need to harmonize the system of import protection, so that barriers on trade can be reduced through the process of negotiations. The GATT therefore, limited the use of quotas, except in some specific sector such, as agriculture and advocated import regimes that are based on “tariff-only”.

In addition, the GATT and now the WTO, required many notifications from contracting parties on their agricultural and trade policies so that these can be examined by other parties to ensure that they are GATT/WTO compatible.

4. Tariff Binding and Reduction

When GATT was established, tariffs were the main form of trade protection and negotiations in the early years focused primarily upon tariff binding and reduction. The text of the 1947, GATT lays out the obligations on the contracting parties in this regard.