International Business Unit 1, Chapter 4

What is International Business? Domestic transaction is the selling of items produced in the same country. International transaction is the selling of items produced in other countries. Foreign trade – transactions usually involved in exchanges of one type or another internationally. Global economy – participating in international transactions.

Benefits for Business Access to Markets Most countries rely on international trade for their economic survival. Trading abroad makes sense for Canadian businesses. A global product is a standardized item that is offered in the same form in all the countries in which it is sold. Cheaper labour Increased quality of goods Increased quantity Access to resources

The Five Ps of International Business International business not only offers advantages to business, it also benefits consumers. International business provides increased markets for businesses and a broader choice of products, services, and prices for consumers. There are 5 major reasons for doing business internationally: product, price, proximity, preference, and promotion. These reasons are sometimes called the 5 Ps of international business, and they represent the benefits of getting involved with businesses outside Canada.

Costs of International Trade Offshore outsourcing is the practice of hiring service providers from countries where labour costs are lower to complete some or all of the steps in the production process. Many companies will not outsource to a particular country at all. Instead, they will turn to large transnational corporations – companies that operate in several countries.

Costs of International Trade Human Rights Issues and Labour Abuses are two ethical problems that result from offshore outsourcing. Workers in many poor countries face a wide range of abuses in the workplace. These abuses could include labour exploitation, including physical and sexual abuse, forced confinement, non-payment of wages, denial of food and health care, and excessive working hours with no rest days. The International Labour Organization is the UN specialized agency that seeks the promotion of social justice and internationally recognized human and labour rights.

Cost of International Trade Environmental Degradation Sustainable development is a process of developing land, cities, businesses, and communities that meets the needs of the present without compromising the ability of future generations to meet their own needs. Environmental degradation occurs when nature’s resources such as trees, habitat, earth, water, and air are being consumed faster than nature can replenish them.

Barriers to International Business The Canadian government uses barriers, sometimes referred to as roadblocks, to help protect domestic businesses and consumers. These barriers can be used to help assist a new business in getting started as well as to protect an existing industry struggling in a competitive global environment.

Barriers to International Business Tariffs (customs duties) are forms of tax on certain types of imports. Tariffs are levied on a percentage-of-value basis (e.g. 6.1% of retail value) or on a specific basis (e.g. $6 per 100 Kg) Tariffs represent one of the most important tools for any government in managing trade with other nations. View table 4.1 on page 124 Each country sets its own rules for dealing with imports. They are there to protect domestic industries. Tariff barriers are often the subject of international negotiations, create trade barriers are gradually being reduced as countries create trade agreements. View movie, “Ben & Jerry’s , A Frozen Empire

Barriers to International Business Non-tariff barriers are standards for the quality of imported goods that are set so high that foreign competitors cannot enter the market. (e.g. if Canada set very high standards for safety and emission controls on imported vehicles, few existing imported vehicles would meet the standards) Costs of Importing and Exporting Price is based on the cost of manufacturing, plus the costs of storage, marketing, shipping, advertising, overhead, and the profit margins of each business involved. Shipping costs is one of the largest components of the landed cost. The landed cost is the actual cost for an imported purchased item, composed of the vendor cost, transportation charges, duties, taxes, broker fees, and any other charges.

Barriers to International Business Excise Taxes An excise tax is a tax on the manufacture, sale, or consumption of a particular product within a country. (e.g. the Canadian government charges an excise tax of 10 cents per litre on gasoline. Raising about $4 billion per year, while provincial governments charge an average 14.5 cents per litre). Excise taxes depend on the quantity or mass of an item.

Barriers to International Business Currency Fluctuations One of several factors that influence the shifting currency exchange rates between countries has to do with the strength of the economies of the two countries in relation to one another. Currency exchange rates have a very real impact on doing business internationally.

Flow of Goods and Services Goods and services flow into Canada as imports, and they flow out as exports. The imports coming into Canada include raw materials, processed materials, semi-finished goods, or manufactured products that are ready for sale. The less finished the imports are, the more jobs they create for Canadians.

Flow of Goods and Services Balance of Trade is the relationship between a country’s total imports and total exports. If the country pays more for imports than it earns from exports, there is a trade deficit. If the country earns more from exports than it pays for imports, there is a trade surplus.

Flow of Goods and Services Imports A business that wants to start importing goods for sale in Canada should consider the five main ways of offsetting the risks of importing in Figure 4.3, page 130. Exports The idea to export a good or service can come either from the company that produces it or from the buyers in a foreign market who wish to purchase it. Direct exporting means the exporter deals directly with the importer and does not use an intermediary. Indirect exporting means the goods move from the exporter to an intermediary and then on to the importer.

Flow of Goods and Services Offsetting Risks Exporters can offset risks through careful planning. If you plan to export a product to a foreign market, start by conducting market research to make sure there are consumers in the market who will buy your goods. Canada’s Major Trading Partners In some ways, international trade is like collecting trading cards. You can use whatever you have in abundance to trade for whatever you need. The only difference is that countries don’t usually trade goods directly. Instead, they buy and sell goods for money. See table 4.2 on page 133, for Canada’s major trading partners.

Canada and International Trade Agreements You’ve already learned that countries often set up trade barriers, such as customs duties, tariffs, and embargoes, to protect domestic businesses. There are two main advantages to reducing trade barriers. The first is that domestic businesses are able to sell their products and services abroad at lower prices since customs duties are not added to the cost of domestic businesses’ exports. The second advantage is that consumers have access to new products, and existing domestic products must improve their quality or reduce their prices in order to compete with imported products.

Canada and International Trade Agreements Trade agreements state which tariff each country will drop or reduce and may include a process for resolving disputes. Trade agreements need to include answers to questions such as when and why people will be permitted to work across international borders, what qualifications they will need, what standards will be applied to their work, and how businesses’ trade secrets (also known as intellectual property) will be protected. Can you name some of these agreements Canada has entered into?

Canada and International Trade Agreements The World Trade Organization developed out of a very important international trade agreement called the General Agreement on Tariffs and Trade (GATT), which was signed in 1947 and came into effect in 1948. Canada and 22 other countries signed this agreement. GATT endured for nearly 50 years and grew to include 115 member states. In 1995, the World Trade Organization (WTO) was established to replace the earlier GTT administration. With 139 member countries, the WTO is the principal international organization that deals with the rules of trade between nations. One important WTO agreement is the 1995 General Agreement on Trade in Services (GATS). It sets guidelines for the trade of World Trade Organization (WTO) services (such as banking) across international borders. Currently, the WTO governs about 97% of all world trade.

Canada and International Trade Agreements North American Free Trade Agreement (NAFTA) The United States wanted to clarify rules regarding services and intellectual property, reduce restrictions on American investment in Canadian industries, and increase their exports to Canada. The Canada-U.S. Free Trade Agreement (FTA) came into effect in January 1989. Soon after the FTA came into effect, the United States announced a similar agreement with Mexico, and Canada asked to be included in the negotiations. The North America Free Trade Agreement (NAFTA), which came into effect in 1994, joined all three countries in a continent-wide free-trade zone. See tables 4.3 and 4.4 on page 136

Canada and International Trade Agreements Other Free Trade Agreements Canada has other free trade agreements around the world. Some are regional (involving groups of countries), while others are bilateral (involving Canada and one other country or group). A trading block is a group of countries that share the same trade interests.

Canada and International Trade Agreements The Group of Eight The Group of Eight (G8), formerly known as the Group of Seven (G7), is an association of the world’s most powerful industrialized democracies. G8 countries are not located close together. They are from different parts of the world working together in the global economy. Read Table 4.5 on page 138

The Future of International Trade European Union (EU) is the union of many European countries into a single market, a process that began after WWII and culminated in a single-currency market in 2002. The euro is the official currency of EU. Denmark and the United Kingdom have not adopted the euro as their currency. Evolution of NAFTA – could see the direction from a trading bloc into a single market.

The Future of International Trade Impact of Cultural Differences The future of international trade depends, in part, on our ability to accept and respond to cultural differences. Culture is the sum of a country’s way of life, beliefs, and customs. It influences how things are bought and sold. Dealing with people – doing business around the world not only means learning other languages and understanding other cultures; it also means learning the nuances of dealing with people and finding out about what’s important to them. Punctuality – in North America people are expected to be on time for appointments. In other cultures, time is considered to be flowing, flexible, and beyond people’s control. What doesn’t get done today can be done tomorrow.

The Future of International Trade Greetings – In many countries, the way you greet someone is an important part of the impression you make. Handshakes are common in most countries, but not everyone shakes hands the same way. Non-verbal Communication Signals – In many cultures, nonverbal signals tell far more than words. Businesspeople may have to rely on the body language of the person they’re speaking with to tell them whether they have or have not made a sale. Good Manners – The three Fs of business – family, friends, and favours – have a very strong influence on the business decisions people make. Knowing the culture of those you are doing business with, is important for a successful outcome. Decision Making – Depending on the culture and how the decisions are made (top-down, down-up), will determine the time needed to make a decision which affects the deal.

Global Dependency Global dependency exists when customers in one country begin to demand items that are created in another country. These customers become aware of the products because of global communications. Over time, the products are incorporated into the culture of the people who buy them.