International Trade

Chapter Details International Trade Interdependence of Nations Benefits of International Trade Government Involvement Balance of Trade Trade Barriers Trade Alliances International Business Political and Legal Technology

International Trade Exchange of goods & services between nations Imports – purchased from other countries Imports – purchased from other countries Exports – sold to other countries Exports – sold to other countries Occurs between businesses, regulated by governments

Ranks of countries Imports 1 World$12,080,000,000,000 World$12,080,000,000,000 World United States$1,869,000,000,000 United States$1,869,000,000,000 United States United States European Union$1,466,000,000,000 European Union$1,466,000,000,000 European Union European Union Germany$916,400,000,000 Germany$916,400,000,000 Germany China$777,900,000,000 China$777,900,000,000 China United Kingdom$603,000,000,000 United Kingdom$603,000,000,000 United Kingdom United Kingdom France$529,100,000,000 France$529,100,000,000 France Japan$524,100,000,000 Japan$524,100,000,000 Japan Italy$445,600,000,000 Italy$445,600,000,000 Italy Netherlands$373,800,000,000 Netherlands$373,800,000,000 Netherlands Information from the CIA website

Rank of countries Exports 1 1World$12,450,000,000,000 1World$12,450,000,000,000World 2European Union$1,330,000,000,000 2European Union$1,330,000,000,000European UnionEuropean Union 3Germany$1,133,000,000,000 3Germany$1,133,000,000,000Germany 4United States$1,024,000,000,000 4United States$1,024,000,000,000United StatesUnited States 5China$974,000,000,000 5China$974,000,000,000China 6Hong Kong$611,600,000,000 6Hong Kong$611,600,000,000Hong KongHong Kong 7Japan$590,300,000,000 7Japan$590,300,000,000Japan 8France$490,000,000,000 8France$490,000,000,000France 9United Kingdom$468,800,000,000 9United Kingdom$468,800,000,000United KingdomUnited Kingdom 10Italy$450,100,000,000 10Italy$450,100,000,000Italy Information from the CIA website

Interdependence of Nations Different countries have different needs and resources Resources rarely meet the needs of the citizens Resources rarely meet the needs of the citizens Trade is necessary Trade is necessary

Advantages Absolute Advantage When a country has a special natural resource or talent that allows it to produce an item at the lowest possible price When a country has a special natural resource or talent that allows it to produce an item at the lowest possible price Comparative Advantage When a nation gains value by producing items in the most efficient way When a nation gains value by producing items in the most efficient way U.S. well suited for high tech goods Developing nations have advantage in labor intensive goods

Benefits of International Trade Consumers benefit from increased competition Producers benefit by having a larger sales market Workers benefit from increased wages and employment Nations benefit from foreign investment and standard of living increase Economic alliances typically lead to political agreements Economic alliances typically lead to political agreements

Government Involvement Government regulates everything that enters the borders All people & goods that enter the United States are subject to search All people & goods that enter the United States are subject to search Same is true of most other nations Same is true of most other nations

Balance of Trade Positive balance Trade surplus – exports are greater than imports Trade surplus – exports are greater than imports Negative balance Trade deficit – imports out value exports Trade deficit – imports out value exports Unfavorable balance reduces a nation’s revenue as it becomes a debtor nation

Balance, cont. Negative value may lead to increased unemployment Deficit can actually help a country As currency value weakens overseas, prices of exported good become cheaper and increase sales As currency value weakens overseas, prices of exported good become cheaper and increase sales

Trade Barriers Three types of limits to trade Tariffs – duty – tax on imports Tariffs – duty – tax on imports Revenue producing – prime means of revenue prior to income tax in 1913 Revenue producing – prime means of revenue prior to income tax in 1913 Protective – usually very high, used to shield domestic trade from foreign competition Protective – usually very high, used to shield domestic trade from foreign competition Quotas Quotas Limit quantity or value of imported products Limit quantity or value of imported products Can be done voluntarily to improve relations Can be done voluntarily to improve relations

Trade barriers Embargoes Embargoes Total ban on a country Can be used for health reasons, i.e. Mad cow disease More often used as a political pressure tactic Cuba, North Korea, Iran Cuba, North Korea, Iran Does not permit for imports from country or exports to country

Trade Alliances World Trade Organization (WTO) Formed under the General Agreement on Tariffs & Trade (GATT) in 1995 Formed under the General Agreement on Tariffs & Trade (GATT) in 1995 Coalition of 151 governments to regulate trade – unanimous decisions only Coalition of 151 governments to regulate trade – unanimous decisions only Studies economies to resolve disputes and regulate service and intellectual property Studies economies to resolve disputes and regulate service and intellectual property Has both critics and supporters Has both critics and supporters

Trade Alliances North American Free Trade Agreement (NAFTA) Goal is to rid North America of trade restrictions Goal is to rid North America of trade restrictions U.S. hoped to increase trade with Mexico U.S. hoped to increase trade with Mexico All restrictions to be lifted by 2009 All restrictions to be lifted by 2009

Trade Alliances European Union (EU) Established economic integration over all of Europe Established economic integration over all of Europe Created single currency Created single currency European market rivals U.S. in terms of market size European market rivals U.S. in terms of market size

International Business Three ways Importing Imports must meet same standards as U.S. products Imports must meet same standards as U.S. products If met, most can enter with the exception of prescription drugs and alcohol Some products have reduced duties or fees Some products have reduced duties or fees Companies often employ customs brokers (licensed by CBP) because of the complex laws involved with importing

International Business Exporting Other nations have similar means, but different laws Other nations have similar means, but different laws Companies will hire freight forwarders (licensed by Int’l Air Transport Assoc.) to handle exports Or just Set up Shop

Setting up Shop Multinationals – corporations with operations in other countries Mini Nationals – midsize and small companies Investments in other countries referred to as foreign direct investment (FDI) Only possible through a joint venture Joint ventures is the involvement of a domestic partner in a foreign investment Joint ventures is the involvement of a domestic partner in a foreign investment Beneficial due to partners knowledge of domestic market Beneficial due to partners knowledge of domestic market

Special Considerations Cultural Differences in language is main challenge Differences in language is main challenge Chevy Nova had poor sales in Latin America Social & business etiquette changes across the globe Social & business etiquette changes across the globe Crossing your legs is seen as rude in Japan Gifts are a normal business practice in Far East, but seen as bribes in U.S.

Japan DO: Bow slightly when introduced or leaving a meeting. Bow slightly when introduced or leaving a meeting. Be introduced through a trusted customer, client, employer, etc. Be introduced through a trusted customer, client, employer, etc. Provide a dinner meeting at some point. Provide a dinner meeting at some point.DON’T: Toss business cards across a table or write on them. Toss business cards across a table or write on them. Press too hard for a commitment or be too aggressive when closing a deal. Press too hard for a commitment or be too aggressive when closing a deal.

Japan Decisions tend to take longer, along a prescribed step-by-step process. More consensus is typically sought in Japan because of the high number of people and business entities involved in transactions. Patience is very important. There is stronger loyalty, so companies do not change business partners or vendors/suppliers very often.

Japan Business in Japan is often organized in large conglomerates with many “family companies,” so it can be difficult to become a “qualified vendor.” The process can take one year or more. If you do not have an established presence in Japan it is easy to be passed over as a new business partner. Contracts can take up to a year to be negotiated. Payment terms tend to be longer.

Considerations, cont. Economic Cost Infrastructure, labor, taxes, and exchange rates Infrastructure, labor, taxes, and exchange rates If infrastructure is inadequate, it could prevent some companies from investing, while attracting others Quality, cost and educational levels of labor Taxes are often negotiable Currency exchange hurts countries with poor economies

Political and Legal Government Stability is crucial Unlikely to invest in tumultuous nation Unlikely to invest in tumultuous nation In reverse to privatization, a country could nationalize all business and take control In reverse to privatization, a country could nationalize all business and take control Actually happened in Bolivia in the 1950s Currently happening in Venezuela Not only bad for company but workers as well Not only bad for company but workers as well Executives become pawns in corrupt countries Payoffs become normal business practice

Political and Legal As countries wish to become more internationally involved, they become more stable Privatization occurs Privatization occurs Tariffs reduced Tariffs reduced New laws to protect property, physical and intellectual New laws to protect property, physical and intellectual

Technology Need to compare computer use, phone (wired and cell) and internet availability U.S. and Finland are well connected Technology is the basis for a strong economy More advanced, profitable businesses at home in more sophisticated nations