Forces Affecting Trading in Global Markets Socio-cultural Socio-cultural Economic & Financial Economic & Financial Legal & Regulatory Legal & Regulatory Physical & Environmental Physical & Environmental Trade Protectionism Trade Protectionism

Socio-cultural forces If you hope to get involved in global trade, it's critical to be aware of the cultural differences among nations. Different nations have very different ways of conducting business Religion is an important part of any society’s culture and can have a significant impact on business operations. Socio-cultural differences can also affect important business decisions involving human resource management.

For example, in Latin American countries, workers believe that managers are placed in positions of authority in order to make decisions and be responsible for the well-being of the workers under their control. This manager was convinced he could motivate his workers to higher levels of productivity by instituting a more democratic decision-making style than the style already in place. Soon workers began quitting their jobs in droves. When asked why, the Peruvian workers said the new production manager and supervisors did not know their jobs and were asking the workers what to do.

Today, firms often provide classes and training for managers and their families on how to adapt to different cultures and avoid culture shock. Socio-cultural differences also affect global marketing strategies. Global marketing is the term used to describe selling the same product in essentially the same way everywhere in the world. Some companies have developed brand names-such as Intel, Nike, IBM, Ford, and Toyota-with widespread global appeal and recognition. Even these successful global marketers often face difficulties. For example, translating an advertising theme into a different language can be disastrous.

A sound philosophy to adopt in global markets is this: Never assume that what works in one country will work in another. Companies must adapt their products to global markets. The slogan is: Think global act local

Economic & Financial Forces  No Worldwide Currency  Currency Fluctuations  Floating Exchange Rates  Bartering/Countertrading

Purchasing power differs from country to country Global financial markets unfortunately do not have a universal currency. The exchange rate is the value of one nation's currency relative to the currencies of other countries. Global financial markets unfortunately do not have a universal currency.

Changes in a nation's exchange rates can have important implications in global markets. A high value of the dollar means that a dollar would be traded for more foreign currency than normal. The products of foreign producers would be cheaper because it takes fewer dollars to buy them, but the cost of U.S.-produced goods would become more expensive to foreign purchasers because of the dollar's high value. Global financial markets operate under a system called floating exchange rates. Currencies "float" according to the supply and demand in the market for the currency.

At certain times, a country itself will intervene and adjust the value of its currency, often to increase the export potential of its products. Devaluation is lowering the value of a nations currency relative to other currencies. Both Mexico and Japan devalued their currencies in the 1990s. Such changes in currency values cause many problems globally.

Currency valuation problems can be especially harsh on developing economies. The only possibility of trade in many developing nations is through one of the oldest forms of trade: bartering, Bartering is the exchange of merchandise for merchandise or service for service with no money involved.

Legal and Regulatory Forces In any economy, both the conduct and direction of business are firmly tied to the legal and regulatory environment. In the United States, for example, federal, state, and local laws and regulations heavily impact business practices. In global markets, no central system of law exists, so several groups of laws and regulations may apply.

Physical and Environmental Forces Physical and environmental forces can also have an important impact in our ability to conduct business in global markets. Technological constraints may make it difficult or perhaps impossible to build a large global market. Countries use different technological systems For example, some developing countries have such primitive transportation and storage systems that international distribution is ineffective

Trade and Nations There is a new paradigm in the business world as the borders between countries gradually vanish. There has always been trade among nations throught the ages. The differences between the amount, type and use of production in each nation have impact over their production, producitvity and efficiency. Each nation has different levels of capabilities in various goods and services. Some countries efficiently produce goods and services at lower costs than other countries. This is the first reason for trade among nations. What are the others?

The theories of comparative and absolute advantage International trade is the exchange of goods and services across national borders. Comparative exchange theory, suggested in the early 19th century by English economist David Ricardo, was the guiding principle that supported this idea of free economic exchange. This theory states that a country should sell to other countries those products that it produces most effectively and efficiently, and buy from other countries those products it cannot produce as effectively or efficiently.

The US has a comparative advantage in producing many goods and services, such as computer chips, software, and engineering service. In contrast, it does not have a comparative advantage in growing coffee or making shoes. So it should sell computer chips and buy coffee A country has an absolute advantage if it has a monopoly on the production of a specific product or is able to produce more effectively than all other nations. For example, South Africa once dominated diamond production. Today, there are only few instances of absolute advantage in the global economy

ABSOLUTE ADVANTAGES of a COUNTRY ULTIMATE EFFICIENCY IN PRODUCTION OF A SPECIFIC PRODUCT BEING SOLE PRODUCER OF A SPECIFIC PRODUCT COMPARATIVE ADVANTAGE of a COUNTRY HAVING LOWER COSTS IN THE PRODUCTION OF A SPECIFIC PRODUCT IN RELATION TO OTHER PRODUCER COUNTRIES

3- Theories of Advantage Output per Unit of Input Comparative U. S. China Software China Clothing

319 Theories of Advantage Absolute Output per Unit of Input Diamond Production South Africa The Rest of the World = Virtual Monopoly = Virtual Monopoly

CountryStrengths United States Technology, R & D Spending Finland Univ. Enrollment, Efficient Legal System, Business Ethics Taiwan Cell-phone Ownership, Tech. Innovation Singapore Savings Rate, Math/Science Education, Political Trust Sweden Press Freedom, Phone Access Global Competitiveness

An example ABSOLUTE ADVANTAGE Turkey produces (in 1 Hour) 40kg Cream or 80 kg Bread Afghanistan produces (in 1 Hour) 30 kg Cream or 15 kg Bread WHO HAS AN ABSOLUTE ADVANTAGE IN THE PRODUCTION OF BOTH GOODS ? ANSWER : TURKEY HAS (SINCE SHE PRODUCES MORE IN BOTH GOODS RELATIVE TO AFGHANISTAN

COMPARATIVE ADVANTAGE TURKEY PRODUCES (in 1 HOUR) 1 KG CREAM FOR 2 KG OF BREAD AFGHANISTAN PRODUCES (in 1 HOUR) 1 KG CREAM FOR ½ KG OF BREAD WHO HAS AN COMPARATIVE ADVANTAGE IN PRODUCING CREAM? ANSWER : AFGHANISTAN HAS (SINCE SHE PRODUCES CREAM FOR LESS BREAD) BUT… TURKEY PRODUCES (in 1 HOUR) 1 KG BREAD FOR ½ KG OF CREAM AFGHANISTAN PRODUCES (in 1 HOUR) 1 KG BREAD FOR 2 KG OF CREAM WHO HAS AN COMPARATIVE ADVANTAGE IN PRODUCING BREAD? ANSWER: TURKEY HAS (SINCE SHE PRODUCE BREAD FOR LESS CREAM

Why trade with other nations? Reasons for trading with other nations: 1. No nations, not even a technologically advanced one, can produce all of the products that its people want and need. 2. Even if a country did become self sufficient, other nations would seek trade with that country in order to meet the needs of their own people. 3. Some nations like China and Russia have an abundance of natural resources and a lack of technological know-how while other countries have sophisticated technology but few natural resources.

Trade relations enable each nation to produce what it is most capable of producing and to buy what it needs in a mutually beneficial exchange relationship. This happens through the process of free trade Free trade is the movement of goods and services among nations without economic, political or trade barriers.

BARRIERS IN GLOBAL BUSINESS NATURAL BARRIERS PHYSICAL BARRIERS SOCIAL AND CULTURAL BARRIERS MAN-MADE/ARTIFICIAL BARRIERS ECONOMICAL RESTRICTIONS TARIFFS ( REVENUE/ PROTECTIVE TARIFFS) TRADE RESTRICTIONS (QUOTAS, EMBARGO, CUSTOM ADMINISTRATIVE REG., EXCHANGE CONTROL) POLITICAL AND LEGAL RESTRICTIONS

REDUCING BARRIERS IN GLOBAL TRADING INTERNATIONAL ORGANIZATIONS TO DEVELOP FREE TRADE GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT) WORLD TRADE ORGANIZATION (WTO) WORLD BANK INT’L MONETARY FUND (IMF)

REDUCING BARRIERS IN GLOBAL TRADING-2 FREE TRADE AREAS AND ECONOMIC INTEGRATIONS FREE TRADE AREAS CUSTOM UNION COMMON MARKET EUROPEAN UNION

TRADE PROTECTIONISM Trade protectionism is the use of government regulations to limit the import of goods and services. Advocates of trade protectionism believe it allows domestic producers to survive and grow, producing more jobs. Back in the 16th, 17th, and 18th centuries, nationswere trading goods (mostly farm products) with one another. Business people at that time advocated an economic principle called mercantilism. Basically, the overriding idea of mercantilism was for a nation to sell more goods to other nations than it bought from them, that is, to have a favorable balance of trade.

Tariff: A tax imposed on imported products. Generally, there are two different kinds of tariffs: protective and revenue. Protective tariffs (import taxes) are designed to raise the retail price of imported products so that domestic goods will be more competitive. Revenue tariffs are designed to raise money for the government. Revenue tariffs are also commonly used by developing countries to help infant industries compete in global markets.

Import quota: A limit on the number of products in certain categories that can be imported. Embargo: A complete ban on the import or export of o certain product. Nontariff barriers are not as specific as tariffs and embargoes but can be as detrimental to free trade. It is common for countries to set restrictive standards that detail exactly how a product must be sold in a country.

Trade Agreements General agreement on tariffs and trade: international trade agreement to encourage multinational reduction or elimination of trade barriers. North American free trade agreements (NAFTA): agreement to gradually eliminate tariffs and other trade barriers between the United States, Canada, and Mexico. European Union (EU): agreement among European nations to eliminate most trade barriers affecting group members.