Key Reason for international trade
Access to factors of production
reduced economic risk
innovation
competitive advantage
Absolute advantage
country can maintain a monopoly or produce at a lower cost than any competitor.
EX: China and silk production
Rare. tied to climate
Comparative Advantage
country can supply a product more efficiently and at a lower cost than it can supply other goods, compared with other countries.
Ex. india's combination of highly educated workforce and low wage scale.
Global Trade
Goods and services
*importing and exporting
Measuring trade
*balancing of trade/payments
*trade deficit
*dumping
Balance of Trade
Difference between a nation's imports and exports
Balance of payments
Overall flow of money into or out of a country
Effects of trade
overseas loands and borrowing
international investments and profits from them
foreign aid payments
Balance of payments surplus
more money into a country than out
balance of payments deficit
more money out of country than in
Exchange rates
value of one nation's currency relative to the currencies of other nations
Exchange rates influenced by
domestic economic and political conditions
central bank intervention
balance-of-payments position
speculation over future currency values
Strategies for reaching global markets
Licensing, exporting, franchising, contract manufacturing, joint ventures, joint ventures and strategic alliances, foreign direct investment.
Pro's of Offshore Outsourcing
more focus on areas where they can excel and grow
outsourced work creates efficiencies, resulting in hiring more workers
fuels global market growth
Con's of Offshore Outsourcing
Jobs lost/wages fall
Reduces product quality
Communications becomes much more difficult.
Barriers to international trade
Social and Cultural barriers
Economic barriers
Legal and political barriers
Free Markets
Social and Cultural barriers
Languages- potential problems with mistranslation, inappropriate messaging, lack of understanding of local customs and differences in taste.
Values and Religious Attitudes- differing values about business efficiency, employment levels, importance of regio
Economic Barriers
Currency Shifts
Legal and Political Barriers
International regulations
Trade restrictions
Ethnocentricity
attitude that one's own culture is superior to all the others (the "ugly" american).
Infrastructure
basic systems of communication, transportation, energy facilities, and financial systems.
Currency conversion and shifts
Fluctuating values can make pricing in local currencies difficult and affect decisions about market desirability and investment opportunities.
Political Climate
Stability is a key consideration
legal environment
three dimensions: u.s law, international regulations, laws of countries where they plan to trade. Corruption can be an important issue.
International Regulations
Friendship, commerce, and navigation treaties between U.S. and other nations.
Types of trade restrictions
Tariffs, Nontariff barriers
Tariffs
Taxes, surcharges, or duties on foreign products.
Revenue tariffs generate income for the government
Protective tariffs raise prices of imported goods to level the playing field for domestic competitors.
Nontariff Barriers
Also called administrative trade barriers
Quotas, Embargo, Exchange Controls
Quotas
limit the amount of a product that can be imported over a specified time period
-prevent dumping: selling a product abroad at a very low price.
Embargo
imposes a total ban on importing a specified product or all trading with a particular country.
Exchange controls
through central banks or government agencies, regulate the buying and selling of currency to shape foreign exchange in accordance with national policy.
Reasons to create trade restrictions
-protect domestic industry
-protect domestic jobs in key industries
-retaliate against countries who have engaged in unfair trade practices
-pressure other countries
Reasons to eliminate trade restrictions
-Reduce prices and increase choices for consumers
- increase domestic jobs
-build exporting opportunities
-use world resources more efficiently.
Trade Agreements
-General Agreement on tariffs and trade (1948)
-Uruguay Round of GATT (1986)
-World Trade Organization (1995)
-Common Markets
--European Union (EU)
--Mercosur
-North American Free Trade Agreement (1994)
-Central American Free trade agreement (2005)
General Agreement on Tariffs and Trade (GATT)
Sponsored negotiations to reduce worldwide barriers to trade
-founded 1947
-Uruguary round of negotiations cut average tariffs by one-third, or $700 billion.
Led to the establishment of the World Trade Organization
World Trade Organization
Monitors GATT agreements
-149 members
-began monitoring GATT agreements in 1995
-has become controversial.
Criticisms of World Trade Organization
-Lead to increased pollution and human rights abuses
-Hurt small foreign businesses that serve cultural tastes and practices
-promote export of manufacturing jobs to low-wage countries
World Bank
-Lends money to less-developed and developing countries.
-Funds projects that build or expand infrastructure
-Provides assistance and advice
-Imposes lending requirements intended to build economies of borrower nations
International Monetary Fund
Promotes trade through financial cooperation
-makes short-term loands to member nations to meet expenses
-operates as lender of last resort for troubled nations
International Economic Communities
Reduce trade barriers and promote regional economic cooperation
Free-trade area
members trade freely among selves without tariffs or trade restrictions
Customs union
establishes a uniform tariff structure for members' trade with nonmembers
common market
members bring all trade rules into agreement
NAFTA (1994)
World's largest free-trade zone, US, Canada, Mexico
CAFTA (2005)
Free-trade zone among US, costa rica, the dominican republic, el salvador, guatemala, hondura, and nicaragua.
European Union
Best known example of common market.
Trading blocs/common markets
Groups of countries promoting the free flow of goods and services
-the north american free trade agreement (NAFTA)
Future Global Trade
People's republic of china, permanent normal trade regulations/rights
russia and others
internet
technology-obstacles/problems