International Trade

Explain what is meant by international trade?

· The exchange of capital, goods and services across international borders – the buying and selling in a number of countries through imports and exports

· Imports- goods/ services bought from another country

· Exports- goods/services produced in one country and then sold in another country

Explain the reasons for international trade

· They are looking for : new markets for growth and profit, increased efficiency of production and reductions in costs and increases in quality = will allow them to have an advantage over their rivals in the supply of goods or services

· Can allow for business growth- allows economies of scale to occur= reduces costs

· New markets means expansion and potentially increased profits for a business

· Products that are mature or even in decline may be given an extension strategy simply by entering a previously untapped market

· Mergers/ takeovers and partnerships can mean a UK business can take advantage of new markets potential relatively quickly

· New production facilities may be in emerging economies where the workforce tends to have low expectations for pay and conditions which allows for a reduction in unit costs

· Developing countries - International trade can bring employment and higher real wages and encourage inward investment and the move to manufacturing employment from agriculture leading to up-skilling of the workforce and the growth of local supplier businesses

Explain what is meant by free trade and protectionism (including tariffs and quotas)

· Free trade- trading freely- no restrictions such has tariffs and quotas

· Protectionism- government restrictions that limit the amount of goods or services that can be imported- often to protect local businesses and jobs from foreign competition

· Tariffs- a tax or duty that raises the price of imported products

· Quotas- limits the amount of products that can commit into the country

· Subsidies- payments to encourage domestic production by lowering costs e,g cotton subsidies for US farmers

Explain what is meant by a trading bloc and a single market

· Trading BLOC- like the EU- group of countries trade with one another but either have very low trade barriers or zero barriers

· Single market- no tariff,quotas or taxes on trade but also where there is free movement of goods, services, capital and people

Free trade advantages

o Efficiency gains from innovation – trade enhances choice in the market and stimulates businesses to be more innovative in creating products for consumers however can disrupt local markets leading to local businesses being unable to compete

o Access to new technology and knowledge – trade stimulates the exchange of ideas and capital equipment at lower prices

o Rising living standards and a reduction in poverty for the local economy however, large businesses fail to increased workers pay and conditions and strip the local economy of raw materials at the lowest prices

Free trade disadvantages

o Destruction of fledgling or industries by fiercely competitive international businesses

o A lack of robust intellectual properly laws in developing countries which mean foreign businesses may find that their products are copied and then sold at much cheaper prices

o Poor working conditions and pay rates- multi national businesses known to treat local workers badly and local habitats and raw materials may be mined for little benefit to the local population

o Reduced tax revenues as there are no tariffs on goods that are imported

Evaluation of Tariffs

· Increasing government revenue to spend on public services through taxation of the product

· Discouraging the dumping of products

· Allowing infant industries to flourish

· Discouraging trade

· Reducing consumer choice

· Pushing prices up and restricting competition – may result in local producers become inefficient which will ultimately slow the growth of the economy

Evaluation of Quotas

· Outcome of the quota is certain and precise

· Local jobs may be created or protected leading to greater tax revenue

· Quotas can be more flexible than tariffs

· They tend to distort international trade as they restrict the amount of imports

· There is a risk of corruption in some countries from bribes by companies to gain access to the market

Evaluation of Subsidies

o Protect local jobs and industries and reduce costs to make businesses more competitive in the global market

o They can encourage inefficiency and may be seen as a protectionist policy- resulting in retaliation

Explain the challenges to UK businesses of developing new international markets for their products

· Identifying the international market needs of customers- may make presumptions about consumer spending habits and lifestyle choices that are incorrect

· Cultural nuances- may have to change the product and/ or the way it is marketed to the local customers

· Distance and time differences- significant travel and transportation costs

· Finding reliable partners- help with research, distribution and retail may be key to successful launch into an international market

· Communication – with local customers and staff-may mean extra barriers to success for the business

· Market research – see if their demand for that product/ service in that country -can be costly and time consuming to carry out

Evaluate the decision of a business to develop new international markets for its products - ADVANTAGES

o Product in decline stage- may be able to sell it in the international market- extension strategy- gain more profits with little/ no investment

o International market- provide a potential new customer base

o Emerging markets have lower wage costs both in the production of products and in the marketing and sales of them – cost saving opportunities

o First mover advantage – gain best locations for its factories, outlets or establish its brand with the local population before any competitiors- creating a barrier to entering the market for other businesses

o Significant grands and tax incentives available to the business for entering the market

Evaluate the decision of a business to develop new international markets for its products - DISADVANTAGES

o Products may not easily translate to meet local customers needs and may require significant investment to become saleable

o Communication with both customers and local staff may act as a barrier to successfully creating and marketing the product – market failure and losses

o Business takes a risk when dealing with fluctuating exchange rates

o Substantial tariffs and others barriers put in place by local government to reduce competitive advantage

o Governments may also try to enforce rules e.g businesses having to enter into partnerships with a local firm- risking the loss of intellectual property and having to share profits