TEXTBOOK

Global Trade in the United States

• Importance of Global Vision: Global vision is essential for U.S. managers to recognize international business opportunities and remain competitive.

  • It involves recognizing and reacting to international business opportunities.

  • Being aware of threats from foreign competitors.

  • Effectively using international distribution networks.

• Growth of World Trade: World trade has increased significantly over the past three decades, climbing from 200 billion a year to over 1.4 trillion.

• U.S. Companies in Global Trade: Many U.S. companies generate a substantial portion of their profits outside the United States.

  • 113 of the Fortune 500 companies make over 50 percent of their profits outside the U.S.

  • Examples include Apple, Microsoft, Pfizer, Exxon Mobil, and General Electric.

• Global Business as a Two-Way Street: Global business involves both U.S. companies selling goods and services worldwide and foreign competition in the domestic market.

  • Foreign competition is common in various industries, including electronics, cameras, automobiles, and more.

  • Toyota, Honda and Nissan hold significant shares of the U.S. auto market.

• Importance of Global Business to the U.S.: Although some European nations depend more on international commerce than the U.S., the impact on the U.S. economy is still considerable.

  • Trade-dependent jobs have grown faster than U.S.-dependent jobs.

  • Every U.S. state has experienced job growth attributable to trade.

  • Trade affects both service and manufacturing jobs.

  • 85% of all U.S. exports of manufactured goods are shipped by 250 companies and 98% of all exporters are small and medium-size firms.

• Impact of Terrorism on Global Trade: Terrorist attacks have impacted global trade by causing short-term shrinkage and increasing costs due to heightened security measures.

  • Companies are paying more for insurance and security.

  • Border inspections slow cargo movements.

  • Tighter immigration policies affect the inflow of skilled workers.

Measuring Trade Between Nations

• Benefits of International Trade: International trade improves relationships, eases tensions, bolsters economies, raises living standards, provides jobs, and enhances quality of life.

  • The value of international trade exceeds 16 trillion a year but is growing.

• Exports and Imports

  • Developed nations account for about 70 percent of the world’s exports and imports.

  • Exports: Goods and services made in one country and sold to others.

    • The United States is the largest exporter of food, animal feed, beverages, engineering products, and high-tech goods.

  • Imports: Goods and services bought from other countries.

    • The United States imports raw materials, industrial supplies, production equipment, and consumer goods.

• Balance of Trade:

  • The difference between the value of a country’s exports and imports during a specific time.

    • A country that exports more than it imports has a favorable balance of trade (trade surplus).

    • A country that imports more than it exports has an unfavorable balance of trade (trade deficit).

  • In 2016, the United States had a trade deficit of 500 billion, with exports totaling 2.2 trillion and imports totaling 2.7 trillion.

  • Piracy leads companies to restrict the distribution of their services to certain regions.

  • The FBI estimates that the theft of intellectual property from products, books and movies, and pharmaceuticals totals in the billions every year.

• Balance of Payments:

  • A summary of a country’s international financial transactions, showing the difference between total payments and receipts.

  • Includes imports and exports (balance of trade), long-term investments, government loans, gifts, foreign aid, military expenditures, and money transfers.

  • The U.S. has generally had an unfavorable balance of payments since 1950.

    • In 2016, the U.S. balance of payments deficit was over 504 billion.

  • To reduce an unfavorable balance of payments:

    • Foster exports.

    • Reduce dependence on imports.

    • Decrease military presence abroad.

    • Reduce foreign investment.

• Exchange Rates:

  • The price of one country’s currency in terms of another country’s currency.

  • Currency appreciation: Less of that country’s currency is needed to buy another country’s currency.

  • Currency depreciation: More of that country’s currency is needed to buy another country’s currency.

  • Example:

    • If the dollar depreciates relative to the Japanese yen, U.S. residents pay more for Japanese goods.

    • If the dollar price of a yen is 0.012 and a Toyota costs 2 million yen, it costs 24,000 dollars. (0.012
      ewline
      times 2,000,000 = 24,000)

    • If the dollar depreciates to 0.018 to one yen, the Toyota costs 36,000 dollars. (0.018
      ewline
      times 2,000,000 = 36,000)

  • Currency markets operate under floating exchange rates.

    • Prices of currencies float based on supply and demand.

    • Governments may intervene and adjust currency value through devaluation.

    • Devaluation makes a country’s exports cheaper.

Why Nations Trade

• Nations Trade to Obtain Resources and Products: Nations trade because they may lack certain resources or the ability to produce certain products at competitive costs.

• Absolute Advantage:

  • A country has an absolute advantage when it can produce and sell a product at a lower cost than any other country or when it is the only country that can provide a product.

  • Example: The U.S. has an absolute advantage in reusable spacecraft and high-tech items; Brazil has an absolute advantage in coffee.

  • Even if the U.S. had an absolute advantage in both coffee and air traffic control systems, it should still specialize and engage in trade.

• Comparative Advantage:

  • Each country should specialize in the products that it can produce most readily and cheaply and trade those products for goods that foreign countries can produce most readily and cheaply.

  • This specialization ensures greater product availability and lower prices.

  • Examples:

    • India and Vietnam have a comparative advantage in producing clothing because of lower labor costs.

    • Japan has a comparative advantage in consumer electronics due to technological expertise.

    • The United States has an advantage in computer software, airplanes, some agricultural products, heavy machinery, and jet engines.

• Free Trade vs. Protectionism:

  • Free trade: The policy of permitting the people and businesses of a country to buy and sell where they please without restrictions.

  • Protectionism: A nation protects its home industries from outside competition by establishing artificial barriers such as tariffs and quotas.

The Fear of Trade and Globalization

• Concerns about Global Trade:

  • Job losses due to imports and production shifting abroad.

  • Fear of job loss, especially in companies under competitive pressure.

  • Employers threatening to export jobs if workers do not accept pay cuts.

  • Service and white-collar jobs increasingly vulnerable to operations moving offshore (outsourcing).

• Outsourcing:

  • Sending domestic jobs to another country.

  • Many U.S. companies have set up call service centers in countries like India and the Philippines.

  • Outsourcing can lead to cheaper goods and services for U.S. consumers but can also lead to job losses.

  • Almost 2.4 million U.S. jobs were outsourced in 2015.

• Benefits of Globalization:

  • Productivity grows more quickly when countries produce goods and services in which they have a comparative advantage.

  • Global competition and cheap imports keep prices down, reducing inflation.

  • Open economies spur innovation with fresh ideas from abroad.

  • Global trade provides poorer countries with the chance to develop economically by spreading prosperity.

  • More information is shared between trading partners, including insights into local cultures and customs.

Barriers to Trade

• Trade Barriers: Keep firms from selling to one another in foreign markets.

• Natural Barriers:

  • Physical: Distance (shipping costs).

  • Cultural: Language (communication difficulties).

• Tariff Barriers:

  • Tariff: A tax imposed by a nation on imported goods.

  • Can be a charge per unit or a percentage of the value of the goods.

  • Protective tariffs make imported products less attractive to buyers than domestic products.

  • Examples: Tariffs on imported poultry, textiles, sugar, steel, and aluminum in the U.S.; tariffs on U.S. cigarettes in Japan.

• Arguments for Tariffs:

  • Protect infant industries.

  • Protect U.S. jobs.

  • Aid in military preparedness.

• Arguments Against Tariffs:

  • Discourage free trade.

  • Raise prices, decreasing consumers’ purchasing power.

• Nontariff Barriers:

  • Import quota: Limits on the quantity of a certain good that can be imported.

  • Embargo: A complete ban against importing or exporting a product, often for defense purposes.

  • Buy-national regulations: Government rules that give special privileges to domestic manufacturers and retailers.

Fostering Global Trade

• Antidumping Laws:

  • Dumping: Charging a lower price for a product in foreign markets than in the firm’s home market.

  • Predatory dumping: Attempt to gain control of a foreign market by destroying competitors with impossibly low prices.

• Trade Negotiations and the World Trade Organization (WTO):

  • Uruguay Round: Agreement that dramatically lowers trade barriers worldwide; signed by 148 nations in 1994.

    • Reduced tariffs by one-third worldwide.

    • Included services, intellectual property rights, and trade-related investment measures.

  • Doha Round: Negotiating round that started in Qatar in 2001; little progress due to disagreements between developing and developed nations.

  • World Trade Organization (WTO):

    • Replaced the General Agreement on Tariffs and Trade (GATT).

    • Members must comply with all agreements under the Uruguay Round.

    • Has an effective dispute settlement procedure.

    • Reduces trade barriers and opens markets.

• The World Bank and International Monetary Fund (IMF):

  • World Bank:

    • Offers low-interest loans to developing nations to build infrastructure and relieve debt burdens.

    • Requires countries to lower trade barriers and aid private enterprise.

    • Provides advice and information to developing nations.

  • International Monetary Fund (IMF):

    • Founded in 1945 to promote trade through financial cooperation and eliminate trade barriers.

    • Makes short-term loans to member nations that are unable to meet their budgetary expenses.

International Economic Communities

• International Economic Communities: Nations that frequently trade with each other may formalize their relationship by creating common economic policies.

  • May involve a preferential tariff, giving advantages to one nation over others.

• Free-Trade Associations:

  • Few duties or rules restrict trade among the partners.

  • Nations outside the zone must pay the tariffs set by individual members.

• North American Free Trade Agreement (NAFTA):

  • Created the world’s largest free-trade zone (Canada, U.S., and Mexico).

  • Opened the Mexican market to U.S. companies.

  • Has increased U.S.-Mexican trade significantly.

  • The United States recently notified the Canadian and Mexican governments that it intends to renegotiate aspects of the NAFTA agreement.

• Mercosur:

  • Includes Peru, Brazil, Argentina, Uruguay, and Paraguay.

  • Elimination of most tariffs among trading partners.

• Central America Free Trade Agreement (CAFTA):

  • Includes the United States, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua.

  • Will reduce tariffs on exports to CAFTA countries.

• The European Union (EU):

  • Created a borderless economy for 28 European nations.

  • Promotes economic progress by eliminating trade barriers and establishing a common currency (euro).

  • Has stimulated economic progress and created new jobs.

  • The UK voted to leave the European Union, a plan known as Brexit, in 2016.

Participating in the Global Marketplace

• Reasons for Going Global:

  • Earn additional profits.

  • Take advantage of a unique product or technological advantage.

  • Access exclusive market information.

  • Address saturated domestic markets, excess capacity, and potential for cost savings.

• Methods of Entering Global Trade:

  • Exporting: Selling domestically produced products to buyers in another country; least complicated and risky.

  • Licensing: Selling a license to manufacture a product to a firm in a foreign country.

  • Franchising: A form of licensing that has grown rapidly in recent years.

  • Contract Manufacturing: A foreign firm manufactures private-label goods under a domestic firm’s brand.

  • Joint Ventures: A domestic firm buys part of a foreign company or joins with a foreign company to create a new entity.

  • Direct Foreign Investment: Active ownership of a foreign company or of overseas manufacturing or marketing facilities; greatest potential reward but also greatest potential risk.

Threats and Opportunities in the Global Marketplace

• Political Considerations:

  • Tariffs, exchange controls, and other governmental actions can threaten foreign producers.

  • Nationalism: Sense of national consciousness that boosts the culture and interests of one country over others; can lead to difficulties for foreign companies.

  • Expropriation: A government takes ownership of a foreign company’s assets, compensating the former owners.

  • Confiscation: A government takes ownership of a foreign company’s assets without compensation.

• Cultural Differences:

  • Societal values, language, customs, and traditions vary by country and affect business practices.

  • Marketers must take care in selecting product names and translating slogans to avoid conveying the wrong meaning.

• Economic Environment:

  • The level of economic development varies considerably among countries.

  • Complex, sophisticated industries are found in developed countries; basic industries are found in less-developed nations.

  • Economic infrastructure (money and banking systems, education, transportation, communications, energy) differs among countries.

The Impact of Multinational Corporations

• Multinational Corporations:

  • Corporations that move resources, goods, services, and skills across national boundaries without regard to the country in which their headquarters are located.

  • Engaged in international trade and take political and cultural differences into account.

• Advantages of Multinational Corporations:

  • Can overcome trade problems and restrictive trade restrictions by having headquarters in more than one country.

  • Can sidestep regulatory problems.

  • Can shift production from one plant to another as market conditions change.

  • Can tap new technology from around the world.

  • Can often save on labor costs.

Trends in Global Competition

• Market Expansion:

  • The need for businesses to expand their markets is a fundamental reason for growth in world trade.

  • Domestic markets may be too small to generate enough demand.

• Resource Acquisition:

  • Companies go to the global marketplace to acquire resources they need to operate efficiently.

  • These resources may include cheap or skilled labor, scarce raw materials, technology, or capital.

• The Emergence of China and India:

  • China and India are impacting businesses around the globe in very different ways.

  • China’s exports have boomed largely thanks to foreign investment.

  • Indians are playing invaluable roles in the global innovation chain.