BUS 100 Chapter 3
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Key Reason for international trade
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Access to factors of production reduced economic risk innovation competitive advantage
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Absolute advantage
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country can maintain a monopoly or produce at a lower cost than any competitor. EX: China and silk production Rare. tied to climate
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Comparative Advantage
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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.
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Global Trade
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Goods and services *importing and exporting Measuring trade *balancing of trade/payments *trade deficit *dumping
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Balance of Trade
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Difference between a nation's imports and exports
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Balance of payments
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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
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Balance of payments surplus
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more money into a country than out
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balance of payments deficit
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more money out of country than in
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Exchange rates
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value of one nation's currency relative to the currencies of other nations
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Exchange rates influenced by
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domestic economic and political conditions central bank intervention balance-of-payments position speculation over future currency values
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Strategies for reaching global markets
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Licensing, exporting, franchising, contract manufacturing, joint ventures, joint ventures and strategic alliances, foreign direct investment.
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Pro's of Offshore Outsourcing
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more focus on areas where they can excel and grow outsourced work creates efficiencies, resulting in hiring more workers fuels global market growth
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Con's of Offshore Outsourcing
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Jobs lost/wages fall Reduces product quality Communications becomes much more difficult.
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Barriers to international trade
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Social and Cultural barriers Economic barriers Legal and political barriers Free Markets
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Social and Cultural barriers
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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 regional differences, and religious practices, holidays and values about issues such as interest-bearing loans.
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Economic Barriers
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Currency Shifts
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Legal and Political Barriers
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International regulations Trade restrictions
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Ethnocentricity
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attitude that one's own culture is superior to all the others (the \"ugly\" american).
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Infrastructure
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basic systems of communication, transportation, energy facilities, and financial systems.
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Currency conversion and shifts
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Fluctuating values can make pricing in local currencies difficult and affect decisions about market desirability and investment opportunities.
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Political Climate
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Stability is a key consideration
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legal environment
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three dimensions: u.s law, international regulations, laws of countries where they plan to trade. Corruption can be an important issue.
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International Regulations
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Friendship, commerce, and navigation treaties between U.S. and other nations.
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Types of trade restrictions
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Tariffs, Nontariff barriers
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Tariffs
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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.
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Nontariff Barriers
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Also called administrative trade barriers Quotas, Embargo, Exchange Controls
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Quotas
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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.
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Embargo
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imposes a total ban on importing a specified product or all trading with a particular country.
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Exchange controls
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through central banks or government agencies, regulate the buying and selling of currency to shape foreign exchange in accordance with national policy.
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Reasons to create trade restrictions
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-protect domestic industry -protect domestic jobs in key industries -retaliate against countries who have engaged in unfair trade practices -pressure other countries
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Reasons to eliminate trade restrictions
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-Reduce prices and increase choices for consumers - increase domestic jobs -build exporting opportunities -use world resources more efficiently.
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Trade Agreements
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-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)
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General Agreement on Tariffs and Trade (GATT)
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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
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World Trade Organization
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Monitors GATT agreements -149 members -began monitoring GATT agreements in 1995 -has become controversial.
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Criticisms of World Trade Organization
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-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
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World Bank
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-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
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International Monetary Fund
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Promotes trade through financial cooperation -makes short-term loands to member nations to meet expenses -operates as lender of last resort for troubled nations
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International Economic Communities
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Reduce trade barriers and promote regional economic cooperation
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Free-trade area
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members trade freely among selves without tariffs or trade restrictions
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Customs union
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establishes a uniform tariff structure for members' trade with nonmembers
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common market
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members bring all trade rules into agreement
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NAFTA (1994)
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World's largest free-trade zone, US, Canada, Mexico
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CAFTA (2005)
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Free-trade zone among US, costa rica, the dominican republic, el salvador, guatemala, hondura, and nicaragua.
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European Union
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Best known example of common market.
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Trading blocs/common markets
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Groups of countries promoting the free flow of goods and services -the north american free trade agreement (NAFTA)
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Future Global Trade
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People's republic of china, permanent normal trade regulations/rights russia and others internet technology-obstacles/problems
