When you have completed this chapter, you will be able to: Explain why countries trade. Explain why companies export and import. Explain how and why countries restrict international trade. Describe the strategies organizations use to compete in the global economy. 1 Business Essentials (Mr. Archambeau)

International Trade What is International Trade? International trade consists of the exchange of goods and services by different countries. Most of the world depends on international trade to maintain its standard of living. What are some American exports? Movies, automobiles, clothing, etc. What are some things Americans love to import? Cigars, chocolate, electronic goods, oil, etc. CHAPTER 7: INTERNATIONAL BUSINESS 2 Business Essentials (Mr. Archambeau)

International Trade Why Do Countries Trade? A country may not be able to produce a good it wants. A country may have an advantage over others in producing particular goods or services. Absolute Advantage: the ability to produce more of a good than another producer with the same quantity of inputs. Law of Comparative Advantage: producers should produce the goods they are most efficient at producing and purchase from others the goods they are less efficient at producing. CHAPTER 7: INTERNATIONAL BUSINESS Business Essentials (Mr. Archambeau) 3

CHAPTER 7: INTERNATIONAL BUSINESS International Trade Business Essentials (Mr. Archambeau) 4 1 People's Republic of China$1,581,000,000,000 2 Germany$1,303,000,000,000 3 United States$1,289,000,000,000 4 Japan$765,200,000,000 5 France$517,300,000,000 6 Netherlands$485,900,000,000 7 South Korea$464,300,000,000 8 Italy$448,400,000,000 9 United Kingdom$410,300,000, Russia$400,100,000,000 Top Ten World Exporters (CIA World Factbook, 2010):

CHAPTER 7: INTERNATIONAL BUSINESS International Trade Business Essentials (Mr. Archambeau) 5 U.S. Trade in Goods: 2011 Totals (U. S. Census Bureau) Canada186, , ,948.3 Canada CountryExportsImportsBalance China66, , ,323.0 Mexico128, , ,801.7 Russia5, , ,337.1 Poland2,034.32, United Kingdom36, ,524.43,241.3 United Arab Emirates9,756.91,608.48,148.5 NOTE: All figures are in millions of U.S. dollars

International Trade Top 10 U.S. Exports to the World Civilian aircraft Semiconductors Passenger cars Pharmaceutical preparations Automotive accessories Other industrial machines CHAPTER 7: INTERNATIONAL BUSINESS Business Essentials (Mr. Archambeau) 6 Fuel oil Organic chemicals Telecommunications Plastic materials

International Trade Top 10 U.S. Imports Crude oil (16.3% of total) Passenger cars Medicinal preparations Automotive accessories Other household goods Computer accessories CHAPTER 7: INTERNATIONAL BUSINESS Business Essentials (Mr. Archambeau) 7 Petroleum products Cotton apparel Telecommunications equipment Video equipment

International Trade Exporting Exports are goods and services that are sold abroad. Example: IBM earns about 40 percent of its revenues abroad. Why do companies export? Answer: About 95 percent of the world’s consumers live outside the United States; exporting increases sales. Companies identify export markets: analyze demographic figures, economic data, country reports, consumer tastes, and competition in the markets being considered. CHAPTER 7: INTERNATIONAL BUSINESS Business Essentials (Mr. Archambeau) 8

International Trade Importing American companies import billions of dollars worth of goods and services every year. They import consumer goods, industrial goods, raw materials, and food products. Why do many companies import materials? They import some or all of the materials they use to reduce production costs, because domestic inputs are not available, because their quality is not as good as imported goods, or because they plan to resell foreign goods in their own country. CHAPTER 7: INTERNATIONAL BUSINESS Business Essentials (Mr. Archambeau) 9

International Trade The Trade Balance The Balance of Trade is the difference between the value of the goods a country exports and the value of the goods it imports. A trade deficit exists if a country imports more than it exports. Why is a trade deficit undesirable? A trade deficit is undesirable because a country spends more than it takes in; money is flowing out of the country. CHAPTER 7: INTERNATIONAL BUSINESS Business Essentials (Mr. Archambeau) 10

International Trade Foreign Exchange Companies that purchase goods or services from foreign countries must pay for them with foreign currency. Companies purchase foreign currency from banks, which convert each currency into dollars. The value of one currency in terms of another is the foreign exchange rate. CHAPTER 7: INTERNATIONAL BUSINESS Business Essentials (Mr. Archambeau) 11

International Trade Foreign Exchange On 10/19/11, the foreign exchange rate for the Japanese Yen was Yen for each U.S. Dollar ( Most foreign exchange rates fluctuate daily. If the value of the Yen rises (if it drops to 100 Yen for each U.S. Dollar), how does this affect a company that has to purchase Japanese goods using Yen? CHAPTER 7: INTERNATIONAL BUSINESS Business Essentials (Mr. Archambeau) 12

International Trade Protection A tariff is a tax on imports. Quotas are restrictions on the quantity of a good that can enter a country. An embargo is a total ban on the import of a good from a particular country. Since 1961 The United States has imposed an embargo on Cuba. CHAPTER 7: INTERNATIONAL BUSINESS Business Essentials (Mr. Archambeau) 13

The Global Economy The Rise of the Global Economy The global economy is an economy in which companies compete actively with businesses from all over the world. Many factors have led to the rise of the global economy:  Improvements in telecommunications technology  Political changes  The establishment of free trade areas CHAPTER 7: INTERNATIONAL BUSINESS Business Essentials (Mr. Archambeau) 14

The Global Economy The Rise of the Global Economy Improvements in telecommunications technology:  Improvements have facilitated the exchange of information, from weeks to seconds (e.g., fax and ) development of the Internet has led to e- commerce (sales over the World Wide Web); small businesses can now reach customers worldwide. What’s the difference between the Internet and the World Wide Web? CHAPTER 7: INTERNATIONAL BUSINESS Business Essentials (Mr. Archambeau) 15

The Global Economy The Rise of the Global Economy Political Changes:  The rise in democracy in much of the world has been a driving force in dramatically increasing opportunities for businesses.  Other changes include the end of the cold war with Russia and increased relations with China. Holiday Inn runs a hotel in Warsaw, Poland and Colgate Palmolive has a facility in Huangpu, China. CHAPTER 7: INTERNATIONAL BUSINESS Business Essentials (Mr. Archambeau) 16

The Global Economy The Rise of the Global Economy The Establishment of Free Trade Areas:  A free trade area is a region within which trade restrictions are reduced or eliminated.  Countries create free trade areas to promote international trade and limit protectionism. The largest free trade area is in North America, and was created by the North American Free Trade Agreement (NAFTA). CHAPTER 7: INTERNATIONAL BUSINESS Business Essentials (Mr. Archambeau) 17

The Global Economy The Rise of the Global Economy North American Free Trade Agreement (NAFTA):  Established in 1994, NAFTA united the United States, Canada, and Mexico in a trade agreement.  Businesses in these countries can sell their products anywhere in North America without facing major trade restrictions. Pros: lower consumer prices, increased sales, and lower labor costs Cons: some American workers have lost their jobs (e.g., Sara Lee moved operations to Mexico and laid of more than 1,000 workers.) CHAPTER 7: INTERNATIONAL BUSINESS Business Essentials (Mr. Archambeau) 18

Doing Business Globally Forms of International Operations Some companies build factories in foreign countries or set up retail outlets overseas.  Selling can be done through local companies familiar with local markets  Selling can be done through establishment of sales, manufacturing, and distribution facilities in foreign countries. Other companies export their products throughout the world and import materials from other countries. CHAPTER 7: INTERNATIONAL BUSINESS Business Essentials (Mr. Archambeau) 19

Doing Business Globally Forms of International Operations Working Through a Foreign Intermediary  A foreign intermediary is a wholesaler or agent who markets products for companies that want to do business abroad..  Companies using a foreign intermediary cannot invest millions in operations abroad. CHAPTER 7: INTERNATIONAL BUSINESS Business Essentials (Mr. Archambeau) 20

Doing Business Globally Forms of International Operations Signing a Licensing Agreement with a Foreign Company  A licensing agreement is an agreement that permits one company to sell another company’s products abroad in return for a percentage of the company’s revenues.  Under such agreements, TGI Friday’s opened branches in Singapore, Indonesia, Malaysia, Thailand, Australia, and New Zealand. CHAPTER 7: INTERNATIONAL BUSINESS Business Essentials (Mr. Archambeau) 21

Doing Business Globally Forms of International Operations Forming a Strategic Alliance  Some companies can expand into foreign markets by forming strategic alliances with foreign companies.  A strategic alliance involves pooling resources and skills in order to achieve common goals.  This allows access to new markets, shared research, broadening of product lines, learning new skills, and expansion of cross-cultural knowledge of management groups.  An example is Daimler-Benz (Mercedes-Benz and Chrysler). CHAPTER 7: INTERNATIONAL BUSINESS Business Essentials (Mr. Archambeau) 22

Doing Business Globally Forms of International Operations Becoming a Multinational Corporation  A multinational corporation establishes manufacturing and distribution facilities in foreign countries.  One purpose is to sell products or services in other countries.  McDonald’s maintains restaurants in 119 countries; sales represent half of total revenues.  Another reason is to take advantage of inexpensive labor costs abroad.  Another example of a multinational corporation is Daimler-Benz (Mercedes-Benz and Chrysler). CHAPTER 7: INTERNATIONAL BUSINESS Business Essentials (Mr. Archambeau) 23

Doing Business Globally Forms of International Operations Challenges of Working in an International Environment  Managers must learn to deal with customers, producers, suppliers, and employees from different countries.  They must become familiar with local laws.  They must learn to respect local customs.. CHAPTER 7: INTERNATIONAL BUSINESS Business Essentials (Mr. Archambeau) 24

Doing Business Globally Forms of International Operations Understanding Foreign Cultures  Business managers from different countries see the world differently.  They must become familiar with local laws.  They must learn to respect local customs.. CHAPTER 7: INTERNATIONAL BUSINESS Business Essentials (Mr. Archambeau) 25

Doing Business Globally CHAPTER 7: INTERNATIONAL BUSINESS Business Essentials (Mr. Archambeau) 26 Why is it important for businesspeople to respect local customs? In Japan, the community elder must be consulted about business decisions.

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