Exploring Global Business

Learning Objectives Explain the economic basis for international business. Discuss the restrictions nations place on international trade, the objectives of these restrictions, and their results. Outline the extent of international trade and the world economic outlook for trade. Discuss international trade agreements and international economic organizations working to foster trade. Define the methods by which a firm can organize for and enter into international markets. Describe the various sources of export assistance. Identify the institutions that help firms and nations finance international business.

Reasons for Trade Restrictions What are some reasons a country would want to restrict trade? © STUART MILES/SHUTTERSTOCK

Restrictions to International Business Nations are generally eager to export their products to provide markets for their industries and develop a favorable balance of trade. © ALBO003/SHUTTERSTOCK Most trade restrictions are applied to imports from other countries. © ALBO003/SHUTTERSTOCK

Reasons for Trade Restrictions To equalize a nation’s balance of payments To protect new or weak industries To protect national security To protect the health of citizens To retaliate for another nation’s trade restrictions To protect domestic jobs © FIKMIK/SHUTTERSTOCK

Reasons Against Trade Restrictions Higher prices for consumers Restriction of consumers’ choices Misallocation of international resources Loss of jobs © FIKMIK/SHUTTERSTOCK

Types of Trade Restrictions: Tariffs An Import duty (tariff) is a tax levied on a particular foreign product entering a country. Revenue tariffs are imposed to generate income for the government. Protective tariffs are imposed to protect a domestic industry from competition by keeping the prices of imports at or above the price of domestic products. Additional Resources Video Types of Trade Restrictions 9:44 https://www.youtube.com/watch?v=_e2gQxN1OBg&feature=plcp

Types of Trade Restrictions: Dumping Dumping is the exportation of large quantities of a product at a price lower than that of the same product in the home market. The U.S. Commerce Department has imposed anti-dumping tariffs and anti-subsidy tariffs on Chinese solar panels to combat dumping. Additional Resources WTO Anti-dumping, subsidies, safeguards: contingencies, etc http://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm8_e.htm Article Wall Street Journal China Broadens Solar Dumping Probe 11/1/12 http://online.wsj.com/article/SB10001424052970204712904578091934175679960.html NY Times Europe to Investigate Chinese Exports of Solar Panels 9/5/12 http://www.nytimes.com/2012/09/06/business/global/eu-prepares-to-investigate-chinese-dumping-of-solar-panels.html?pagewanted=all CNN U.S. slams Chinese solar panels with new tariffs 5/17/12 http://money.cnn.com/2012/05/17/markets/chinese-solar-tariffs/index.htm?iid=EL U.S. Imposes Punitive Tariffs on Steel U.S. Steel CEO Asks for Tariffs on Chinese Steel Some Chinese PV makers to be hit with tariffs as high as 70% © FILIP FUXA/SHUTTERSTOCK

Types of Trade Restrictions: Nontariff Barriers Nontariff barriers—nontax measures imposed by a government to favor domestic over foreign suppliers Import quota—a limit on the amount of a particular good that may be imported during a given time U.S. Import Quotas Embargo—a complete halt to trading with a particular nation or in a particular product. Embargoes may be imposed to accomplish foreign policy and national security goals. Iran Sanctions Cuba Trade Embargo Foreign exchange control—restriction on amount of foreign currency that can be purchased or sold Additional Resources WTO Non-tariff barriers: red tape, etc http://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm9_e.htm U.S. Treasury Sanctions Programs and Country Information http://www.treasury.gov/resource-center/sanctions/Programs/Pages/Programs.aspx U.S. Foreign Exchange Intervention (About the Fed  What We Do) http://www.newyorkfed.org/aboutthefed/fedpoint/fed44.html Exchange Rates http://research.stlouisfed.org/fred2/categories/32219 The Wall Street Journal Articles about Foreign Exchange http://online.wsj.com/public/search?article-doc-type=%7BForeign+Exchange%7D&HEADER_TEXT=foreign+exchange

Types of Trade Restrictions: Nontariff Barriers (cont’d) Currency devaluation is the reduction of the value of a nation’s currency relative to the currencies of other countries. Bureaucratic red tape subtly imposes unnecessarily burdensome and complex standards and requirements for imported goods. Cultural attitudes can impede acceptance of products in foreign countries. © MILAN LJUBISAVIJEVIC/SHUTTERSTOCK

Types of Trade Restrictions: Cultural Attitudes How important is it to you that your goods are made in the U.S.A? Additional Resources Article American Consumers Overvalue U.S. Produced Apparel, MU Study Finds 10/30/12 http://munews.missouri.edu/news-releases/2012/1030-american-consumers-overvalue-u-s-produced-apparel-mu-study-finds/ NY Times A Label The Has Regained Its Luster 9/14/12 http://www.nytimes.com/2012/09/16/fashion/made-in-the-usa-has-a-new-meaning.html?_r=0 © MYPIXXX/SHUTTERSTOCK

Barriers to International Trade

Social and Cultural Differences Language: Potential problems include 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.

Political and Legal Differences Political Climate Stability is a key consideration. Legal Environment U.S. law International regulations Country’s law Climate of corruption. Foreign Corrupt Practices Act forbids U.S. companies from bribing foreign officials, candidates, or government representatives. International Regulations Treaties between U.S. and other nations. Tariffs are taxes charged on imported goods. Enforcement problems, as with piracy

Government Corruption Transparency International produces an annual corruption index for businesspeople and the general public. Foreign Corruption Practices Act Violations

The Extent of International Business (cont’d) Trade barriers are decreasing, new competitors are entering the global marketplace, creating more choices for consumers and new job opportunities. International business will grow with the expansion of commercial use of the Internet.

The World Economic Outlook for Trade

The World Economic Outlook for Trade http://www.imf.org/external/datamapper/index.php

General Agreement on Tariffs and Trade (GATT) An international organization of 159 nations dedicated to reducing or eliminating tariffs and other barriers to world trade Founded in 1947 The goal was to create an agreement that would ensure postwar stability and avoid a repeat of the mistakes of the recent past Protectionism World Economic Devastation WWII Most-Favored-Nation Status

International Trade Agreements WTO World Trade Organization (WTO) 161 Members (as of April 2015) Established in 1995 https://www.wto.org/index.htm Oversees GATT provisions Has judicial powers to mediate trade disputes arising from GATT rules Exerts more binding authority than GATT

The World Bank Established in 1944 for post-war reconstruction. Present mandate: Worldwide Poverty Alleviation. Funds projects to build and expand infrastructure in developing countries.

The International Monetary Fund (IMF) Created in 1945 188 countries Its primary purpose is to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other. The Fund's mandate was updated in 2012 to include all macroeconomic and financial sector issues that bear on global stability.

WTO Members Share in World Merchandise Trade, 2011

International Economic Organizations: The Evolving European Union The European Union is now an economic force, with a collective economy larger than that of the United States or Japan. Source: http://europa.eu/abc/european_countries/index_en.htm (accessed March 14, 2012) 28 Countries European Union

International Economic Organizations: NAFTA North American Free Trade Agreement (NAFTA) The United States Canada Mexico FLAGS: © IINTS VIKMANIS/SHUTTERSTOCK MAPS: © ILDOGESTO/SHUTTERSTOCK

International Economic Organizations: NAFTA Support Contributes to significant increases in trade and investment Benefits companies in all three countries Results in increased sales, new partnerships, and new opportunities Creates high-paying export-related jobs Leads to better prices and selection in consumer goods Criticism Has not achieved its goals Resulted in job losses Erodes labor standards and lowers wages Undermines national sovereignty and independence Does nothing to help the environment Hurts the agricultural sector Additional Resources Article TIME A Brief History of NAFTA 12/30/08 http://www.time.com/time/nation/article/0,8599,1868997,00.html Radio NPR NAFTA at Ten 1/1/04 http://www.npr.org/templates/story/story.php?storyId=1579461 KJZZ Arizona Impact of NAFTA on Arizona 9/5/12 http://kjzz.org/content/1209/impact-nafta-arizona

International Economic Organizations: CAFTA-DR Central American Free Trade Agreement – Dominican Republic (CAFTA-DR) Est. 2003 El Salvador Guatemala Honduras Nicaragua Dominican Republic Costa Rica FLAGS: © IINTS VIKMANIS/SHUTTERSTOCK MAPS: © ILDOGESTO/SHUTTERSTOCK

International Economic Organizations: ASEAN Association of Southeast Asian Nations (ASEAN) Est. 1967 Brunei Myanmar Cambodia Indonesia Laos Malaysia Philippines Singapore Thailand Vietnam FLAGS: © IINTS VIKMANIS/SHUTTERSTOCK MAPS: © ILDOGESTO/SHUTTERSTOCK

International Economic Organizations: OPEC Organization of Petroleum Exporting Countries (OPEC), Est. 1960 Algeria Indonesia Iran Iraq Kuwait Libya Nigeria Qatar Saudi Arabia United Arab Emirates Venezuela FLAGS: © IINTS VIKMANIS/SHUTTERSTOCK MAPS: © ILDOGESTO/SHUTTERSTOCK

International Economic Organizations: Others The Commonwealth of Independent States, Est. 1991 Trans-Pacific Partnership (TPP), Est. 2011 Commonwealth of Independent States (CIS), Est. 1991 Caribbean Basin Initiative (CBI) Common Market of the Southern Cone (MERCOSUR), Est. 1991 Organization of Petroleum Exporting Countries (OPEC), Est. 1960

Trans Pacific Partnership A multinational trade agreement Ten years of negotiations among 12 nations completed October 2015 & signed Februar 2016 Eliminates trade restrictions among member nations Imposes labor and environmental standards Safeguards intellectual property Ensures fair competition with state-owned enterprises TPP Member Nations Australia Malaysia United States Brunei Canada Mexico Vietnam Singapore Japan Peru Chile New Zealand

TPP Benefits to U.S. Businesses The TPP is expected to: Boost U.S. exports to Asian markets Agriculture Small Business Services Technology/Intellectual Property Level the playing field for U.S. manufacturing Labor Environment Ownership

TPP Concerns May result in further export of manufacturing jobs to low-wage nations. May raise prices for pharmaceuticals and other high-value products by spreading American standards for patent protections to other countries. Allows multinational corporations to challenge domestic regulations and court rulings before special tribunals. Protects corporate interests in the name of free trade

Organizing for International Business Licensing Exporting Joint-Venture Totally Owned Facilities Strategic Alliances Trading Companies Countertrade Multinational Firm

Methods of Entering International Business: Licensing Licensing is a contractual agreement in which one firm permits another to produce and market its product and use its brand name in return for a royalty or other compensation. Advantage It allows expansion into foreign markets with little or no direct investment. Disadvantages The product image may be damaged if standards are not upheld. The original producer does not gain foreign marketing experience.

Methods of Entering International Business: Exporting May use an export/import merchant who assumes the risks of ownership, distribution, and sale Letter of credit - Issued by a bank on request of an importer stating that the bank will pay an amount of money to a stated beneficiary Bill of lading - Issued by a transport carrier to an exporter to prove merchandise has been shipped Draft - Issued by the exporter’s bank, ordering the importer’s bank to pay for the merchandise, thus guaranteeing payment once accepted by the importer’s bank

Methods of Entering International Business: Exporting (cont’d) May use an export/import agent who arranges sale for a commission or fee; the exporter retains title to products until they are sold May establish own sales offices or branches in foreign countries

Methods of Entering International Business: Steps in Entering International Markets Identify exportable products. Identify key foreign markets for the products. Analyze how to sell in each priority market. Set export prices and payment terms, methods, and techniques. Estimate resource requirements and returns. Establish overseas distribution network. Determine shipping, traffic, and documentation procedures and requirements. Promote, sell, and be paid. Continuously analyze current marketing, economic, and political situations.

Methods of Entering International Business: Joint Ventures A joint venture is a partnership formed to achieve a specific goal or to operate for a specific period of time. Advantages Immediate market knowledge and access Reduced risk Control over the product attributes Disadvantages Complexity of establishing agreements across national borders High level of commitment required of all parties involved

Methods of Entering International Business: Totally Owned Facilities Totally owned facilities refers to production and marketing facilities developed by a firm in one or more foreign nations. Advantage Direct investment provides complete control over operations. Disadvantage Risk is greater than that of a joint venture. Two forms Building new facilities in the foreign country Purchasing an existing firm in the foreign country

Methods of Entering International Business: Strategic Alliances Strategic alliances are partnerships formed to create competitive advantage on a worldwide basis.

Methods of Entering International Business: Trading Companies Trading companies are firms that provide a link between buyers and sellers in different countries. Buys products in one country at the lowest price consistent with quality and sells to buyers in another country Takes title to products and perform all the activities necessary to move the products from one country to another © ROBOLAB/SHUTTERSTOCK

Methods of Entering International Business: Countertrade Countertrade is an international barter transaction. Early 1990s: Many developing nations had major restrictions on converting domestic currency into foreign currency. Countertrade avoids restrictions on converting domestic currency to foreign currency. © BOJANOVIC/SHUTTERSTOCK © DVARG/SHUTTERSTOCK Crude Oil Exchanged for Planes

Methods of Entering International Business: Multinational Enterprise Multinational enterprise refers to firms that operate on a worldwide scale without ties to any specific nation or region.

Financing International Business The Export-Import Bank of the United States (Ex-Im Bank) is an independent agency of the U.S. government whose function it is to assist in financing the exports of American firms. Multilateral Development Bank (MDB) is an internationally- supported bank that provides loans to developing countries to help them grow. World Bank, Inter-American Development Bank (IDB), Asian Development Bank (ADB), African Development Bank (AFDB), European Bank for Reconstruction and Development (EBRD) The International Monetary Fund (IMF) is an international bank with 186 member nations that makes short-term loans to developing countries experiencing balance-of-payment deficits.

Sources of Export Assistance: NEI National Export Initiative (NEI) Announced August 2010 by President Obama Goal: Revitalize U.S. exports Means: Federal Agencies assist U.S. firms in developing export-promotion programs to compete in foreign markets and create jobs in the U.S. (some examples below) Federal Agency Assistance International Trade Administration Domestic and overseas commercial officers provide assistance and information. Advocacy Center Facilitates advocacy to assist U.S. firms competing for major projects and procurements worldwide. National Trade Data Bank Provides international economic and export-promotion information from more than 20 U.S. agencies.

To Help U.S. Business Succeed, Globally.” Using the Internet “Our Mission: To Help U.S. Business Succeed, Globally.” The International Trade Administration of the U.S. Department of Commerce (ITA) website has links to statistics, industry analysis, trade laws, and answers to often-asked trade questions. www.ita.doc.gov

The Challenges Ahead Global economic recovery remains sluggish. Financial challenges in euro-area economies slow economic growth. WTO rules and principles have assisted governments in keeping markets open and provide a platform for which the trade can grow as the global economy improves. “We see the light at the end of the tunnel and trade promises to be an important part of the recovery. But we must avoid derailing any economic revival through protectionism.” --WTO Director-General Pascal Lamy