The World Marketplace: Business Without Borders 3-1 Discuss business opportunities in the world economy Explain the key reasons for international trade Describe the tools for measuring international trade Analyze strategies for reaching global markets Discuss barriers to international trade and strategies to surmount them Describe the free-trade movement and discuss key benefits and criticisms 3-2 3-3 3-4 3-5 3-6

Global Trade: Key Reasons and Business Opportunities Access to technology and decrease in barriers to trade has increased global business opportunities Growing usage of cell phones is an important indicator of economic growth Leads to increase in GDP

Global Trade: Key Reasons and Business Opportunities Opportunity to penetrate huge and growing markets Access to factors of production Reduced risk Inflow of innovation

Competitive Advantage Opportunity cost: Opportunity of giving up the second-best choice when making a decision Absolute advantage: When a country can produce more of a product than other nations using the same amount of resources

Competitive Advantage Comparative advantage: Benefit a country has in a given industry if it can make products at a lower opportunity cost than other countries Seldom remains static due to upgrade of technology and workforce

Evaluating International Trade Balance of trade: Difference between a nation’s exports and imports Trade surplus: Total value of exports is higher than the total value of imports Trade deficit: Total value of imports is higher than the total value of exports Balance of payments: Total flow of money into or out of a country

Evaluating International Trade Balance of payments surplus: More money flows in than out Balance of payments deficit: More money flows out than in Exchange rates: Measure the value of one nation’s currency relative to the currency of other nations Countertrade: Barter of products for products rather than for currency

Web-link: WTO Seminar on Exchange Rates and Trade Director-General Pascal Lamy’s opinion on improving understanding of the economic interface between exchange rates and trade http://www.wto.org/english/news_e/sppl_e/sppl222_e.htm

Exhibit 3.2 - Market Development Options

Strategies for Reaching Global Markets Foreign outsourcing: Contracting with foreign suppliers to produce products at a fraction of the cost of domestic production Importing: Buying products domestically that have been produced or grown in foreign nations

Strategies for Reaching Global Markets Exporting: Selling products in foreign nations that have been produced or grown domestically Foreign licensing: Organization (licensor) granting a foreign firm (licensee) the rights to produce and market products or to use its trademark in a defined geographical area

Strategies for Reaching Global Markets Foreign franchising: Firms (franchisor) expand by offering businesses (franchisees) in other countries the right to produce and market their products according to specific operating requirements

Strategies for Reaching Global Markets Direct investment: Acquiring foreign firms or developing new facilities from the ground up in foreign countries Joint ventures: Two or more companies join force to pursue specific opportunities Partnership: Long-term agreement Strategic alliance: Less encompassing and informal agreement

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Why does Earth Class Mail have an unprecedented opportunity for impact on conventional postal mail delivery? Which reasons for engaging in international trade seem to be relevant to Earth Class Mail’s demonstration at the International Trade Show for Postal Executives? Explain your answer. Which strategy for reaching global markets does Earth Class Mail seem to be employing?

Barriers to Trade Sociocultural differences Economic differences Legal/political differences

Global Trade: Problems and Solutions Sociocultural differences: Among cultures in language, attitudes, and values Vital to understand and respond Requires cultivating firsthand knowledge, and practicing extreme sensitivity

Global Trade: Problems and Solutions Economic differences Critical to understand and evaluate Infrastructure: Country’s physical facilities that support economic activity

Global Trade: Problems and Solutions Political and legal differences International businesses must comply with: International legal standards Laws of their own and host countries Ease of doing business increases the chances of a country to grow

Global Trade: Problems and Solutions Political climate Influences whether that nation is attractive to foreign business Protectionism: National policies designed to restrict international trade, usually with the goal of protecting domestic businesses

Common Trade Restrictions Tariffs: Taxes levied against imports Quotas: Limitations on the amount of specific products that may be imported from certain countries during a given time period Voluntary export restraints (VERs): Limitations on the amount of specific products that one nation will export to another nation

Common Trade Restrictions Embargo: Complete ban on international trade of a certain item, or a total halt in trade with a particular nation

Free Trade Unrestricted movement of goods and services across international borders General Agreement on Tariffs and Trade (GATT): International trade treaty designed to encourage worldwide trade among its members

Free Trade Movement World Trade Organization (WTO): Permanent global institution to: Promote international trade Settle international trade disputes World Bank: International cooperative to reduce poverty in the developing world

Web-link: World Bank World bank endeavors to end extreme poverty within a generation and boost shared prosperity. http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/0,,contentMDK:20103838~menuPK:1696997~pagePK:51123644~piPK:329829~theSitePK:29708,00.html

Free Trade Movement International Monetary Fund (IMF): Promotes international economic cooperation and stable growth

Free Trade Movement Key actions Supports stable exchange rates and facilitates a smooth system of international payments Encourages member nations to adopt sound economic policies Promotes international trade and lends money to member nations to address economic problems

Trade Restrictions Reasons to Create Reasons to Eliminate Protect domestic industry Reduce prices and increase choices for consumers by encouraging competition from around the world Protect domestic jobs in key industries Increase domestic jobs in industries with a comparative advantage versus other countries Protect national security interests Increase jobs—both at home and abroad—from foreign companies Retaliate against countries who have engaged in unfair trade practices Build exporting opportunities through better relationships with other countries Pressure other countries to change their policies and practices Use resources more efficiently on a worldwide basis

Trading Blocs and Common Markets Trading blocs: Groups of countries that have reduced or eliminated all tariffs Allow free flow of goods among the member nations Common market: Group of countries that have eliminated tariffs and harmonized trading rules to allow the free flow of goods among member nations

Trading Blocs and Common Markets North American Free Trade Agreement (NAFTA): Treaty among the United States, Mexico, and Canada that eliminated trade barriers and investment restrictions Drawback - Increase in the U.S trade deficit that adversely affects the economy

Trading Blocs and Common Markets European Union: Aid Europe’s trade position and to increase its international political and economic power Drawback - Economically weaker member countries could drag the EU into a damaging recession

3-1 Discuss business opportunities in the world economy Explain the key reasons for international trade Describe the tools for measuring international trade Analyze strategies for reaching global markets Discuss barriers to international trade and strategies to surmount them Describe the free-trade movement and discuss key benefits and criticisms 3-2 3-3 3-4 3-5 3-6