1. Trade Relations – Imports and Exports
Global Business
Trade Relations – Imports and Exports
Presented By
Mrs. Bowden

3. Learning Objectives
To understand basic principles surrounding imports and exports (trade).
To understand the history of trade relations.
To understand why countries trade what they do.
To understand regulations on trade.

4. Imports & Exports How do countries trade internationally? Export
Have students look around the classroom to find imports. Things marked Made in…
Have them name products they think are exports.
Import – products purchased from another country.
Major U.S. import = Oil
Export – products sold to another country.
Major U.S. export = Cars and car parts

5. Trade Reasons Q Q Q Q Q What and Why have you traded before?
Why do countries trade internationally?
Surplus
Specialization Q Q
Need: Q Q Q
A country may have more of a product than it needs or can consume.
Products that a country cannot produce on its own or will not produce; they are only available through trade.
Increased Competition
Political / Historical reasons
Ask students to give examples of trading an item with someone. Follow-up with asking them why they traded the item.
Points to cover:
Surplus – Some countries have a surplus of certain products. The country has more than it needs or can consume. International business allows a country to turn surplus into revenue for the country.
Specialization – There may be products that a country cannot produce on its own or does not produce because it’s better at making something else. These are items that are only available through trade.
Increased competition – Competition prevents one business from having exclusive control of a product and keeps business fair for the customers. If several choices are offered for a product, the providers will all compete to offer the best choices and prices to gain the most customers.
And Political and Historical reasons – Some trades occur to improve relations between countries or to maintain relationships that already exist. OR
Competition keeps business fair; providers will compete to keep customers happy.
Maintains or improves relationships that already exist.

6. Trade Resources Who trades internationally?
Discuss some of the world’s most sought after resources and where they can be found.
Diamonds- Russia, Botswana, Congo, Australia
Rice- China, Indonesia, Vietnam, India
Corn- United States, China, Brazil
Wheat- China, India, United States, Russia
Soybeans- United States, Brazil, Argentina
Silver- Peru, Mexico, China, Chile
Gold- China, South Africa, Australia, United States, Peru
Rubber- Thailand, Indonesia, Malaysia

7. Trade Partners and Patterns
Trade partners are countries that trade products with one another.
Trade patterns are what a country trades and in what direction.
Canada
China
Mexico
Japan
Sells to U.S.:
Automobiles
Natural gas
Petroleum (oil)
Purchases from U.S.:
Computer equipment
Electrical equipment
Sells to U.S.:
Power generation equipment
Oil seeds
Electrical machinery & equipment
Purchases from U.S.:
Toys, games, sports equipment
Sells to U.S.:
Electrical machinery
Vehicles
Mineral Fuel & oil
Purchases from U.S.:
Machinery
Mineral fuel & oil
Sells to U.S.:
Vehicles
Machinery & electrical machinery
Optic & medical instruments
Purchases from U.S.:
Machinery
Cereals (corn & wheat)
Discuss the top trade partners with the U.S. and what they trade.

8. Rationale and Goals of Trade and Investment Policies
Government policies are designed to regulate, direct, and protect national activities. The exercise of these policies is the result of national sovereignty, which provides a government with the right to shape the environment of the country and its citizens.
The domestic policy actions of most governments aim to increase the standard of living of citizens and to improve the quality of life, and to achieve full employment.
These policies affect international trade and investment indirectly.

9. Rationale and Goals of Trade and Investment Policies (cont.)
In more direct ways, a country may also pursue technology transfer from abroad or the exclusion of foreign industries to the benefit of domestic infant firms.
Government officials can also develop regulations on imports to protect citizens.
Nations institute foreign policy measures designed with domestic concerns in mind but explicitly aimed to exercise influence abroad.
A major foreign policy goal is national security.

10. Gross Domestic Product (GDP):
Measuring Trade
What measures are used to evaluate a country’s international trade?
Gross Domestic Product (GDP):
Measures the output of products created within a country.
Balance of Trade:
Measures the difference between what a country sells versus what a country buys from other countries.
Foreign Debt:
Measures the amount of money a country owes to other countries.

11. Imports & Exports When is international trade restricted? And WHY??
Free trade – the ability for countries to trade with one another with no restrictions.
Trade barriers – restrictions preventing free trade.
Tariffs – Taxes a country places on products as they cross its borders. Tariffs primarily target products being brought into a country and cause prices to be higher for customers.
Quotas – A limit on how much of a product can be brought into a country during a specific time. Quotas cause prices to be higher for customers.
Embargo – Prevent a product from being sold at all within a country.

12. International Organizations
General Agreement on
Tariffs and Trade (GATT)
International Trade
Organization (ITO)
World Trade
Organization (WTO)

13. The International Trade Organization
In 1948, the ITO represented an agreement among 53 countries to:
Aid in international commercial policies, restrictive business practices, commodity agreements, employment and reconstruction, and economic development and international investment.
It developed a constitution for a new United Nations agency.
The ITO was never implemented.

14. The General Agreement on Tariffs and Trade
GATT started in 1947 as a set of rules to ensure nondiscrimination, transparent procedures, the settlement of disputes, and the participation of the lesser-developed countries in international trade.
GATT used tariff concessions to limit the level of tariffs that would be imposed on other GATT members.
The Most Favored Nation clause calls for each member country to grant every other member country the same treatment that it accords with any other country with respect to imports and exports.

15. The World Trade Organization
The WTO was introduced in 1995 and administers international trade and investment accords.
In 2002, the Dola Round ended the first stage of implementation. The aim is to further hasten implementation of liberalization to help the impoverished and developing nations.

16. Changes in the Global Policy Environment
Three major changes have occurred over time in the global policy environment:
a reduction of domestic policy influence;
a weakening of traditional international institutions;
and a sharpening of the conflict between industrialized and developing nations.

17. Reduction of Domestic Policy Influences
Currency flows have increased from an average daily trade volume of $18 billion in 1980 to $1.2 trillion in 2001.
As a result, currency flows have begun to set the value of exchange rates independent of trade, which in turn have now begun to determine the level of trade.
The interactions between global and domestic financial flows have severely limited the influence of governments.
To regain influence, some governments have tried to restrict world trade by erecting barriers, charging tariffs, and implementing import regulations.

18. Weakening of International Institutions
The intense links among nations and the new economic environment resulting from new market entrants and the encounter of different economic systems are weakening the WTO.
The International Monetary Fund does not have the funds available to satisfy the needs of all struggling nations.
The World Bank has been unsuccessful in furthering the economic goals of the developing world and newly emerging market economies. Some claim that its bank policies have created more poverty.

19. Conflict Between Industrialized and Developing Nations
In the past, it was hoped that the gap between industrialized and developing nations would gradually be closed.
Although several less-developed nations have emerged as newly industrialized countries, even more nations are facing grim economic futures.
An increase in environmental awareness has led to a further sharpening of the conflict.

20. Restrictions of Imports
Many countries including the United States have passed antidumping laws which help domestic industries by restricting foreign products being sold below the cost of production, or at prices lower than those in the home market.
Imports are also restricted by nontariff barriers, such as buy-domestic campaigns. It is difficult to remove these barriers.
Imports can also be reduced by tightening market access and entry of foreign products through involved procedures and inspections.

21. Effects of Import Restriction
Import control may mean that the most efficient sources of supply are not available, resulting in second-best products or higher costs for restricted supplies.
Import control may result in the downstream change in the composition of imports.
Due to inefficiency,
import controls may
cause a lag in
technological
advancements.

22. Restrictions of Exports
Nations control their exports for reasons of short supply, national security and foreign policy purposes, or the desire to retain capital.
National security controls are placed on weapons and high-technology exports.
Although restriction of exports is a valuable international relations tool, it may give a country’s firms the reputation of being unreliable suppliers and may divert orders to firms of other nations.

23. Export Promotion
Export promotion is designed to help firms enter and maintain their position in international markets and to match or counteract similar efforts by other nations.
Various approaches toward export promotion include:
knowledge transfer
direct or indirect subsidization of export activities
reducing governmental red tape for exporters
export financing and mixed aid credits to exporters
altered tax legislation for nationals living abroad

24. Import Promotion
Countries that maintain large balance-of-trade surpluses use import promotion measures.
The Japan External Trade Organization (JETRO) has begun to focus on the promotion of imports to Japan.

25. The Impacts of Foreign Direct Investment on Host Countries
Positive Impact
capital information
technology and management skills transfer
regional and sectoral development
internal competition and entrepreneurship
favorable effect on balance of payments
increased employment
Negative Impact
industrial dominance
technological dependence
disturbance of economic plans
cultural change
interference by home government of multinational corporation

26. Restrictions on Investment
Many nations that lack necessary foreign exchange reserves restrict exports of capital, because capital flight can be a major problem.
Once governments impose restrictions on the export of funds, the desire to transfer capital abroad increases. This creates problems for gaining new outside investors.

27. Nonfinancial Incentives
Investment Promotion
Financial Incentives
Fiscal Incentives
Nonfinancial Incentives

28. Investment Promotion (cont.)
Fiscal incentives are specific tax measures designed to attract the foreign investor, including special depreciation allowances, tax credits or rebates, special deductions for capital expenditures, tax holidays, and reduction of tax burdens.
Financial incentives offer special funding for the investor by providing land or building, loans, and loan guarantees.
Nonfinancial incentives can consist of guaranteed government purchases, special protection from competition, and investments in infrastructure facilities.

29. Bargaining Power of Multinational Corporation and Host Country
Policy Provided/Demanded
Incentives for Investment
Continued Privileged
Treatment
Discriminating Requirements
End of Relationship/
Divestment
MNC
Time

30. U.S. Perspective on Trade and Investment Policies
The U.S. seeks a positive trade policy rather than reactive, ad hoc responses to specific situations.
Protectionist legislation can be helpful, provided it is not enacted into law.
Trade promotion authority gives Congress the right to accept or reject treaties and agreements, but reduces the amendment procedures

31. International Perspective on Trade and Investment Policies
From an international perspective, trade and investment negotiations must continue.
In doing so, trade and investment policy can take either a multilateral or bilateral approach:
bilateral negotiations are carried out mainly between two nations.
multilateral negotiations are carried out among a number of nations.

32. ???? Trade Resources – research project
What four countries are the top 4 trade partners of the United States, and what do we trade?
Be sure to discuss trade reasons in your answer ex. surplus, specialization, competition, or political/historical. Justify your answer.
????

33. Learning Objectives
To understand the traditional arguments of how and why international trade improves the welfare of all countries
To review the history and compare the implications of trade theory from the original work of Adam Smith to the contemporary theories of Michael Porter
To examine the criticisms of classical trade theory and examine alternative viewpoints of which business and economic forces determine trade patterns between countries
To explore the similarities and distinctions between international trade and international investment

34. Evolution of Trade Theory
The Age of Mercantilism
Classical Trade Theory
Factor Proportions Trade Theory
International Investment and Product Cycle Theory
The New Trade Theory: Strategic Trade
The Theory of International Investment

35. The Age of Mercantilism
The evolution of trade into the form we see today reflects three events:
The Collapse of Feudal Society
The Emergence of the Mercantilist Philosophy
The Life Cycle of the Colonial Systems of the
European Nation-States

36. Mercantilism Mixed exchange through trade with accumulation of wealth
Conducted under authority of government
Demise of mercantilism inevitable

37. Classical Trade Theory
The Theory of Absolute Advantage
The ability of a country to produce a product with fewer inputs than another country
The Theory of Comparative Advantage
The notion that although a country may produce both products more cheaply than another country, it is relatively better at producing one product than the other

38. Classical Trade Theory Contributions
Adam Smith—Division of Labor
Industrial societies increase output using same labor-hours as pre-industrial society
David Ricardo—Comparative Advantage
Countries with no obvious reason for trade can specialize in production, and trade for products they do not produce
Gains From Trade
A nation can achieve consumption levels beyond what it could produce by itself

39. Factor Proportions Trade Theory
Developed by Eli Heckscher
Expanded by Bertil Ohlin

40. Factor Proportions Trade Theory Considers Two Factors of Production
Labor
Capital

41. Factor Proportions Trade Theory
A country that is relatively labor abundant (capital abundant) should specialize in the production and export of that product which is relatively labor intensive (capital intensive).

42. The Leontief Paradox The Test: The Method:
Could Factor Proportions Theory be used to explain the types of goods the United States imported and exported?
The Method:
Input-output analysis

43. The Leontief Paradox The Findings: The Controversy:
The U.S. exported labor-intensive products and imported capital-intensive products.
The Controversy:
Findings were the opposite of what was generally believed to be true!

44. Overlapping Product Ranges Theory: Staffan Burenstam Linder
Trade in manufactured goods dictated not by cost concerns, but by similarity in product demands across countries.
Work focused on preferences of consumer demand.
Today, termed market segments.

45. Product Cycle Theory Raymond Vernon
Focus on the product, not its factor proportions
Two technology-based premises

46. Product Cycle Theory: Vernon’s Premises
Technical innovations leading to new and profitable products require large quantities of capital and skilled labor
The product and the methods for manufacture go through three stages of maturation

47. Stages of the Product Cycle
The New Product
The Maturing Product
The Standardized Product

48. The Product Cycle and Trade Implications
Increased emphasis on technology’s impact on product cost
Explained international investment
Limitations
Most appropriate for technology-based products
Some products not easily characterized by stages of maturity
Most relevant to products produced through mass production

49. The New Trade Theory: Strategic Trade
Two New Contributions
Paul Krugman-How trade is altered when markets are not perfectly competitive
Michael Porter-Examined competitiveness of industries on a global basis

50. Internal Economies of Scale External Economies of Scale
Strategic Trade
Krugman’s Economics of Scale:
Internal Economies of Scale
External Economies of Scale

51. Strategic Trade
Government can play a beneficial role when markets are not purely competitive
Theory expands to government’s role in international trade
Four circumstances exist that involve imperfect competition in which strategic trade may apply

52. The Four Circumstances Involving Imperfect Competition:
Strategic Trade
The Four Circumstances Involving Imperfect Competition:
Price
Cost
Externalities
Repetition

53. Strategic Trade Porter’s Diamond of National Advantage
Innovation is what drives and sustains competitiveness
Four components of competition
Factor Conditions
Demand Conditions
Related and Supporting Industries
Firm Strategy, Structure, and Rivalry

54. Michael Porter’s Competitive Clusters
Critical masses of unusual competitive success in particular fields, located in one place

55. The Theory of International Investment
The movement of capital has allowed foreign direct investments across the globe

56. The Theory of International Investment
Firms as Seekers
Seeking Resources
Seeking Factor Advantages
Seeking Knowledge
Seeking Security
Seeking Markets

57. The Theory of International Investment
Firms as Exploiters of Imperfections
Imperfections in Access
Imperfections in Factor Mobility
Imperfections in Management
Firms as Internalizers
Establish their own multinational operations-internalize production
Competitive advantage due to confidentiality