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Trade Relations – Imports and Exports
Global Business Trade Relations – Imports and Exports Presented By Mrs. Bowden
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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.
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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
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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.
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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
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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.
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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.
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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.
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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.
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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.
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International Organizations
General Agreement on Tariffs and Trade (GATT) International Trade Organization (ITO) World Trade Organization (WTO)
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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.
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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
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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.
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Nonfinancial Incentives
Investment Promotion Financial Incentives Fiscal Incentives Nonfinancial Incentives
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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.
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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
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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
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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.
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???? 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. ????
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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
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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
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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
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Mercantilism Mixed exchange through trade with accumulation of wealth
Conducted under authority of government Demise of mercantilism inevitable
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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
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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
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Factor Proportions Trade Theory
Developed by Eli Heckscher Expanded by Bertil Ohlin
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Factor Proportions Trade Theory Considers Two Factors of Production
Labor Capital
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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).
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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
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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!
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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.
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Product Cycle Theory Raymond Vernon
Focus on the product, not its factor proportions Two technology-based premises
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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
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Stages of the Product Cycle
The New Product The Maturing Product The Standardized Product
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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
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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
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Internal Economies of Scale External Economies of Scale
Strategic Trade Krugman’s Economics of Scale: Internal Economies of Scale External Economies of Scale
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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
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The Four Circumstances Involving Imperfect Competition:
Strategic Trade The Four Circumstances Involving Imperfect Competition: Price Cost Externalities Repetition
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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
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Michael Porter’s Competitive Clusters
Critical masses of unusual competitive success in particular fields, located in one place
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The Theory of International Investment
The movement of capital has allowed foreign direct investments across the globe
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The Theory of International Investment
Firms as Seekers Seeking Resources Seeking Factor Advantages Seeking Knowledge Seeking Security Seeking Markets
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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
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