Fundamentals of International Business

Fundamentals of International Business
CHAPTER 4: Economics and Politics Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Key Terms absolute advantage opportunity cost comparative advantage Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Chapter Objectives Define comparative and absolute advantage. Define opportunity cost Be able to explain how to determine what products countries should trade. Calculate opportunity cost Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Economics of Trade Absolute advantage The ability of one country to use its resources to make a product or service more efficiently than other countries. Apple Peaches Canada 1,000 600 United States 800 1,400 Total 1,800 2,000 Chapter 4: ECONOMICS AND POLITICS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Economics of Trade Apple Peaches Canada 1,000 600 United States 800 1,400 Total 1,800 2,000 Apple Peaches Canada 2,000 United States 2,800 Total Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Economics of Trade What if one of the countries is more productive at manufacturing both products? Apples Peaches Canada 1,000 500 United States 1,200 800 Total 2,200 1,300 Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Economics of Trade Opportunity cost The value of what is foregone, or the cost of giving something up to get something else. For example, the opportunity cost of being in class is the money a student could earn working at a job. Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Economics of Trade Comparative advantage The ability of a country to produce a good at a lower opportunity cost than another country. Comparative advantage is the foundation for specialization and trade. Chapter 4: ECONOMICS AND POLITICS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Economics of Trade Apples Peaches Canada 1,000 500 United States 1,200 800 Total 2,200 1,300 In Canada,1 peach cost 1000/500 = 2 apples In the United States, 1 peach costs 1200/800 = 1.5 apples The opportunity cost of peaches is lowest in United States: therefore, the United States should produce peaches Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Apples Peaches Canada 1,000 500 United States 1,200 800 Total 2,200 1,300 In Canada 1 apple costs 500/1000 = .5 peaches In the United States, 1 apple cost 800/1200 = .667 peaches The opportunity cost of apples is lowest in Canada; therefore, Canada should produce apples Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Apples Peaches Canada 2000 United States 1600 Total Canada has a comparative advantage in apples and United States has a comparative advantage in peaches 200 apples were lost to gain 300 peaches Production in both countries can be adjusted so that no apples are lost Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Apples Peaches Canada 2000 United States 200 1467 Total 2200 200 apples = 200*.667 peaches = 133 peaches lost 1600 – 133 = 1467 Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Practice makes it perfect
Practice questions handout Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Application Q 22 a) Wool Chocolate Ireland 4,000kg 2,200kg Switzerland 2,500kg 5,000kg Total 6,500kg 7,200kg b. i) Ireland has an absolute advantage in wool ii) Switzerland has an absolute advantage in chocolate Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

c) d) Both countries gain. Ireland gain 4000kg of wool and Switzerland gains 10,00kg of chocolate. Also the world gained 1500kg of wool and 2800kg of chocolate Wool Chocolate Ireland 8,000kg Switzerland o 10,000kg Total Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Application Q 23 a) Pair of Shoes Computers Italy 8,000 2,000 India 10,000 20,000 Total 18,000 22,000 b) It mean that India can uses the same resources and produces 2000 more pairs of shoes and 18,000 more computers for the same resources. India is more efficient in making shoes and computers. Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

c) Italy: 1 pair of shoes = 2000/8000 = .25 computers India: 1 pair of shoes = 20,000/10000 = 2 computers d) Italy 1 computer = 8,000/2000 = 4 pairs of shoes India 1 computer = 20,000/10,000 = 2 pairs of shoes Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Pair of Shoes Computers Italy 16,000 India 40,000 Total f) The world has gained 18,000 more computers but lost 2,000 pairs of shoes from trade. g) 2,000 pairs of shoes are lost to gain 18,000 computers Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

h) Pair of Shoes Computers Italy 16,000 India 2000 36,000 Total 18,000 India: 2000* 2 = 4000 computers 40,000 – 4000 = 36,000 Therefore the world has gained no shoes but gained a total of 14,000 computers. Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

CHAPTER 5: International Trade Agreements and Organizations Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Key Terms trade agreement North American Free Trade Agreement (NAFTA) European Union (EU) euro trade organizations World Trade Organization (WTO) Asia-Pacific Economic Co-operation (APEC) Group of Eight (G8) Group of Twenty (G20) Organization for Economic Co-operation and Development (OECD) World Bank International Monetary Fund (IMF) Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Chapter Objectives By the time you finish this chapter, you should be able to: Compare the characteristics of a multinational corporation participating in global business with those of a Canadian company focused on domestic business Describe international agreements and organizations that have influenced global business activity Describe Canada’s involvement in international trade organizations Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Globalization and International Trade
Globalization, in an economic context, is the movement of goods, services, technology, investment, ideas, and people throughout the world. Used under license from Shutterstock, Inc. Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Positive effects of globalization Outsourcing Lower prices Improved human rights Increased productivity Innovation Better jobs Increased capital flow Negative effects of globalization Lost Canadian jobs Fear of job loss Loss of Canadian productivity Exploitation of cheap labour Increased pollution Unhealthy products Spread of disease Increase in the income gap Influence of multinational corporations on governments Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Companies use three major types of globalization strategies: Global strategy Multidomestic strategy Transnational strategy Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Global strategy Regards the world as one big market—all people want the same product and will respond to marketing in a similar way Product and marketing are uniform around the world Takes advantage of economies of scale (proportionate savings gained by producing larger quantities) Does not respond to individual cultures Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Multidomestic strategy Customizes products, services, and marketing for the local culture—local management is most capable of determining what is best for the local subsidiary Effective when cultural differences are prominent Less political and exchange-rate risk Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Car manufacturers Ex. Ford Mustang was only sold in North America (2015 going global but with major changed to the car design) Ex. Diesel cars only sold in Europe and Asia and there are still specific models only sold in those markets. BMW Diesel Kei Cars – only sold Japan and now around Europe but not in North America Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Transnational strategy Combines the best elements of the global and multidomestic strategies Respects needs of local market, while maintaining efficiencies of a global strategy Manufacturing takes place at least expensive source, human resources and marketing take place at the local level Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Fast food (McDonald’s, KFC…) Adjust their menu to cultural demands but keeps core product and business operations same Ex. Maharaja burger in India Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Trade Agreements Trade agreement An enforceable treaty between two or more countries that involves the movement of goods and services, elimination of trade barriers, establishment of terms of trade, and encouragement of foreign investment. Agreements may be multilateral (involving three or more parties) or bilateral (involving two countries). Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Trade Agreements The North American Free Trade Agreement (NAFTA) Launched in January 1994 between Canada, the United States, and Mexico Created world’s largest free trade area Sets rules surrounding movement of goods, services, and investments across North America Eliminates tariffs and other trade barriers, and promotes fair competition Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

NAFTA Partners: NAFTA Economy: Today NAFTA covers a North American economy with a combined output of US$17.0 trillion. NAFTA Population: The NAFTA region is home to million people, 33.3 million of whom live in Canada, million in the United States, and million in Mexico. NAFTA Languages: English, Spanish, and French are languages widely spoken in the NAFTA countries. However, many other languages are spoken across the continent. Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

NAFTA at a Glance 33.3 million 304.1 million 106.7 million
AFTA Partners Canada U.S. Mexico Combined Population (July 2008 est.) 33.3 million 304.1 million 106.7 million 444.1 million Languages English and French English Spanish Gross Domestic Product, 2008 (Current prices, US$) 1,501 billion 14,441 billion 1,087 billion 17.0 trillion Trade with NAFTA Partners, 2008 (Current prices, US$) 570.8 billion 919.9 billion 393.5 billion 946.1 billion Inward Foreign Direct Investment Among NAFTA Countries, 2008 (US$) 240.0 billion 229.8 billion 156.0 billion --- 1 Jobs Created (millions) 4.3 25.1 9.3 39.7 National Employment Level, 2008 (millions) 17.1 145.4 43.2 205.7 Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Pair Activity: Create a Success Company Profile
Read the success story assigned by the teacher the summarize the following and create a company profile including the following information Name of the company, what the company does, is it a Canadian, American and Mexican company? How the company benefitted from NAFTA Be ready to present and share it with the class. Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Trade Agreements Advantages of NAFTA Has helped create higher paying jobs in education, engineering, and banking sectors in Canada Allows freer flow of goods and services across North America, providing better access to raw materials, talent, capital, and technology Trade has tripled between the three members since NAFTA’s inception Disadvantages of NAFTA Manufacturing jobs have been lost to Mexico, where labour costs are lower Without tariffs, many Mexican farmers could not compete and lost their livelihoods Canadian companies sold to foreign investors Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Trade Agreements Tax Treaties A tax treaty is created to prevent double taxation and tax evasion for people who would pay taxes in Canada and another country. The treaty determines how much tax each country can collect. Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Trade Agreements The European Union (EU) A trade agreement signed in 1993 that now encompasses twenty-eight countries in Europe and a population of almost half a billion people. It has its own flag, anthem, and currency, and common financial, security, and foreign policies. Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Trade Agreements The euro The European currency unit adopted by the European Union and used in most EU countries. Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Trade Agreements Advantages of a common currency Disadvantages of a common currency Decreased risk of exchange-rate fluctuations Initial costs of implementation Price transparency Lack of national control Elimination of transaction costs Loss of tradition Increased markets Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Trade Organizations Trade organizations Groups established to help with the free flow of goods and services. They may be global in scope or national organizations created by individual governments to help domestic companies expand into international markets. Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

International Organizations Activity
In pairs: Read about the assigned international organization and summarize it’s purpose and be ready to present it to the class 20 minutes for this activity Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Trade Organizations World Trade Organization (WTO) An international organization established in 1995 (which now has over 150 member countries) that promotes trade liberalization throughout the world. The main purposes of the WTO are: To act as a forum for negotiations To provide a set of rules that have been negotiated and signed by the governments of member countries To offer a forum for dispute settlement Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Trade Organizations Asia-Pacific Economic Co-operation (APEC) A trade organization, created in 1989, that unites twenty-one of the countries surrounding the Pacific Ocean to co-operate on regional trade. Its goals are to foster open and free trade among its members, increase prosperity and economic growth, and develop the Asia-Pacific community. Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Trade Organizations The Group of Eight (G8) A trade organization encompassing the major economies of the world, which meet to discuss macroeconomic issues such as economic growth, trade liberalization, and helping developing countries. Member Countries: France United States Canada Great Britain Italy Germany Japan Russia Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Trade Organizations The Group of Twenty (G20) A trade organization established during the economic crisis of the 1990s to provide a discussion forum for the major economies of the world beyond the G8. The G20 focuses on: Economic and employment growth Elimination of trade barriers Reforming financial institutions and regulations Restructuring global financial organizations Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

G20 Members Brazil, China, Saudi Arabia, Republic of Korea, France, Australia, China, Canada, Germany, Indonesia, Argentina, Turkey, India, Russia, South Africa, Mexico, Japan, United Kingdom, United States, and the European Union. Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

G8 AND G20 1. Both the G8 and G20 originated from the G7, a seven-nation strong coalition which includes Britain, United States, France, Canada, Japan, Italy, and Germany. 2. The G7 was formed in order to flight the oil embargo imposed by the Arab Nations due to the intervention of the United States and United Kingdom in the Yom Kippur War (Between Israel and the surrounding Arab nations). The G7 influenced international economic and political decision-making. Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

3. In 1997, Russia joined the ranks of G7, and the coalition was renamed as the G8.
4. In 1999, the G8 added sixteen other nations, and the group was renamed as the G20 to respond to the financial crisis. Currently, the G20′s aims focus fixing/avoding present and future economic crises problem. Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Trade Organizations Canada’s Place in the G8 and G20 Canada’s GDP and population are low compared to other G8 and G20 countries Talk of replacing Canada in the G8, and placing it as a second-tier country in the G20 Would be detrimental to Canada, as its needs, concerns, and interests would not be given the same consideration as in the past Used under license from Shutterstock, Inc. Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Trade Organizations Organization for Economic Co-operation and Development (OECD) A trade organization with thirty member countries, established in 1961 to promote the advancement of democracy and market economies. OECD members have worked together to eliminate bribery, money laundering, and fraud, and to create a code of conduct for multinational companies. Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Trade Organizations The World Bank An organization with 186 member countries that provides monetary and technical support for developing countries. Provides loans and grants to assist with education, health, infrastructure, farming, environmental issues, resource management, and other economic concerns. Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Trade Organizations International Monetary Fund (IMF) An organization whose purpose is to promote financial stability, prevent and solve economic crises, encourage growth, and assuage poverty. It does this by: Encouraging countries to adopt responsible economic policies Lending money to emerging and developing countries Providing technical training in areas such as banking regulations and exchange rate policies Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

What is the difference between he world bank and IMF?
The main role of the IMF is not to lend money but to oversee monetary rate policies and ensure the members are following the agreed upon terms More concerned about ECONOMIC stability through monitoring currency exchange and money related issues Short term loans The World Bank exists to encourage poor countries to develop by providing them with assistance and money for projects and policies with the purpose of improving the economy of that country. Provide LONG term loans Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

The Role of the UN in International Business
The UN has four main purposes: To keep peace throughout the world To develop friendly relations among nations To work together to help poor people live better lives, to conquer hunger, disease, and illiteracy, and to encourage respect for each other’s rights and freedoms To be a centre for helping nations to achieve these goals Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

The Role of the UN in International Business
UN is responsible for organizations that influence international business, including the International Labour Organization (ILO), the International Monetary Fund (IMF), and the World Bank UN devotes resources to improving the standard of living, the unemployment rate, and economic conditions throughout the world UN Economic and Financial Committee deals with issues such as international trade, globalization, and poverty elimination Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

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