BUSINESS BRIEF: TRADE
This Business Brief provides background information on Trade and is a source of business
vocabulary and concepts to use in Discussion Board activities or to clarify students' questions.
International trade takes place within the framework of agreements worked out by countries in
the World Trade Organisation (WTO), formerly known as the General Agreement on Tariffs and
Trade (GATT). Over the last 50 years trade barriers have been coming down and free trade, open
borders and deregulation now form the ideal for almost all nations, even if the situation is far
from one of complete laissez-faire, with no government intervention. Protectionism is no longer
the order of the day in most places; even if some developing countries argue that protectionist
measures are the way to get their economies going, they avoid using the term.
Trade negotiations are well-known for their epic eleventh-hour negotiating sessions, where
individual nations argue for what they see as their specific interests. Countries argue for
protection of their strategic industries, ones they consider vital to future prosperity such as the
electronics industry in the developed world. A less developed country beginning car assembly
might want to protect it as an infant industry. European farmers argue for their subsidies, where
governments guarantee farmers a higher price than they would normally get, making it hard for
developing nations to compete in agricultural products. The French argue for cultural protection,
pointing out the uniqueness of their film industry and winning restrictions, or quotas, on the
number of Hollywood products that Europe imports.
Countries accuse each other of dumping, where exported goods are sold at a lower price than in
the home market, or for less than they cost to produce, usually in order to gain market share in
the export market. The offending country may reply that it has a comparative advantage in
producing these goods (the ability to produce them cheaper than anyone else) and that they are
not selling below cost.
Of course, there are trading blocks with no trade barriers at all such as the single market of the
European Union. The North American Free Trade Agreement, or NAFTA (between the US,
Canada and Mexico) is also eliminating its tariff walls and customs duties. Their equivalents in
Asia and Latin America are ASEAN and MERCOSUR.
One major concern in international trade between smaller companies is payment. The exporter
wants to be sure about getting paid and the importer wants to be sure of getting the goods. A
common solution is the letter of credit mentioned in the unit, where a bank guarantees payment
to the exporter's bank once it receives the related shipping documents, including the clean bills of
lading, showing the goods have been shipped without damage or other problems. Shipping terms
like CIF, or Cost, Insurance & Freight, where the exporter pays for insurance of goods while
they are
being transported, are part of the standard Incoterms defined by the International Chamber of
Commerce. These terms are used in standard contracts that form the basis, with adaptations, for
most international trade contracts.