International Business RWA CHAPTER 7 Learning Objectives Explain why countries trade Explain why countries export and import Explain how and why countries restrict international trade Describe the strategies organizations use to compete in the global economy McDonald’s The golden arches of McDonald’s are a familiar sight in 119 countries around the world. The fast food restaurant’s international expansion is a good example of business practices that will become more prevalent in the global economy of the 21st century. McDonald’s is able to operate successfully in foreign countries by offering consistent standards for “quality, value, and convenience.” International Trade International Trade consists of the exchange of goods and services between countries. For example, in Canada we can purchase coffee from Columbia, chocolate from Europe, toys from China, cosmetics from France, cars from Germany, clothing from Italy, etc., which are just of few of the goods that we import into Canada to satisfy the needs and wants of the Canadian consumer. Likewise, in China or any of the other countries mentioned above, you will be able to find goods imported from Canada, especially sea food, lumber, and wheat. Why do countries trade? Countries trade to get access to goods that meets the needs of their citizens, who are the consumers. Countries also trade to get access to materials that are not available in their own country. For example, France has an abundance of fresh drinking water but no oil; Saudi Arabia has an abundance of oil but scarcity of fresh drinking water—the two countries may trade oil for water. In both countries there is a need for the product. Trading also opens up many other doors for countries and gives them exposure to world markets that they wouldn’t otherwise be exposed to. Why countries trade, cont’d. Absolute Advantage—some countries are abundant in some resources but scarce in others or are unable to produce others. For example, Great Britain has less fertile soil than Honduras and doesn’t have the climate to grow coffee. On the other hand, the Honduras has the climate, the fertile land, and the cheap labor to grow coffee. Therefore, the Honduras has an absolute advantage over Great Britain to grow coffee and sell it to them. Comparative Advantage Some countries may be less efficient at producing all goods that its citizens need. The law of Comparative Advantage states that some countries should produce the goods that they are most efficient at producing and import from others goods that they cannot produce at home. For example, Canada has an absolute advantage in forestry products, but not in labor. China has an absolute advantage in labor; therefore, it would be more efficient if Canada shipped its lumber to China to have furniture built there rather than in Canada. Why do companies export? To increase their sales abroad To introduce their products to other countries To diversify—engage in a variety of operations to bring in more revenue To develop innovative brands—create new products—which can be later marketed back home Identifying Export Markets Analyze demographic figures, economic data, country reports, consumer tastes, etc., is how companies identify export markets. They also visit the countries and conduct surveys to assess consumer demand and to find out what restrictions they may face. To find out if there are specific requirements on packaging, labeling, and product safety Exporting Exports:--goods and services that are sold abroad. Fact:--the US is the world’s largest exporter; it exports about $700 billion worth of goods and services annually. Exports represent an important source of revenue for many companies; for example, IBM earns about 40% of its revenue outside the US; Air Canada flies to many countries outside Canada and earns a substantial portion of its revenue from international flights paid for by clients in the countries it services. Imports Imports—goods and services that are purchased abroad—such as German and Japanese cars; French wine; Swiss chocolate; luxury handbags from Italy; shoes from England, just to name a few. Fact:--the US is the world’s largest importer, it purchases about $900 billion worth of foreign goods and services annually. Import of Materials Many companies import materials from other countries because they are cheaper to produce elsewhere, they could be better quality, and they may not be available in their own country. Many companies import goods because they can resell them in their own country for a higher profit; for example, cars made in Japan and Germany are sold at car dealerships in the US and Canada because consumers want these products versus North American made cars; consumers are willing to pay more money for a car which they consider to be of better quality. The Balance of Trade The Balance of Trade is the difference between the value of the goods a country exports and the value of goods it imports. Trade Surplus happens when a country exports more than it imports; Trade Deficit occurs when a country imports more than it exports—this means that the value of goods and services it sells to other countries is less than the value of the goods and services that it exports Countries, such as Japan, usually run huge trade surpluses because it exports much more than it imports, especially in cars, machinery, and electronic goods. Protectionism International trade can benefit all trading partners; but, it may also hurt some domestic producers. For example, a Canadian manufacturing company may be forced to shut down because it is cheaper to have the goods made in Taiwan where there is an abundance of cheap, skilled labor. Tariff is a tax on imports which is put in place by the government to raise the price on foreign goods so that local manufacturers can compete. Quotas are restrictions on the quantity of a good that can enter a country. This is again done by the government to protect local businesses. Embargo is a complete or total ban on the importation of a particular good, such as ivory from South Africa or coral from the Philippines, etc. Page 161 Please answer the following questions. Under Fact and Idea Review Numbers: 1, 2, 3, & 4 Under Critical Thinking Number 1 & 2 Assessing Math Skills Do the assignment. Be sure to put your name and date on the assignment.