Introduction Part One Introduction International Trade Growth International Trade Milestones Largest...

Introduction

Part One

Introduction

International Trade Growth

International Trade Milestones

Largest Exporting and Importing Countries

International Trade Drivers

International Trade Theories

The International Business Environment


Year Exports Imports

1980 364.30 400.40

1985 381.80 399.30

1990 783.20 817.90

1995 1190.80 1200.10

2000 1457.30 1453.10

2004 2125.00 2095.000

500

1000

1500

2000

2500

1980 1985 1990 1995 2000 2004

Exports

Imports

From Wikipedia Commons and http://www.freeworldmaps.net/

http://atheism.about.com/od/ancientmythologyreligion/ig/Lebanon-Phoenician-Photos/Phoenician-Sea-Trade-Commerce.htm

Introduction








The Bretton-Woods Conference (July 1944): created the International Monetary Fund in 1945.--Provided for an international payment system.--Provided for stable currency exchange

rates.


General Agreement on Tariffs and Trade (GATT), 1949–94

Tariffs

Country A

Country B

Tariffs

Country A

Country B

$50

Tariffs

Country A

Country B

$50

$75

Tariffs

Country A

Country B

$75

+ 30$50

Tariffs

Country A

Country B

$75

$80

Tariffs

Country A

Country B

$75

$80

Protectionism

.

Tariffs

Country A

Country B

$75

Tariffs

Country A

Country B

Country C


General Agreement on Tariffs and Trade (GATT), 1949–94, resulted in gradual reduction of average tariff from over 40% in 1947 to about 4% in 2002.

Tariffs

Country A

Country B

Country C

Tariffs

Country A

Country B

Labor unions liketariffs or protectionismbecause it allows themto negotiate high-wagejobs which are protectedfrom foreign products madein countries with lower laborcosts and lower prices.

Advantages

A small country, which willwill have little effect on world trade, can help its domestic or homeindustries grow by keeping outforeign imports

Governments get revenue from tariffs

Tariffs

Country A

Country B

Disadvantages

Consumers in thehome country payhigher prices.

Tariffs

Country A

Country B

$75

.

Tariffs

Country A

Country B

$75

+ 30$50

Tariffs

Country A

Country B

$75

+ 30$50$45

Tariffs

Country A

Country B

$75

$75

Tariffs

Country A

Country B

$75

$75$70

.

Tariffs

Country A

Country B

$75

$75


General Agreement on Tariffs and Trade (GATT), 1949–94, resulted in gradual reduction of average tariff from over 40% in 1947 to about 4% in 2002.


The World Trade Organization (January 1995)

The Treaty of Rome (March 1957)


The Creation of the euro • Common currency of twelve of the twenty-five

countries of the European Union. • Developed in the early 1990s.• Placed in circulation on January 1, 2002.• Replaced eleven strong legacy currencies.• One of the strongest currencies of the world.

End of Part One of Introduction

Introduction







The World’s Largest Exporters of Merchandise in 2004 (in US $ billions)

The World’s Largest Importers of Merchandise in 2004 (in US $ billions)

Introduction








• Cost Drivers • Competitive Drivers• Market Drivers• Technology Drivers


Cost Drivers


Cost Drivers • Export


Cost Drivers Export:Some companies require largecapital investments in plants and machinery


Assembly line

Cost Drivers Export:Some companies require largecapital investments in plants and machinery

Strong incentive to spread the costs of these fixed costs over a large number of units.

Export


Cost Drivers • Export

– Some companies require large capital investments in plants and machinery.

– Strong incentive to spread the costs of these fixed costs over a large number of units.

• Import / Outsourcing– Some companies, in response to consumer demands,

attempt to offer goods at the lowest possible price.– Strong incentive to lower production costs.– Several business processes are outsourced abroad.

routingbyrumor.wordpress.com


Competitive Drivers • Companies follow their domestic competitors

abroad to maintain their world-wide market share.

• Companies retaliate against foreign competitors entering their home market by going to these competitors’ home markets.

• Companies counter a competitor’s new product entry by offering a similar product, often produced abroad.


Market Drivers • Consumers’ tastes and preferences have

become increasingly uniform worldwide.

recipes.howstuffworks.com


Market Drivers • Consumers’ tastes and preferences have

become increasingly uniform worldwide.• Consumers have become increasingly

knowledgeable about products and willing to try new foreign alternatives.


Technology Drivers • Diffusion of information seems universal.• Competition for products is worldwide: the

Internet allows people to trade with one another.• Jet travel allows people to do business

worldwide.

Introduction







Adam Smith 1723-1790

Scottish moral philosopher and father of modern economics

http://jacusers.johnabbott.qc.ca/~bill.russell/Who%20is%20Who.html

Adam Smith 1723-1790

In 1776 wrote An Inquiryinto the Nature and Causesof the Wealth of Nations.

http://jacusers.johnabbott.qc.ca/~bill.russell/Who%20is%20Who.html


Adam Smith's Theory of Absolute Advantage

The Wealth of Nations (1776)

When a nation can produce a certain type of goods more efficiently than other countries, it is in its best interest to manufacture more of those goods than it needs, and trade with countries that produce other goods more efficiently than that nation can.


Absolute Advantage Illustration• France can produce 20,000 liters of wine or 2

units of machinery for each year of labor.• Germany can produce 15,000 liters of wine or

3 units of machinery for the same amount of labor.

• France sells wine to Germany, and Germany sells machinery to France.

• Both countries benefit from the trade.


Ricardo's Theory of Comparative Advantage

Political Economy and Taxation (1815)• Nations trade with one another when they can

produce certain goods relatively more efficiently than one another.

• Most international trade today is explained by the Theory of Comparative Advantage.


Theory of Comparative Advantage Illustration

• The UK can make 25 tons of wheat or 5 units of machinery using one year of labor.

• Brazil can make 21 tons of wheat or 3 units of machinery using the same amount of labor.

• The UK has an absolute advantage in machinery and wheat. • However, in the UK, the “relative price” of a unit of machinery is

5 tons of wheat. In Brazil, the “relative price” of that same unit is 7 tons of wheat.

• If the UK decides to grow wheat, it has to “give up” 1/5 of a piece of machinery. If it can find wheat at a lower price than 1/5 of a piece of machinery, it finds it advantageous.


Theory of Comparative Advantage Illustration

• If Brazil decides to make machinery, it has to “give up” 7 units of wheat. If it can find machinery at a lower price than 7 tons of wheat, it finds it advantageous.

• The UK will sell its machinery to Brazil at the price of 6 tons of wheat.

• The UK gets wheat at a lower price than it can produce it (1/6 of a unit of machinery) and Brazil gets machinery at a lower price than it can make it (6 tons of wheat).

• Both nations gain from this trade.


Factor Endowment Theory

Developed by Hecksher and Ohlin (1933)• A country will enjoy a comparative advantage

over other countries if it is naturally endowed with a greater abundance of one of the factors of economic production, such as land, labor, capital or entrepreneurship.

• Explains why certain countries specialize in the production of certain products.


Factor Endowment Theory• Countries with an abundance of land will specialize in the

production of items that require a lot of land (for example, Argentina and beef, Brazil and soybeans).

• Countries with an abundance of educated labor will specialize in the production of items that require a lot of educated labor (for example, India and computer programming).

• Countries with an abundance of capital will specialize in services tied to capital lending (for example, Switzerland and banking, London and insurance).

• Countries with an abundance of entrepreneurship will specialize in “products” tied to entrepreneurship (for example, United States and intellectual property).


International Product Life Cycle

Developed by Raymond Vernon (1966)• Over its life cycle, a product will be

manufactured first in the country in which it was first developed, then in other developed countries, and eventually in developing countries.


International Product Life Cycle • First Stage

A new product is launched in a country, called the country of innovation, to satisfy market need.

• Second Stage Markets emerge in developed countries, and additional manufacturing facilities are created there.

• Third Stage The manufacturing process has become routine, and manufacturing shifts to developing countries.


Porter's Cluster Theory • A firm can develop a substantial competitive

advantage in manufacturing certain goods when a large number of its competitors and suppliers are located in close proximity.

• The area attracts the most talented employees and the extraordinary competition between the firms generates a greater need to innovate and become efficient.

• Such a grouping of companies is called a cluster.


Porter's Cluster Theory Examples• Silicon Valley, California, is a cluster for

information technology.• Sassuolo, Italy, is a cluster for ceramic tiles.• Limoges, France, is a cluster for porcelain.• Genève, Switzerland, is a cluster for watches.• Yiwu, China, is a cluster for socks and hosiery.

Introduction








• Culture• Demographics• Economics• Regulations and Laws• Infrastructure• Communications• .....much of the international business

environment is different from the domestic environment.

End of Program.

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