Chapter 3: Competing in the Global Marketplace
Global
The word global has assumed a new meaning, referring to boundless mobility and competition in social, business, and intellectual arenas. No longer just an option, having a global vision has become a business imperative.
Global Vision
The ability to recognized and react to international business opportunities, be aware of threats from foreign competition, and effectively use international distribution networks to obtain raw materials and move finished products to customers.
The Importance of Global Business to the United States
Many countries depend more on international commerce than the United States does. For example, France, Great Britain, and Germany all derive more than 19 percent of their gross domestic product (GDP) from world trade, compared to about 12 percent for the United States. Nevertheless, the impact of international business on the U.S. economy is still impressive:
The United States exports about a fifth of its industrial production and
a third of its farm products.
One of every 16 jobs in the United States is directly or indirectly
supported by exports.
U.S. businesses export nearly $850 billion in goods to foreign
countries every year, and almost a third of U.S. corporate profits is
derived from international trade and foreign investment.
Exports account for almost one-third of America’s economic growth.
Chemicals, office machinery, computers, automobiles, aircraft, and
electrical and industrial machinery make up almost half of all
nonagricultural exports.
These statistics might seem to imply that practically every business in the United States is selling its wares throughout the world, but nothing could be further from the truth. About 85 percent of all U.S. exports of manufactured goods are shipped by 250 companies. Only the very large multinational companies have seriously attempted to compete worldwide. Fortunately, more small companies are now aggressively pursuing international markets.
Measuring Trade Between Nations
Exports
Goods and services produced in one country and sold in other countries.
Imports
Goods and services that are brought from other countries.
Balance of Trade
The difference between the value of a country’s exports and the value of its imports during a certain time.
Trade Surplus
A favorable balance of trade that occurs when a country imports more than it exports.
Trade Deficit
An unfavorable balance of trade that occurs when a country imports more than it exports.
Balance of Payments
A summary of a country’s international financial transactions showing the difference between the country’s total payments to and its total receipts from other countries.
The Changing Value of Currencies
Currency Appreciation
The exchange rate is the price of one country’s currency in terms of another country’s currency. If a country’s currency appreciates, less of that country’s currency is needed to buy another country’s currency.
Currency Depreciation
If a country’s currency depreciates, more of that country’s currency will be needed to buy another country’s currency.
Floating Currency Rates
Currency markets operate under a system called floating exchange rates. Prices of currencies “float” up and down based upon the demand for and supply of each currency. Global currency traders create the supply of and demand for particular currency based on that currency’s investment, trade potential, and economic strength.
Devaluation
If a country decides that its currency is not properly valued in international currency markets, the government may step in and adjust the currency’s value. In a devaluation, a nation lowers the value of its currency relative to other currencies.
Why Nations Trade
Absolute Advantage
A country has an absolute advantage when it can produce and sell a product at a lower cost than any other country or when it is the only country that can provide a product.
Principle of Comparative Advantage
Even if the United States had an absolute advantage in both coffee and air traffic control systems, it should still specialize and engaged in trade. Why? the reason is the principle of comparative advantage, which says that each country should specialize in the products that it can produce most readily and cheaply and trade those products for goods and services that foreign countries can produce most readily and cheaply. This specialization ensures greater product availability and lower prices.
Free Trade
…Thus, the principle of comparative advantage acts as a stimulus to trade. When nations allow their citizens to trade whatever goods and services they choose without government regulation, free trade exists. Free trade is the policy of permitting the people of a country to buy and sell where they please without restriction.
Protectionism
The opposite of free trade is protectionism, in which a nation protects its home industries from outside competition by establishing artificial barriers such as tariffs and quotas.
Barriers to Trade
Natural Barriers
Natural barriers to trade can be either physical or cultural. For instance, even though raising beef in the relative warmth of Argentina may cost less than raising beef in the bitter cold of Siberia, the cost of shipping the beef from South America to Siberia might drive the price too high. Distance is thus one of the natural barriers to international trade. Jet airplanes cut the time needed to ship goods long distances, but weight is a factor. Thus air cargo is limited to products with a high value per pound. For example, it would not make sense to ship coal or gravel by air, although orchids, seafood, computers, and replacement parts for machinery are often moved this way. With advances in technology, liquefied natural gas, asphalt, and other hard-to-transport products can now be moved by ship or barge—something not feasible 15 or 20 years ago. Further improvements in technology should help lower other distance barriers as well.
Language is another natural trade barrier. People who can’t communicate effectively may not be able to negotiate trade agreements or may ship the wrong goods.
Tariff Barriers
Tariff
A tariff is a tax imposed by a nation on imported goods. It may be a charge per unit, such as per barrel of oil or per new car; it may be a percentage of the value of the goods, such as 5 percent of a $500,000 shipment of shoes; or it may be a combination. No matter how it is assessed, any tariff makes imported goods more costly, so they are less able to compete with domestic markets.
Protective Tariff
Protective tariffs make imports less attractive to buyers than domestic products are. The United States, for instance, has protective tariffs on imported poultry, textiles, sugar, and some types of steel and clothing. Japan imposes tariffs on U.S. cigarettes that makes them cost 60 percent more than Japanese brands.
Arguments for and against Tariffs
Congress has debated the issue of tariffs since 1789. The main argument against tariffs is that they discourage free trade, and free trade lets the principle of comparative advantage work most efficiently. The main argument for tariffs is that they protect domestic business and workers
Infant-Industry Argument
One of the oldest arguments in favor of protectionism is the infant-industry argument. By protecting new domestic industries from established foreign competitors, so this argument goes, a tariff can give a struggling industry time to become an effective competitor. A tariff protected the infant U.S. motorcycle industry against British firms. But eventually the Japanese drove most European and American producers from the market. Harley Davidson is the only remaining large U.S. motorcycle maker.
Job Protection Argument
A second argument for tariffs is the job protection argument. Supporters—especially unions—say we should use tariffs to keep foreign labor from taking away U.S. jobs. U.S. jobs are lost, they say, when low-wage countries sell products at lower prices than those charged in the United States.
Preparedness Argument
Defense suppliers and the military often use the preparedness argument for tariffs. They say that industries and technology that are vital to our military should be protected during peacetime because these industries will be needed in the event of war. U.S shipbuilders, gunpowder manufacturers, and uniform manufacturers are helped by this sort of tariff.
Nontariff Barriers
Governments also use other tools besides tariffs to restrict trade. Among them are import quotas, embargoes, buy-national regulations, custom regulations, and exchange controls.
Import Quotas
One type of nontariff barrier is the import quota or limits on the quantity of a certain good that can be imported. The goal of setting quotas is to limit imports to the optimum amount of a given product. America protects its shrinking textile industry with quotas.
Embargo
A complete ban against importing or exporting a product is an embargo. Often embargoes are set up for defense purposes. For instance, the United States does not allow various high-tech products, such as supercomputers and lasers, to be exported to countries that are not allies. Although this embargo costs U.S. firms billions of dollars each year in lost sales, it keeps enemies from using the latest technology in their military hardware.
By-National regulations
Government rules that give special privileges to domestic manufacturers are called buy-national regulations. One such regulation in the United States bans the use of foreign steel in constructing U.S. highways. Many state governments have buy-national rules for supplies and services.
Custom Regulations
In a more subtle move, the a country may make it hard for foreign products to enter its markets by establishing custom regulations that are different from generally accepted international standards, such as requiring bottles to be quart size rather than liter size. The French seem most adept in this tactic.
Exchange Controls
Exchange controls are laws that require a company earning foreign exchange (foreign currency) from its exports to sell the foreign exchange to a control agency, usually a central bank.
Fostering Global Trade
Antidumping Laws
U.S firms don’t always get to compete on an equal basis with foreign firms in international trade. To level the playing field, Congress has passed antidumping laws.
Dumping
Dumping is the practice of charging a lower price for a product (perhaps below cost) in foreign markets than in the firm’s home market. The company might be trying to win foreign customers, or it might be seeking to get rid of surplus goods. Sometimes, too, to help create an export market, a government will subsidize certain industries so that they can sell their goods for less. In the past, Japanese steel was sold below cost in world markets, and the losses were covered by government subsidies.
Predatory Dumping
Most industrialized nations have antidumping regulations. They are especially concerned about predatory dumping, the attempt to gain control of a foreign market by destroying competitors with impossibly low prices. Without import quotas companies such as Intel wouldn’t exist.
One of the most famous dumping cases in U.S. history involved Japanese color television sets during the 1960s and 1970s. …The U.S. television industry was effectively destroyed.
The Uruguay Round and the World Trade Organization
Uruguay Round
The Uruguay Round of trade negotiations is an agreement to dramatically lower trade barriers worldwide. Adopted in 1994, the agreement was signed by 117 nations in Marrakech, Morocco. The most ambitious global trade agreement ever negotiated, the Uruguay Round reduced tariffs by one-third worldwide, a move that is expected to increase global income by $255 billion annually by 2005. Perhaps the most notable aspect of the agreement is its recognition of new global realities. For the first time, an agreement covers service, intellectual property rights, and trade-related investment measures such as exchange controls.
The Uruguay Round made several major changes in world trading practices:
Entertainment, pharmaceutical, integrated circuits, and software. Under new rules, patents, copyrights, and trademarks are protected for 20 years. Computer programs are protected for 50 years and semiconductor chips for 10 years. Many developing nations will have a decade to phase in patent protection for drugs. However France, which limits the number of U.S. movies and television shows that can be shown, refused to liberalize market access for the U.S. entertainment industry.
Financial, legal, and accounting services. Services are brought under international trading rules for the first time, potentially creating a vast opportunity for these competitive U.S. industries. Now, it is easier to admit managers and key personnel into a country.
Agriculture. Europe will gradually reduce farm subsidies, opening new opportunities for such U.S. farm exports as wheat and corn. Japan and Korea will begin to import rice. But subsidies for U.S. growers of sugar, citrus fruit, and peanuts will be reduced.
Textiles and apparel. Strict quotas limiting imports from developing countries are being phased out over 10 years, causing further job losses in the U.S. clothing industry. But retailers and consumers will be the big winners because quotas now add $15 billion a year to clothing prices.
A New Trade Organization
The new World Trade Organization (WTO) replaces the old General Agreement on Tariffs and Trade (GATT), which was created in 1948. The GATT contained extensive loopholes that enabled countries to evade agreements to reduce trade barriers. Today, all WTO members must fully comply with all agreements to under the Uruguay Round. The WTO also has an effective dispute settlement procedure with strict time limits to resolve disputes.
The WTO has emerged as the world’s most powerful institution for reducing trade barriers and opening markets. Approximately 135 nations now belong to the organization. The advantage of WTO membership is that member countries lower trade barriers among themselves. Countries that don’t belong must negotiate trade agreements individually with all their trading partners. To date, China and Russia are the largest countries that have not qualified for WTO membership.
The World Bank and International Monetary Fund
Two international financial organizations are instrumental in fostering global trade.
World Bank
The World Bank offers low-interest loans to developing nations. Originally, the purpose of the loans was to help these nations build infrastructure such as roads, power plants, schools, drainage projects, and hospitals. Now the World Bank offers loans to help developing nations relieve their debt burdens. To receive loans, countries must pledge to lower trade barriers and aid private enterprise. In addition to making loans, the World Bank is a major source of advice and information for developing nations. The United States has granted the organization $60 million to create knowledge databases on nutrition, birth control, software engineering, creating quality products, and basic accounting systems.
International Monetary Fund (IMF)
The International Monetary Fund (IMF) was founded in 1945, one year after the creation of the World Bank, to promote trade through financial cooperation and eliminate trade barriers in the process. The IMF makes short-term loans to member nations that are unable to meet their budgetary expenses. It operates as a lender of last resort for troubled nations. In exchange for these emergency loans, IMF lenders frequently extract significant commitments from the borrowing nations to address the problems that led them to the crises. These steps may include curtailing imports or even devaluing their currency.
…The danger of counting on the IMF, though, is the “moral hazard” problem. Investors would assume that the IMF would bail them out and would therefore be encouraged to take bigger and bigger risks in emerging markets, leading to the possibility of even deeper financial crises in the future.
International Economic Communities
Nations that frequently trade with each other may decide to formalize their relationship. The governments meet and work out agreements for a common economic policy. The result is an economic community or, in other cases, a bilateral trade agreement (an agreement between two countries to lower trade barriers).
Preferential Tariff
For example, two nations may agree upon a preferential tariff, which gives advantages to one nation (or several nations) over others. For instance, when members of the British Commonwealth trade with Great Britain, they pay lower tariffs than do other nations. In other cases, nations may form free-trade associations.
Free Trade Zone
In a free trade zone, few, if any, duties or rules restrict trade among the partners, but nations outside the zone must pay the tariffs set by the individual members. A customs union sets up a free-trade area and specifies a uniform tariff structure for members’ trade with nonmember nations. In a command market, or economic union, members go beyond a customs union and try to bring all of their government trade rules into agreement.
North American Free Trade Agreement (NAFTA)
The North American Free Trade Agreement (NAFTA) created the world’s largest free trade zone. The agreement was ratified by the U.S. Congress in 1993. It includes Canada, the United States, and Mexico, with a combined population of 360 million and an economy of $6 trillion.
Canada, the largest U.S. trading partner, entered into a free trade agreement in 1988. Thus most of the new long-run opportunities opened for U.S. businesses under NAFTA are in Mexico, America’s third largest trading partner. Before NAFTA, tariffs on Mexican exports to the United States averaged just under 4 percent, and most goods and services entered the United States duty-free, so NAFTA’s primary impact was to open the Mexican market to U.S. companies. When the treaty went into effect, tariffs on about half the items traded across the Rio Grande disappeared. Since NAFTA came into effect, U.S-Mexican trade has increased by 250 percent, from 80 billion to $200 billion annually. The pact removed a web of Mexican licensing requirements, quotas, and tariffs that limited transactions in U.S. goods and services. For example, the pact allows U.S. and Canadian companies to own subsidiaries in Mexico for the first time in 50 years.
…Ultimately, some U.S. politicians would like to expand NAFTA to include other Latin American countries and perhaps even Great Britain. Chile was to be the first new entrant, but wrangling within the U.S. Congress has blocked NAFTA expansion so far. Concerns that NAFTA will eventually cost more American jobs than it creates have stalled congressional expansion of the agreement. As a result, countries south of the U.S. boarder have been forming their own trade agreements.
Mercosur
The largest new trade agreement is Mercosur, which includes Brazil, Argentina, Uruguay, and Paraguay. The elimination of most tariffs among the trading partners has resulted in trade revenues that currently exceed $16 billion annually. The economic boom created by Mercosur will undoubtedly cause other nations to either seek trade agreements on their own or entry into Mercosur. The European Union, discussed next, hopes to have a free trade pact with Mercosur by 2005.
The European Union
Maastricht Treaty
In 1993, the member countries of the European Community (EC) ratified the Maastricht Treaty, which proposed to take the EC further toward economic, monetary, and political union. Officially called the Treaty on European Union, the document outlined plans for tightening bonds among member states and creating a single market. The European Commission, which drafted the treaty, predicts that Maastricht will create over 2 million new jobs by 2002.
European Union
Also, retail prices in the European Union (EU), as the EC is now called, are expected to fall by a minimum of 6 percent . Exhibit 3-1, page 79, shows the members of the EU.
Although much of the treaty deals with developing a unified European market, Maastricht is also intended to increase integration among the EU members in areas much closer to the heart of national sovereignty. The treaty called for economic and monetary coordination, including a common currency and an independent central bank. In addition, EU members will eventually share foreign security and defense policies as well as European citizenship—any EU citizen will be able to live, work, vote, and run for office in any member country.
The Euro
Eleven of the 15 members of the European Union are converting their currencies to the eurodollar, or “euro” for short, a new currency that will circulate in all 11 nations. Due to internal policies, Great Britain, Portugal, Spain, and Sweden will not convert to the euro; the currencies that will become obsolete are listed in Exhibit 3-2, page 81.
Participating In The Global Marketplace
Exporting
When a company decides to enter the global market, usually the least complicated and least risky alternative is exporting, or selling domestically produced products to buyers in another country. A company, for example, can sell directly to foreign importers or buyers. Exporting is not limited to huge corporations such as General Motors or Westinghouse. Indeed small companies account for 96 percent of all U.S. exporters, but only 30 percent of the export volume. The United States is the world’s largest exporter.
Licensing
Another effective way for a firm to move into the global arena with relatively little risk is to sell a license to manufacture its product to a firm in a foreign country. Licensing is the legal process whereby a firm (the licensor) agrees to let another firm (the licensee) use a manufacturing process, trademark, patent, trade secret, or other proprietary knowledge. The licensee, in turn, agrees to pay the licensor a royalty or fee agreed on by both parties.
Contract Manufacturing
In contract manufacturing, a foreign firm manufactures private-label goods under a domestic firms brand. Marketing may be handled by either the domestic company or the foreign manufacturer. Levi Strauss, for instance, entered into an agreement with the French fashion house Cacharel to produce a new Levi’s line called “Something New” for distribution in Germany.
The advantage of contract manufacturing is that it lets a company “test the water” in a foreign country….
Joint Ventures
Joint ventures are somewhat similar to licensing agreements. In a joint venture, the domestic firm buys part of a foreign company or joins with a foreign company to create a new entity. A joint venture is a quick and relatively inexpensive way to enter the global market. It can also be very risky. Many joint ventures fail. Others fall victim to a takeover, in which one partner buys out the other.
[However], In a successful joint venture, both parties gain valuable skills from the alliance….
Direct Foreign Investment
Active ownership of a foreign company or of overseas manufacturing or marketing facilities is direct foreign investment. Direct investors have either a controlling interest or a large minority interest in the firm. Thus, they stand to receive the greatest potential reward but also face the greatest potential risk.
Countertrade
International trade does not always involve cash. Today, Countertrade is a fast-growing way to conduct international business. In Countertrade, part or all of the payment for goods or services is in the form of barter (swapping goods for goods), an age-old practice whose origins have been traced back to cave dwellers. The U.S. Commerce Department says that roughly 30 percent of all international trade involves countertrade. Each year about 300,000 U.S. firms engage in some form of countertrade. American companies, including General Electric, Pepsi, General Motors, and Boeing, barter about $7.5 billion of goods and services every year.
Threats and Opportunities in the Global Marketplace
To be successful in a foreign market, companies must fully understand the foreign environment in which they plan to operate. Politics, cultural differences, and the economic environment can represent both opportunities and pitfalls in the global marketplace.
Nationalism
The political structure of a country may also jeopardize a foreign producer’s success in international trade. Intense nationalism, for example, can lead to difficulties. Nationalism is the sense of national consciousness that boosts the culture and interests of one country over those of all other countries. Strongly nationalistic countries, such as Iran and New Guinea, often discourage investment by foreign companies. In other, less radical forms of nationalism, the government may take actions to hinder foreign operations.
…In a hostile climate, a government may expropriate a foreign company’s assets, taking ownership and compensating the former owners. Even worse is confiscation, when the owner receives no compensation. This happened during rebellions in several African nations during the 1990s.
Cultural Differences
Central to any society is the common set of values shared by its citizens that determine what is socially acceptable. Culture underlies the family, educational system, religion, and social class system. The network of social organizations generates the overlapping roles and status positions. These values and roles have a tremendous effect on people’s preferences and thus on marketer’s options.
…Language is another important aspect of culture. Marketers must take care in selecting product names and translating them slogans and promotional messages so as not to convey the wrong meaning. For example, Mitsubishi Motors had to rename its Pajero model in Spanish-speaking countries because the term refers to a sexual activity. Toyota Motors’ MR2 model dropped the number 2 in France because the combination sounds like a French swearword. The literal translation of Coca-Cola in Chinese characters means “bite the wax tadpole.”
Economic Environment
The level of economic development varies considerably, ranging from countries where everyday survival is a struggle, such as the Sudan and Eritrea, to countries that are highly developed, such as Switzerland and Japan. In general, complex, sophisticated industries are found in developed countries, and more basic industries are found in less developed nations.
Infrastructure
Business opportunities are usually better in countries that have an economic infrastructure in place. Infrastructure is the basic institutions and public facilities upon which an economy’s development depends. When we think about how our own economy works, we tend to take our infrastructure for granted. It includes the money and banking system that provides the major investment loans to our nation’s businesses; the educational system that turns out the incredible varieties of skills and basic research that actually run our nation’s production lines; the extensive transportion and communication systems—interstate highways, railroads, airports, canals, telephones, internet sites, postal systems, television stations—that link almost every piece of our geography into one market; the energy system that powers our factories; and, of course, the market system itself, which brings our nation’s goods and services into our homes and businesses.
The Impact of Multinational Corporations
Multinational Corporations
Corporations that move resources, goods, services, and skills across national boundaries without regard to the country in which their headquarters are located are multinational corporations. Some are so rich and have so many employees that they resemble small countries. For example, the sales of both Exxon and General Motors are larger than the GDP of all but 22 nations in the world. Multinational companies are heavily engaged in international trade. The successful ones take political and cultural differences into account.
Today dozens of America’s top names—including General Electric, Gillette, Xerox, Dow Chemical, and Hewlett-Packard—sell more of their products outside of the United States than they do at home. U.S. service companies—such as McDonalds, Service Master (cleaning services), and Federal Express—are close behind.
Capitalizing On Trends In Business
Market Expansion
The need for markets to expand their markets is perhaps the most fundamental reason for the growth in world trade. The limited size of domestic markets often motivates managers to seek markets beyond their national frontiers. The economics of large-scale manufacturing demand big markets. Domestic markets, particularly in smaller countries like Denmark and the Netherlands simply can’t generate enough demand. Nestle’ was one of the first businesses to “go global” because its home country, Switzerland, is so small. Nestle’ was shipping milk to 16 different countries as early as 1875. Today hundreds of thousands of businesses are recognizing the potential rich rewards to be found in international markets.
Resource Acquisition
More and more companies are going to the global marketplace to acquire the resources they need to operate efficiently. These resources may be cheap or skilled labor, scarce raw materials, technology, or capital. Nike, for example, has opened manufacturing facilities in many Asian countries in order to use cheap labor. Honda opened a design studio in southern California to put that “California flair” into the design of some of its vehicles. Large multinational banks such as Bank of New York and Citigroup have offices in Geneva, Switzerland. Geneva is the private banking center of Europe and attracts capital from around the world.
Competition
As multinational firms continue to enter new markets, their competitors will often do the same to maintain their competitive position. Starbucks, for example, recently entered Great Britain. Nestle’ quickly developed Starbuck-type stores and moved into London shortly after Starbucks. Mazda has struggled for years in Japan because it lacked the resources of its larger domestic competitors—Toyota and Nissan. It entered the U.S. market in an effort to keep pace with its Japanese rivals by gaining market share and profitability. With the opening of Eastern Europe and China, thousands of businesses are racing to capture new customers. Each realizes that if it falls behind its competitors, it may have a difficult time catching up.
Technological Change
New technology, particularly the Internet, transportation systems, and information processing, fosters continued growth in international trade. Transportation improvements from computerized container ships to cargo jetliners have dramatically improved the efficiency of distribution throughout the world. Moreover Federal Express and other shippers use advanced computerized tracking software that enables them to enter FedEx’s database and track where their packages are at any point in time.
The internet opens up the world to any seller with a web site. Markets no longer have geographic boundaries. E-mail enables a manager in London to receive reports from Dallas, Moscow, Cape town, and Tokyo in a matter of minutes rather than days. Thus, coordinating global business strategies is now a workable reality.
Government Actions
Governments around the globe, working with the WTO, have significantly lowered barriers to world trade. Sellers in the global marketplace have a more level playing field than ever before. Regional trade organizations, such as the European Union, NAFTA, and Mercosur, also have reduced trade barriers in large geographic areas. As these governmental actions continue to make it easier to “go global,” world trade will continue to grow.
Summary of Learning Goals
>lg 1 Why is global trade important to the United States?
International trade improves relations with friends and allies, eases tension among nations, helps bolster economies, raises people’s standard of living, and improves the quality of life. The United States is still the largest importer and exporter in the world. We export a fifth of our industrial production and about a third of our farm crops. One out of every 16 jobs in the United States is supported by exports.
>lg 2 How is global trade measured?
Two concepts important to global trade are the balance of trade (the difference in volume between a country’s imports and its exports over some period) and the balance of payments (the difference between a country’s total payments to other countries and its total receipts from other countries). The United States now has both a negative balance of trade and a negative balance of payments. Another important concept is the exchange rate, which is the price of one country’s currency in terms of another country’s currency. Currencies float up and down based upon the supply of and demand for each currency. Sometimes a government steps in and devalues its currency relative to the currencies of other countries.
>lg 4 What are the barriers to international trade?
The three major barriers to international trade are natural boarders, such as distance and language; tariff barriers, or taxes on imported good; and nontariff barriers. The nontariff barriers to include import quotas, embargoes, buy-national regulations, customs regulations, and exchange controls. The main argument against tariffs is that they discourage free trade and keep the principle of comparative advantage from working efficiently. The main argument for using tariffs is that they help protect domestic companies, industries, and workers.
>lg 5 How do governments and institutions foster world trade?
The World Trade Organization created by the Uruguay Round has dramatically lowered trade barriers worldwide. For the first time a trade agreement covers services, intellectual property rights, and exchange controls. The World Bank makes loans to developing nations to help build infrastructures. The International Monetary Fund makes loans to member nations that cannot meet their budgetary expenses.
>lg 6 What are international economic communities?
International economic communities reduce trade barriers among themselves while often establishing common tariffs and other trade barriers toward nonmember countries. The best-known economic communities are the European Union, NAFTA, and Mercosur.
>lg 7 How do companies enter the global marketplace?
There are a number of ways to enter the global market. The major ones are exporting, licensing, contract manufacturing, joint ventures, and direct investment.
>lg 8 What threats and opportunities exist in the global marketplace?
Domestic firms entering the international arena need to consider the politics, economies, and culture of the countries where they plan to do business. For example, governments can change. In the area of culture, many products fail because companies don’t understand the culture of the country where they are trying to sell their products. Some developing countries also lack an economic infrastructure, which often makes it very difficult to conduct business.
>lg 9 What are the advantages of multinational corporations?
Multinational corporations have several advantages. First, they can sidestep restrictive trade and licensing restrictions because they frequently have headquarters in more than one country. Multinationals can also move their operations from one country to the next depending on which location offers more favorable economic conditions. In addition, multinationals can tap into a vast source of technological expertise by drawing upon the knowledge of a global workforce.
>lg 10 What are the trends in the global marketplace?
Global business activity will continue to escalate due to several factors. Firms that desire a larger customer base or need additional resources will continue to seek opportunities outside their country’s borders. When an organization moves into a new global market, competitors typically follow its lead and enter the same market. In addition, technological improvements in communication and transportation will continue to fuel in global markets by making it easier to sell and distribute products internationally.