Chapter 1 – Introduction to International Business & Trade Definition of International Business & Trade International Business – it refers to all commercial activities, including sales, investments, and transportation, that take place between to or more countries (Daniels, Radebaugh & Sullivan, 2015). This involves international movement of: Products Services Information and data Skills Manpower/Human resources Technology (Infrastructure or software) Patents, licenses, etc. Domestic Business – it refers to commercial transactions that take place within the geographical boundaries of a country. It is also known as domestic or national business. Differences between International and Domestic Business Trade – it involves the buying and selling of goods and services, or the exchange of goods or services between people or countries. International Trade – it refers to the movement of products or services across international boundaries (i.e., import, export). It also enables countries to expand markets for goods and services that they would not have had access to otherwise. As a result, the market has more competition and thus more competitive prices, resulting in a cheaper product for the consumer. International business is broader and more comprehensive, with a greater scope. Other types of transactions include investments, tourism, travel, transportation, communication, banking, distribution, advertising, and so on. Globalization vs. International Trade/Business Globalization - It refers to the global connection and integration of people, businesses, and governments. It also involves the liberalization of cross-border trade and resource movements or the reduction of government regulations and restrictions to international movements of commodities, services, capital, technology, and people that influence global economic development. Over time, globalization has accelerated which resulted to increased global interaction which contributed a rise in international trade as well as the exchange of ideas and culture. Globalization has resulted in increased interconnection across global markets, as well as enhanced communication and awareness of business opportunities in the far areas of the world. More investors can now explore new markets and access new investment opportunities from a greater distance than ever before. Advantages/Disadvantages of engaging in international trade and business Advantages of International Trade Bigger variety of products for the local population One important advantage of international trade is that it gives the local population the opportunity to choose from a bigger variety of different products. For instance, imagine a world where you can only buy goods that are manufactured or grown locally. You will notice that the product range would be quite limited and most of the tasty and convenient things you can buy in our stores would not be available to you if there was no free trade. Thus, trading with other countries is a great opportunity to assure a big variety of goods for billions of people on our planet. Higher level of competition with decreasing prices Through globalization and the increase in international trade, also the level of global competition increased significantly. While in former times, some local companies had almost no competitors and had been able to charge pretty high prices for their products, those companies are now often forced to lower their product prices due to fierce global competition. This may be quite bad for those companies, however, we as consumers can greatly benefit from an increased level of competition since this implies lower product prices and we will be able to afford more material goods due to that. Fierce competition leads to high level of technological progress International competition not only lowers product prices, it also leads to fast technological progress since companies around the world try to invent new things in order to get a competitive advantage over other globally operating firms. High levels of technological progress not only imply a higher level of competitiveness for firms, it also benefits our global society since technology often makes our lives more convenient. Thus, although firms may only act in a profit-maximizing and selfish manner, this could still also translate into an increase in the quality of life of many people all over the world. Companies can expand their target market Another advantage of international trade is that it gives companies the opportunity to expand their target markets. For instance, imagine you engage in the production of a pretty specialized product and there is one big competitor in your local market which you will likely never be able to beat in his game. However, due to the possibility of international trade, you might be able to target other regions all over the world instead of focusing on one local market. Thus, it may no longer be important to beat your big local competitor since you have plenty of other markets abroad where you can make big profits and you will not be dependent on the local market anymore. Companies can buy cheap resources from countries with weak currencies Especially for companies that are resource-intensive and need plenty of commodities and other raw materials on a regular basis, international trade can be quite beneficial since those companies might be able to buy large quantities of raw materials from foreign countries for a relatively cheap price. This is especially true when it comes to buying from companies in countries with pretty weak currencies. This is especially true for companies operating in the US or in Europe. Since they both benefit from pretty stable currencies, the currencies of other countries often greatly depreciate in value and companies in the US and Europe can get their raw materials pretty cheap from those countries due to the high depreciation rate. Low production costs Companies can also produce their products in low-wage countries like China in order to save money in the production process. By doing so, they can offer those products at a pretty low price and can therefore increase their level of competitiveness compared to companies that want to produce locally in high-wage countries. Supply with important medical equipment International trade is not only beneficial for the mass production of goods for our daily life, it has also its advantages when it comes to the supply with medical equipment. Some countries may have the production capacities to supply other countries with large numbers of medical equipment so that those countries are prepared in case they need this kind of equipment in a short period of time. Thus, international trade can also contribute to a higher level of security regarding the supply of medical equipment. Countries can specialize in certain products Due to international trade, it has become more important than ever for countries to specialize in certain kinds of products. For instance, countries with quite low wages can specialize in labor-intensive products and get a competitive advantage in this field since other countries will not have these low wages and will therefore not be able to compete in the long run. Therefore, it is crucial to use local advantages in certain areas in order to assure the competitiveness of industries in the respective country. This high level of specialization may give companies in those countries a long-term competitive advantage, which may improve their global market position and increase profits. International cooperation International trade also fosters cooperation between countries. If countries engage in significant trade activities with each other, they are more likely to cooperate and find compromises regarding certain conflicts of interest. Thus, international trade can also improve the bonds between companies and states and may lead to a higher level of competitiveness of companies due to those cooperations. Trade partners can support each other In case of financial difficulties, companies who are trading with each other on a regular basis as part of a long-term agreement may also be willing to help each other in case of economic downturns or other financial difficulties. This may prevent one of those companies from going bankrupt. Thus, international trade may also give companies a higher level of security against bankruptcy and other serious financial issues. International trade can increase total global welfare Since countries can specialize in the things they can produce in the most efficient manner, global trade can significantly increase the overall welfare levels on our planet. This means that we as humanity are able to consume more goods and services on average compared to a state without international trade. However, this doesn’t mean that everyone will be able to consume more. Due to distribution problems, some people might even suffer from international trade since their countries might lose their competitiveness. Thus, even though overall global welfare increases due to international trade, some countries might even end up worse compared to a fictive state where there is no international trade at all. Higher tax revenue Since international trade will increase the overall welfare levels in many countries, the tax revenue in those countries will also likely increase. Therefore, this higher tax revenue can be used to improve the local infrastructure. By doing so, the overall quality of life for the local population can be further improved. Access to international industry experts Another upside of international trade is that firms get access to industry experts all over the world. In certain fields, especially in those areas where technology is not mature yet, there is often a quite limited number of people who really know what they are talking about. In those areas, it is crucial for companies to hire those experts in order to get a competitive advantage. Thus, with international trade and globalization, it is much easier for those companies to hire those experts or at least to manage cooperations with them. Hedging against business risks in certain markets Focusing on just one single local market is often quite risky since in times of local economic downturns or other issues in this region, companies may get in serious financial trouble. Thus, by targeting different markets and by engaging in international trade, companies are less dependent on one single market and they can diversity their geographic business risk due to that. Countries may refrain from serious conflicts due to economic interests Since international trade is quite important in our nowadays state of the world, countries may refrain from serious conflicts since they do not want to put their important trade connections at risk. Therefore, international trade may also help to avoid conflicts or even wars. Access to foreign investments International trade also allows investors from all over the world to finance projects in countries abroad. This is not only beneficial for the profits of investors, but may also improve the living conditions of many people in poor countries since through investments in those countries, the economy will be strengthened and more people may be able to get a higher income and to provide for their families. Disadvantages of International Trade Dependency on other countries From the previous analysis, it has become clear that international trade has many advantages and can be a major factor in order to improve and assure our global wealth. However, there are also some issues related to global trade. One disadvantage of international trade is that it often implies a significant dependence on countries. For instance, if large amounts of a special commodity are shipped to another country and the commodity is quite rare, the exporting country can often dictate prices and the receiving country may have to pay those prices since there may simply be a lack of alternatives. Therefore, international trade can lead to an unpleasant level of dependencies on other countries, which may be pretty economically harmful to certain countries. Countries may be forced into conflicts Due to economic dependencies from other countries, some countries may also be forced into conflicts which they actually do not want to be involved in. For instance, if the economic dependency on trade with another country is quite strong, countries may be forced to engage in local conflicts and fight for another country’s interests since they fear to lose their important trade options otherwise. Economic interests may lead to injustice Even though international trade has the potential to improve the living conditions of billions of people on our planet due to welfare gains, there is still a significant distribution problem regarding this gain in wealth. While some countries in our rich Western world greatly profit from international trade, other countries may actually suffer since they might not be able to compete in this fierce global market and the local population may rather suffer than profit from those trade activities. Therefore, international trade can even lead to serious global injustice in some poor countries of our planet. Local unemployment Global trade may also lead to significant local unemployment. Small companies may go out of business Companies of different sizes are also affected by international trade in a different manner. For instance, while big companies are often able to profit from international trade since they are able to expand their economic territory, small companies may not have this opportunity since they have limited financial resources and expanding to other markets may be costly. Therefore, especially for those small companies, global trade may lead to serious financial trouble and many of those small businesses may eventually lose their competitiveness and go out of business in the long run. High levels of greenhouse gas emissions Global trade can also be quite harmful to our environment. Since global competition increases significantly, companies all over the world have an incentive to expand as fast as possible. However, this expansion process often involves the production of high amounts of material goods, which in turn implies serious levels of greenhouse gas emissions and eventually contributes to global warming. Negative externalities regarding pollution Another problem of international trade is that the related fierce competition will give companies an incentive to excessively pollute our environment. For instance, emissions do not stop at country borders but will hurt our whole planet since they contain harmful greenhouse gases that contribute to global warming. However, companies will not take those negative externalities into account since they are not charged for those emissions properly. Therefore, every company has the incentive to excessively pollute our environment in order to accomplish higher production levels, even though this will lead to an unpleasant environmental outcome for everyone in the long run. Resource depletion International trade also contributes to the resource depletion problem. Since our global welfare levels increase on average due to international trade, people are able to consume more material goods. For the production of those goods, large amounts of natural fossil resources have to be used, which may cause serious problems since at one point in time, some of our natural resources may be entirely depleted and we will no longer be able to use those resources for production purposes. This may lead to a variety of problems since we might no longer be able to produce many important goods due to a lack of commodities. Cultural differences Cultural differences may also lead to problems related to international trade. For instance, if two countries had problems in the past and their cultural values are also quite different, those countries may not be able to establish fair trading agreements and for those kinds of problematic relationships, trade will be of no use. Big companies may be able to avoid paying taxes Some big corporations also managed to avoid or at least to greatly reduce their tax burden through international trade and offshore firms. Big tech companies often only pay around 2% taxes on their profits while other smaller companies will not be able to avoid taxes and therefore suffer from a competitive disadvantage. This can be considered to be quite unfair since companies who earn the most should also contribute to tax revenue in an appropriate manner. Exchange rates greatly vary over time Another disadvantage of engaging in international trade is that there is a significant exchange rate risk associated with it. For instance, let’s assume you are a manufacturer of certain components and you buy your raw materials in a foreign country. If the currency in the foreign country significantly appreciates, you might be in serious trouble since you have to spend much more for the same amount of raw materials now. Thus, if you do not hedge against those currency risks, you might get in serious trouble sooner or later. Complying with international laws may be difficult International trade also implies the need to adjust business actions in order to comply with international and foreign laws. While companies who only engage in national markets just have to make sure to comply with local laws, companies engaging in international trades also have to take into account several other regulatory frameworks, which may be costly since the help of experts may be needed in order to comply with those international regulations. Financial stability of counterparties may be questionable By engaging in international trade, there is also a significant counterparty risk involved. For instance, you might not be able to evaluate the financial counterparty in a foreign country correctly. If this counterparty goes bankrupt, you may be in serious trouble since you might not get the money this company might still owe to you. Therefore, international trade can also significantly increase the counterparty risk for companies. Highly skilled workers may leave their home country Globalization and international trade may also lead to a state where highly skilled workers might leave their home country since they are able to earn much more money abroad. However, this leads to serious problems for a country since only low-skilled workers may be left and not enough mental potential may stay in the country to economically progress in the long run. Political instabilities may be a challenge Some regions may also be politically unstable and revolutions may lead to serious problems for companies trading with other companies in those regions. For instance, revolutions often lead to expropriation and your counterparty may go out of business, which may also lead to a financial loss for you if your counterparty still owes you money.
