UNIT CECONOMIC FOUNDATIONS

AND FINANCING

5.04 Summarize global marketing and international trade.

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The nature of international trade

• International trade: The exchange of goods and services among nations.

• Imports: Goods and services purchased from other nations.

• Exports: Goods and services sold to other nations.

• Most countries are not able to produce all of the goods and services that they need, therefore, they must purchase some from other nations.

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The nature of international trade (cont.)

• Interdependence occurs because nations possess unique resources and capabilities and are able to supply other countries with goods and services that those countries may not be capable of producing. This creates global marketing.

• Global marketing: The process of selling products to more than one country.

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The nature of international trade

(cont.)

• Absolute advantage: The condition that exists when a country has unique resources and capabilities that allow it to produce a product at the lowest cost possible.

• Comparative advantage: The value gained by a nation when it sells its products most efficiently. When countries produce goods best suited for their capabilities, this gives them the comparative advantage in international trade.

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The nature of international trade (cont.)

• Emerging nations that have large, unskilled labor forces willing to work for low wages have the comparative advantage when manufacturing labor-intensive products such as clothing and toys. High-wage countries (U.S.) find it more cost effective to buy these products from those emerging nations rather than produce them themselves.

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What are the benefits of international trade?

• Benefits to consumers– High-quality goods at lower prices– Increased variety of goods and services

from which to choose

• Benefits to producers– Expansion opportunities in other countries– More customers, thus more profit– Approximately one-third of the profits of

US businesses come from international trade and foreign investments.

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What are the benefits of international trade? (cont.)

• Benefits to workers– Increased trade may lead to increased

employment opportunities at home and abroad.

• Benefits to nations– Individuals have more choices when making

purchasing decisions.– A higher standard of living often results in

countries that benefit from foreign investments.

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What is the government’s involvement in international trade?• In the U.S., imports are monitored

through the customs division of the U.S. Treasury Department. All goods that enter this country are subject to a search and review by customs officials.

• All U.S. citizens and businesses must abide by the customs requirements of foreign countries when visiting or when exporting goods.

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What is the government’s involvement in international trade?

(cont.)• Balance of trade: The difference in value

between the exports and imports of a nation.– Trade surplus: A positive balance of trade

that occurs when exports exceed imports.– Trade deficit: A negative balance of trade

that occurs when imports exceed exports.– A trade deficit reduces the revenue of a

nation.– A nation with a large trade deficit may have

high unemployment, as foreign competitors take jobs away from domestic firms.

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What is the government’s involvement in international trade?

(cont.)

• Free trade: Commercial exchange between nations with no restrictive regulations.– When countries want to limit trade, they set

trade barriers or restrictions to control the flow of goods and services between nations.

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What is the government’s involvement in international trade? (cont.)

• Trade barriers– Tariff (duty): A tax on imports.

• May be used to produce income for a country

• Tariffs in the U.S. today are as low as 25 cents or less per item or pound.

• Protective tariffs are high to increase the price of imported goods so that domestic products can compete with them and to protect domestic jobs and businesses.

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What is the government’s involvement in international trade? (cont.)

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What is the government’s involvement in international

trade? (cont.)

• Trade barriers (cont.)

– Quota: A limit on the number or value of products that may be imported.

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What is the government’s involvement in international trade?

(cont.)

• Trade barriers (cont.)

– Embargo: A ban on specific goods entering and leaving a country.

• May be imposed for health reasons• May be imposed for political reasons

– Protectionism: The establishment of economic policies that restrict imports in order to protect domestic industries.

• Opposite of free trade• Tariffs and quotas are methods used to practice

protectionism.

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What is the government’s involvement in international trade?

(cont.)

• Trade barriers (cont.)

– Subsidy: Government assistance given to boost certain industries.• Allows industries to better compete with

foreign competition• U.S. and Europe subsidize farmers.

These subsidies allow farmers to overproduce products to be sold or donated to other countries.

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Trade agreements and alliances

• In order for foreign governments to establish guidelines for international trade and to set up trade alliances, they make agreements with each other.– World Trade Organization (WTO)– North American Free Trade Agreement

(NAFTA)– European Union (EU)

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World Trade Organization (WTO)

• Formed in 1995

• As of October 2004, 148 member nations that make rules governing international trade and resolve trade disputes

• Studies important trade issues and evaluates the health of the world economy

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North American Free Trade Agreement

(NAFTA)

• International trade agreement among Canada, the U.S., and Mexico

• Went into effect on January 1, 1994• Primary goal is to eliminate all trade

barriers and investment restrictions among the three nations by 2009

• Eliminated tariffs on thousands of goods traded between Mexico and the U.S.

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European Union (EU)

• Europe’s trading bloc• Trading bloc: An agreement between two or

more countries to eliminate all trade restrictions between them while imposing trade and investment barriers on countries not part of the bloc.

• Established in 1992• Allows free trade among the member nations• Established a single European currency (the

euro) and a central bank.• To be a member, countries must conform to

the EU’s political, economic, and legal standards.

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Forms of international trade• Importing

– Products imported into the U.S. must meet the same standards as domestic products.

– U.S. businesses that deal in foreign imports hire customs brokers who are specialists licensed by the U.S. Treasury Department and who understand the laws, procedures, and tariffs governing imports.

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Forms of international

trade (cont.)• Exporting

– An easy way for domestic companies to enter the global marketplace with minimal risk

– The U.S. government internet export portal and BuyUSA website are excellent resources for businesses wishing to export goods and services.

• www.buyusa.com• www.export.gov

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Forms of international trade (cont.)

• Licensing: Allowing another company (licensee) to use a trademark, patent, formula, company name, or other intellectual property for a fee or royalty.– A foreign company makes a product using

information or guidelines provided by the licensor.

– If the product is successful in a foreign country, the licensor has entered the market with minimal risk; if the product fails, the licensor’s name reputation are damaged.

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Forms of international trade (cont.)

• Licensing (cont.)

– Franchising is a special type of licensing.• A franchisor allows a franchisee the rights to

operate using the company name.• The franchisee must follow the operational

guidelines established by the franchisor in order to ensure a unified image for the company.

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Forms of international trade (cont.)

• Contract manufacturing: The process by which a company hires a foreign manufacturer to make its products according to company specifications.– The finished products may be sold in that country

or exported.– Many U.S. companies that sell clothing, toys, and

computers use contract manufacturers.– The major benefit is lower wages.– A major disadvantage is that proprietary information

that must be given to the manufacturers is often stolen by workers and sold to counterfeiters.

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Forms of international trade (cont.)

• Joint venture: An agreement between two or more companies to work together to provide a good or service.– In some countries, foreign investors are not

allowed to own 100 percent of a business.– A local business partner must be found,

thus creating a joint venture.– Local partners know the local market and

are familiar with the procedures for conducting business in their own country.

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Forms of international trade (cont.)

• Joint venture (cont.)

– Foreign direct investment (FDI): The establishment of a business in a foreign country.

• May involve simply setting up an office to maintain a presence in that country.

• High levels of FDI may involve the purchase of existing foreign companies or construction of manufacturing facilities and retail stores.

• Examples: British, Dutch, and Japanese investments in the U.S.

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Forms of international trade (cont.)

• Joint venture (cont.)

– Multi-nationals: Large corporations with operations in several countries.

– Mini-nationals: Small and midsized companies that have operations in foreign countries.

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Political factors that affect international

business

• Government’s stability• Changes in trade

regulations and/or agreements

• Domestic laws which may impact a business’s operations

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Economic factors that affect international business

• Infrastructure• Labor force

– Quality and cost of labor in a foreign country

– Educational and skill levels of workers– Customary wages and employment laws

• Employee benefits– In most countries, employers are

responsible for paying for required benefits in addition to wages.

– Payroll taxes

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Economic factors that affect international business (cont.)

• Taxes– Property taxes– Taxes on profits

• Standard of living– This is a consideration when considering a foreign

country as a market rather than a manufacturing site.

– Is the standard of living in the targeted country high enough so that the citizens can afford to purchase your product?

– As the number of middle-income workers increases in poorer nations, the demand for consumer goods will increase.

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Economic factors that affect international

business (cont.)

• Foreign exchange rate– Changes in the exchange rate affect

businesses that sell in foreign markets.– When the U.S. dollar strengthens in value

against other currencies, international sales of U.S.-made products will most likely fall.

– When the U.S. dollar weakens in value against other currencies, international sales of U.S.-made products will most likely increase.

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Socio-cultural factors that affect international business

• Language and symbols– Differences in language and customs often

make doing business in foreign countries challenging.

– Cultural symbols differ from country to country.

• Holidays and religious observances

• Social and business etiquette

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Technological factors that affect international business

• Measurement systems

• Electric volt standards

• Use of computers, faxes, voice mail, cellular phones, and the Internet

• Radio and television broadcast stations

• Internet service providers

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Global marketing strategies

• Globalization: Selling the same product and utilizing the same promotional methods in all countries.– Only used for a small number of products

sold globally– Globalization works when different cultures

share common needs. Companies are then able to identify a global consumer.

– Benefits companies by giving them global brand recognition

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Global marketing strategies (cont.)

• Adaptation: A company uses an existing product and/or promotion with some changes in order to better suit the characteristics of a foreign market.– Product adaptation– Promotion adaptation– Pricing adaptation

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Product adaptation

Changing a product to meet different consumer and cultural needs.– Product name may change.

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Promotion adaptation

Changing the advertising message to reflect the differences in foreign markets.– Oftentimes, advertising must be changed

to reflect government regulations, values, and cultural differences.

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Pricing adaptation

Setting prices to compete with the prices of local products.

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Global marketing strategies (cont.)

• Customization: Designing specific products or promotions for certain foreign markets.