Part 5. International Trade

Exercise 18. Match the words and the definitions:

1. International trade a. Exchange of goods and services across national borders.

2. Exporting b. Buying products from another country.

3. Importing c. Relationship of exports to imports.

4. Balance of trade   d. Value of one currency relative to the currencies of other countries.

5. Balance of payment e. Difference between money coming into a country and money leaving the country.

6. Exchange rate f. Selling products to another country.

7. Import quota g. Limiting a number of products that can be imported.

8. Embargo   h. Complete ban on import or export of certain products.

International trade is the exchange of goods and services across national borders.

There are several reasons why one country would trade with other countries. First, no country, even a technologically advanced one, can produce all the products that its people want and need. Second, even if a country became self-sufficient, other countries would demand trade with that country to meet the needs of their people. Third, some countries have an abundance of natural resources and a lack of technological know-how. Other countries (for example, Japan) have vast technological skills, but few natural resources. Trade relations enable each country to produce what it is most capable of producing and to buy what it needs in a mutually beneficial exchange relationship.

Exchanges between and among countries, however, involve more than goods and services. Countries also exchange art, athletes (for international competition and friendly relations), cultural events (plays, dance performances, and so forth), medical advances, space exploration and labour.

The guiding principle behind international economic exchanges is the economic comparative advantage theory. This theory states that a country should produce and sell to other countries those products that it produces most effectively and efficiently and should buy from other countries those products it cannot produce as effectively or efficiently.

A country has an absolute advantage if it has a monopoly on the production of a specific product or is able to produce it more cheaply than all other countries.

The following terms refer to international trade:

Exporting is selling products to another country.

Importing is buying products from another country.

Balance of trade is the relationship of exports to imports. A favourable balance of trade occurs when exports exceed imports, an unfavourable balance of trade occurs when imports exceed exports.

Balance of payments is the difference between money coming into a country (from exports) and money leaving the country (for imports) plus money flows from other factors such as tourism, foreign aid, and military expenditures.

Exchange rate is the value of one currency relative to the currencies of other countries.

An organization may participate in international trade in many ways, including exporting and importing, joint venturing, licensing, creating subsidiaries, franchising, and forming a multinational organization. Firms just beginning to reach the international market are likely to use an independent export house (trading company) to handle all such sales. Eventually the function may be absorbed internally in the form of an export department or an export section in marketing.

A firm may decide to service a growing overseas market by licensing the manufacture of its product by a foreign producer on a royalty basis. The company sends representatives to the foreign producer to help set up the production process and may provide a variety of services such as marketing advice. Coke and Pepsi often enter foreign markets in this way.

As the size of a foreign market expands, a firm may want to establish a wholly owned foreign subsidiary. Such a subsidiary would operate much like a domestic branch.

Franchising is popular both domestically and in international markets. Firms such as McDonald’s and Hertz have many overseas units operated by franchisers.

One of the necessary ingredients for successful exchanges in many countries is knowing how to deal with foreign government bureaucracy. It is usually not enough to have a good product or ready markets. Government administrators overseas will often insist on some under-the-table payment to get the necessary permits and the permission to begin trade. Usually only natives to that country are suitably skilled to conduct such matters. They are used to the procedures, know who to see and what to say, and can minimize the necessary fees. To be successful trader in foreign countries, therefore, one might have to begin by contacting local businesspeople and gaining their cooperation and sponsorship.

What is often a much greater barrier to international trade is trade protectionism in a form of tariffs on imports, making them more expensive.

There are two different kinds of tariffs: revenue and protective. Revenue tariffs are designed to raise money for the government. Protective tariffs are designed to raise the retail price of imported products so that domestic products will be more competitive. These tariffs are meant to save jobs for domestic workers and to keep industries from closing down entirely because of foreign competition.

The term that describes limiting the number of products in certain categories that can be imported is import quota.

An embargo is a complete ban on the import or export of certain products.

There are two sides of the tariff issue.

Some people feel that tariffs are necessary to protect national markets from foreign competition.

Their arguments include the following:

· Tariffs save jobs.

· They protect industries vital to the country’s security such as aerospace, shipbuilding and automobile industries.

· They are needed to protect new domestic industries from established foreign competitors.

The opponents of tariffs counter argue by presenting the following negative effects tariffs can have:

· Tariffs reduce competition.

· They tend to increase inflationary pressure because they raise consumer prices.

· Tariffs tend to support special interest groups such as local manufacturers, but overall hurt the public who are forced to pay higher prices for imported products.

· Tariffs can lead to foreign retaliation and subsequently to trade wars.

Debates over trade restrictions will evidently stay a major part of international politics for the next decade.

Exercise 19. True or false?

1. Countries only trade when they have a lack of goods.

2. Except goods, countries also exchange art, medical advances, cultural events, etc.

3. Using an independent export house is usually the first step in reaching the international market.

4. Franchising is only used on domestic markets.

5. Trade protectionism only makes goods more expensive.

 

Tasks

Task 1. Answer the questions:

1. What are three forms of business ownership?

2. What does "unlimited liability" mean?

3. What are "fringe benefits"?

4. Why is it easier to manage a partnership than a sole proprietorship?

5. What is the difference between a limited and general partnership?

6. What points should an agreement between partners include?

7. What is the purpose of forming a corporation?

8. What is the most difficulty in forming a corporation?

9. How can a corporation save money on taxes?

10. What does double taxation of corporations mean?

Task 2. Answer the questions:

1. What are functions of packaging?

2. What is brand?

3. What is the difference between a brandname and a trademark?

4. What are two types of middlemen? What is the difference between them?

5. How do they help customers?

6. Can you give any other examples of different distribution strategies than those given in the text?

7. How does the public benefit from advertising?

8. What is the best way to create a favourable word-of-mouth?

9. What are the steps of public relations function?

10. What pricing aims can there be?

Task 3. Answer the questions:

1. What knowledge and skills should a good manager have?

2. What questions should be answered in the process of planning?

3. What are three forms of planning and who are they fulfilled by?

4. Why is stuffing now called human resources management?

5. What leadership style do you personally prefer at your workplace and why?

6. Why can the control function be called a heart of the management system?

Task 4. Answer the questions:

1. What are the purposes of accounting?

2. What is the difference between assets and liabilities?

3. What does "Owner's equity" mean?

4. What is the difference between the income statement and the balance sheet?

5. What is long-term financing usually used for?

6. What are the differences between stockholders and bondholders?

7. What is short-term financing used for?

8. What are the sources for short-term financing?

Task 5. Answer the questions:

1. Can you give examples of countries with lack of natural resources (except Japan)? abundance of human resources?

2. What does "The economic comparative advantage theory" mean?

3. What does "absolute advantage" mean?

4. What are the ways a company can use to participate in international trade?

5. What is usually the first step of a successful trader in a foreign country?

6. What is the difference between two kinds of tariffs?

7. What are your views on tariffs issue?