International Marketing: CH 2.

It is critical that the international marketing manager recognize and understand the differences
in economies of the world marketplace. The key topics associated with the global economic
environment are:
 International trade theory. Firms expanding internationally must appreciate how their
international activities match a country’s goals for international trade.
 Balance of payments. Leading indicator of the international economic health of a
country.
 Government policy and trade. Firms are directly impacted by government policies.
 Institutions in the world economy. Institutions such as the WTO have great influence.
 Regional economic integration. Firms benefit from economic integration because costs
of doing business are lower.

International Trade Theory

The principal economic basis for international trade is difference in price; that is, a nation can
buy some goods more cheaply from other nations that it can make them. Just as most firms do
not seek complete vertical integration but buy many materials and supplies from outside firms,
so most nations decide against complete self-sufficiency, or autarky, in favor of buying cheaper
goods from other countries.

Absolute Advantage
Absolute advantage is a country’s ability to produce good at a lower cost, in terms of real
resources, than another country. Florida has a climate that is better suited for growing oranges
than Alaska does.

Comparative Advantage
Different countries have dissimilar prices and costs on goods because different goods require a
different mix of factors in their production and because countries differ in their supply of these
factors. Comparative advantage is a country’s ability to produce a good at a lower cost, relative
to other goods, compared to another country; a country tends to produce and export those
goods in which it has the greatest comparative advantage and import those goods in which it
has the least comparative advantage.

Product Life Cycle

According to this concept, many products go through a trade cycle wherein one nation is
initially an exporter of a product, then loses its export markets, and finally become an importer
of the product. In this example, assume that a U.S. firm has developed a high-tech product.
What follows is:
1. The united states export the product.
2. Foreign production starts.
3. Foreign production becomes competitive in export markets.
 4. Import competition begins.
In phase 1, a product’s innovation is likely to be related to the needs of the home market. As
the firm begins to fill home-market needs, it starts to export the new product.
In phase 2, importing countries gain familiarity with the new product. Gradually, producers in
wealthy countries begin producing the product for their own markets.
In phase 3, foreign firms gain production experience, leading to lower per unit manufacturing
costs.
In phase 4, the foreign producers now have sufficient production experience and economies of
scale to allow them to export back to the innovator’s home country.

Balance of Payments
In the study of international trade, the principal source of information is the balance of
payments (BoP). This is a summary statement of all the economics transactions between one
country and all other countries over a period of time, usually one year. Deficits (spending
exceeds earnings) or surpluses (earnings exceed spending) occur in specific BoP accounts. The
current account includes a list of trade transactions in manufactures goods and services, as well
as a list of unilateral transfers. The capital account includes flows such as direct and portfolio
investments, private placements, and bank and government loans.

Government Policy and Trade

International trade differs from domestic trade in that it occurs between different political
units, each one a sovereign nation exercising control over its own trade. Commercial policy is
the term used to refer to government regulations affecting foreign trade.

Tariffs
A tariff is a tax on products imported from other countries. A tariff levied based on quantity is
called a specific duty. A tariff levied as a percentage of the value of the goods is called an ad
valorem duty. Governments impose tariffs for two reasons: (1) they may want to earn revenue,
and (2) they want to make foreign goods more expensive to be able to protect national
producers. Tariff engineering is the term used to describe this process of minimizing the impact
of tariffs by modifying the form in which the product is exported so the importing country
imposes a lower tariff. Tariffs used to be most effective and easiest tool for countries to use in
reducing or eliminating foreign-made goods. Over the past 50 years, though, the WTO, bilateral
trade agreements, and agreements among nations, such as the NAFTA have significantly
reduced and eliminated tariffs.

Quotas
Quotas are quantitative restrictions that limit the amount of good that may enter a country.

Exchange Control
The most complete tool for regulation of foreign trade is exchange control, a government
monopoly on all dealings in foreign exchange, often resulting in a government’s rationing it out
according to its own priorities.
Non-tariff Barriers
Another form of government trade restriction, NTBs, do not directly impose a duty on imports.
NTBs include customs documentation requirements, country of origin marking, food and drug
laws, labelling laws, antidumping laws, “buy national” policies, and subsidies.

The World Trade Organization (WTO)

Because each nation is sovereign in determining its own commercial policy, the danger is that
arbitrary national actions will minimize international trade. One way to fight all of this, was the
creation of the WTO. The WTO has contributed to the expansion of world trade. Since 1947, is
has concluded eight major multilateral trade negotiations, the latest being the Uruguay round.
Providing a framework for multilateral trade negotiations is a primary reason for the WTO’s
existence, but other WTO principles further trade expansion. One is the principle of
nondiscrimination. Each contracting party must grant all others the same rate on import duty.
Consultation is another WTO principle. When trade disagreements arise, the WTO provides a
forum for consultation.

United Nations Conference on Trade and Development (UNCTAD)

Although the WTO has been an important force in world trade expansion, benefits have not
been distributed equally. The result of the dissatisfaction of the less-developed countries, was
the formation of the UNCTAD. The goal of UNCTAD is to further the development of emerging
nations, by trade as well as by other means.

International Monetary Fund (IMF)

In the days of the gold standard, exchange rated did not change in value. The stability and
certainty of the international gold standard came to an end, however, with the advent of WW1.
At the conclusion of WW2, nations met to address some of the problems that were believed to
have been contributing factors leading up to the war. One of the elements involved the
international monetary system and resulted in the establishment of the IMF, an organization
that acts as a forum for monetary and fiscal discussions that affect the world economy and that
supplies financial assistance and technical assistance.

World Bank Group

The world bank is another institution conceived at Bretton Woods. The World bank groups is an
institution whose goal is to promote economic growth, to provide loans for infrastructure
development, and to improve the living conditions of the world’s population.

Regional Economic Integration

Another major development since WW2 has been the growth of regional groupings. Regional
economic integration takes place when nations agree to work together to pursue common
economic gains. There are costs to a nation in joining a regional group, the chief one being that
the nation must give up national sovereignty—its right to govern itself without outside
interference.
Free-Trade Area
Although all regional groupings have economic goals, the various groups differ in organization
and motivation. The simplest is a free-trade area, in which the member countries agree to have
free movement of goods among themselves; that is, no tariffs or quotas are imposed against
goods coming from other members. Multilateral trade agreements are trade agreements
between more than two countries. Bilateral trade agreement is a trade between two countries.

Customs Union
Though similar to a free-trade area in that it has no tariffs on trade among members, a customs
union adds the more-ambitious requirement that members also have a uniforms tariff on trade
with nonmembers.

Common Market
A true common market includes a customs union but goes significantly beyond that because it
seeks to standardize or harmonize all government regulations affecting trade.

Economic Union
An economic union among nations is characterized by a common currency. This form of
integration is uncommon because of the impact on inflation and unemployment rates.

Political Union
The most integrated form of economic cooperation is political union. This form requires
adoption of the principles behind the other forms of integration, as well as the adoption of a
governing structure that supersedes individual national or state interests.