In global trade, there’s a convergence and, at times, a conflict of the interests of the different

stakeholders—from businesses to governments to local citizens.

● Country’s balance of payments

○ record of its economic transactions with the rest of the world; this record
shows whether a country has a trade surplus or trade deficit
■ trade surplus - value of exports exceeds value of imports
■ trade deficit - value of imports exceeds value of exports
● Trade figures can be further divided into merchandise trade and services trade
accounts; a country can run a surplus in both accounts, a deficit in both accounts, or
a combination of the two.

● Foreign exchange provides a means for settling accounts across borders.

● The dynamics of international finance can have a significant impact on a nation’s
economy as well as the fortunes of individual companies.
○ Currencies can be subject to devaluation or revaluation which firms can
manage by hedging.
● Trade is the concept of exchanging goods and services between two people or
entities.
● International trade is the concept of this exchange between people or entities in two
different countries.

● Mercantilism
○ developed in 16th century – earliest efforts to develop an economic theory
○ country’s wealth was determined by the amount of its gold and silver holdings
○ promotes exports and discourages imports (goal: trade surplus)
○ new nations promoted exports was to impose restrictions on imports
(protectionism)
● Japan, China, Singapore, Taiwan, and even Germany still favor exports and
discourage imports through a form of neo-mercantilism
○ promote a combination of protectionist policies and restrictions and
domestic-industry subsidies

● Adam Smith
○ questioned mercantile theory in 1997
○ offered a new trade theory called absolute advantage
■ ability of a country to produce a good more efficiently than another
nation
■ trade between countries shouldn’t be regulated or restricted by
government policy or intervention and should flow naturally accdng to
market forces
■ by specialization, countries would generate efficiencies, because
their labor force would become more skilled by doing the same tasks
● Comparative Advantage by David Ricardo 1817
○ occurs when a country cannot produce a product more efficiently than the
other country; however, it can produce that product better and more efficiently
than it does other goods
○ tries to fix the flaw of absolute advantage: some
 ○ countries may be better at producing both goods and, therefore, have an
advantage in many areas
● Firm-based Theories
○ emerged after World War II and was developed in large part by business
school professors, not economists
○ evolved with the growth of the multinational company (MNC) and intraindustry
trade (trade between two countries of goods produced in the same industry)
● Country Similarity Theory intraindustry trade terms of customer preferences, offer the most potential for success.
companies often find that markets that look similar to their domestic one, in

○ developed by Swedish economist Steffan Linder in 1961

○ consumers in countries that are in the same or similar stage of development
would have similar preferences
○ most trade in manufactured goods will be between countries with similar per
capita incomes, and intraindustry trade will be common
● Product Life Cycle Theory
○ Raymond Vernon, a Harvard Business School professor in 1960s
○ originating in the field of marketing, stated that a product life cycle has three
distinct stages: (1) new product, (2) maturing product, and (3) standardized
product
● Global Strategic Rivalry
○ Emerged in 1980s and based on the work of economists Paul Krugman and
Kelvin Lancaster
○ focused on MNCs and their efforts to gain a competitive advantage against
other global firms in their industry
○ critical ways that firms can obtain a sustainable competitive advantage are
called the barriers to entry for that industry
■ research and development,
■ the ownership of intellectual property rights,
■ economies of scale,
■ unique business processes or methods as well as extensive
experience in the industry, and
■ the control of resources or favorable access to raw materials
● National Competitive Advantage Theory
○ Michael Porter of Harvard Business School in 1990
○ nation’s competitiveness in an industry depends on the capacity of the
industry to innovate and upgrade
○ four determinants are
■ (1) local market resources and capabilities
● recognized the value of the factor proportions theory, which
considers a nation’s resourcesas key factors in determining
what products a country will import or export
■ (2) local market demand conditions
● sophisticated home market is critical to ensuring ongoing
innovation, thereby creating a sustainable competitive
advantage
■ (3) local suppliers and complementary industries
● large global firms benefit from having strong, efficient
supporting and related industries to provide the inputs required
by the industry
 ■ (4) local firm characteristics
● include firm strategy, industry structure, and industry rivalry
● General Agreement on Tariffs and Trade (GATT)
○ series of rules governing trade that were first created in 1947 by 23 countries
○ 125 member nations by the time it was replaced by WTO
○ expanded global trade, primarily through the reduction of tariffs
○ “trade should be free and equal”
○ Most-Favored-Nation-Clause (MFN)
■ once a benefit, usually a tariff reduction, was agreed on between two
or more countries, it was automatically extended to all other member
countries
○ Uruguay Round in 1986-1994 current round: DOHA round started Nov 2001

■ trade meetings were called rounds in reference to the series of

meetings among global peers held at a “roundtable.”
■ resulted in the end of GATT and the creation of the World Trade
Organization (WTO)
● World Trade Organization (WTO)
○ January 1, 1995
○ actual institution charged with the mission of promoting free and fair trade
○ serve as a negotiating forum for member nations to dispute, discuss, and
debate trade-related matters
○ the largest, global trade organization with 153 members
○ biggest change from GATT to the WTO is the provision for the settlement of
disputes
○ has also undertaken the effort to focus on services rather than just goods
○ WTO Agreement on Trade-Related Aspects of Intellectual Property Rights
(TRIPS)
■ creator of the property has the right to financially benefit from his or
her creation
○ Agriculture and textiles are two key sectors in which the WTO faces
challenges as well as antidumping.
■ company exports to a foreign market at a price that is either lower
than the domestic prices in that country or less than the cost of
production
● Tariffs
○ any tax or fee collected by a government/ tax on imported goods
○ trade liberalization, they generally mean reducing the tariffs on imported
goods, thereby allowing the products to enter at a lower cost
○ any increase in tariffs is referred to as protection or protectionism
○ two basic ways in which tariffs may be levied: specific tariffs and ad valorem
tariffs
■ specific tariffs - levied as a fixed charge per unit of imports
■ ad valorem tariff - levied as a fixed percentage of the value of the
commodity imported
■ two-part tariff - both a specific and an ad valorem tariff are levied on
the same product simultaneously
○ One method used to measure the degree of protectionism within an economy
is the average tariff rate
 ■ average tariff rates are less than 20 percent in most countries,
although they are often quite a bit higher for agricultural commodities
■ most developed countries, average tariffs are less than 10 percent and
often less than 5 percent

Regional economic integration

1. Free Trade Area
● most basic form of economic cooperation
● remove all barriers to trade between themselves but are free to independently
determine trade policies with nonmember nations
● ex. NAFTA
2. Customs Union
● economic cooperation as in a free-trade zone
● barriers to trade are removed between member countries
● diff from FTA is members agree to treat trade with nonmember countries in a
similar manner
3. Common Market
● allows for the creation of economically integrated markets between member
countries
● barriers and any restrictions on the movement of labor and capital between
member countries are removed
● like customs unions, there is a common trade policy for trade with
nonmember nations
● workers no longer need a visa or work permit to work in another member
country of a common market
4. Economic Union
● created when countries enter into an economic agreement to remove barriers
to trade and adopt common economic policies

Trade bloc is basically a free-trade zone, or near-free-trade zone, formed by one or more
tax, tariff, and trade agreements between two or more countries

Pros of creating REI

● Trade creation
● Employment opportunities
● Consensus and cooperation
Cons
● Trade diversion
● Employment shifts and reductions
● Loss of national sovereignity

1. North American Free Trade Agreement (NAFTA)

● Encouraging trades between Canada, US, and Mexico
● Mexican maquiladoras have fared well in this arrangement by being the final
production stop before entering the United States or Canada
○ Maquiladoras are production facilities located in border towns in
Mexico that take imported materials and produce the finished good for
export
2. South America: MERCOSUR
● Common Market of the South, Mercado Común del Sur
● Established in 1988 as a regional trade agreement between Brazil and
Argentina and then was expanded in 1991 to include Uruguay and Paraguay
○ + Bolivia, Chile, Colombia, Ecuador, and Peru have become associate
members
○ + Venezuela is in the process of full membership
3. Europe: European Union (EU)
○ most integrated form of economic cooperation
○ EU originally began in1950 to end the frequent wars between neighboring
countries in the Europe
○ 6 founding nations were France, West Germany, Italy, and the Benelux
countries (Belgium, Luxembourg, and the Netherlands), all of which signed a
treaty to run their coal and steel industries under a common management
○ EU has twenty-seven member countries
4. Asia: ASEAN + Asia Pacific Economic Cooperation - 21 member economies
● Association of Southeast Asian Nations in 1967 by Malaysia, Thailand,
Indonesia, Singapore, and the Philippines
○ Myanmar (Burma), Vietnam, Cambodia, Laos, and Brunei have joined
the association
● primary focus is on economic, social, cultural, and technical cooperation as
well as promoting regional peace and stability
● prevent the domination of Southeast Asia by external powers—specifically
China, Japan, India, and the United States
African Economic Community (AEC) has more member countries but smaller portion of global trade

● most global businesses find that operating in stable environments leads to the best
business operations for a range of reasons
○ Staffing
■ asier to recruit skilled labor if the in-country conditions are stable and
relatively risk-free
○ Operations
■ In unstable environments, companies fear loss or damage to property
and investment
○ Regulations
■ Unclear and constantly changing business rules make it hard for firms
to plan for the long term
○ Currency convertibility and free-flowing capital
● United Nations
○ Formed in 1945 to replace League of Nations (1919)
○ maintain international peace and security; to develop friendly relations
between nations; and to foster international cooperation in solving economic,
social, humanitarian, and cultural issues
○ Human rights and equality 10 principles: human rights, labor, environment, anti-corrpution

○ 192 nations - Taiwan with observer status

○ With 6 main bodies
■ General Assembly
● deliberative body of the UN and consists of all of the member
countries that meet in regular sessions throughout the year
 ■ Security Council
● responsible for addressing issues related to peace and
security
■ Economic and Social Council (ECOSOC)
● responsible for issues related to economics, human rights, and
social matters
■ Secretariat
● oversees the operations of the UN and is technically headed
by the Secretary-General
■ International Court of Justice
● hears disputes between nations
■ UN Trusteeship Council - inactive
● Recent support for trade liberalization is seen in the establishment of numerous free
trade areas and the participation of many countries in the Doha Round of trade talks.
● Recent opposition to trade liberalization is seen in national responses to the financial
crisis, the protest movement at the Seattle Ministerial and other venues, and the
failure in the United States to grant trade promotion authority to the president.
● International Investment
○ Portfolio Investment
■ investment in a company’s stocks, bonds, or assets, but not for the
purpose of controlling or directing the firm’s operations or
management
○ Foreign Direct Investment
■ investment in or the acquisition of foreign assets with the intent to
control and manage them
■ long-term strategy
■ Inward FDI
● investments coming into the country
■ Outward FDI
● investments made by companies from that country into foreign
companies in other countries
■ Inward FDI - Outward FDI = net FDI inflow
■ Horizontal FDI
● company is trying to open up a new market—a retailer, for
example, that builds a store in a new country to sell to the local
market
■ Vertical FDI
● company invests internationally to provide input into its core
operations—usually in its home country
■ Backward Vertical FDI
● firm brings the goods or components back to its home country
(i.e., acting as a supplier)
■ Forward Vertical FDI
● firm sells the goods into the local or regional market (i.e.,
acting as a distributor)
■ Greenfield FDI
● multinational corporations enter into developing countries to
build new factories or stores
 ■ Brownfield FDI
● company or government entity purchases or leases existing
production facilities to launch a new production activity.
● Why companies choose to invest in foreign markets
○ Cost
○ Logistics
○ Market
○ Natural Resources
○ Know-how
○ Customers and competitors
○ Policy
○ Ease
○ Culture
○ Impact
○ Expatriation of funds
○ Exit
● In most instances, governments seek to limit or control foreign direct investment to
protect local industries and key resources. They do this by:
○ Ownership Restrictions
○ Tax rates and sanctions
● How governments encourage FDI
○ Financial incentives
○ Infrastracture
○ Administrative processes and regulatory environment
○ Invest in education
○ Political, economic, and legal stability