Chapter 3: Exploring Global Business

export-import bank of the united states

an independent agency of the U.S. government whose function is to assist in financing the exports of American firms

international monetary fund (IMF)

an international bank with 188 member nations that makes short-term loans to developing countries experiencing balance-of-payment deficits

coutertrade

an international barter transaction

general agreement on tariffs and trade (GATT)

an international organization of 159 nations dedicated to reducing or eliminating tariffs and other barriers to world trade

multilateral development bank (MDB)

an internationally supported bank that provides loans to developing countries to help them grow

economic community

an organization of nations formed to promote the free movement of resources and products among its members and to create common economic policies

export-import agent

arranges the sale of the products to foreign intermediaries for a commission or fee

revenue tarrifs

imposed solely to generate income for the government

absolute advantage

the ability to produce a specific product more efficiently than any other nation

comparative advantage

the ability to produce a specific product more efficiently than any other product

currency devaluation

the reduction of the value of a nation's currency relative to the currencies of other countries

balance of payments

the total flow of money into a country minus the total flow of money out of that country over some period of time

balance of trade

the total value of a nation's exports minus the total value of its imports over some period of time

Describe the various sources of export assistance. (Chapter Summary)

Many government and international agencies provide export assistance to U.S. and foreign firms. Sources of export assistance include U.S. Export Assistance Centers, the International Trade Administration, U.S. and Foreign Commercial Services, Export Legal Assistance Network, Advocacy Center, National Trade Data Bank, and other government and international agencies.

An internationally supported bank that provides loans to developing countries to help them grow.

Multilateral Development Bank (MDB)

The total flow of money into a country minus the total flow of money out of that country over the same period of time.

Not Balance of Trade

To protect the health of citizens. (Reasons for Trade Restrictions)

Products may be embargoed because they are dangerous or unhealthy e.g., farm products contaminated with insecticides.

To protect national security. (Reasons for Trade Restrictions)

Restrictions in this category generally apply to technological products that must be kept out of the hands of potential enemies. For example, strategic and defense-related goods cannot be exported to unfriendly nations.

True or False. Licensing and exporting can be considered relatively low-risk methods of entering foreign markets.

True

True or False. Quotas may be set on worldwide imports or on imports from a specific country.

True

True or False. Strategic alliances are partnerships formed to create competitive advantage on a worldwide basis.

True

True or False. Tariff is a tax levied on a particular foreign product entering a country.

True

True or False. The International Monetary Fund (IMF) makes short-term loans to developing countries experiencing balance-of-payment deficits.

True

international business

all business activities that involve exchanges across national boundaries

Chapter Three Concept Checks: (No Answers)

*Sections 3-1 to 3-3:* 1. Explain the economic basis for international business. 2. Why do firms engage in international trade? 3. What is the difference between an absolute advantage and a comparative advantage? 4. What is the difference between balance of trade and balance of payments? 5. List and briefly describe the principal restrictions that may be applied to a nation's imports. 6. What reasons are generally given for imposing trade restrictions? 7. What are the general effects of import restrictions on trade? 8. According to the IMF, what are the world economic growth projections for 2013 and 2014? 9. What is the importance of exports to the U.S. economy? 10. Which nations are the principal trading partners of the United States? What are the major U.S. imports and exports? 11. Discuss international trade agreements and international economic organizations working to foster trade. 12. Are trade deficits bad? a. In testimony before the Senate Finance Committee, Daniel T. Griswold, associate director of the Center for Trade Policy at the Cato Institute, remarked, "The trade deficit is not a sign of economic distress, but of rising domestic demand and investment. Imposing new trade barriers will only make Americans worse off while leaving the trade deficit virtually unchanged." *Section 3-4 and beyond:* 13. Define and describe the major objectives of the World Trade Organization (WTO) and the international economic communities. 14. What is the North American Free Trade Agreement (NAFTA)? What is its importance for the United States, Canada, and Mexico? 15. Two methods of engaging in international business may be categorized as either direct or indirect. How would you classify each of the methods described in this chapter? Why? 16. What is a letter of credit? A bill of lading? A draft? 17. In what ways is a multinational enterprise different from a large corporation that does business in several countries? 18. What are the steps in entering international markets? 19. List some key sources of export assistance. How can these sources be useful to small business firms? 20. What is the Export-Import Bank of the United States? How does it assist U.S. exporters? 21. What is a multilateral development bank (MDB)? Who supports these banks? 22. What is the International Monetary Fund? What types of loans does the IMF provide? 23. The United States restricts imports but, at the same time, supports the WTO and international banks whose objective is to enhance world trade. As a member of Congress, how would you justify this contradiction to your constituents? 24. What effects might the devaluation of a nation's currency have on its business firms, its consumers, and the debts it owes to other nations? 25. Should imports to the United States be curtailed by, say, to eliminate our trade deficit? What might happen if this were done? 26. When should a firm consider expanding from strictly domestic trade to international trade? When should it consider becoming further involved in international trade? What factors might affect the firm's decisions in each case? 27. How can a firm obtain the expertise needed to produce and market its products in, for example, the EU?

To retaliate for another nation's trade restrictions. (Reasons for Trade Restrictions)

A country whose exports are taxed by another country may respond by imposing tariffs on imports from that country.

Define the methods by which a firm can organize for and enter into international markets. (Chapter Summary)

A firm can enter international markets in several ways. It may license a foreign firm to produce and market its products. It may export its products and sell them through foreign intermediaries or its own sales organization abroad, or it may sell its exports outright to an export-import merchant. It may enter into a joint venture with a foreign firm. It may establish its own foreign subsidiaries, or it may develop into a multinational enterprise. Generally, each of these methods represents an increasingly deeper level of involvement in international business, with licensing being the simplest and the development of a multinational corporation the most involved.

To protect new or weak industries. (Reasons for Trade Restrictions)

A new, or infant, industry may not be strong enough to withstand foreign competition. Temporary trade restrictions may be used to give it a chance to grow and become self-sufficient. The problem is that once an industry is protected from foreign competition, it may refuse to grow, and "temporary" trade restrictions will become permanent. For example, a recent report by the Government Accountability Office (GAO), the congressional investigative agency, has accused the federal government of routinely imposing quotas on foreign textiles without "demonstrating the threat of serious damage" to U.S. industry. The GAO said that the Committee for the Implementation of Textile Agreements sometimes applies quotas even though it cannot prove the textile industry's claims that American companies have been hurt or jobs have been eliminated.

The ability to produce a specific product more efficiently than any other nation.

Absolute Advantage

Restriction of consumers' choices: (Reasons against Trade Restrictions)

Again, this is a direct result of the elimination of some foreign products from the marketplace and of the artificially high prices that importers must charge for products that are still imported.

The total value of a nation's exports minus the total value of its imports over some period of time.

Balance of Trade

To protect domestic jobs. (Reasons for Trade Restrictions)

By restricting imports, a nation can protect jobs in domestic industries. However, protecting these jobs can be expensive. For example, protecting jobs in the U.S. carbon-steel industry costs, or per job. In addition, Gary Hufbauer and Ben Goodrich, economists at the Institute for International Economics, estimate that the tariffs could temporarily save jobs in the steel industry, but at an annual cost to steel users of, or per job saved. Yet recently the United States imposed tariffs of up to on steel pipes imported from China, South Korea, and Mexico. Similarly, it is estimated that we spent more than for every job saved in the apparel manufacturing industry—jobs that seldom paid more than year

The ability to produce a specific product more efficiently than any other product.

Comparative Advantage

An international barter transaction.

Contertrade

Discuss the restrictions nations place on international trade, the objectives of these restrictions, and their results. (Chapter Summary)

Despite the benefits of world trade, nations tend to use tariffs and nontariff barriers (import quotas, embargoes, and other restrictions) to limit trade. These restrictions typically are justified as being needed to protect a nation's economy, industries, citizens, or security. They can result in the loss of jobs, higher prices, fewer choices in the marketplace, and the misallocation of resources.

A complete halt to trading with a particular nation or in a particular product.

Embargo

Selling and shipping raw materials or products to other nations.

Exporting

True or False. A firm that has no ties to a specific nation or region and operates on a worldwide scale is called a national enterprise.

False

True or False. A letter of credit is issued by the transport carrier to the exporter to prove that merchandise has been shipped.

False

True or False. A letter of credit is issued in favor of the importer.

False

True or False. The United States has enjoyed a trade surplus during the last two decades.

False

True or False. The participants in the Kennedy Round have succeeded in reducing tariffs by less than.

False

Higher prices for consumers: (Reasons against Trade Restrictions)

Higher prices may result from the imposition of tariffs or the elimination of foreign competition, as described earlier. For example, imposing quota restrictions and import protections adds annually to U.S. consumers' apparel costs by directly increasing costs for imported apparel.

A tax levied on a particular foreign product entering a country.

Import Duty

All business activities that involve exchanges across national boundaries.

International Business

Explain the economic basis for international business. (Chapter Summary)

International business encompasses all business activities that involve exchanges across national boundaries. International trade is based on specialization, whereby each country produces the goods and services that it can produce more efficiently than any other goods and services. A nation is said to have a comparative advantage relative to these goods. International trade develops when each nation trades its surplus products for those in short supply. A nation's balance of trade is the difference between the value of its exports and the value of its imports. Its balance of payments is the difference between the flow of money into and out of the nation. Generally, a negative balance of trade is considered unfavorable.

Discuss international trade agreements and international economic organizations working to foster trade. (Chapter Summary)

The General Agreement on Tariffs and Trade (GATT) was formed to dismantle trade barriers and provide an environment in which international business can grow. Today, the World Trade Organization (WTO) and various economic communities carry on this mission. These world economic communities include the European Union, the NAFTA, the CAFTA, the Association of Southeast Asian Nations, the Pacific Rim, the Commonwealth of Independent States, the Caribbean Basin Initiative, the Common Market of the Southern Cone, the Organization of Petroleum Exporting Countries, and the Organization for Economic Cooperation and Development.

Identify the institutions that help firms and nations finance international business. (Chapter Summary)

The financing of international trade is more complex than that of domestic trade. Institutions such as the Ex-Im Bank and the International Monetary Fund have been established to provide financing and ultimately to increase world trade for American and international firms.

Misallocation of international resources: (Reasons against Trade Restrictions)

The protection of weak industries results in the inefficient use of limited resources. The economies of both the restricting nation and other nations eventually suffer because of this waste.

Loss of jobs: (Reasons against Trade Restrictions)

The restriction of imports by one nation must lead to cutbacks—and the loss of jobs—in the export-oriented industries of other nations. Furthermore, trade protection has a significant effect on the composition of employment. U.S. trade restrictions—whether on textiles, apparel, steel, or automobiles—benefit only a few industries while harming many others. The gains in employment accrue to the protected industries and their primary suppliers, and the losses are spread across all other industries. A few states gain employment, but many other states lose employment.

To equalize a nation's balance of payments: (Reasons for Trade Restrictions)

This may be considered necessary to restore confidence in the country's monetary system and in its ability to repay its debts.

Outline the extent of international business and the world economic outlook for trade. (Chapter Summary)

World trade is generally increasing. Trade between the United States and other nations is increasing in dollar value but decreasing in terms of our share of the world market. Exports as a percentage of U.S. GDP have increased steadily since 1985, except in the 2001 and 2008 recessions.

embargo

a complete halt to trading with a particular nation or in a particular product

licensing

a contractual agreement in which one firm permits another to produce and market its product and use its brand name in return for a royalty or other compensation

multinational enterprise

a firm that operates on a worldwide scale without ties to any specific nation or region

bill of lading

a legal document issued by a bank or other financial institution guaranteeing to pay a seller a stated amount for a specified period of time

letter of credit

a legal document issued by a bank or other financial institution guaranteeing to pay a seller a stated amount for a specified period of time

totally owned facilities

a level of involvement in international business that has its own production and marketing facilities in one or more foreign nations (this is a direct investment that provides complete control over operations , but carries a greater risk than joint venture)

import quota

a limit on the amount of a particular good that may be imported into a country during a given period of time

export-import merchant

a merchant wholesaler

trade deficit

a negative balance of trade

nontariff barrier

a nontax measure imposed by a government to favor domestic over foreign suppliers

joint venture

a partnership formed to achieve a specific goal or to operate for a specific period of time

strategic alliance

a partnership formed to create competitive advantage on a worldwide basis

foreign-exchange control

a restriction on the amount of a particular foreign currency that can be purchased or sold

import duty (tariff)

a tax levied on a particular foreign product entering a country

A complete halt to trading with a particular nation or in a particular product is called a(n): a. Embargo. b. Stoppage. c. Stay. d. Closure. e. Barricade.

a. Embargo.

If Saudi Arabia were to trade crude oil for two 747 jets from U.S.-based Boeing, this international barter transaction would be known as a: a. countertrade. b. financing partnership. c. protective tariff. d. venture. e. multinational transaction. (Exercise 3.1)

a. countertrade.

Which one of the following reasons might a country have trade restrictions? a. To equalize a nation's balance of payments. b. All of these choices are correct. c. To retaliate for another nations trade restrictions (trade war). d. To protect domestic jobs. (Exercise 3.1)

b. All of these choices are correct. To equalize a nation's balance of payments. All of these choices are correct. To retaliate for another nations trade restrictions (trade war). To protect domestic jobs.

Foreign licensing is similar to: a. Starting From Scratch. b. Franchising. c. Wholesaling. d. Establishing A Subsidiary In Another Country. e. Establishing A Sales Office In A Foreign Country.

b. Franchising.

In 2 Design, Inc., manufactures and sells unique kitchen and dining room table sets. The headquarters of the company is in Portland, Oregon, with manufacturing facilities in North Carolina. The owners are ready to expand their client base to Canada and Mexico, both logistically manageable with longer-term plans to expand to Europe. After some initial research, the owners of In 2 Design thought that offering their company name and logo to a foreign company to manufacture and sell their product line in return for a royalty would be beneficial for both parties. After more thought and discussion with other company owners who have contemplated doing the same thing, the owners of In 2 Design are even more unsure of what step to take next. The In 2 Design owners have ultimately chosen that a joint venture is their best strategy. All of the following are characteristics a joint venture would offer the company that licensing would not except a. a high level of commitment from all parties. b. a much less complex arrangement. c. advanced control over the product attributes. d. immediate market knowledge offered by the partnering firm. e. working with one or two firms already established in Mexico and Canada. (Exercise 3.1)

b. a much less complex arrangement.

A complete halt to trading with a particular nation is known as: a. a nontariff barrier. b. an embargo. c. an import quota. d. a dissolution of trading. e. foreign-exchange control. (Exercise 3.1)

b. an embargo.

___________ is the exportation of large quantities of a product at a price lower than that of the same product in the home market. a. Embargo. b. Duty. c. Dumping. d. Export quota. e. Dropping.

c. Dumping.

General Motors and Ford products produced in the United States are found around the world. The United States is ___________ these automobiles. a. Tariffing. b. Importing. c. Exporting. d. Releasing. e. Dumping.

c. Exporting.

Because it has not been around long enough to establish itself, the Russian automobile industry could be classified as a(n): a. Hopeless Industry. b. Soft Industry. c. Infant Industry. d. Protected Industry. e. Toddler Industry.

c. Infant Industry.

CAFTA, NAFTA, OECD, and OPEC are all examples of: a. Political Organizations. b. Peace Treaties. c. International Economic Communities. d. World Trade Organization Members. e. Democratic Organizations.

c. International Economic Communities.

Established in 1944 and headquartered in Washington, D.C., the World Bank is an example of: a. Eximbank. b. IMF. c. MDB. d. EFTA. e. LAFTA.

c. MDB.

____________________ by definition, every country has a(n) advantage in some product. a. relative. b. absolute. c. comparative. d. superior. e. inferior.

c. comparative.

When a South American country produces coffee and exports the coffee to the rest of the world, what type of advantage might it have? a. Multilateral advantage. b. Key advantage. c. No advantage. d. Absolute advantage. e. Economic advantage. (Exercise 3.1)

d. Absolute advantage.

____________________ purchasing products or materials in other nations and bringing them into one's own country is: a. Trading. b. Balancing. c. Exporting. d. Importing. e. Dumping.

d. Importing.

Which of the following statements correctly characterizes changes in trade restrictions since the global financial crisis? a. Banks have loosened credit and are loaning money to foreign borrowers. b. There are fewer tariffs. c. Multinational companies have developed production networks. d. There are increases in import licensing and tariffs. (Exercise 3.1)

d. There are increases in import licensing and tariffs.

Escribo Services, a small, independent publishing company is ready to expand into international business. Since the company is committed to proceeding slowly and starting at the most simple level, Escribo Services has decided that ________ is the best approach. a. exporting. b. constructing totally owned facilities. c. a joint venture. d. licensing. e. direct investment. (Exercise 3.1)

d. licensing.

What set the stage in 2001 for WTO members to take an important step toward multilateral trade liberalization? a. The Kennedy Round. b. The Tokyo Round. c. The Trans-Pacific Partnership. d. The Uruguay Round. e. The Doha Round. (Exercise 3.1)

e. The Doha Round.

The World Trade Organization was created by the: a. Kennedy Round. b. United Nations. c. League of Nations. d. Tokyo Round. e. Uruguay Round.

e. Uruguay Round.

protective tarrifs

imposed to protect a domestic industry from competition by keeping the price of the competing imports level with or higher than the price of similar domestic products.

draft

issued by the exporter's bank, ordering the importer's bank to pay for the merchandise, thus guaranteeing payment once accepted by the importer's bank

world trade organization (WTO)

powerful successor to GATT that incorporates trade in goods, services, and ideas

trading company

provides a link between buyers and sellers in different countries

importing

purchasing raw materials or products in other nations and bringing them into one's own country

exporting

selling and shipping raw materials or products to other nations