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Introduction

Introduction. Introduction. International Trade Growth International Trade Milestones Largest Exporting and Importing Countries International Trade Drivers International Trade Theories The International Business Environment. Introduction. International Trade Growth

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Introduction

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  1. Introduction

  2. Introduction International Trade Growth International Trade Milestones Largest Exporting and Importing Countries International Trade Drivers International Trade Theories The International Business Environment

  3. Introduction International Trade Growth International Trade Milestones Largest Exporting and Importing Countries International Trade Drivers International Trade Theories The International Business Environment

  4. International Trade Growth The worldwide growth in international trade 1953-2003

  5. International Trade Growth World’s Total International Trade in Merchandise (US$ Billions)

  6. International Trade Growth World’s Total International Trade in Services (US$ Billions)

  7. International Trade Growth World’s Total International Trade in Merchandise and Services (US$ Billions)

  8. Introduction International Trade Growth International Trade Milestones Largest Exporting and Importing Countries International Trade Drivers International Trade Theories The International Business Environment

  9. International Trade Milestones The Bretton-Woods Conference (July 1944) The World Trade Organization (January 1995) The Treaty of Rome (March 1957) The creation of other Trade Blocs The creation of the euro (placed in circulation in January 2002)

  10. International Trade Milestones The Bretton-Woods Conference(July 1944) created: • The International Monetary Fund (IMF) • The General Agreement on Tariffs and Trade (GATT) which was further negotiated with successive Rounds in Geneva [1948], Annecy [1949], Torquay [1951] and Geneva [1956] • Dillon Round [1960-61] • Kennedy Round [1964-67] • Tokyo Round [1973-79] • Uruguay Round [1986-94]

  11. International Trade Milestones The World Trade Organization(January 1, 1995) • Replaced the GATT • In charge of “enforcing” free trade • Since 2001, has been working on the Doha Round of multilateral negotiations

  12. International Trade Milestones The Treaty of Rome(March 15, 1957) • Led to the eventual creation of the European Union • Initially included Belgium, France, Germany, Italy, Luxembourg, and the Netherlands • Expanded in 1973, 1981,1986, 1995, and 2004 • Includes 25 countries as of August 2006

  13. International Trade Milestones Regional Economic Trade Blocs 1958-1985 • European Union (1958) • Central American Common Market (1960) • ASEAN (1967) • Andean Community (1969) • Caricom (1973) • ECOWAS (1975) • Gulf Cooperation Council (1981) • NAFTA (1994) • Economic and Monetary Community of Central Africa (1994) • East African Community (2001)

  14. International Trade Milestones The Creation of the euro • Common currency of twelve of the twenty-five countries of the European Union • Developed in the early 1990s • Placed in circulation on January 1, 2002 • Replaced eleven strong legacy currencies • One of the strongest currencies of the world

  15. Introduction International Trade Growth International Trade Milestones Largest Exporting and Importing Countries International Trade Drivers International Trade Theories The International Business Environment

  16. Introduction International Trade Growth International Trade Milestones Largest Exporting and Importing Countries International Trade Drivers International Trade Theories The International Business Environment

  17. International Trade Drivers • Cost Drivers • Competitive Drivers • Market Drivers • Technology Drivers

  18. International Trade Drivers Cost Drivers • Export • Some companies require large capital investments in plants and machinery • Strong incentive to spread the costs of these fixed costs over a large number of units • Import / Outsourcing • Some companies, in response to consumer demands, attempt to offer goods at the lowest possible price • Strong incentive to lower production costs • Several business processes are outsourced abroad

  19. International Trade Drivers Competitive Drivers • Companies follow their domestic competitors abroad to maintain their world-wide market share • Companies retaliate against foreign competitors entering their home market by going to these competitors’ home markets • Companies counter a competitor’s new product entry by offering a similar product, often produced abroad

  20. International Trade Drivers Market Drivers • Consumers’ tastes and preferences have become increasingly uniform worldwide • Consumers have become increasingly knowledgeable about products and willing to try new foreign alternatives

  21. International Trade Drivers Technology Drivers • Diffusion of information is universal • Competition for products is worldwide: the Internet allows people to trade with one another • Competition for talent and employees is worldwide: “The World is Flat” write Thomas Friedman

  22. Introduction International Trade Growth International Trade Milestones Largest Exporting and Importing Countries International Trade Drivers International Trade Theories The International Business Environment

  23. International Trade Theories Adam Smith's Theory of Absolute Advantage The Wealth of Nations (1776) When a nation can produce a certain type of goods more efficiently than other countries, it is in its best interest to manufacture more of those goods than it needs, and trade with countries that produce other goods more efficiently than that nation can.

  24. International Trade Theories Absolute Advantage Illustration France can produce 20,000 liters of wine or 2 units of machinery for each year of labor. Germany can produce 15,000 liters of wine or 3 units of machinery for the same amount of labor. France sells wine to Germany, and Germany sells machinery to France. Both countries benefit from the trade.

  25. International Trade Theories Ricardo's Theory of Comparative Advantage Political Economy and Taxation (1815) Nations trade with one another when they can produce certain goods relatively more efficiently than one another. Most international trade today is explained by the Theory of Comparative Advantage

  26. International Trade Theories Theory of Comparative Advantage Illustration The UK can make 25 tons of wheat or 5 units of machinery using one year of labor. Brazil can make 21 tons of wheat or 3 units of machinery using the same amount of labor. The UK has an absolute advantage in machinery and wheat. However, in the UK, the “relative price” of a unit of machinery is 5 tons of wheat. In Brazil, the “relative price” of that same unit is 7 tons of wheat. If the UK decides to grow wheat, it has to “give up” 1/5 of a piece of machinery. If it can find wheat at a lower price than 1/5 of a piece of machinery, it finds it advantageous.

  27. International Trade Theories Theory of Comparative Advantage Illustration If Brazil decides to make machinery, it has to “give up” 7 units of wheat. If it can find machinery at a lower price than 7 tons of wheat, it finds it advantageous. The UK will sell its machinery to Brazil at the price of 6 tons of wheat The UK gets wheat at a lower price than it can produce it (1/6 of a unit of machinery) and Brazil gets machinery at a lower price than it can make it (6 tons of wheat). Both nations gain from this trade.

  28. International Trade Theories Factor Endowment Theory Developed by Hecksher and Ohlin (1933) A country will enjoy a comparative advantage over other countries if it is naturally endowed with a greater abundance of one of the factors of economic production, such as land, labor, capital or entrepreneurship It explains why certain countries specialize in the production of certain products

  29. International Trade Theories Factor Endowment Theory Countries with an abundance of land will specialize in the production of items that require a lot of land (for example, Argentina and beef, Brazil and soybeans). Countries with an abundance of educated labor will specialize in the production of items that require a lot of educated labor (for example, India and computer programming). Countries with an abundance of capital will specialize in services tied to capital lending (for example, Switzerland and banking, London and insurance). Countries with an abundance of entrepreneurship will specialize in “products” tied to entrepreneurship (for example, United States and intellectual property).

  30. International Trade Theories International Product Life Cycle Developed by Raymond Vernon (1966) Over its life cycle, a product will be manufactured first in the country in which it was first developed, then in other developed countries, and eventually in developing countries.

  31. International Trade Theories International Product Life Cycle • First Stage A new product is launched in a country, called the country of innovation, to satisfy market need • Second Stage Markets emerge in developed countries, and additional manufacturing facilities are created there • Third Stage The manufacturing process has become routine, and manufacturing shifts to developing countries

  32. International Trade Theories Porter's Cluster Theory A firm can develop a substantial competitive advantage in manufacturing certain goods when a large number of its competitors and suppliers are located in close proximity. The area attracts the most talented employees and the extraordinary competition between the firms generates a greater need to innovate and become efficient. Such a grouping of companies is called a cluster.

  33. International Trade Theories Porter's Cluster Theory Examples • Silicon Valley, California, is a cluster for information technology • Sassuolo, Italy, is a cluster for ceramic tiles • Limoges, France, is a cluster for porcelain • Genève, Switzerland, is a cluster for watches • Yiwu, China, is a cluster for socks and hosiery

  34. Introduction International Trade Growth International Trade Milestones Largest Exporting and Importing Countries International Trade Drivers International Trade Theories The International Business Environment

  35. The International Business Environment • Culture • Demographics • Economics • Regulations and Laws • Infrastructure • Communications • .....much of the international business environment is different from the domestic environment

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