Unit 1

INTRODUCTION TO INTERNATIONAL BUSINESS

Objectives
This unit is to define what it means by ‘international business’, to highlight some
key concepts relating to international business, and the main activities of
international business and its stakeholders.
What is International Business?
Collinson et al. (2020) defined ‘International Business’ as the study of transactions
taking place across national borders for the purpose of satisfying the needs of
individuals and organisations.
There are many forms of international business transactions. The ‘classical’ view
of international business has been international trade, in the form of exporting and
importing. Trade is about transactions between actors that are physically located
in different places. These actors may be in the same country, but located in
different cities, states or provinces, for instance. They may also be in different
countries in which case the activity is known as international trade. International
trade continues to grow and remains core to the world economy.
According to the United Nations Conference on Trade and Development (UNC-
TAD) the exports of goods and services in 2017 was worth US$22,7 trillion, an
almost six-fold increase from US$4 trillion in 1990. (By definition, the total world
exports will be equal to the total world imports, so it is axiomatic that exports have
grown as fast as imports.)
Trade is not new, as human beings have been engaged in bartering goods since the
dawn of civilisation. International trade is also not new – we know that early
Egyptians, Assyrians, Indians and Chinese all systematically traded with each
other. Indeed, trade has been the driving force of economic growth and a driving
force for globalisation.
Griffin and Pustay (2015) described that ‘International Business’ consists of
business transactions between parties from more than one country. Examples of
international business transactions include buying materials in one country and
shipping them to another for processing or assembly, shipping finished products
10
from one country to another for retail sale, building a plant in a foreign country to
capitalize on lower labour costs, or borrowing money from a bank in one country
to finance operations in another. The parties involved in such transactions may
include private individuals, individual companies, groups of companies, or
governmental agencies.
How does international business differ from domestic business? Simply put,
domestic business involves transactions occurring within the boundaries of a single
country, whereas international business transactions cross national boundaries.
International business can differ from domestic business for a number of other
reasons, including the following:
The countries involved may use different currencies, forcing at least one party to
convert its currency into another.
The legal systems of the countries may differ, forcing one or more parties to adjust
their practices to comply with local law. Occasionally, the mandates of the legal
systems may be incompatible, creating major headaches for international
managers.
The cultures of the countries may differ, forcing each party to adjust its behaviour
to meet the expectations of the other.
The availability of resources differs by country. One country may be rich in natural
resources but poor in skilled labour, whereas another may enjoy a productive, well-
trained workforce but lack natural resources. Thus, the way products are produced
and the types of products that are produced vary among countries.
KEY TERMS and CONCEPTS
Exports - Goods and services produced by a firm in one country and then sent to
another country.
Imports - Goods and services produced in one country and bought in by another
country.
International trade - The exchange of goods and services across international
borders.
Economic globalization
Economic globalization is defined as the growing interdependence of locations and
economic actors across countries and regions. Economic actors include very small
actors (individual entrepreneurs) or very large one (such as a nation-state) and
11
firms of all sizes. They are not only multinational enterprises but also formally and
systematically organized entities such as non-governmental organizations,
associations, charities, governmental organizations, state-owned firms, hospitals,
research centres and universities. These actors may generate profits, provide jobs,
reduce poverty or they may have other goals.
Interdependence
Interdependence is defined as the mutual reliance between groups of actors
including individuals, firms, countries or regions. The degree of this mutual
reliance can vary considerably. The issue of interdependence is the key to
differentiate internationalisation and globalisation. Interdependence is the essence
of globalisation, and as usual, it is a continuum, with firms, individuals and
countries demonstrating different degrees of interdependence. Understanding
globalisation requires us to appreciate the increasing degree of interdependence
between economic units, whether firms, individuals or countries.
Multinational enterprises (MNEs)
A multi-plant firm that controls and coordinates operations in at least two
countries; or a firm that engages in value-added international business activities,
that has affiliates in more than one country, and whose operations and activities in
different locations are actively coordinated by one or more headquarters
organisations. Though people may usually think about big and giant corporations
in the world as MNEs, the majority of MNEs are small and medium-sized (SMEs).
Moreover, MNEs also dominate the landscape of almost every country.
Affiliate, Associate, and Subsidiary
Depending on the level of ownership an entity has in a connected business, it may
be termed as an affiliate, associate, or subsidiary of a parent company. In most
cases, affiliate and associate are used synonymously to describe a company with a
parent company that only possesses a stake of between 20 and 50% ownership of
the company. A minority stake is ownership or interest of less than 50% of a
company.
However, a subsidiary is a business whose parent company holds a majority stake
(meaning they are a majority shareholder of 50% or more of all shares). Some
subsidiaries are wholly owned, meaning the parent corporation owns 100% of the
subsidiary.

12
For example, the Walt Disney Corporation has about 40% stake in the History
Channel, 80% stake in the ESPN, and 100% interest in the Disney Channel. So,
the History Channel is an affiliate; the ESPN is a subsidiary; and the Disney
Channel is a wholly owned subsidiary.
Foreign direct investment (FDI)
FDI means equity investments by private firms in firms located in other nations. It
is different from portfolio (financial) investment in that FDI is undertaken by
MNEs which exercise control of their foreign affiliates.
Regional integration
One of the most visible outcomes of globalisation is economic integration, and this
is happening naturally as a result of growing interdependence. However, at the
same time as ‘natural’ integration takes place because of growing MNE and trading
activities, and the greater interdependence due to supranational organisations,
common institutions, etc., there is also a process of formal regional integration.
Most often, countries that are geographically proximate set up formal agreements
to create ‘groups’ that seek in large part to increase foreign direct investment (FDI)
and trade within their region, consequent from increased opportunities to exploit
economies of scale. Smaller and more peripheral countries also hope that it will
increase their bargaining power with larger and powerful ‘central’ economies.
Interdependence caused by globalisation is more a consequence of increased cross-
border activity, while regional integration is intended to cause it.
Upstream and downstream
Upstream and downstream are common terms in production process industries,
such as oil and gas, metals, and biopharmaceuticals. They represent the beginning
and end stages of the production process.
Upstream production is the process of exploring and extracting raw materials,
whereas the downstream stage involves processing the materials into a finished
product and selling it.
Technology and Innovation
Innovation means the introduction of any novelty, but there is an important
distinction between ‘invention’ and ‘innovation’. An invention is an idea, sketch or
model of any new or improved device, product, process or system. Innovations only
occur when the new product, device or process is involved in a commercial
transaction. Multiple inventions may be involved in achieving an innovation.

13
Technology represents the cumulative stock of these innovations. It therefore
includes all activities that provide assets with which an economic actor can
generate products or services. Science provides us with more generic knowledge,
which may or may not generate products and services.
Innovation and technology lie at the core of the greater interdependence that we
see as part of globalisation. International business is tightly connected not only
because it enables firms and countries to be interdependent (through
communication technologies, transportation, logistics, etc.) but also because it is
the source of economic growth and competitiveness.
Institutions
In the social sciences, institutions are not a synonym for ‘organisations’.
Institutions are the ‘sets of common habits, routines, established practices, rules,
or laws that regulate the interaction between individuals and groups’. They are the
‘invisible glue’ that holds all economic actors together. Several authors define
institutions as being the ‘rules of the game’, but this is an oversimplification.
Institutions can be formal and informal.
Formal institutions
Formal institutions are rules that may take the form of legal codes, laws and
promulgations, government decrees that are legally laid out and codified. Formal
institutions can also exist in the form of rules within a firm. Responsibilities, job
descriptions, codes of conduct, and accounting and financial regulations are all
forms of formal institutions that are binding upon employees within a firm.
Informal institutions
Informal institutions are – by definition – not always laid out in the form of written
instruction but come out of usage and tradition and are often unwritten and tacit.
That is, people in that particular environment may ‘know’ these rules, but to
outsiders they are unknown, and are often transmitted simply by use. Countries
have informal institutions, and some of these are often described as part of the
national ‘culture’. However, informal institutions are not entirely the same thing
as culture. It is an unwritten rule (an informal institution) to shake hands with men,
but not with women in South Asia. Firms also have informal institutions that are
defined by interaction. IBM no longer formally requires male staff to dress in dark
conservative suits, but should you wear the wrong outfit, you can be sure that
someone will let you know that you have contravened an informal institution!

14
Institutions and supranational agreements
Not all formal institutions are national or subnational. Globalisation and the
subsequent growth of international business have prompted the need to establish
global and regional agreements to monitor and regulate economic activities.
World Trade Organization (WTO)
An international organisation that deals with the rules of trade among member
countries; one of its most important functions is to act as a dispute-settlement
mechanism.
General Agreement on Tariffs and Trade (GATT)
A major trade agreement that was established to negotiate trade concessions
among member countries, and since superseded by the WTO agreements.
Globalisation and Liberalisation
The liberalisation of economic systems has been a decisive feature of the post-
1945 ‘liberalisation’, and one of the underlying reasons behind the growth of
international firms and international business, and the need for supranational
organisations. Liberalisation has come to have many meanings, and these include
the liberalisation of capital flows, the liberalisation of trade regimes and the
liberalisation of markets and economic systems. These are core to understanding
globalisation and the growth of interdependence.
International capital flows can be differentiated into several types:
 foreign direct investment;
 international bank lending;
 international bonds and other credit instruments;
 portfolio investment, which implies ownership of shares or bonds of firms
located overseas without the control associated with direct investment;
 international equities and other financial instruments (such as options and
derivatives);
 development assistance and aid (both government-to-government aid, and
non-governmental organisation/NGO-controlled flows);
 monetary flows (through the sales and purchase of foreign currencies).
Liberalisation has also occurred incrementally, but by far the most significant
change goes back to the regulations (and organisations to monitor and enforce

15
these regulations) established by the Bretton Woods agreement in 1944. It led to
the growth of multinational banking, international money markets, derivatives
trading, debt trading, and the cross-border listing and multiple listing of firms on
several stock markets, to mention but a few developments. The growth of these
new forms of investment has also caused new kinds of economic challenges,
including the sub-prime mortgage crisis, and highlighted the need for greater cross-
border regulation of MNEs that are able to take advantage of differences between
national regulatory frameworks.
The liberalisation of capital flows within the Bretton Woods agreement
demonstrates its ideological origins and reflects certain market capitalism-based
value systems and institutions. A large number of countries liberalised capital
flows in the mid-1980s, as a means to attract international investment. The
increasing globalisation of capital markets has led to considerable loss in economic
autonomy of individual governments. The lack of control over domestic economic
development has seen the need for governments to pursue policies designed to
minimise disruptive financial flows, and this has pushed most to even greater
levels of financial liberalisation and greater engagement in international business.
Liberalisation is an important force in economic globalisation and promotes
interdependence of economies. It is implicit within this view that FDI and MNE
activity can be undertaken with much greater ease than previously.
Small and medium-sized enterprises (SMEs)
SMEs are defined by governments using different criteria for policy purposes.
SMEs are firms with fewer than 250 employees in Europe, but fewer than 500 in
the United States. Indian manufacturing firms qualify as SMEs if they invest less
than US$2 million in plant and equipment.
Since SMEs are small operations, they are much more flexible in a variety of ways,
and they are invaluable partners to larger firms because they can change direction,
focus and structure with relative ease. One of the major competitive advantages
SMEs have over large firms is their flexibility. Larger firms wishing to outsource
for various reasons tend to rely on SMEs because they are especially astute in
utilising external networks more efficiently. SMEs overcome their biggest
disadvantage – limited resources – by the skilful use of alliances. SMEs also
overcome their limited size and resources by being more innovative than larger
firms in the same industry. SMEs have tended to have an innovation advantage in
highly innovative industries where the use of skilled labour is relatively important.

16
 Although SMEs have the advantages of being flexible and responding rapidly to
change, there are also disadvantages due to their absolute size limitations.
Nonetheless, SMEs are the backbone of many industries because of their efficiency
and flexibility.
Global value chains (GVCs)
Value chains are defined as the full range of activities bringing products or services
from conception to production to consumption. Such chains that involve intra-firm
or inter- firm economic activities beyond national borders are referred to as global
value chains (GVCs).
Global production networks (GPNs)
Global production networks (GPNs) are organisational platforms where various
actors from globally dispersed locations compete and cooperate for value creation,
transformation and capture.
International production and trade are increasingly organised within global value
chains (GVCs) or global production networks (GPNs) where the different stages
of the production process are located across different countries. Globalisation
motivates companies to restructure their operations internationally through
outsourcing and offshoring of activities. GVCs can be ‘producer-driven’ or ‘buyer-
driven’ chains. Producer-driven GVCs are more common in high-tech sectors such
as pharmaceuticals. Lead of ‘flagship’ firms are upstream and control the design
of products, while the assembly is fragmented in different countries. In buyer-
driven chains, retailers control the production taking place in other countries, but
focus on marketing and sales. Such GVCs are common in the apparel and food and
agriculture industries.
Outsourcing, offshoring and nearshoring
eg. Outsourcing was traditionally done by manufacturing firms with some or all of the
parts and components of their products manufactured by someone else and do the
assembly of the final product themselves. In recent years, outsourcing has gone
beyond manufacturing activities and spread into the other functions of Porter’s
value chain such as R&D, logistics, human resources etc. It also has been adopted
among service activities.
Offshoring is when the outsourcing is done to a location beyond the national
borders. Offshoring can be done internally by moving activities from a parent

chuyển ra nước ngoài

17
company to its foreign affiliates (sometimes referred to as captive offshoring,
involving FDI), or outsourced to third parties offshore in other countries. Decisions
over offshoring are largely driven by differences in production cost, taking into
consideration transportation costs for both inputs and outputs, and the need to
coordinate between units based in different locations.
The concept of nearshoring refers to relocation (offshoring) to a nearby country.
For example, a UK firm moving its call centres to Ireland instead of India. Some
of the driving forces behind the rise of nearshoring include:
 lower transportation costs;
 smaller time zone differences;
 time-to-market; and
 lesser liability of foreignness.

Reading

Reading 1. Read the article and do the tasks that follow

NEW WORKING MODEL
By Michael Skapinker
As we embark on this new investigation of the future of work, there are
several lessons we can draw by looking back. First, time, and our own adaptability,
may solve some of our deepest problems. There are still developed countries
worried about large-scale unemployment, France and Germany among them. But
their problems are now widely seen as the result of excessive labour market
regulation. Far from telling employees to enjoy more leisure, French and German
companies are trying to find ways to ensure their staff work more hours. And in
the UK, employers and policy-makers now worry about a shortage of workers, not
of work.
Second, the countries that seem poised to assume world economic
leadership – Japan in the past; India and, especially, China now – may face
obstacles that are barely visible today. And third, there is nothing new about our
sense that we are at a turning point. People have often felt that work has changing
in ways they had not seen before. Is it different this time? Is the way we work

18
really changing fundamentally?
In one sense yes, simply because the countries that are playing a fuller part
in the world economy, particularly China and India, have such large populations.
‘We simply have not comprehended yet the full impact of 2.5bn people coming
into the world economy who were not part of it before,’ says Kim Clark, dean of
Harvard Business School.
The second change is the technology affecting work today. The internet and
broadband connections have made it far easier for companies to distribute their
work around the world and to remain open 24 hours a day, seven days a week.
The trend towards both outsourcing and offshoring have offered India and
China huge opportunities to develop their people’s skills. They have also provided
companies around the world with enticements that are difficult to resist. Diana
Farrell, director of the McKinsey Global Institute, the consultancy’s in-house
economic think-tank, says that 70 per cent of the costs of a typical company in the
developed world come from labour and 30 per cent from capital. Capital is
expensive and labour is cheap in countries such as India and China. Companies
that benefit from the cost savings involved in employing Indian or Chinese labour
are at a significant advantage.
The problem is, Ms Farrell says, that competitor companies can achieve the
same benefits by moving some of their operations to India or China too.
Competitive advantage can only be retained if companies understand that there is
more to be gained from India or China than cost-cutting. The two countries are
potentially huge markets too. Lower vehicle development costs in India, for
example, mean cheap cars can be produced for the local market. New niche
markets can be found for these products in developed countries too.
Companies can address business problems in India and China that they
could not solve in their home markets. For example, Ms Farrell cites an airline that
used to find it uneconomic to chase debts of less than $200. By using Indian
accountants, they were able to chase debts of $50. This is good for western
companies, but what of western workers?
A common question heard in the US and Western Europe today is: ‘What
are we all going to do?’ Prof Clark says: ‘First of all we have to recognise
something that’s lost in a lot of these conversations: most of us don’t work in places

19
that are competing with the Chinese.’ Or the Indians.
Technology is likely to continue to allow more jobs to be done remotely,
but, Prof Clark argues, there will be an opposing trend too: companies offering a
more personal service at close quarters. Ms Farrell argues that demographic
changes mean there are going to be fewer Americans and western Europeans to do
the jobs available anyway.
Japan and Western Europe are ageing societies. Even the US, still a
relatively young country by comparison, will have 5 per cent fewer people of
working age by 2015 than it does today.
Faced with these projections, western societies can either export the jobs or
import the workers.
Will China and India become as dominant as Japan once looked like
becoming? Prof Clark says the most significant obstacle they face is the quality of
the universities. Few of them show signs of becoming the world-class research
centres they need to be if China and India are to become world economic leaders.
From the Financial Times (Cotton et al., 2007)
Task 1: Answer the following questions.
1. According to the writer, what are the two greatest changes in the world affecting
business?
2. According to the writer, what lessons can be learned from previous attempts to
predict the future of work?
3. What have been the effects of outsourcing on global business?
4. What is the point which the writer makes about capital and labour?
5. What example of problem-solving does the writer give?
Task 2: What key point(s) does the writer make about the following
countries?
Germany France the UK Japan
India China the US
Task 3: Put the following words in the correct order. Check your answer in
the article.

20
1 regulation labour market excessive
2 leadership economic world
3 in-house think-tank economic
4 markets potentially huge
5 vehicle lower development costs
6 niche new markets
7 world-class centres research
Task 4: Discuss the following question.
Which five countries do you think will dominate the world economy in twenty
years’ time? Rank them in order of importance and give reasons. Compare your
ideas with your partner.
Reading 2 - Firm-specific advantage (FSA) – Country-specific advantage
(CSA)
Starbucks: A global ‘coffee culture’
From its first location in Seattle’s Pike Place Market in 1971, Starbucks has
grown into one of the largest coffee chains in the world. In 2018, Starbucks had
29,324 stores globally – an increase from the previous year, when it had 27,339.
The company purchases and roasts high-quality coffee beans which are then
brewed and retailed in trendy designer coffee shops that cater to a loyal following
of young urban professionals, who appreciate the distinct taste of Starbucks’
coffee. In 2018 its sales were US$24.72 billion.
The company’s road to success began in 1985, when, after convincing the
founders of Starbucks to test the coffee bar concept, the then director of retail
operations, Howard Schultz, started his own coffee house to sell Starbucks coffee
under the name Il Giornale. Within two years, Schultz purchased Starbucks and
changed its company name to Starbucks Corporation. Since then, the company has
expanded rapidly, opening stores in key markets and creating a ‘corporate coffee
culture’ in each of the urban areas in which it settled. Coffee bars are located in
high-traffic areas and include large bookstores, suburban malls, universities and
high-traffic intra-urban communities.
Popularity has not come without a price for Starbucks. Coffee prices fell
21
considerably in the late 1990s and led to the displacement of thousands of farmers.
The main reason for a fall in the price of coffee was the oversupply that arose from
improved production techniques and from a crop boom in the 1990s. Although
Starbucks only purchases approximately 1 per cent of the global supply of coffee,
its high profile has made it a main target for protestors who accuse the coffee giant
of not providing a fair price to coffee growers; despite Starbuck’s policy of
purchasing high-quality beans at premium market prices. To address the concerns
of protestors, Starbucks introduced Fairtrade-endorsed coffee to its coffee houses.
While the amount of Fairtrade coffee sold by the company is insignificant, at 1 per
cent of total sales, it is enough to portray the company as progressive and avert a
consumer boycott.
The company directly operated 8,575 coffee houses in the United States in
2018. Unlike many coffee and fast-food chains, Starbucks does not franchise
(license the right to operate one of its stores) to individuals in the United States. It
does, however, negotiate licensing agreements with companies that have control
over valuable retail space, such as an airport or hospital. In 2018, there were 6,031
Starbucks stores operating under licences in the US.
With coffee houses in over 75 countries, today Starbucks has a global
presence. In contrast to its domestic operations, the majority of Starbucks’
international operations are through licenses. Indeed, of 13,082 international stores
in 2017, 8,319 were licensed and in joint venture, while 4,763 were directly owned.
While Starbucks international stores represented around 48 per cent of the total
number of stores, international revenues only made up about 26 per cent of total
revenues in 2017. Starbucks has also adopted different international strategies in
different countries: for example, in 1998, when it expanded into the UK, it did so
through an $83 million acquisition of Seattle Coffee Company which had 60
outlets. The outlets were then rebranded as Starbucks. After failing to make gains
in 2007, Starbucks, in 2012 formed a 50:50 joint venture with Tata Global
Beverages in India, called Tata Starbucks. The joint venture has so far been seen
as a success after opening its first outlet in October 2012, it opened its 75th outlet
in April 2015, and now has a presence in seven cities.
While Starbucks has had many successes in its international ventures, it was
not successful in expanding to Australia. Starbucks first entered Australia in 2000
through a wholly owned subsidiary and opened several stores in quick succession.

22
By 2008, however, it became apparent that Starbucks had troubles and, from both
cultural and financial pressure, it closed 61 of its 85 outlets. While Starbucks
adapted its product line in China to meet the different needs of consumers, in
Australia they failed to appreciate the differences between US and Australian
preferences. Starbucks is branded as ‘affordable luxury’, but as analysts point out,
Starbucks’ aggressive expansion mean its availability led it not to have a ‘luxury
image’ but to be a symbol of American consumerism. In fact, Australians prefer
smaller boutique-style coffee cafés, with personal touch and stronger-tasting
coffee than was on offer at Starbucks.
More recently, Starbucks tapped into one of the most difficult coffee
markets in the world: Italy. Though the founders pride themselves on the Milanese-
inspired origin of the company, it took Starbucks 47 years to actually enter the
country. Opening its flagship store on a trendy square in Central Milan in 2018,
the company hopes to attract tourists as well as locals through its store’s luxurious
and high-end design. Italians are famous for their coffee culture and are said to be
sceptical of the American lifestyle. Nevertheless, Starbucks hopes to succeed in
this difficult market, competing against local, cheaper coffee houses. For its goal,
the company has sought help from various sources to make sure the Starbucks-in-
Italy story becomes a successful one. For example, the retail giant entered a
partnership with Percassi, a local brand management and real estate company.
Whether these and other adaption-related efforts allow Starbucks to succeed and
help it win the Italians’ hearts, is a question that (for now) remains to be written in
the stars.
(Collinson et al., 2020)
Reading comprehension questions:
1. What are Starbucks’ firm-specific advantages?
2. Why is Starbucks focusing its international expansion on emerging countries,
such as India and China?
3. Why did Starbucks fail in Australia?
4. What are the advantages of Starbucks using licensing and joint ventures when
expanding abroad?

23
Case Studies
REAL CASE 1: WALMART INC.
Walmat Inc. – the world’s biggest food retailer – opened its first
international store in Mexico City in 1991 and then it expanded to parts of Canada,
Latin America, Germany, United Kingdom, China, and South Korea. In 1993, only
around 1 per cent of Walmart stores were located outside the United States. By
1998, the number of stores operated internationally grew to 18 per cent of total
number of stores. Between 1995 and 1998, over 5 per cent of the company’s sales
revenues came from its international operations. The international business model
applied to new markets was the same as that used by the company in the United
States: (1) Walmart stores which offered clothing, small appliances, hardware,
sporting goods and similar items; (2) Sam’s clubs, which offered bulk products to
customers who had opted for warehouse memberships; and (3) Walmart
hypermarkets, which combined the inventories of discount stores with full-line
supermarkets. In 2018, Walmart was expanding its online grocery pickup service
in countries such as Canada, Mexico, and China.
By 2018, still under 24 per cent of sales came from Walmart’s international
retail stores spread across 27 countries. These included sales from the company’s
2,358 stores in Mexico, 642 stores in the United Kingdom, 443 stores in China,
336 stores in Japan and 20 stores in India. Entering new markets, however, has not
always been easy for the company. Growth and expansion of their business model
in some international markets was becoming increasingly complex. As the case
illustrates, cultural and regulatory differences between home and host markets can
make establishing a dominant foreign market presence, more challenging. This is
particularly the case when large, established multinational companies such as
Walmart, seek to export the business model which has been successful in their
home markets into new host country contexts.
Walmart in Germany
Many foreign firms targeting the mainland European market seek to enter
Germany. Germany has a strong economy, a high per-capita GDP, and a
population with high levels of disposable income. But Germany is also home to
the largest supermarket discounters. Supermarket chains such Aldi and Lidl
dominate the grocery business. German consumers, despite their high buying
power, are known to be among the most price-conscious in Europe and highly
24
reluctant to spend a significant amount of time in hypermarkets. The margins in
the food retail sector in Germany range between 0.5 per cent and 1 per cent
compared to 5 per cent in the United Kingdom. When Walmart entered Germany
in 1997, the company first acquired 21 stores from the supermarket chain
“Wertkauf’ and then 74 stores from the supermarket chain ‘Interspar’. As the
fourth largest operator of supermarkets in Germany, the company planned to
further expand to 500 stores.
After entering the German market, the company soon learned that if you
choose to follow a low-cost strategy and provide a wide range of items, you need
to expand rapidly before your competitors do. Yet, Walmart’s ‘Wertkauf’ stores
were small and hosted only a limited range of items. This was paralleled by the
growth of competitors such as ‘Metro’ which undercut Walmart, with the latter
having to revoke products because it was too difficult to compete on cost. While
the strategy of ‘Everyday low prices’ proved to be very successful for Walmart in
the United States, it was somewhat taken for granted in Germany where customers
were used to being offered low prices.
The managers of Walmart were also not familiar with laws and regulations
in Germany and even broke them at times. Unlike the United States, Germany had
some of the strongest trade unions in the world such as Ver.di (over 2 million
members), which had significant influence over how businesses operations were
regulated. Ver.di sued Walmart in 2000 for not publishing their profit and loss
statements in due time for which the company was sentenced to pay a fine.
Walmart also tried to drive competitors out of business through price wars. The
company developed a new brand (‘Smart Brand’) and sold the items below
manufacturing cost. This drove competitors to also lower their prices and reduced
industry profitability as a whole. The Federal Cartel office stopped the price war,
which was a competitive practice not highly disregarded in Germany.
The managing directors of Walmart refused to allow these setbacks to
thwart their efforts. They continued to push their US business model to German
consumers. However, when new products are introduced, cultural factors also
matter. To compete more effectively, Walmart decided to invest in customer
service, as discount retailers were notorious for not providing very good service.
The new program titled the ‘ten-foot rule’ meant that every ten feet there would be
a Walmart employee waiting to offer help to customers. The customer reaction

25
was negative, as German customers were not used to talking to employees but
rather to use the self-service option. The same cultural factors became a problem
when Walmart decided to manage the German locations from the United Kingdom,
meaning the corporate language became English. The older German managers who
did not speak English felt left out and eventually decided to leave the company. As
these key business connections were lost, suppliers such as Adidas and Nike
refused to work with the company, leading to a loss in Walmart’s range of goods.
Walmart never managed to expand beyond 95 stores and sold its operations to
‘Metro’ one of Germany’s largest retail groups. Walmart excited the German
market in 2006 with a loss of one billion dollars before tax.
Walmart in China
China is the world’s second largest economy and biggest grocery market,
with Chinese grocery sales anticipated to grow from $1,119 billions in 2015 to
$1,491 billions in 2020. Western supermarket chains such as Tesco (UK) have
historically struggled to gain presence in the Chinese market. Walmart China
began in 1996 when the company opened a hypermarket in Shenzhen through a
joint venture agreement with Hong Kong listed company, Citic Pacific. When
Walmart decided to enter this market in the late 1990s, despite having found a
partner with some local knowledge and political ties, it still had some major
hurdles to overcome. Walmart’s challenges in China reflect the company’s
misunderstanding of the country’s economic, political, and cultural environments.
China’s grocery market remained highly fragmented and locally focused. Given
the size of the country, Chinese consumers preferred shopping in small, local stores
where it was more convenient to travel to. Consumers were also patient in their
purchases as they compared items based on their quality, brands, and prices. The
younger generation of Chinese consumers, preferred to buy grocery online rather
than offline. Over 90 per cent of consumers preferred to use mobile payment
systems such as AliPay and WeChat than cash or credit cards. As a result, there
were many specialized grocery retailers in China, focusing on narrow range of
products such as organic products, or meat products. Nearly all local supermarket
chains were domestic and smaller in size. The larger local retailers such as
Yonghui, Lianhua or China Resources Vanguard sold their products through a
complex distribution system that typically involved between three and five layers
of intermediaries. Since 2016, companies such as Alibaba Group Holding Ltd and
Tencent Holdings Ltd have started to cut deals to integrate traditional shopping

26
with online shopping.
Walmart’s business model also clashed with traditional business structures.
Its low-cost format put more attention on finding locations that can accommodate
the hypermarkets, lowering product prices and achieving supply chain efficiency.
Yet, scaling up the business became a challenge because achieving supply chain
efficiency was difficult in a country like China which lacked a sophisticated
technological and physical infrastructure to transport goods from one region to
another. China therefore not only presented great opportunities but also involved
a high risk of failure, particularly if the company did not adapt its business model.
To overcome the problems associated with Chinese consumption habits and
infrastructure limitations, Walmart looked to enlist new partners. In 2016, Walmart
formed a strategic alliance with Chinese company JD.com to provide consumers
with online retailing services. JD.com is the largest e-commerce company in China
by revenue and it was believed that their online capabilities and understanding of
the Chinese consumers would increase Walmart’s chances of success in China. In
April 2018, Walmart announced the opening of its first small format high-tech
grocery store in China, where consumers could use their smartphones to pay for
items that were available on JD Daojia, an affiliate of JD.com. The store would be
one tenth of the size of a traditional Walmart hypermarket and would be located in
a residential area. Customers could check out and pay using Tencent’s WeChat
pay system without having to go through a cashier. Their partner, JD.com would
also be able to deliver items within a 1.2-mile radius in under 30 minutes. Walmart
has been able to maintain its foothold in the Chinese market. Although Walmart’s
$7.5 billion in sales represents only 2 per cent of their total revenues, sales in China
have grown in the last decade, while sales in the United States have decreased.
(Collinson et al., 2020)
1. What are the firm-specific advantages of Walmart?
2. What specific cultural and political barriers to entry does it face?
3. Why was Walmart more successful in China than in Germany?
REAL CASE 2: Back again? IKEA’s re-entry into Japan
The origins of Swedish furniture giant, IKEA, can be traced back to its
founder. Ingvar Kamprad was an entrepreneur who began selling pens, wallets and
watches door-to-door in 1943. Entering the furniture market at the time was very

27
difficult to an entrepreneur and as Ingvar tried to sell his low-priced furniture,
rivals began to increase barriers to entry by banning local suppliers from providing
raw materials to IKEA. The company was also not allowed to attend industry
exhibitions to showcase its furniture. What could the company do to develop an
advantage in the market? IKEA began to import raw materials from Poland and
design their own furniture, which was showcased to customers at exhibitions
organised by IKEA employees. At present, IKEA is the largest furniture retail
chain in the world, with over 400 stores in 41 countries and territories and over
800 million customers per year. Most of these stores are fully or partially owned
by the IKEA Group, with the remaining few being owned and run by the
company’s franchise partners.
Over the decades, the retailer has built a strong international presence. The
international expansion of IKEA began in Norway in 1963 followed by Denmark
in 1969 where the company set up small stores. The first IKEA store outside of the
Scandinavian region was established in Switzerland in 1973, followed by stores
being opened in Germany (late 1973), the Netherlands (1983) and Luxembourg
(1991), among others. IKEA’s strategy was to provide customers with low priced,
but fashionable furniture, which everyone could afford and which they could take
and assemble at home. This business model was implemented in every
international market entered.
IKEA’s initial entry into Japan
Although IKEA has been successful in establishing a strong presence in
most foreign markets entered, IKEA’s history in Japan reflects the challenges of
replicating their home market strategy into international markets. Japan was one
of the first Asian markets which IKEA considered as part of their international
expansion strategy. After World War II, the Japanese economy grew
exponentially, and the country changed from a developing to a developed nation.
In 1968, with an annual growth in per-capita GDP of 10 per cent, Japan had
become the world’s second largest economy. The number of Japanese people
living in the cities also grew exponentially, meaning more potential customers for
IKEA’s products. The company entered the Japanese market for the first time in
1974 via a joint venture arrangement with a local partner. The joint venture was
chosen as a mode of entry in order to offset potential financial risks in the market.
Yet, the company soon realised that the Japanese market was very different in

28
terms of its culture, lifestyle and shopping behaviour compared to the other
European markets in which the company was already operating.
IKEA’s exist and re-entry
Following a period of poor sales, the company exited the Japanese market
in 1986, 12 years after their initial foray into Japan. IKEA’s market failure was
attributed to the fact that the company did not have a good understanding of how
to communicate their business model to the Japanese customers. Japanese
customers were also not ready for the ‘do-it-yourself’ furniture style. The Japanese
culture was influenced by the historical lack of resources of the country, which
translated into customers not necessarily wanting furniture that was seen as
fashionable but not durable, and which would have to be replaced every few years.
Further, even when Japanese customers were willing to buy furniture from IKEA,
they realised that the products sold were too large for the size of their homes.
Japanese homes were, on average, smaller than Swedish homes. IKEA’s local joint
venture partner at the time was unable to help the company understand how to
adapt its strategy to local demand and attract customers. The joint venture
partnership was, therefore, dissolved and IKEA left the Japanese market. Starting
with the early 2000s, news about IKEA’s return to Japan with a new market
strategy and fresh product line began to emerge.
In April 2006, IKEA decided to finally re-enter Japan, which remained the
second largest economy and retail market in the world. The investment – a 43,000-
sq.-meter site wholly owned by the company with plans to open 14 more stores
until 2020 – showed IKEA’s high commitment to the Japanese market. After a 20-
year hiatus, the company learned from its past mistakes and decided that size of
the furniture was key when selling to market such as Japan. This decision came
from the market research conducted by the company, in the period of time they
spent out of the market. IKEA staff visited a large number of Japanese houses to
understand how these people cook, how they spend their leisure time, the
environment in which they sleep and take a bath. This time around, IKEA opted to
retain full control of its operations in the Japanese market.
Yet, for a retailer like IKEA, a key source of competitive advantage lies in
their ability to achieve standardization by providing the same built products across
different international markets and achieve efficiency by flat packing their
furniture for easy transport. Therefore, adapting its products to international

29
markets would have increased costs significantly for the company. In turn, the
company decided to select 7,500 items out of its 10,000-product line-up that were
more suited to the sizes and preferences of Japanese customers. In the time they
spent out of the market after exit, the company had also accumulated more
experience with tailoring its range of products to the needs of local consumers.
Having sold furniture in locations such as New York, Paris and London, they
realised that they could apply this know-how to better provide for areas with small
spaces. Further, IKEA introduced ‘Tebura de box’ which was a service that
enabled customers to post all their desired products in a box, which would then be
delivered to their homes. This was designed to address the problem faced by
Japanese customers who came to the store via public transport. Given its success,
this service was later implemented in other international markets.
The Japanese market remains tough as the company continues to experience
problems such as: restrictions on the acquisition of land to build new superstores,
regulations around local adaptation of product labelling and restrictions on the type
of food products that can be imported into Japan and served in IKEA restaurants.
The deregulation of Japanese Large Scale Retail Store Law, which affected the
company’s ability to set up operations in Japan, was a step forward.
(Collinson et al., 2020)
1. Why did IKEA decide to venture into Japan?
2. Why did the company fail to perform well in Japan? What lessons can
retailers draw from this?
3. What FSAs did the company require to compete effectively in Japan?
4. What were the advantages of IKEA switching from a joint venture to a
wholly owned subsidiary when re-entering the Japanese market?
Review
1. Collinson et al. (2020) defined economic globalisation as the growing
interdependence of locations and economic actors across countries and regions.
Griffin and Pustay (2015) described that ‘International Business’ consists of
business transactions between parties from more than one country.
2. International business is the study of transactions taking place across
national borders for the purpose of satisfying the needs of individuals and

30
organisations. Two of the most common types of international business activity
are export/import and foreign direct investment (FDI). In recent years both have
been on the rise. Much of this is a result of large multinational enterprises (MNEs).
3. Small and medium-sized enterprises (SMEs) often function as the backbone
of large MNEs, efficiently providing goods and services that are integrated into
the latter’s production process. SMEs also compete with MNEs in niche markets.
SMEs are often more flexible then MNEs but struggle to match MNEs in terms of
resources.
4. Institutions are defined as ‘sets of common habits, routines, established
practices, rules, or laws that regulate the interaction between individuals and
groups’. Understanding institutions, both formal and informal, is important for
both firms and employees, so they can adjust their behaviours accordingly.
5. Trade regulation has become an important issue in international business.
Today, the World Trade Organization (WTO) is the major supranational body
responsible for governing the international trading system.
6. There are two ways to measure FDI: FDI stock and FDI flow. Inward FDI
flow is money coming into a country during the reporting year, from foreign-
owned MNEs which have their subsidiaries in the recipient country. Outward FDI
flows are monies going out from firms that are registered in the home country to
another country through their subsidiaries abroad. FDI flow is different from FDI
stock: the latter looks at the accumulation of FDI over time, whereas FDI flow only
looks at FDI inflow or outflow in one reporting year. FDI stock is a more reliable
indicator of FDI activity in countries.
7. International production and trade are increasingly organised within global
value chains (GVCs) of global production networks (GPNs) where the different
stages of the production process are located across different countries. Due to the
globalised nature of some markets, it is advantageous for firms to develop products
in different countries to benefit from home countries’ location advantages.

31
 Unit 2
INTERNATIONAL TRADE

A. Terms, definitions, theories

International trade: Purchase, sale, or exchange of goods and services across

national borders.
Exporting: Sending goods to another country for sale or trade.
Importing: Bringing in goods from another country for sale or trade.
Trade surplus: Condition that results when the value of nation's exports is greater
than the value of its imports. thặng dư thương mại
Trade deficit: Condition that results when the value of a country's imports is
greater than the value of its exports. thâm hụt thương mại
Mercantilism: A trade theory which holds that a government can improve the
economic well-being of the country by encouraging exports and stifling imports to
accumulate wealth in the form of precious metals. chủ nghĩa trọng thương
chủ nghĩa trọng
thương mới
Neo-mercantilism: A trade theory which holds that a government can improve the
economic well-being of the country by encouraging exports and stifling imports.
lợi thế tuyệt đối Theory of absolute advantage: A trade theory which holds that nations can
increase their economic well-being by specialising in goods that they can produce
more efficiently than anyone else.
lợi thế tương đối Theory of comparative advantage: A trade theory which holds that nations
should produce those goods for which they have the greatest relative advantage.
lý thuyết tỷ lệ nhân tố Factor endowment theory: A trade theory which holds that nations will produce
and export products that use large amounts of production factors that they have in
abundance and will import products requiring a large amount of production factors
that they lack.
Heckscher-Ohlin theory: A trade theory that extends the concept of comparative
advantage by bringing into consideration the endowment and cost of factors of
production and helps to explain why nations with relatively large labour forces will
concentrate on producing labour-intensive goods, whereas countries with
relatively more capital than labour will specialise in capital-intensive goods.

32
nghịch lý leontief Leontief paradox: A finding by Wassily Leontief, a Nobel Prize-winning
economist, which shows that the United States, surprisingly, exports relatively
more labour-intensive goods and imports capital-intensive goods.
International product life cycle (IPLC) theory: A theory of the stages of
production of a product with new ‘know-how’: it is first produced by the parent
firm, then by its foreign subsidiaries, and finally anywhere in the world where costs
are the lowest; it helps explain why a product that begins as a nation’s export often
ends up as an import. lý thuyết vòn đời sản phẩm quốc tế
Embargo: A complete ban on trade (imports and exports) in one or more products
with a particular country. lệnh cấm vận
GATT: The General Agreement on Tariffs and Trade – a treaty that was designed
to promote free trade by reducing both tariff and non-tariff barriers to international
trade. hiệp định chung về thuế quan và mậu dịch
WTO: an international body dealing with rules of trade between nations.

B. Reading
Reading 1
INTERNATIONAL TRADE
International trade is the branch of economics concerned with the exchange of
goods and services with foreign countries. Some international economic problems
cannot be solved in the short run. Consider the US balance of trade deficit. US
trade with Japan and China heavily affects its overall imbalance. Moreover, this
trade deficit will not be reduced by political measures alone; it will require long-
run economic measures that reduce imports and increase exports. Other nations are
also learning this lesson – and not just those that have negative balances. After all,
most countries seem to want a continual favourable trade balance, although this is
impossible, since a nation with a deficit must be matched by a nation with a
surplus.
The complexity of global value chains, in services and manufacturing, make
international trade an even more important topic today. Currency shifts, inflation
and, in many cases, unemployment present critical challenges alongside trade
interdependencies across countries. However, there is strong evidence that open
trade brings growth and prosperity to the world economic system. Since the time
of Adam Smith in 1790, economists have shown that free trade is efficient and

33
leads to maximum economic welfare. More recently, new trade theory and its
variants have suggested that governments intervene in markets ‘intelligently’ to
enhance the benefits of international trade.

METHODS OF PROMOTING TRADE

A subsidy is financial assistance to domestic producers in the form of cash payments,
low-interest loans, tax breaks, product price supports, or some other form. It is
intended to assist domestic companies in fending off international competitors.
Critics charge that subsidies cover costs that truly competitive industries should be
able to absorb their own. It is widely believed that subsidies benefit companies and
industries that receive them but not consumers.
Governments also promote exports by providing export financing. They can offer
loans that a company could otherwise not obtain or charge them an interest rate
that is lower than the market rate. Another option is to guarantee that the
government will repay a company's loan if the company should default on
repayment-called a loan guarantee. Many nations also have special agencies
dedicated to helping their domestic companies gain export financing.
Most countries promote trade with other nations by creating what is called a
foreign trade zone (FTZ)-a designated geographic region in which merchandise
is allowed to pass through with lower customs duties (taxes) and/or fewer customs
procedures. Finally, most nations have special government agencies responsible
for promoting exports. These agencies often organize trips for trade officials and
businesspeople to visit other countries to meet potential business partners and
generate contracts for new business. They also typically open trade offices in other
countries to promote the home country's exports and introduce businesses to
potential business partners in the host nation.

BARRIERS TO TRADE
Why do many countries produce goods and services that could be purchased more
cheaply from others? One reason is trade barriers, which effectively raise the cost
of these goods and make them more expensive to local buyers.
One of the most common reasons for the creation of trade barriers is to encourage
local production by making it more difficult for foreign firms to compete there.
Another reason is to help local firms export and thus build worldwide market share
by doing such things as providing them with subsidies in the form of tax breaks

34
and low-interest loans.
Other common reasons include:
■ to protect local jobs by shielding home-country business from foreign
competition;
■ to encourage local production to replace imports;
■ to protect infant industries that are just getting started;
■ to reduce reliance on foreign suppliers;
■ to encourage local and foreign direct investment;
■ to reduce balance of payments problems;
■ to promote export activity;
■ to prevent foreign firms from dumping (selling goods below cost in order to
achieve market share);
■ to promote political objectives such as refusing to trade with countries that
practise apartheid or deny civil liberties to their citizens.
Commonly used barriers
A variety of trade barriers deter the free flow of international goods and services.
The following presents five of the most commonly used barriers.
Price-based barriers: Imported goods and services sometimes have a tariff added
to their price. Quite often this is based on the value of the goods. For example,
some tobacco products coming into the United States carry an ad valorem tariff of
over 100 per cent, thus more than doubling their cost to US consumers. Tariffs
raise revenues for the government, discourage imports, and make local goods more
attractive.
Quantity limits: Quantity limits, often known as quotas, restrict the number of units
that can be imported or the market share that is permitted. If the quota is set at zero,
as in the case of Cuban cigars from Havana to the United States, it is called an
embargo. If the annual quota is set at 1 million units, no more than this number can
be imported during one year; once it is reached, all additional imports are turned
back. In some cases a quota is established in terms of market share.
International price fixing: Sometimes a host of international firms will fix prices
or quantities sold in an effort to control price. This is known as a cartel. A well-

35
known example is the Organization of the Petroleum Exporting Countries (OPEC),
which consists of Saudi Arabia, Kuwait, Iran, Iraq and Venezuela, among others.
By controlling the supply of oil it provides, OPEC seeks to control both price and
profit. This practice is illegal in the United States and Europe, but the basic idea of
allowing competitors to cooperate for the purpose of meeting international
competition is being endorsed more frequently in countries such as the United
States. For example, US computer firms have now created partnerships for joint
research and development efforts.
Financial limits: There are a number of different financial limits. One of the most
common is exchange controls, which restrict the flow of currency. A common
exchange control is to limit the currency that can be taken out of the country: for
example, travellers may take up to only $3,000 per person out of the country.
Another example is the use of fixed exchange rates that are quite favourable to the
country. For example, dollars may be exchanged for local currency on a 1:1 basis;
without exchange controls, the rate would be 1:4. These cases are particularly
evident where a black market exists for foreign currency that offers an exchange
rate much different from the fixed rate.
Foreign investment controls: Foreign investment controls are limits on foreign
direct investment or the transfer or remittance of funds. These controls can take a
number of different forms, including: (1) requiring foreign investors to take a
minority ownership position (49 per cent or less); (2) limiting profit remittance
(such as to 15 per cent of accumulated capital per year); and (3) prohibiting royalty
payments to parent companies, thus stopping the latter from taking out capital.
Such barriers can greatly restrict international trade and investment. However, it
must be realised that they are created for what governments believe are very
important reasons. A close look at one of these, tariffs, helps to make this clearer.
Tariffs
A tariff is a tax on goods that are shipped internationally. The most common is the
import tariff, which is levied on goods shipped into a country. Less common is the
export tariff for goods sent out of the country, or a transit tariff for goods passing
through the country. These taxes are levied on a number of bases. A specific duty
is a tariff based on units, such as $1 for each item shipped into the country. So a
manufacturer shipping in 1,000 pairs of shoes would pay a specific duty of $1,000.
An ad valorem duty is a tariff based on a percentage of the value of the item, so a
watch valued at $25 and carrying a 10 per cent duty would have a tariff of $2.50. A

36
compound duty is a tariff consisting of both a specific and an ad valorem duty, so
a suit of clothes valued at $80 that carries a specific duty of $3 and an ad valorem
duty of 5 per cent would have a compound duty of $7.
Governments typically use tariffs to raise revenue and/or to protect local industry.
At the same time, these taxes decrease demand for the respective product while
raising the price to the buyer. There are numerous reasons for using tariffs, such
as to protect domestic industries or firms. One of the alleged practices that
triggered the US policy was dumping, which is the selling of imported goods at a
price below cost or below that in the home country.
Another reason for using tariffs is to raise government revenue. Import tariffs, for
example, are a major source of revenue for less developed countries. A third reason
is to reduce citizens’ foreign expenditures in order to improve the country’s
balance of payments.
Tariffs continue to be one of the most commonly used barriers to trade, despite the
fact that they often hurt low-income consumers and have a limited impact, if any,
on upper-income purchasers. In recent years most industrialised countries have
tried to reduce or eliminate the use of these trade barriers and to promote more free
trade policies.

NON-TARIFF BARRIERS TO TRADE

Non-tariff barriers are rules, regulations and bureaucratic red tape that delay or
preclude the purchase of foreign goods. Examples include (1) slow processing of
import permits; (2) the establishment of quality standards that exclude foreign
producers; and (3) a ‘buy local’ policy. These barriers limit imports and protect
domestic sales.
The economic effects of non-tariff barriers (NTBs) on trade are roughly similar
to those of tariffs. They are inefficient distortions that reduce potential gains from
trade.
NTBs have gained prominence and importance in recent years as nations have
begun resorting to them more frequently for protection. Sometimes they are not
imposed by countries to interfere deliberately with trade. Rather, they arise out
of domestic policy and economic management. Examples include tax breaks to
reduce regional income disparities or regulations designed to increase local
purchasing or employment. These, in turn, result in a type of indirect export
subsidy. Other NTBs are more blatant devices that restrict imports or foster

37
exports.
Quotas
The most important NTBs are quotas that restrict imports to a particular level.
When a quota is imposed, domestic production generally increases and prices rise.
As a result, the government usually ends up losing tariff revenues.
Historically, the GATT and WTO have prohibited import quotas except on
agricultural products, as emergency measures, or when a country has short-run
balance of payments problems. Countries have circumvented this regulation most
notably for textiles, footwear and automobiles by negotiating voluntary export
restraint agreements that are useful in preventing retaliatory action by the
importing country. In general, business would rather be protected by quotas than
by tariffs. Under quotas, if future domestic demand is known, companies can
determine their future production levels. Under tariffs, domestic producers must
estimate the elasticity of the demand curve for imported products and the future
movements in world prices, which is a more difficult challenge.
‘Buy national’ restrictions
‘Buy national’ regulations require governments to give preference to domestic
producers, sometimes to the complete exclusion of foreign firms. In Europe, for
example, many of the telephone, telegraph, electric utility, airline, and railroad
industries are government owned and buy from national firms only, thus closing a
large market to exporters. On the other hand, countries like the United States have
a similarly wide range of inefficient ‘Buy American’ regulations at the national
and state levels that discriminate against foreign suppliers. In 1976 the Tokyo
Round of GATT discussions started a process that led to the Agreement on
Government Procurement (GPA). In 2014 a total of 17 parties signed up to the
revised version of the agreement, comprising 45 WTO members. Since 2014,
Montenegro, New Zealand, Ukraine and Moldova have signed up to the GPA. The
central aim of the GPA is to open up government procurement markets (worth an
estimated US$1.7 trillion annually) to all members.
Customs valuation
Considerable progress has been made in the area of customs valuation for the
payment of duties. Value for duty is now generally based on the invoice cost, and
the latitude of any country’s customs office to reclassify products has been
reduced.
38
Technical barriers
Product and process standards for health, welfare, safety, quality, size and
measurements can create trade barriers by excluding products that do not meet
them. Testing and certification procedures, such as testing only in the importing
country and conducting on-site plant inspections, are cumbersome, time
consuming and expensive. The costs must be borne by the exporter prior to the
foreign sale. National governments have the right and duty to protect their citizens
by setting standards to prevent the sale of hazardous products. But such standards
can also be used to impede trade. For example, at one point Japan excluded US-
made baseball bats from the market because they did not meet the country’s
standard. No product produced outside Japan (even products made by foreign
subsidiaries of Japanese MNEs) could bear the certification stamp of the Japanese
Industrial Standard (JIS) or the Japanese Agricultural Standard (JAS), and selling
in Japan without the JIS or JAS logo was difficult. Similarly, at one time the
regulations for automobile safety in the United States required that bumpers be
above the height practical for imported subcompact cars, thus creating a technical
barrier for these car manufacturers.
Export restraints
Over the vigorous objections of countries exporting natural resources, the GATT
(and WTO) rounds have moved to tighten the conditions under which exports can
be restrained. In general, world tariffs increase with the level of processing: for
example, import duties increase as copper is processed from concentrate to blister,
to refined copper, to copper wire and bars, to copper pots and pans. This tariff
structure makes upgrading of natural resources in the producing country difficult.
Natural resource-producing countries have been largely unsuccessful in their
attempts to harmonise tariffs on a sectoral basis in order to increase their ability to
upgrade prior to export. However, they have argued successfully for their right to
restrict exports to induce further domestic processing.

Reading comprehension tasks

A. Choose the best alternative to complete the following sentences
1. Which of these is not an instrument the government uses to promote trade?
a. Tariffs b. Subsidies c. Export financing d. Foreign Trade Zone

39
2. Which of these is a common instrument used by the government to promote trade?
a. Tariffs b. Subsidies c. Quotas d. Local content requirements
3. Financial assistance to domestic producers in the form of cash payments, low-
interest loans, tax breaks, product price supports or some other form is called
_________.
a. export financing b. embargo c. subsidy d. tariff
4. When a government guarantees that it will repay the loan of a company if the
company should default on repayment, it is called a (n) _________.
a. subsidy. b. loan guarantee.
c. infant industry protection. d. loan repayment clause.
5. A designated geographic region in which merchandise is allowed to pass
through with lower customs duties and/or fewer customs procedures is called
a(n) _______.
a. chaebol b. subsidy
c. the WTO d. foreign trade zone
6. Which of these add to the cost of imported products because they levy an
additional tax upon them?
a. tariffs b. quotas c. local content requirements d. embargoes
7. Tariffs are classified into all of these except
a. transit b. domestic c. export d. import
8. Restrictions on the amount of a good that can enter or leave a country during a
certain period of time is called a(n) ________.
a. export subsidy b. local content requirement
c. quota d. tariff
9. A complete ban on trade (imports and exports) in one or more products with a
particular country is called a(n) __________.
a. embargo b. tariff-quota
c. tariff d. voluntary export restrain

40
10. A treaty that was designed to promote free trade by reducing both tariffs and
non-tariff barriers to international trade is called the _______:
a. WTO. b. GATT. c. OPEC. d. VER
B. Fill in each gap with an appropriate term
1. A _______
tariff is a government tax levied on a product as it enters or leaves a
country.
2. A tariff levied by the government of a country that is exporting a product is
called an __________.
export tariff

3. A tariff levied by the government in a country that is importing a product is

called an __________.
import tariff

4. A tariff levied as a percentage of the stated price of an imported product is called

__________
ad valorem tariff.
5. A tariff levied as a specific fee for each unit (measured by number, weight, etc.)
of an imported product is called __________.
specific duty

6. A tariff levied on an imported product and calculated partly as a percentage of

its stated price, and partly as a specific fee for each unit is referred to as a (n)
__________.
compound duty

7. The __________
WTO is the only international body dealing with rules of trade
between nations.
8. When a company exports a product at a price lower than the price normally
charged in its domestic market, it is said to be _________.
dumping

Reading 2: TRADE AND DEVELOPMENT

With political independence, the Less Developed Countries (LDCs) inherited
a structure of production and international trade that had largely been designed to
serve the interests of the metropolitan powers, rather than those of the LDCs
themselves.
They were heavily dependent on the production and export of a limited range
of primary commodities (foodstuffs, fuels and industrial raw materials) going
mainly to the developed capitalist economy. In many cases, that dependence has
not yet been broken.
At the present time, for example, coffee still represents approximately 90 per

41
cent of Burundi’s recorded export and 50 per cent of Columbia’s; copper accounts
for more than 70 per cent of Zambia’s export; cocoa represents more than 70
percent of Ghana’s exports. Many other examples could be given.
The import structures of the LDCs were dominated by the importation of
manufactured goods and intermediate inputs – durable consumer goods, machinery,
and transport equipment, chemicals, petroleum and so on. At independence most trade
was with the colonial “mother country”.
Orthodox economists tended to argue that this structure of production and trade
was consistent with the LDCs’ comparative advantage and that they enjoy
significant gains from trade. The critics of this view, however, maintain that the
gain from trade were more likely, for variety of reasons, to be appropriated by the
developed capitalist economies. The unequal exchange thesis espoused by some
neo-Marxists, went further and suggested that trade was actually carried out at the
expense of the LDCs, producing the condition of under development and poverty.
At the center of the relationship between trade and development remains the
controversy concerning the long-term behavior of the terms of trade of the
LDCs. The commodity, or net barter, terms of trade are the ratio of the unit price
of export to the unit price of import and the deterioration in the index implies that
a given volume of exports is exchanged for a smaller volume of imports.
The secular deterioration hypothesis is associated with the work of Hans
Singer and Raul Prebisch. In its original form, it was based on the argument that
in the developed countries strong trade unions could ensure that workers, rather
than consumers, benefited from productive gains, whereas in the LDCs, higher
productivity led to lower prices, thus benefiting consumers in the developed
economies. Associated with, although formally separated from, such argument was
the view that primary commodity export prices were highly unstable and prone
violent fluctuations, thus damaging the development of the LDCs.

Reading comprehension tasks

1. What is a structure of production and trade of LDCs? What about MDCs (More
Developed Countries)?
2. Give three examples of the current reliance of LDCs on primary products for
export.
3. What are the arguments which suggest that there were no advantages to be
gained by LDCs from their structure of production and trade?

42
 4. Give a definition of the net barter terms of trade.

D. Exercises

Exercises 1: Replace the underlined words and expressions in the text with the
words and expressions below

A. balance of payments B. balance of trade C. barter or counter-trade

D. climate E. commodities F. division of labour
G. economies of scale H. factors of production I. nations
K. protectionism L. quotas M. tariffs

nations
(1) Countries import some goods and services from abroad, and export others to
commodities
the rest of the world. Trade in (2) raw materials and goods is called visible trade
in Britain and merchandise trade in the US. Services, such as banking, insurance,
tourism, and technical expertise, are invisible imports and exports. A country can
have a surplus or a deficit in its (3) difference between total earnings from visible Balance of
Trade
exports and total expenditure on visible imports, and in its (4) difference between Balance of
total earnings from all exports and total expenditure on all imports. Most countries Payment
have to pay their deficits with foreign currencies from their reserves, although of
course the USA can usually pay in dollars, the unofficial world trading currency.
Countries without the currency reserves can attempt to do international trade by
barter or counter-trade
way of (5) direct exchanges of goods without the use of money. The (imaginary)
situation which a country is completely self-sufficient and has no foreign trade is
called autarky.
The General Agreement on Tariffs and Trade (GATT), concluded in 1940, aims to
maximize international trade and to minimize (6) the favouring of domestic protectionism

industries. GATT is based on the comparative cost principle, which is that all
nations will raise their income if they specialize in producing the commodities in
which they have the highest relative productivity. Countries may have an absolute
or a comparative advantage in producing particular goods or services, because of
(7) inputs (raw materials, cheap or skilled labour, capital, etc), (8) weather
factors of production climate
division of labour
conditions, (9) specialization of work into different jobs, (10) savings in unit costs
arising from large-scale production, and so forth. Yet most governments still
pursue protectionist policies, establishing trade barriers such as (11) taxes charged
tariffs

43
 quotas
on imports, (12) restrictions on the quantity of imports, administrative difficulties,
and so on.
Exercises 2: Choose the best alternative to complete the sentence
1. Many countries, such as the United Kingdom and New Zealand, are ______
dependent on international trade.
a. favourably b. heavily C. perfectly d. grossly
2. The fact that labour costs are lower in other countries _______ us at a
tremendous disadvantage.
a. makes b. does C. puts d. sells
3. If a country has a _______ currency, importers and exporters may have to keep
changing the prices of their goods.
a. swimming b. flying c. flowing d. floating
4. Some countries try to be _______ in certain commodities so that they are not
dependent on imports.
a. economic b. sufficient c. self-sufficient d. self-
financing
5. It's better to start exporting on a small _______ and then expand if things go
well.
a. measure b. measurement c. scale d. rate
6. Because of high shipping costs, it made more sense to _______ a manufacturer
to produce our range of furniture.
a. license b. lease c. control d. handle
7. The government has imposed protective tariffs to stop the _____ of cheap
imports which threatened to destroy domestic industries.
a. rain b. famine c. flood d. storm
8. Some manufacturers were accused of ______, in other words selling goods
abroad at a lower price than they were sold domestically.
a. dumping b. revaluing c. flooding d. devaluation

44
Exercise 3: Look at the following table and discuss
The 2018 US-China Trade War: ten key events

US 2018 China
Tariff of 20%–50% on washing machines
January
and tariff of 30% on solar panels
Tariff of 25% on steel and tariff of 10%
February
on aluminium
March
Tariffs accounting for
April $3 billion in goods
from US
Negotiations between
Negotiations between US and China US and China
May
representatives fail to end trade war representatives fail to
end trade war
Tariffs accounting for
Tariffs accounting for $50 billion in
June $50 billion in goods
goods from China
from US
July
August
Tariffs accounting for
Tariffs accounting for $200 billion in
September $60 billion in goods
goods from China
from US
October
Trade negotiations
Trade negotiations between Trump and
November between Trump and Xi
Xi begin
begin
Trump and Xi meet at
Trump and Xi meet at G-20 summit December
G-20 summit
Several rounds of
Several rounds of tariffs on China retaliation tariffs on
totalling more than $250 billion. the US totalling more
than $130 billion.

45
1. How do trade wars work against the principles supported by the theory of
comparative advantage?
2. What reasons were given for the start and subsequent escalation of the US–
China trade war in 2017–18?
3. How can trade barriers negatively affect third countries who are not directly
targeted in a trade war?

E. Extension activities

1. In the United States, where Internet services are cheap, the ratio of capital to
labor used is higher than that of capital used in accounting services. But in other
countries, where Internet services are expensive and labor is cheap, it is
common to use less capital and more labor than in the United States. Can we
still say that Internet services are capital intensive compared to accounting
services? Why or why not?
2. “The world’s poorest countries cannot find anything to export. There is no
resource that is abundant-certainly not capital or land, and in small poor nations
not even labor is abundant.” Discuss.
3. Dumping occurs when a firm sets a lower price (net of trade costs) on exports
than it charges domestically. A consequence of trade costs is that firms will feel
competition more intensely on export markets because the firms have smaller
market shares in those export markets. This leads firms to reduce markups for
their export sales relative to their domestic sales; this behavior is characterized
as dumping. Dumping is viewed as an unfair trade practice, but it arises
naturally in a model of monopolistic competition and trade costs where firms
from both countries behave in the same way. Policies against dumping are often
used to discriminate against foreign firms in a market and erect barriers to trade.

F. Essay writing
Write a 300 word essay on the following topic:
Present a written argument to answer the following question: Do you agree
that free trade makes rich countries richer and poor countries poorer?
Use some trade theories to support your argument

46