Introduction of international trade

INTERNATIONAL BUSINESS ADMINISTRATION
‘Notes for Management Students’
Text Book Referred: John J. Wild, Kenneth L. Wild “International
Business: the challenges of globalization ” (2014), Global Edition,
Pearson Prentice Hall, 7edition
(one can buy its e-book in only $5 online)
Course Instructor:
Dr. SANDEEP SOLANKI (INDIA)
Assistant Professor, Department of Marketing,
College of Business Administration,
Prince Sattam Bin Abdulaziz University, Al Kharj, Saudi Arabia
9/17/2019 By: Dr. Sandeep Solanki R.no. SO-115 1

Recommended Text Book for Intl. Bus. Admin. is strongly recommended :
7th Edition, Global Edition of John J.Wild and Kenneth L. Wild, International Business – The
Challenges of Globalization, Pearson
TEXT BOOK

CONTENT (Unit – I):
Concept of International Trade (Chapter 5, Pg. 156 – 161)
 An Overview of Intl. Trade
 Factors affecting International Trade
 Benefits of International Trade
 Dangers of Trade Dependency
Regional Economic Integration (Chapter 8, Pg. 224 - 2228)
 Meaning & Concept of Regional Economic Integration
 Levels of Regional Integration
 Benefits and Drawbacks of Regional Integration
 Integration in Middle East – GCC (Chapter 8, Pg. 242)

1. Concept of International Trade (8th ed. Chapter 5 on Pg. 162 – 167)
AN OVERVIEW OF INTERNATIONAL TRADE:
Definition& Meaning of International Trade: The purchase, sale or exchange of capital, goods and
services across international borders or territories. This is in contrast to domestic trade which occurs
between different states, regions or cities within a country. Due to trade barriers, international trade
becomes expensive than the domestic one. International business include business activities like –
importing & exporting, international investments i.e. flow of capital, fulfilling entry barriers such as
licensing, franchising, management contracts etc.
 One way to measure the importance of trade to a nation is to examine the volume of an economy’s
trade relative to its output. Trade as a share of GDP is defined as the sum of exports and imports (of
goods & services) divided by GDP. Recall that GDP is the value of all goods and services produced
by a domestic economy over a one-year period. For example, India’ trade volume is 25% of its
GDP, Saudi Arabia trade volume is 50% of its GDP, and Romania’s trade volume is 75% of its
GDP

1. Concept of International Trade (8th ed. Chapter 5 on Pg. 162 – 167)
AN OVERVIEW OF INTERNATIONAL TRADE……………contd..
 People around the world are accustomed to purchasing goods and services produced in other
countries. In fact, many consumers get their first taste of another country’s culture through
merchandise purchased from that country. For example, the fine artwork of ‘Imari’ porcelain
conveys the Japanese attention to detail and quality. And American Eagle jeans portray the casual
lifestyle of people in the US.
 International trade provides a country’s people with a greater choice of goods and services. For
example, Finland has a cool climate, it cannot be expected to grow cotton. But it can sell paper and
other products made from lumber (which it has in abundance) to the US. Finland can then use the
proceeds from the sale of products derived from lumber to buy US-grown Pima cotton.

AN OVERVIEW OF INTERNATIONAL TRADE………..continued…
 Regional Trade Agreements: Smaller groups of nations are integrating their economies by fostering
trade and boosting cross-border investment. For example, GCC, NAFTA, EU and APEC. For
example: The achievements accomplished by the UAE in the area of GCC joint integration are
documented in the statistical reports of the Gulf Cooperation Council General Secretariat. In 2013,
the UAE was ranked first with regard to permitting citizens of Gulf countries to own real estate
(76%) and granting licenses for economic activities (86%). The country was ranked second with
regard to attracting citizens from GCC countries to work in its government sector (34%), admitting
students of the Gulf countries to public education (30%), and the volume of intra-regional trade of
GCC countries (22%) of the total exports and imports.
(source: https://www.mof.gov.ae/en.aspx)
 International trade is an important engine for job creation in many countries. The US department of
commerce calculates that for every $1 billion increase in exports, 22,800 jobs are created in the US.
Expanded trade benefits other countries similarly.

 Global Supply Chain: Businesses today compete to gain a profitable place in the constantly
evolving global supply chains. And this is true even for a business who sells only to domestic
customers. The chances are some of its suppliers, or suppliers of suppliers, would be foreign. And
some foreign companies will be seeking opportunities to export to its market to compete with it
directly, or supplying its domestic competitors to compete against it indirectly. For example,
Apple’s iconic iPhone is supposedly a Chinese made product. It is assembled in the factories of
China with components sourced literally from all over the world. Tapping into the best producers of
highly specialized niche components. Only a small fraction of the value-addition is carried out in
USA. The ultimate goal of maintaining an effective supply chain in an industrial set up is to
transfer the benefit of cutting cost the international buyer.

 The value and volume of international trade continues to increase. Today, world merchandise (stock
of manufactured goods & commodities) exports are valued at more than $14 trillion, and service
exports are worth more than $4 trillion. For example, China is world’s top merchandise exporter
with a value of $2049 billion and that of US is top services exporter with a value of $621 billion.
 According to Wikipedia, most traded export products are: Crude Oil, Automobile parts, Medication
mixes, Computer parts, unwrought Gold (which needs further processing), Aircrafts, Insulated
wires, TV monitors/projectors, Power units etc. In addition to textile, machinery and food products.
 Example of Saudi Arabia: As per worldtoexports/saudiarabia.com, Saudi Arabia’s overall import
items in 2018 were: Machinery & Computers (Turbo-jets & A.C.), Vehicles (cars & trucks),
Electricals (Radar & Water heaters), Cereals (wheat & rice), Pharmaceuticals, Aircrafts, Mineral
Fuels, Medical Apparatus, Articles of Iron & Steel, and Furniture.

IMAGES OF VARIOUS MERCHANDISE PRODUCTS:

STEPS IN INTERNATIONAL TRADE:

FACTORS AFFECTING INTERNATIONAL TRADE:
This is in terms of the flow of international trade and the following factors affect the flow:
1) Inflation & Deflation: Inflation is the rate at which the general level of prices for goods an
services is rising, and, subsequently, purchasing power is falling. It is a situation in a country
wherein the prices of the commodities are rising and goods are becoming expensive. A relative
increase in country’s inflation rate will decrease its foreign trade (Export – Import), because the
cost of exports increase and hence the capability to export for a firm decreases. Imports increases
during inflation, ceteris paribus (other things being equal), because domestic demand decreases
and consumers prefer to buy imported goods at a lower cost, rather . Deflation is in contrast to
inflation wherein the prices of the commodities are lowering as compared to the base year. And
hence the export is encouraged due to lowering cost of production.
2) Government Restrictions (barriers): A government may reduce its country’s imports from or
exports to other nation by introducing tariff and non-tariff restrictions (also known as trade
barriers). Generally, trade barriers between two nations are also affected by political reasons. For
example, USA imposed trade sanctions with a ban to selling aircrafts and repair parts to Iranian
Aviation Companies.
9/17/20
19 By: Dr. Sandeep Solanki R.no. SO-115 12

3) Competition: Competition in international trade is actually between the global companies existing
in the mainstream industrialized economies such as US, China, Taiwan, Brazil, Singapore etc.
Companies are striving not only to capture resources but also a share in international markets. For
example, global brands competing against each other: M-Benz v/s BMW, Coca-Cola v/s Pepsi,
Duracell v/s Energizer, Sony v/s Samsung etc. Higher the competition higher the flow of
international trade.
4) Technological Innovation: When businesses or consumers use technology to conduct transactions,
they engage in e-business (e-commerce) – the use of computer networks to purchase, sell or
exchange products; to service customers; and to collaborate with partners. E-business is making it
easier for companies to make their products abroad, not simply to import and export finished
goods. Technology stimulates demand of goods & services across borders.

5) National Production or GDP (gross domestic product): is the monetary value of all goods and
services produced by a domestic economy over a one-year period. A country’s GDP per capita
(also termed as per capita income) is simply its GDP divided by its population to measure a
nation’s income per person. The level of output (GDP) in any given year influences the level of
international trade in that year. Slower world economic output slows the volume of international
trade, and higher output propels greater trade. Trade slows in times of economic recession because
when people are less certain about their own financial futures they buy fewer domestic and
imported products.
6) Cost of Transportation: The distance to cover the geographical location between two countries
affects the international trade, in addition to the goods or services in demand. For example, the
cost of transportation to import coffee beans from Uganda will be less expensive than importing
from Brazil. Also the mode of transportation (by Air or Ship) affects the cost of transportation in
international trade deals.

7) The Foreign Exchange Market: Unlike domestic transactions, international transactions involve
the currencies of two or more nations. To exchange one currency for another in international
transactions, companies rely on a mechanism called the foreign exchange market – a market in
which currencies are bought and sold and their prices are determined. Financial institutions can
convert currencies using an exchange rate – the rate at which one currency is exchanged for
another. Rates depend on the size of the transaction, the trader conducting it, general economic
conditions, and sometimes government mandate. For example, in the event of exports by an
exporter worth 2000 dollars from USA to Saudi Arabia; given, the exchange rate is 1$ = 4 Saudi
Rials. The total import value is 8000 Saudi Rials for the Saudi importer. But due to some
inflationary effect or any other factor, the exchange rate changes to 5 Saudi Rials for 1 dollar, then
the payment by the importer will become expensive i.e. 10,000 Saudi Rials. Therefore, other
factors remaining constant, the importing goods will become expensive and thus may have to be
curtailed.

8) Balance of Payments (BoP): A country’s balance of payment is a national accounting system that
records all receipts coming into the nation and payments to entities in other countries.
International transactions that result in inflows from other nation add to the BoP accounts and
international transactions that result in outflows to other nations reduce the BoP accounts. It has
two major components – the current account and the capital accounts and both should be equal.
Current account, also referred as balance of trade (BoT) is the largest component of balance of
payments (BoP) of any nation. Capital account records transactions involving sale and purchase of
assets with a foreign country.
9) Balance of Trade (BoT): The current account is a national account that records transactions
involving the export and import of visible goods (merchandise) and income receipts on assets
abroad and income payments on foreign assets inside the country. In other words, the balance of
trade is the difference between the value of a country’s imports and exports for a given period.
There is positive or surplus balance of trade when exports exceeds imports and there is a negative
or trade deficit when imports exceeds exports. During trade deficit the government attempts to
curtail imports and promote exports such as by export financing and giving subsidies.

10) Foreign Direct Investment (FDI): In the event of lowering trade barriers, companies realized that
they could now produce in the most efficient and productive locations and simply export to their
markets worldwide. This set off a wave of FDI flows into low-cost emerging markets such as India
and China. FDI is understood in terms of international flows of capital to purchase physical assets
or a significant amount of the ownership (stock) of a company in another country, to gain a
measure of management control and take-away profits. This boosts the flow of international trade
between nations. For example, United States have a significant investment in Malaysia’s
petroleum and petrochemical sectors. Some of the companies are ExxonMobil, Caltex,
ConocoPhillips, Murphy Oil, Hess Oil, Halliburton, Dow chemical, and Eastman chemical.

BENEFITS OF INTERNATIONAL TRADE:
1) International trade provides a country’s people with a greater choice of goods and services. For
example, Sony offer its electronic products world-wide in the categories of audio, video, energy
storage, play-station, security, camera, mobile & accessories etc.
2) International trade is an important engine for job creation in many countries. For example,
through foreign direct investments (FDI) in hi-tech manufacturing sector, global companies like
Siemens and Boeing have opened its plants in India and China, where labor cost of skilled & semi-
skilled labor is comparatively less.
3) Product Sale Flexibility: Products performing average, in local or regional market, one may
research greater demand & opportunities abroad. For example, sales of Japanese-built fuel
efficient small cars began in North America in late 1957 and by 1990 the Japanese power-house
Toyota had produced more than 100 million vehicles only for export purposes.

BENEFITS OF INTERNATIONAL TRADE:
4) Disposal of Surplus goods: One of the advantages of international trade is that you may have an
outlet to dispose of surplus goods that you're unable to sell in your home market. For example,
GCC nations exporting the excessive production of crude oil world-wide.
5) Access to New Customers: While doing business across borders, the product of a company may be
much liked than its domestic consumers and hence discovering a new market, say, through social
media channels like FB, Instagram, YouTube etc, For example, more than one out of four
Norwegians read Disney Character Comics of the publisher Donald Duck & Co.

DANGERS OF TRADE DEPENDENCY:
 Meaning of Trade Dependency: Trade between most nations is characterized by a degree of
interdependency. Companies in developed nations trade a great deal with companies in other
developed nations. The level of inter-dependency between pairs of countries often reflects the
amount of trade that occurs between a company’s subsidiaries in the two nations. Emerging
(developing) markets that share borders with developed countries are often dependent on their
wealthier neighbors.
 But the dangers of interdependency become apparent when a nation experiences economic
recession or political turmoil, which then harms dependent nations. For many years, Mexico was a
favorite location for the production and assembly operations of the US companies making all sorts
of products, including refrigerators, mobile phones and textiles. But then some companies
abandoned Mexico for cheaper production locations in Asia, which left empty factories and
unemployed workers behind in Mexico.

MEANING OF REGIONAL ECONOMIC INTEGRATION (REI):
The process whereby countries in a geographic region cooperate to reduce or eliminate barriers to the
international flow of products, people, or capital is called regional economic integration. A group of
nations in a geographic region undergoing economic integration is called a regional trading bloc.
According to Wikipedia, Economic Integration, is the unification of economic policies between
different states, through the partial or full abolition of tariff and non-tariff restrictions on trade.
For Example:
 European Union (EU) having a common currency i.e. Euros. Includes: Austria, Belgium, Britain,
Estonia, France, Germany, Greece, Italy, Romania, Netherlands, Spain Sweden etc.
 Asia Pacific Economic Cooperation (APEC) includes: Australia, Chile, China, Hong-Kong, Japan,
South Korea, Mexico, New Zealand, Russia, Taiwan, Mexico, Canada, and USA
 BRICS: is an Association of Emerging National Economies i.e. Brazil, Russia, India, China and
South Africa

LEVELS OF ECONOMIC INTEGRATION (EI):
Each level of integration incorporates the properties of those levels that precede it:
1) Free Trade Area (FTA): EI whereby countries seek to remove all barriers to trade among
themselves but where each country determines its own barriers against nonmembers is called a
free trade area. A free trade area is the lowest level of economic integration that is possible
between two or more countries. Countries belonging to the FTA strive to remove all tariffs and
nontariff barriers such as quotas and subsidies, on international trade in goods and services.
However, each country is able to maintain whatever policy it sees fit against nonmember
countries. These policies can differ widely from country to country. Countries belonging to a FTA
also typically establish a process by which trade disputes can be resolved. For Example, EFTA –
European Free Trade Association includes Iceland, Liechtenstein, Norway and Switzerland.
2) Customs Union: EI whereby countries remove all barriers to trade among themselves and set a
common trade policy against nonmembers is called a customs union. Thus, the main difference
between a FTA and customs union is that the members of a customs union agree to treat trade with
all nonmember nations in a similar manner. Countries belonging to a customs union might also
9/17/2019
By: Dr. Sandeep Solanki R.no. SO-115 22

negotiate as a single entity with other supranational organization, such as the World Trade
Organization (WTO). For Example: GCC
3) Common Market: EI whereby countries remove all barriers to trade and to the movement of
labor and capital among themselves and set a common trade policy against nonmembers is called a
common market. Thus, a common market integrates the elements of FTAs and custom union and
adds the free movement of important factors of production – people and cross-border investment.
The level of integration is very difficult to attain because it requires members to cooperate to at
least some extent on economic and labor policies. Furthermore, the benefits to individual countries
can be uneven because skilled labor may move to countries where wages are higher, and
investment capital may flow to areas where returns are greater. For Example: Central American
Common Market comprising of Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua

4) Economic Union: EI whereby countries remove barriers to trade and the movement of labor and
capital among members, set a common trade policy against nonmembers and coordinate their
economic policies is called an economic union. An economic union goes beyond the demands of a
common market by requiring member nations to harmonize their tax, monetary and fiscal policies
and to create a common currency. Economic unions require that member countries concede a
certain amount of their national autonomy (or sovereignty) to the supranational union of which
they are a part. For Example: Closer Economic Relations Agreement between Australia and New
Zealand.
5) Political Union: Economic and political integration whereby countries coordinate aspects of their
economic and political systems is called a political union. A political union requires member
nations to accept a common stance on economic and political matters regarding nonmember
nations. However, nations are allowed a degree of freedom in setting certain political and
economic policies within their territories. For example, Canada and USA. In both these nations,
smaller states and provinces combined to form larger entities.

9/17/2019
Figure: Levels of Regional Integration

BENEFITS OF REGIONAL ECONOMIC INTEGRATION (REI):
1) Trade Creation: EI removes barriers to trade and/or investment for nations belonging to a trading
bloc. The increase in the level of trade between nations that results from regional economic
integration is called trade creation. One result of trade creation is that consumers and industrial
buyers in member nations are faced with a wider selection of goods and services not previously
available. For example, US has many popular brands of bottled water including Coke’s Dasani and
Pepsi’s Aquafina. Trade creation can also increase aggregate demand in an economy. The wider
selection of products that results from trade creation can lower prices. Lower product prices then
increase purchasing power, which in turn tend to increase demand for goods and services.
2) Greater Consensus: The benefit of trying to eliminate trade barriers in smaller groups of
countries is that it can be easier to gain consensus from fewer members as opposed to, say, the 159
countries that comprise the WTO.

3) Political Cooperation: A group of nations can have significantly greater political weight than
each nation has individually. Thus, the group as a whole, can have more say when negotiating with
other countries in forums such as the WTO. Integration involving political cooperation can also
reduce the potential for military conflict between member nations. For Example: Brazil and
Argentina
4) Employment Opportunities: Regional integration can expand employment opportunities by
enabling people to move from one country to another to find work, or simply to earn a higher
wage. For example, those young people who have willingness to learn language skills and explore
new culture can develop an attitude of ‘learn & earn’. Noticeably ‘France’ give such an
opportunity to rest of the world.
5) Corporate Savings: Trade agreements can allow companies to alter their strategies, sometimes
radically. For example, nations in the Americas want to create a FTA that runs from the northern
tip of Alaska to the southern tip of South America. Companies that do business throughout this
region could save millions of dollars annually from the removal of import tariffs under an eventual
agreement. MNCs could also save money by supplying entire regions from just a few regional
factories, rather than having a factory in each nation.
9/17/2019

DRAWBACKS OF REGIONAL ECONOMIC INTEGRATION (EI):
1) Trade Diversion: The flip side of trade creation is trade diversion – the diversion of trade away
from nations not belonging to a trading bloc and toward member nations. Trade diversion can
occur after the formation of a trading bloc because of the lower tariffs charged among member
nations. It can actually result in increased trade with a less-efficient producer within the trading
bloc and in reduced trade with a more efficient but nonmember producer. So, EI can
unintentionally reward a less efficient producer within the trading bloc. Unless there is other
internal competition for the producer’s goods or service, buyer will likely pay more after trade
diversion because of the inefficient production methods of the producer.
2) Loss of National Sovereignty: There is also a cultural element of such agreements. Some people
argue that they will lose their unique national identity if their nation cooperates too much with
others. Successive levels of integration require that nations surrender more of their national
sovereignty. The least amount of sovereignty that must be surrendered to the trading bloc occurs in
a free trade area.
9/17/2019

DRAWBACKS OF REGIONAL ECONOMIC INTEGRATION (EI):
3) Shifts in Employment: Perhaps the most controversial aspect of region EI is its effect on people’s
jobs. The formation of a trading bloc promotes efficiency by significantly reducing or eliminating
barriers to trade among its members. The surviving producer of a particular good or service, then,
is likely to be the bloc’s most efficient producer. Industries requiring mostly unskilled labor, for
example, tend to respond to the formation of a trading bloc by shifting product ion to a low-wage
nation within the bloc. It is likely that once trade & investment barriers are removed, countries
protecting low-wage domestic industries from competition, will see these jobs move to the country
where wages are lower.

INTEGRATION IN MIDDLE EAST (GCC):
Several Middle Eastern nations formed the Gulf Cooperation Council (GCC) in 1980. Members of the
GCC are Bahrain, Kuwati, Oman, Qatar, Saudi Arabia, and the UAE. Its cooperative thrust allows
citizens of member countries to travel freely in the GCC without Visa. It also permits citizens of one
member nation to own land, property, and businesses in any other member nation without the need for
local sponsors or partners.
As per Wikipedia, the Key Objectives of the GCC are:
1) Formulating similar regulations in various fields such as religion, finance, trade, customs, tourism,
legislation, and administration.
2) Fostering scientific and technical progress in industry, mining, agriculture, water and animal
resources.
3) Establishing scientific research centers.
4) Setting up joint ventures.
5) Unified military (Peninsula Shield Force)
6) Encouraging cooperation of the private sector
7) Strengthening ties between their people

Picture from Wikipedia:
Head States of the GCC in Abu Dhabi on 05th May 1981 and the LOGO OF THE GCC

END OF UNIT – I
THANK YOU!
9/17/2019
By: Dr. Sandeep Solanki PSAUni.
S.Arabia 32

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