The world has a long, rich history of international trade among nations that can be traced back to early Assyrian, Babylonian, Egyptian, and Phoenician civilizations. These and other early civilizations recognized that trade can be tied directly to an improved quality of life for the citizens of all the partners. Today, the practice of trade among nations is growing by leaps and bounds. There is hardly a person on earth who has not been influenced in some way by the growing trade among nations.
Why International Trade?
One of the most logical questions to ask is, why do modern countries trade with one another? There are numerous reasons that countries engage in international trade. Some countries are deficient in critical raw materials, such as lumber or oil. To make up for these various deficiencies, countries must engage in international trade to obtain the resources necessary to produce the goods and/or services desired by their citizens. In addition to trading for raw materials, nations also exchange a wide variety of processed foods and finished products. Each country has its own specialties that are based on its economy and the skills of its citizens. Three common specialty classifications are capital, labor, and land.
Capital-intensive products, such as cars and trucks, heavy construction equipment, and industrial machinery, are produced by nations that have a highly developed industrial base. Japan is an example of a highly developed industrial nation that produces large quantities of high-quality cars for export around the world. Another reason Japan has adapted to producing capital-intensive products is that it is an island nation; there is little land available for land-intensive product production. Labor-intensive commodities, such as clothing, shoes, or other consumer goods, are produced in countries that have relatively low labor costs and relatively modern production facilities. China, Indonesia, and the Philippines are examples of countries that produce many labor-intensive products. Products that require large tracts of land, such as cattle production and wheat farming, are examples of land-intensive commodities. Countries that do not have large tracts of land normally purchase land-intensive products from countries that do have vast amounts of suitable land. The United States, for example, is one of the leading exporters of wheat. The combination of advanced farming technology, skilled farmers, and large tracts of suitable farmland in the Midwest and the Great Plains makes the mass production of wheat possible.
Over time a nation's work force will change, and thus the goods and services that nation produces and exports will change. Nations that train their workers for future roles can minimize the difficulty of making a transition to a new, dominant market. The United States, for example, was the dominant world manufacturer from the end of World War II until the early 1970s. But, beginning in the 1970s, other countries started to produce finished products more cheaply and efficiently than the United States, causing U.S. manufacturing output and exports to drop significantly. However, rapid growth in computer technology began to provide a major export for the United States. Practically speaking, the United States has been slowly transformed from a manufacturing-based economy into a new Information Age-based economy that relies on exporting cutting-edge technology as high tech software and computer companies proliferate.
Political Environment
Each country varies regarding international trade and relocation of foreign plants on its native soil. Some countries openly court foreign companies and encourage them to invest in their country by offering reduced taxes or some other investment incentives. Other countries impose strict regulations that can cause large companies to leave and open a plant in a country that provides more favorable operating conditions. When a company decides to conduct business in another country, it should also consider the political stability of the host country's government. Unstable leadership can create significant problems in recouping profits if the government falls of the host country and/or changes its policy towards foreign trade and investment. Political instability is often caused by severe economic conditions that result in civil unrest.
Another key aspect of international trade is paying for a product in a foreign currency. This practice can create potential problems for a company, since any currency is subject to price fluctuation. A company could lose money if the value of the foreign currency is reduced before it can be exchanged into the desired currency. Another issue regarding currency is that some nations do not have the necessary cash. Instead, they engage in counter trade, which involves the direct or indirect exchange of goods for other goods instead of for cash. Counter trade follows the same principles as bartering, a practice that stretches back into prehistory. A car company might trade new cars to a foreign government in exchange for high-quality steel that would be more costly to buy on the open market. The company can then use the steel to produce new cars for sale.
In a more extreme case, some countries do not want to engage in free trade with other nations, a choice known as self-sufficiency. There are many reasons for this choice, but the most important is the existence of strong political beliefs. For example, the former Soviet Union and its communist allies traded only with each other because the Soviet Union feared that Western countries would attempt to control their governments through trade. Self-sufficiency allowed the Soviet Union and its allies to avoid that possibility. However, these self-imposed trade restrictions created a shortage of products that could not be produced among the group, making the overall quality of life within the Soviet bloc substantially lower than in the West since consumer demand could not be met. When the Berlin Wall came down, trade with the West was resumed, and the shortage of products was reduced or eliminated.
Economic Environment
An important factor influencing international trade is taxes. Of the different taxes that can be applied to imported goods, the most common is a tariff, which is generally defined as an excise tax imposed on imported goods. A country can have several reasons for imposing a tariff. For example, a revenue tariff may be applied to an imported product that is also produced domestically. The primary reason for this type of tariff is to generate revenue that can be used later by the government for a variety of purposes. This tariff is normally set at a low level and is usually not considered a threat to international trade. When domestic manufacturers in a particular industry are at a disadvantage, vis-à-vis imports, the government can impose what is called a protective tariff. This type of tariff is designed to make foreign products more expensive than domestic products and, as a result, protect domestic companies. A protective tariff is normally very popular with the affected domestic companies and their workers because they benefit most directly from it.
In retaliation, a country that is affected by a protective tariff will frequently enact a tariff of its own on a product from the original tariff enacting country. In 1930, for example, the U.S. Congress passed the Smoot-Hawley Tariff Act, which provided the means for placing protective tariffs on imports. The United States imposed this protective tariff on a wide variety of products in an attempt to help protect domestic producers from foreign competition. This legislation was very popular in the United States, because the Great Depression had just begun, and the tariff was seen as helping U.S. workers. However, the tariff caused immediate retaliation by other countries, which immediately imposed protective tariffs of their own on U.S. products. As a result of these protective tariffs, world trade was severely reduced for nearly all countries, causing the wealth of each affected nation to drop, and increasing unemployment in most countries. Realizing that the 1930 tariffs were a mistake, Congress took corrective action by passing the Reciprocal Trade Agreements Act of 1934, which empowered the president to reduce tariffs by 50 percent on goods from any other country that would agree to similar tariff reductions. The goal was to promote more international trade and help establish more cooperation among exporting countries.
Another form of a trade barrier that a country can employ to protect domestic companies is an import quota, which strictly limits the amount of a particular product that a foreign country can export to the quota-enacting country. For example, the United States had threatened to limit the number of cars imported from Japan. However, Japan agreed to voluntary export quotas, formally known as "voluntary export restrictions," to avoid U.S. imposed import quotas. The power of import quotas has diminished because foreign manufacturers have started building plants in the countries to which they had previously exported in order to avoid such regulations.
A government can also use a nontariff barrier to help protect domestic companies. A nontariff barrier usually refers to government requirements for licenses, permits, or significant amounts of paperwork in order to allow imports into its country. This tactic often increases the price of the imported product, slows down delivery, and creates frustration for the exporting country. The end goal is that many foreign companies will not bother to export their products to those markets because of the added cost and aggravation. Japan and several European countries have frequently used this strategy to limit the number of imported products.
Cultural Environment
Before a corporation begins exporting products to other countries, it must first examine the norms, taboos, and values of those countries. This information can be critical to the successful introduction of a product into a particular country and will influence how it is sold and/or marketed. Such information can prevent cultural blunders, such as the one General Motors committed when trying to sell its Chevy Nova in Spanish-speaking countries. Nova, in Spanish, means "doesn't go"—and few people would purchase a car named "doesn't go." This marketing error—resulting simply from ignorance of the Spanish language—cost General Motors millions in initial sales—as well as considerable embarrassment.
Business professionals also need to be aware of foreign customs regarding standard business practices. For example, people from some countries like to sit or stand very close when conducting business. In contrast, people from other countries want to maintain a spatial distance between them and the people with whom they are conducting business. Thus, before business-people travel overseas, they must be given training on how to conduct business in the country to which they are traveling.
Business professionals also run into another practice that occurs in some countries—bribery. The practice of bribery is common in several countries and is considered a normal business practice. If the bribe is not paid to a businessperson from a country where bribery is expected, a transaction is unlikely to occur. Laws in some countries prohibit businesspeople from paying or accepting bribes. As a result, navigating this legal and cultural thicket must be done very carefully in order to maintain full compliance with the law.
Physical Environment
Other factors that influence international trading activities are related to the physical environment. Natural physical features, such as mountains and rivers, and human-made structures, such as bridges and roads, can have an impact on international trading activities. For example, a large number of potential customers may live in a country where natural physical barriers, such as mountains and rivers, make getting the product to market nearly impossible.
World Trade Organizations and Agreements
After World War II, the world's leading nations wanted to create a permanent organization that would help foster world trade. Such an organization came into being in 1947 when representatives from the United States and twenty-three other nations signed the document creating the General Agreement on Tariffs and Trade (GATT), which now includes more than one hundred countries as signatories. The threefold purpose of GATT was to (1) foster equal, nondiscriminatory treatment for all member nations;(2) promote the reduction of tariffs by multilateral negotiations; and (3) foster the elimination of import quotas. GATT nations meet periodically to review progress toward established objectives and to set new goals that member countries want to achieve. The goals and objectives of GATT vary and change over time as trade issues evolve based on domestic and world economies.
Likewise, representatives from Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, and the United Kingdom came together to form the European Economic Community (EEC)—sometimes called the Common Market—in 1958. The purpose of the EEC was to create equal and fair tariffs for all of the nations in the organization so that trade could flourish in Europe. The EEC has generally been regarded as successful.
The United States and Canada signed the U.S. Canadian Free Trade Agreement in 1989, which provided for the removal of all trade barriers between the two countries—such as tariffs, quotas, or other trade restrictions—within a ten-year period. This act helped promote even more trade between the two countries, thus further strengthening an already strong trade relationship.
The United States, Canada, and Mexico signed the North American Free Trade Agreement (NAFTA) in 1994 in order to create a free-trade zone among the three countries. Leaders of these three countries realized that a large North American free-trade zone could compete effectively against the EEC and other trading blocs that might develop in the future. This competitive factor was a driving force in the nations' signing of the agreement, each believing that, over the long run, all three would benefit from the agreement.
In addition to feeling the impact of trade agreements and trade organizations per se, international trade is affected more indirectly by the financial stability and general economic well-being of all countries in our increasingly interconnected world. Thus two other international organizations ultimately affect the health of world trade.
To further promote trade among countries, the Allied nations of World War II met in 1944 in Bretton Woods, New Hampshire, to help set postwar global financial policies and thereby avoid future financial crises. The International Monetary Fund (IMF) was created as a result of that conference, its mission being to provide loans to countries that are in financial trouble. The IMF dictates the terms of the loans, which may include cutting domestic subsidies, privatizing government industries, and moderating trade policies. To fund these loans, IMF members make annual contributions, with each country's contribution determined by its size, national income, population, and volume of trade. Larger contributing countries, such as Britain and the United States, have more say as to what countries get loans and the terms of the loan.
The World Bank, with approximately 157 members, is another international organization to which the United States is a major contributor. The World Bank's mission is to help less developed countries achieve economic growth through improved trade. It does so by providing loans and guaranteeing or insuring private loans to nations in need of financial assistance. The World Bank has been characterized as (1) a last-resort lender, (2) a facilitator of development projects so as to encourage the inflow of private banking funds, and (3) a provider of technical assistance for fostering long-term economic growth.
Summary
The world has a long history of international trade. In fact, trading among nations can be traced back to the earliest civilizations. Trading activities are directly related to an improved quality of life for the citizens of nations involved in international trade. It is safe to say that nearly every person on earth has benefited from international trading activities.
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Kotler, P., and Armstrong, G. (1993). Marketing: An Introduction. Upper Saddle River, NJ: Prentice-Hall.
[Article by: ALLEN D. TRUELL; MICHAEL MILBIER]
