International trade

Why countries trade 

There are two basic types of trade between countries:

 • the first in which the receiving country itself cannot produce the goods or provide the services in question, or where they do not have enough. 

• the second, in which they have the capability of producing the goods or supplying the services, but still import them. 

The rationale for the first kind of trade is very clear. So long as the importing country can afford to buy the products or services they are able to acquire things which, otherwise they would have to do without. Examples of differing significance are the import of bananas into the UK, in response to consumer demand, or copper to China, an essential for Chinese manufacturing industry. 

The second kind of trade is of greater interest because it accounts for a majority of world trade today and the rationale is more complex. The UK imports motor cars, coal, oil, TV sets, domestic appliances and white goods, IT equipment, clothing and many more products which it was well able to produce domestically until it either transferred production abroad or ceased production as local industries became uncompetitive. At first sight, it would seem a waste of resources to import goods from all over the world in which a country could perfectly well be self-sufficient.

 However, the reasons for importing this category of product generally fall into three classifications:

 • the imported goods may be cheaper than those produced domestically;

 • a greater variety of goods may be made available through imports;

 • the imported goods may offer advantages other than lower prices over domestic production – better quality or design, higher status (eg prestige labelling), technical features, etc. 

Comparative advantage 

The law of comparative advantage was first articulated by the 19th century economist David Ricardo who concluded that there is an economic benefit 4 The Global Economy for a nation to specialize in producing those goods for which it had a relative advantage, and exchanging them for the products of the nations which had advantages in other kinds of product. An obvious example is coal which can be mined in open-cast Australian mines or in China with low cost labour and shipped more than 10,000 miles to the UK where a dwindling supply of coal can be extracted only from high cost deep mines. In coal, Australia and China have comparative advantages. The theory of comparative advantage can be extended on a macro-economic scale. Not only will trade take place to satisfy conditions of comparative advantage; in principle, the overall wealth of the world will increase if each country specializes in what it does best. Stated at its most simplistic, of course the theory ignores many factors, of which the most important is that there may be limited international demand for some nations’ specialized output. Nevertheless, the question arises why specialization has not occurred on a greater scale in the real world. The main reasons, all of them complex, may be summarized in order of significance, as follows: 

• strategic defence and economic reasons (the need to produce goods for which there would be heavy demand in times of war);

 • transport costs which preclude the application of comparative advantage; 

• artificial barriers to trade imposed to protect local industry, such as tariffs and quotas. 

The evolution of International trade

Overall, merchandise trade grew by an average of 3.4% per annum from 1870 to 1913 in the period up to World War I. Two World Wars interspersed by the Depression and a world slump effectively reduced the annual rate of growth in international trade to less than 1% in the period 1914 to 1950. Then, as the international institutions which were established in the immediate post-1945 period began to introduce some financial stability and impact, world trade there followed a 23 year period of more buoyant growth averaging 7.9% up to 1973. In the next 25 years to 1998, the average growth rate in merchandise trade fell back to 5.1%. More recently, a less stable period of global economic slowdown saw merchandise exports fall by 4% in 2001, after rising by an exceptional 13% in 2000. 

Apart from the period between the two World Wars and up to 2001, trade has continuously outstripped growth in the world economy as a whole. The rationale for foreign trade and its organization 5 Protectionism To analyze what happened in the inter-war years of the 1920s and 1930s, it is necessary to understand that the reaction of many governments to economic slump was to protect jobs at home by raising the protection against imports. The most common method of protection is the introduction or increase of tariffs on imported goods. In the 1920s and 1930s, the widespread use of tariffs caused job losses, in turn, in other countries – a reiterative process. In the second half of the 1930s, the prolonged world slump was alleviated, particularly in Europe, by the heavy public spending on defence equipment and munitions in the lead-up to the World War II. 

After 1945, there were concerted international efforts to put in place organizations which would reduce the effects of trade protection and any future reductions in world economic activity. The first of these were the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), now known as the World Bank which were established by the Bretton Woods Agreement in 1947. These institutions which have become the cornerstones of international macroeconomic management were largely the brainchild of British economist John Maynard Keynes, who was among the first to recognize that reductions in government spending and increases in protection had been major causes of the pre-war depression.\

 Methods of protection

The tools of protection may be categorized as either tariff or non-tariff barriers.

 Tariffs

A tariff is a ‘tax’ or import duty levied on goods or services entering a country. Tariffs can be fixed or percentage levies and serve the twin purposes of generating revenue for governments and making it more difficult for companies from other countries to do business in the protected market. The moves towards ‘free trade’ of the 19th century were largely offset by the reintroduction of tariffs in the early part of the 20th century at rates sometimes as high as 33 and 50%. Since 1945, tariffs have been lowered significantly as a result of eight successive rounds of multilateral trade negotiations under the General Agreement on Tariffs and Trade (GATT), the third institution established following the Bretton Woods Agreement, and its successor the World Trade Organization (WTO). Non-tariff barriers Although progress was made in dismantling tariff barriers under the GATT in the period up to 1995 when the WTO was established, the use of non-tariff protection increased during the 1980s, mostly as a substitute for the tariffs which were outlawed.

 The following is a list of non-tariff measures which have been deployed by both developed and developing countries: 

• Quotas A numerical limit in terms of value or volume imposed on the amount of a product which can be imported. Chinese quotas on imported automobiles or French quotas on Japanese VHS equipment during the 1980s are wellknown examples.

 • Voluntary export restraints Agreed arrangements whereby an exporter agrees not to export more than a specific amount of a good to the importing country (usually to preempt the imposition of more stringent measures). Such agreements are common for automobiles and electronics, but are also applied to steel and chemicals.

 •Domestic subsidies The provision of financial aid or preferential tax status to domestic manufacturers which gives them an advantage over external suppliers. The most obvious examples are agricultur,e where both the EU and US have consistently employed subsidies to help domestic producers.

 • Import deposits The device of requiring the importer to make a deposit (usually a proportion of the value of the goods) with the Government for a fixed period. The effect on cash flow is intended to discourage imports. 

• Safety and health standards / technical specifications This more subtle form of deterrent requires importers to meet stringent standards or to complete complicated and lengthy formalities. 

The French bans on lamb and then beef imported from the UK during the 1990s will be long remembered by the British farming industry. Regions in world trade Although the multilateral trading system promoted by the GATT and now the WTO has been broadly successful in overcoming protectionist regimes – at least up to the current Doha round – it has failed to prevent the concomitant proliferation of regional pacts and regional trade agreements (RTAs). More than 60% of world trade is regional and almost all major countries belong to at least one RTA. In 2001, 61% of the EU’s trade was between member states and 55% of North American trade was between the three NAFTA countries. The jury is still out on whether RTAs can be viewed as stepping stones toward multilateral integration or as discriminatory arrangements that fracture the multilateral trading system. The failure of the WTO summit meeting in Cancun, Mexico in September 2003, subsequent Conference Meetings of Ministers and the further summit in Hong Kong in The rationale for foreign trade and its organization 7 December 2005 to reach agreement, have not been encouraging. 

More recently, there has been an ominous rash of new protectionist measures and RTA negotiations. There are four basic models of trading block: Free trade area Members agree to reduce or abolish trade barriers such as tariffs and quotas between themselves but retain their own individual tariffs and quotas against non-members. Customs union Countries which belong to customs unions agree to reduce or abolish trade barriers between themselves and agree to establish common tariffs and quotas against outsiders. Common market Essentially, a common market is a customs union in which the members also agree to reduce restrictions on the movement of factors of production – such as people and finance – as well as reducing barriers on the sale of goods.

 Economic union 

A common market which is taken further by agreeing to establish common economic policies in areas such as taxation and interest rates. Even a common currency is described as an economic union. The original European Economic Community (EEC) in the mid-1950s, comprising six members, was the forerunner of a number of such agreements. Now with 27 member states, the European Union is still the most advanced economic grouping. However, some of the more recent groupings, notably ASEAN and NAFTA, having created regional trading agreements, account for increasingly significant proportions of world trade. They are beneficial in allowing countries inside the arrangement to acquire some goods at lower prices through tariff reductions than they could from the rest of the world. However, they may also cause trade to be ‘diverted’ away from efficient producers outside the arrangement towards less efficient sources,

The marketing concept 

There is no argument about the concept of marketing but there are constant arguments about the best way to define it. The consequence of this is that there are literally hundreds of definitions of marketing, all of which can claim to be correct. This does not mean that opinions differ about the essence of marketing but that we can have different attitudes towards a single concept.

The exchange process 

The idea that international marketing can be seen as an exchange process can be broken down into its constituent elements in the diagrammatic form.

This demonstrates the two sides of the exchange; the business on one side using its expertise and resources to offer products and services on to a market made up of potential customers who have their own ideas about what they need and do not need. The business that most closely matches its principles and practice products and services to the buyer’s perceptions of their needs will be more likely to achieve its goal of profits and will be more likely to produce satisfied customers. The other point about this diagram is that it is not a process that has a start and a finish. Businesses should be constantly questioning what they do with their expertise and resources in terms of offers on to the market simply because the perceived needs of the customers are dynamic, that is, subject to change, and, in international trade, may be very volatile. The marketing process In fact we could take this a stage further. Perhaps the most important question any business should be continually asking itself is: ‘What business am I in?’ You may think that this is a pointless question and that every business knows its business. But you could be wrong. The fact is that many businesses can get so focused on their products and services that they can be very short sighted regarding the actual expertise and resources which they possess. 

There are a number of case studies illustrating this, one of the more obvious ones being Bic who, when asked by consultants what business they were in, replied, of course, that they were in the ‘pen business’, more specifically the low price pen business. The consultants conducted a marketing audit, an in depth investigation of the strengths and weaknesses of the marketing function of a business, and came back with their perception of Bic’s business. They said that Bic’s expertise and resources were in ‘disposable plastic’. 

Not a very revolutionary statement but one which revolutionised Bic’s attitude towards it business. It was not a pen manufacturer but a ‘disposable plastic’ manufacturer, more specifically extruded plastic containing metal inserts. What came next, the very first disposable razors, to be followed by disposable lighters, disposable toothbrushes, disposable perfume dispensers etc. etc. Fundamental questions can sometimes produce answers which fundamentally change the nature of a business. Back to our marketing definitions. While there may be innumerable definitions of marketing it is possible to pick out a couple of elements which are common to all of them, in fact the elements of a concept of marketing: 

• Customer Orientation 

• Profit 

• (or other objective)

 That is to say that all of a marketing company’s activities are centred around the needs of the consumer and the whole process starts by finding out what the customer wants. 

The selling process company which attempts to produce what it chooses to produce and then sell it into the market. Another cliche´: ‘marketing is about making what we can sell, not selling what we can make.’ All of this is not because we like to please our customers, which of course we do, but primarily based on the fact that a satisfied customer is a more profitable customer. However, it has to be said that definitions of words can help understanding but the more practical question concerns the HOW? of marketing rather than the WHAT?. That is, if a company were to accept the need to be responsive to market demand, to be ’ customer orientated’, as a means of becoming more successful in competitive markets, then how would it go about doing it? Firstly, the difference between selling and marketing is important. The following tables illustrate the basic difference in the processes, the major point being that selling starts with production, followed by the need to sell enough to make a profit, whilst marketing starts with market research in order to identify current market needs and profits from a satisfied customer. The other important distinction is the fact that selling is totally a one way process whilst marketing is based on continuous feedback from the customer and adaptation by the company to changes in consumer demand.

Often referred to as the ‘Marketing Mix’ - that is a cluster of elements which all have to interact together in a cohesive plan. The right mix is the recipe for success! There are other structures for the elements of the mix, notably the concept of the ‘7Ps’ which adds to the above: 

• PEOPLE - considerations of the personnel involved and their responsibilities and needs 

• PROCESS – administrative processes necessary for implementation 

• PHYSICAL – actual evidence of implementation, change and outcomes 

And a list of twelve elements produced by Professor Neil Borden of the Harvard Business School: • Product planning 

• Pricing 

• Branding 

• Channels of distribution 

• Personal selling 

• Advertising 

• Promotion 

• Packaging 

• Display 

• Servicing 

• Physical handling

• Marketing research 

All of which are contained within the more simplistic 4 Ps approach. No amount of planning is beneficial without real implementation of the plan in practice. Planning is not a process that can be seen but it does result in the high profile activities of selling, promotion and physical distribution which are clearly visible as the practical results of the planning. . It is not the marketing process which changes from home to export markets, or even from one export market to another, but the application of that process which will differ from one market to another. The concept of market orientation, by definition, means that companies will attempt to discover the differences exhibited from one market to another and adapt to them in order to maximise profitable business. The differences encountered between the UK home market and overseas markets form a formidable list, and it is an ignorance of these differences which very often explains the failures of UK companies overseas.