Chapter One The Contents of Chapter 1 1.1 What Is International Trade? 1.2 Why International Trade? 1.3 Risks and Barriers to International Trade 1.4.

Chapter OneChapter One

The Contents of Chapter 1

1.1 What Is International Trade? 1.2 Why International Trade? 1.3 Risks and Barriers to International Trade 1.4 Basic International Trade Theories 1.5 Laws and Regulations Governing International Trade

1.1 What Is International Trade?

INTERNATIONAL TRADE: The economic interaction

among different nations involving the exchange of goods and services, that is, exports and imports. The guiding principle of international trade is comparative advantage, which indicates that every country, no matter their level of development, can find something that it can produce cheaper than another country.

Some concepts:Foreign Trade: From the perspective of one country, international trade is also called ‘foreign trade’.Export and Import: International trade can also understood as ‘export and import of goods or technology or service’.Tangible goods: Goods that can be seen and touched. They account for the most percentage of international trade.Visible Trade:  Trade in goods which can be actually seen passing through ports or airport, entering or leaving one country.Invisible trade: Trade in services and technologies

Major Categories of International Trade

Merchandise exports and imports (also referred to as visible trade).Service exports and imports (also referred to as invisible trade) ： tourism, transportation, performance of services and use of assets. Investments: foreign direct investment( FDI) and portfolio investment( 间接投资 , 证券投资 ).Combination of visible & invisible trade ： international processing trade, international leasing.

1.2. Why International Trade?

Numerous reasons for 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.

Advantages to consider:

Enhance your domestic competitiveness Increase sales and profits Gain your global market share Reduce dependence on existing markets Exploit international trade technology Reduce dependence on existing markets Exploit international trade technology Extend sales potential of existing products Stabilize seasonal market fluctuations Enhance potential for expansion of your business Sell excess production capacity Maintain cost competitiveness in your domestic market

Advantages and Disadvantages of International Trade

Disadvantages to keep in mind:

You may need to wait for long-term gains Hire staff to launch international trading Modify your product or packaging Develop new promotional material Incur added administrative costs Dedicate personnel for traveling Wait long for payments Apply for additional financing Deal with special licenses and regulations

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1.3 Risks and Barriers to International Trade

Political / legalforces

Economicforces

1

2Environmentaluncontrollablescountry market A

Environmentaluncontrollablescountrymarket B

Environmentaluncontrollablescountrymarket C

Competitivestructure Competitive

Forces

Level of Technology

Price Product

Promotion Channels of distribution

Geography and

Infrastructure

Foreign environment(uncontrollable)

Structure ofdistribution

Economic climate

Cultural forces

3

45

6

7Political/

legalforces

Domestic environment(uncontrollable)

(controllable)

Market Entry Methods and the Levels of Involvement in International Markets

Wholly-owned subsidiary

Company acquisition

Assembly operations

Joint venture

Strategic alliance

Licensing

Contract manufacturing

Franchising

Importing & Exporting ( direct and

indirect)

Levels of

Involvement

Risk and Control in Market Entry

Control

Risk

Indirect ExportingPiggybacking

Trading companiesExport management companies

Domestic purchasing

Co-operation strategiesJoint ventures

Strategic alliances

Direct exportingDistributors

AgentsDirect marketing

FranchisingManagement contracts

ManufacturingOwn subsidiary

AcquisitionAssembly

Country riskCountry risk comprises political, social and economic

components, including: Exchange control regulations Changes in government policies Trade embargoes Lack of foreign currency War

Commercial riskThis is the exposure to a loss caused by: A buyer's inability to pay due to financial constraints A seller's inability to supply the correct quality and quantity

of goods A bank's inability to honor its undertakings

Risks in international trade

Aspects to consider by the importer (buyer): Can the seller be trusted to supply the correct quantity and qualit

y of goods?

Will the goods be delivered at the destination agreed upon?

Will the goods be delivered in time?

Will your cash flow permit you to pay the seller immediately or is the seller prepared to offer credit terms?

Should you deal directly with the seller or make use of an intermediary bank or agent?

How easy/difficult will it be to resolve potential disputes/problems?

Barriers to international trade

Socio-cultural Barriers language religion customs and manners Economic Barriers exchange rate extra costs ( freight, packing cost, insurance, cost of documents, etc.) Trade Barriers tariffs (specific duties 从量税 , ad valorem duties 从价关税 , common duties, etc.) non-tariffs( quota, license, new barriers)

The reason for setting up trade barriers

To protect the own country's jobs by shielding home country from foreign competition. To encourage local production to replace imported goods. To protect newly founded industries. To reduce problems in balance of payments. To stimulate export activity. To encourage local and foreign direct investment. To prevent foreign companies from dumping (which means selling goods below cost so as to obtain market share). To arrive at the political aims.

Barriers are set up just for the sake of a nation in conducting international trade. Every nation has its own specific features and while doing international trade, a nation does not want its benefits, its firms and industries hurt

International trade theory helps managers and governmental policy makers focus on the following:

What products should be imported and exported. How much should be traded. With whom they should trade.

International trade theory shows that nations will get a higher level of living by specializing in goods for which they possess a comparative advantage and importing those for which they have a comparative disadvantage.

1.4 Basic International Trade Theories

Mercantilism 重商主义 Predominated in Europe in the seventeenth

century. Their philosophy — International trade is a zero

sum game ， i.e. that the benefit which one country gains from international trade means a corresponding detriment to another country.

A country should export more than they import. A nation’s power and security can be increase

by increasing national wealth.

International Trade Theories

Theory of Absolute Advantage 绝对优势论 The theory developed by Adam Smith in The

Wealth of Nations (1776). If country A can produce and export more of a

commodity X at a cheaper cost or more efficiently than country B, then country A has an absolute advantage in producing X over country B.

A country’s wealth is based on its available goods and services rather than on gold.

Theory focuses on the capability of one nation to produce more of a kind of goods with the same amount of input than another country.

A country should focus on the production of those goods in which it has an absolute advantage and acquire or purchase from abroad those goods which it cannot produce at home cheaply or efficiently.

International Trade Theories

Theory of Comparative Advantage比较优势论

First put forward by David Ricardo in 1815 It suggested that international trade was not governed by absolute advantage in price but by comparative advantage. A country can still gain from trading certain goods even though its trading partners can produce those goods more cheaply. The comparative advantage comes if each trading partner has a product that will bring a better price in another country than it will at home. If each country specializes in producing the goods in which it has a comparative advantage, more goods are produced, and the wealth of both the buying and the selling nations increases. If all countries specialize in producing what that are comparatively best at, and then trade freely with one another, the world will be better off economically.

International Trade Theories

New Theories Factor Endowment Theory 要素禀赋论 , 又称 H—O 理论 Firstly initiated by a Swedish economist, Eli Heckscher, and published in Sw

edish The Effect of Foreign Trade on the Distribution of Income. The theory was inherited and developed by another Swedish economist, Bertil Ohlin, once the student of Heckscher in University of Stockholm.

Countries will produce and export products that use large amounts of production factors which they are rich in and they import products which require large amounts of production factors that are short in their country.

Product Life Cycle Theory 产品生命周期理论 Developed by R. Vernon, a professor of Harvard Business School in 1966.

Two principles:(1)Technology is a critical factor in creating and developing new products.(2) Market size and structure are important in determining trade patterns.

International Trade Theories

The theory of international trade has changed drastically from that first put forward

by Adam Smith. The classical theories of Adam Smith and David Ricardo focused on

the abilities of countries to produce goods more cheaply than other countries.The

earliest production and trade theories saw labor as the major factor expense that

went into any product. If a country could pay that labor less, and if that labor could

produce more physically than labor in other countries, the country might obtain an

absolute or comparative advantage in trade.

Subsequent theoretical development led to a more detailed understanding of

production and its costs. Factors of production are now believed to include labor

(skilled and unskilled), capital, natural resources, and other potentially significant

commodities that are difficult to reproduce or replace, such as energy. Technology,

once assumed to be the same across all countries, is now seen as one of the premier

driving forces in determining who holds the competitive edge. International trade is

now seen as a complex combination of thousands of products, technologies, and firms

that are constantly innovating to either keep up with or get ahead of the competition.

As world economies grow and the magnitude of international trade increase, the

simplistic ideas that guided international trade have had to grow with them.

the Uniform Rules for Collections (ICC Publication No. 552,1995), 《托收统一规则》

the Uniform Customs and Practice for Documentary Credits, ICC Publication No.600 《跟单信用证统一惯例》 ( 国际商会第 600 号出版物）

INCOTERMS 2000 《 2000 年国际贸易术语解释通则 》

Regulations issued by the United Nations United Nations Convention on International Bills of Exchange and Inte

rnational Promissory Notes 《联合国国际汇票和国际本票公约》 United Nations Convention on Contracts for the International Sale of G

oods 《联合国国际货物销售合同公约》

1.5 Laws and Regulations Governing International Trade

Rules and regulations issued by the International Chamber of Commerce

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.