International Trade and Business: Benefits and Barriers
Chapter 3: International Trade and Business
Why Do Firms Engage in International Trade?
Firms engage in international trade to:
- Increase sales and find new markets
- Increase diversification of products
- Utilize excess capacity
- Increase revenue and profit
- Become a stronger competitor in the domestic market
Essentially, firms engage in international trade for the same reasons they engage in domestic trade: to expand their profits and business.
Principal Restrictions on a Nation’s Imports
The principal restrictions that may be applied to a nation’s imports include:
- Currency devaluation: Reduction of the value of a nation’s currency relative to the currencies of other countries
- Tariff (import duty): A tax levied on a foreign product entering a country
- Quota: A limit on the amount of a particular good that may be imported into a country
- Cultural barriers and bureaucratic red tape
- Foreign-exchange control: A restriction on the amount of a particular foreign currency that can be purchased or sold
- Embargo: A complete halt to trading with a particular nation or in a particular product
Reasons for Imposing Trade Restrictions
Trade restrictions are generally imposed to:
- Equalize a nation’s balance of payments
- Protect new or weak industries
- Protect national security
- Protect the health of citizens
- Retaliate for another nation’s trade restrictions
- Protect domestic jobs
General Effects of Import Restrictions on Trade
The general effects of import restrictions on trade are:
- Higher prices for consumers
- Restriction of consumer choices
- Misallocation of international resources
- Loss of jobs
Major Objectives of the WTO and International Economic Communities
The World Trade Organization (WTO) was established by the General Agreement on Tariffs and Trade (GATT) to resolve trade disputes among member nations and oversee the provisions of the Uruguay Round. All members must observe GATT rules. The primary objective is to remove barriers to trade.
An international economic community is an organization of nations that promotes the free movement of products and resources among its members and creates common economic policies. Major international economic communities include the Organization of Petroleum Exporting Countries (OPEC), the ASEAN Free Trade Area (AFTA), the North American Free Trade Agreement (NAFTA), and the European Union (EU).
Advantages and Disadvantages of McDonald’s Foreign Currency Sales
One of the multiple advantages of McDonald’s ringing up sales in multiple foreign currencies is the ability to weather economic ups and downs in different areas. A disadvantage would be if exchange rates swing unfavorably for the American dollar.
Why McDonald’s Uses Joint Ventures in India
McDonald’s operates some restaurants directly but also sells franchise licenses to firms to open restaurants using its name. In some markets, the company operates restaurants in joint ventures with local firms. The idea of a joint venture is to unite resources, skills, and knowledge, and to share risks and profits. Joint ventures are sometimes used to access foreign markets. In India, McDonald’s has one joint venture with a local firm to operate restaurants in the west and south and a second joint venture with a different company to operate restaurants in the east and north.
How Being a Multinational Enterprise Helps McDonald’s
While the main attraction of McDonald’s is its hamburgers, the company also adapts to local tastes. It owns and sells franchise licenses in different parts of the world. Extending its hours to accommodate customers at non-traditional meal times, even staying open 24 hours a day in some locations, helps McDonald’s build its business regardless of the short-term global economic outlook. Being a multinational enterprise, with a presence in more than 170 countries, helps McDonald’s build its business regardless of the short-term global economic outlook.