Manchester, England. (New Of The South) – In recent years, the world economy has witnessed an escalation of protectionism between major economic powers namely USA $500bn tariffs against China and 10% tariffs against all its trading partners. This is a somewhat sharp u-turned from economics of globalisation of the last decades. Who are the winners and losers in this heightened unfolding protectionism era?
Before, analysing arguments for and against protectionism, it is reasonable to briefly enumerate some International Trade (Exports – Imports + Lines of Credit) benefits as follows:
• increases the number of goods that domestic consumers can choose from,
• decreases the cost of those goods through increased competition, and
• allows domestic industries to ship their products abroad.
• While all of these seem beneficial, free trade isn’t widely accepted as completely beneficial to all parties.
• This article will examine why this is the case, and look at how countries react to the variety of factors that attempt to influence trade.
When a firm or an individual buys a good or a service produced more cheaply abroad, living standards in both countries increase. There are other reasons consumers and firms buy abroad that also make them better off—the product may better fit their needs than similar domestic offerings or it may not be available domestically. In any case, the foreign producer also benefits by making more sales than it could selling solely in its own market and by earning foreign exchange (currency) that can be used by itself or others in the country to purchase foreign-made products.
Still, even if societies as a whole gain when countries trade, not every individual or company is better off. When a firm buys a foreign product because it is cheaper, it benefits—but the (more costly) domestic producer loses a sale. Usually, however, the buyer gains more than the domestic seller loses. Except in cases in which the costs of production do not include such social costs as pollution, the world is better off when countries import products that are produced more efficiently in other countries.
Why countries trade?
In one of the most important concepts in economics, Ricardo observed that trade was driven by comparative rather than absolute costs (of producing a good). One country may be more productive than others in all goods, in the sense that it can produce any good using fewer inputs (such as capital and labour) than other countries require producing the same good. Insight was that such a country would still benefit from trading according to its comparative advantage—exporting products in which its absolute advantage was greatest, and importing products in which its absolute advantage was comparatively less (even if still positive).
Though a country may be twice as productive as its trading partners in making clothing, if it is three times as productive in making steel or building airplanes, it will benefit from making and exporting these products and importing clothes.
There are three main methods of restricting Trade: tariffs, quotes and embargoes. Besides, there are some other methods such as local content requirements, administrative delays, currency controls, etc.
Maintaining a stable and attractive currency is just one policy objective of governments in the area of foreign trade. Most nations adopt measures aimed at preserving a trade surplus and a positive balance of payments. As part of these efforts, some nations provide protection for their domestic industries from foreign competition.
Protectionism is a set of policies aimed at protecting a nation’s industries from foreign competition. When, for example, an American buys a Volkswagen instead of a Ford, American dollars leave the country and (most likely) German workers, rather than American workers, draw a paycheck. To prevent this, governments impose tariffs, quotas, and embargos. A tariff is just a tax on stuff imported from other another country; the tax raises its price and thus diminishes its attraction. A quota is a limit placed on the quantity of a specific good allowed into the country. An embargo or economic sanctions are a complete prohibition against bringing a certain good s or trade into a country, restricting access to international capital markets (economic hitman ideology).
Protectionist measures are usually aimed at protecting a domestic industry and the jobs it represents. But governments also pursue these measures to maintain a positive balance of trade or trade surplus. If a country exports more than it imports, it has a trade surplus—this means that more currency is flowing into your country than flowing out—currency that can pay domestic wages and fuel business expansion. A trade deficit, on the other hand, means a country is importing more than it is exporting and, on balance, more money is flowing out of the country than flowing in. This means that your dollars are paying foreign wages and fueling foreign rather than domestic economic growth.
A more critical statistic is the balance of payments. This measures not just the net exchange of goods between countries, but also the amount of money other countries spend on services, such as a banking and insurance, and the amount of money foreigners invest in your country’s economy. American dollars, for example, may flow to Japan to purchase Nintendos, but they may return when Japanese investors purchase American golf courses.
Governmental trade policy can therefore be complicated. Policies aimed at one element of international commerce will trigger another set of reactions—for example, if the American government placed strict quotas on a long list of Japanese manufactured goods, American manufacturers might benefit.
Especially during hard economic times, protectionist policies tend to become more popular with politicians and with much of the public. Impose tariffs, the argument goes, to protect American companies from foreign competition and thus to save American jobs.
Economic sanctions – also restrict international trade e.g. Zim Economic sanctions since 2001 (amended 2018 at the best of some misguided self- serving opposition leaders), resulting in negative or adverse economic environment affecting the whole nation in several and various ways (socially, economically, health, politically, etc). However, most Zimbabweans are currently looking up to the promising and pragmatic Transitional Stabilisation Program (TSP) and well received recent Monetary Policy Statement, February 2019 to re-orient, restructure the economy towards production and exports led endogenous, sustainable economic recovery, growth and development in line with Vision 2030.
An evaluation of the potential problems faced by businesses that trade internationally when entering new markets:
Global trade businesses have to take care of challenges and risks at various parts. Some risks are same as the risk and challenges faced by a local business but others are unique to the international business field. Even the challenges that are related by definition vary in nature. For instance both forms of businesses have to tolerate economic challenges, but a global trade business will be facing several issues linked to international financial markets that don’t concern local businesses as much. They are more of a challenge in nature than risks and most of them can be taken care of through appropriate preparation.
The very first challenge for a global enterprise is to formulate an international approach and then execute it. The administrators and those at decision-making positions often find it hard to alter their thought pattern, which is not good to work in international model. There are numerous worldwide businesses but only a few of them have really accepted a good international approach. Though the situation is improving with more and more professionals and trained graduates taking on the management positions. Nevertheless, global business management needs additional ordinary management, foreseeing and control talents.
Political expertise is a must for everyone but it becomes all so vital when working at global stage. If some plans were appropriate for your trade, a change in ruling government can bring strong changes in those plans. Political disarray will bring down the financial system and that can affect your business. To avoid safeguard business from such unhelpful bangs, you need to make sound political decisions.
It begins from organizing the resources to initiate global trade and consist of everything like variation in exchange rate, international financial crisis (or some financial crises in the host nation), change in oil rates, international price rises or tariff barriers imposed by the host ruling party, also the export related rules of your own government.
Various multinational businesses have to countenance severe opposition by some environment friendly organizations. Citizens are more worried about water and air pollution these days as it is becoming a severe danger to their health. Some natural calamity such as earthquake and floods or some kind of civil war breaking out in the host nation is also in the catalogue of potential challenges. A fresh challenge that a global trade business has to bear these days in some specific nation is the danger of bombing, violence or terror campaigns.
Like any other business, international business also involves risks. However, there are different types of risks involved in International Business. Risks, which are easily avoidable in a local business, are almost impossible to avoid in international business.
Some of the common risks involved in international business are:
Currency Fluctuations- If you purchase large quantities of products, couple of cents can make a world of a difference. Fluctuations in the currency can affect the importer of the exporter depending on the direction that currency shifted in. Currency Fluctuations are only avoidable if a company buys forward, or agrees on a fixed currency rate.
Refusal of payment- another common risk in International business. When you are trading with a local business, you can sue the business or claim the assets of the business under certain conditions. If you are trading with another country, then the laws could be different and in the favour of the buyer. Sometimes the payment is not big enough to compensate for a law suit or airplane ticket. Many businesses use lines of credit, but there are still a lot of international scammers who will not pay if they can get away with it.
Cultural sensitivity- if you are planning to operate a business in another country, you have to be aware of the culture in that country. In some countries, things are done differently. A business has risk of being shut down or gaining negative reputation if they are not culturally sensitive. For example, McDonalds could not sell meat or chicken that was not halal in a Muslim country. All Muslims do not eat meat or chicken that is not halal, and McDonalds had to sell halal meat and chicken only. They were able to quickly change their menus to survive in Muslim countries, but many businesses don’t. Researching about cultures and norms is very important in International business.
Shipment risks- If you export or import large quantities of goods, then there will always are risk of losing your goods. The shipment can be misplaced or arrive late. You cannot use the JIT inventory system if you are operating an International business. If you get goods from another country, shipment of goods will always be one of the top concerns.
These are some of the risks involved in International business. These risks are not here to discourage you from doing business internationally. They are here to remind you that there are several risks, which are involved, and that it is your responsibility to avoid these risks. With proper research and knowledge, doing business internationally can be one of the best decisions that your company ever makes!
By Lazarus Nyagumbo, Economist, MSc International Economics (UK), PGCE Business & ICT (UK), BSc (Hons) Economics (UZ).
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