Exporting and Trading info

Case: The cashew The cashew tree is best known today for its nuts, which account for about 20 percent of the value of nuts produced worldwide—a value about equal to that of almonds or hazelnuts. The fruit of the tree (known as the cashew apple), however, drew first attention. The Tupi Indians of Brazil first harvested the cashew apple in the wild. They later introduced it to early Portuguese traders, who in turn propagated the plant in other tropical countries. But attempts to grow the tree on plantations proved unsuccessful because the cashew was vulnerable to insects in the close quarters of plantations. Instead, some of the abandoned plantation trees propagated new trees in the wild where they thrived in the forests of India, East Africa, Indonesia, and Southeast Asia. Several factors inhibited early use of the cashew nut. First, cashew fruit matures before the nut, so the fruit is spoiled by the time the nut can be harvested usefully. Second, the processing of cashew nuts is t...

Trade theory, is useful because it helps to explain what might be produced competitively in a given locale, where a company might go to produce a given product efficiently, and ^whether governmental practices will interfere with the free flow of trade among countries. Some trade theories deal with the question of what will happen to international trade in the absence of governmental interference; others prescribe how government should interfere with trade flows in order to achieve certain national objectives. Mercantilist theory proposed that a country should try to achieve a favorable balance of trade (export more than it imports) in order to receive an influx of gold. Neomercantilist theory also seeks a favorable balance of trade, but its purpose is to achieve some social or political objective. Adam Smith developed the theory of absolute advantage, which holds that consumers will be better off if they can buy foreign-made products that are priced more cheaply than domestic o...

If present trends continue, factor endowment (land, labor, and capital) relationships will continue to evolve. The population growth rate is much higher in LDCs, especially sub-Saharan Africa, than in developed countries. Two possible consequences include a continued shift of labor-intensive production activities to LDCs and agricultural production away from densely populated areas. At the same time, the finite supply of natural resources may lead to price increases for these resources (except for short respites). This may work to the advantage of LDCs because supplies in industrial countries have been more fully exploited. Some trade theories and current policymakers hold that a laissez-faire trade policy (one with minimum government influence) should prevail. Yet governments are seldom neutral in their effects on trade competitiveness. Many countries have recently tried to better their trade advantages by altering the quality and quantity of their resource inputs and by targeting s...

Trade Impediments In spite of the advantages that may accrue for firms engaging in importation or exportation, many factors can impede a firm's entry into trading relations, and these in turn affect the full realization of trade among countries. First, a firm's management may have imperfect knowledge of markets in foreign countries and thus be unable to take advantage of the avenues open to the firm. Or a producer might be aware of potential demand in foreign countries but nevertheless not know the mechanics of exporting and distributing in foreign markets. The process of exporting, after all, involves a whole new set of terminology and institutions. Finally, a company might perceive that exporting or importing is too risky. A potential exporter, for example, may fear that payment will not be forthcoming, that payment will be in a currency that cannot easily be used, or that the competitive environment abroad is too unknown or disorderly. A potential importer may lack the ...

Import Opportunities The impetus for trade involvement may come from either the exporter or the importer. In either case, there must be both a seller and a buyer. Impetus may come from an importer because a firm is seeking out cheaper or better-quality supplies, components, or products to be used in its production facilities. Or a firm may be actively seeking new products that have been developed abroad in order to complement its existing lines. This will give the company more to sell; it might also enable the importer to use excess capacity in its own distribution sales force. If international procurement of supplies and components lowers costs or improves the quality of finished products, the procuring company may then be better able to combat import competition for the finished products. Or the procuring firm may be able to compete more effectively in export markets itself. The automobile industry exemplifies global competition that depends on subcontractors, including foreign ...

WHY COMPANIES TRADE Most trade theories approach the issue from a national perspective; that is, they begin with a question such as, "Why should Sri Lanka trade?" Regard- less of the advantages that countries may gain by trading, trade ordinarily will not begin unless businesses within the country perceive that there are opportunities for exporting and importing. Since companies have a limited number of resources, they must decide whether to exploit those resources domesti- cally or internationally. Only if they see that the international opportunities might be greater than the domestic ones will they divert their resources to the foreign sector. To understand why trade takes place, it is therefore useful to understand the trade advantages accruing to individual businesses. Export Opportunities  Excess Capacity Use Companies frequently have immediate or long-term output capabilities for which there is inadequate domestic demand. This may be in the form of kn...

Dependence In recent years, many developing countries have decried their dependence, realizing that they are too dependent on the sale of one primary commodity and/or too dependent on one country as a customer and supplier. Because LDC economies are small, they tend to be much more dependent on a given industrial country than the industrial country is dependent on them. Mexico, for example, depends on the United States for over 60 percent of its imports and exports, whereas the United States depends on Mexico for less than 5 percent of its imports and exports. Mexico can thus be much more adversely affected by U.S. policies than the United States can be affected by Mexican policies. This sort of dependence by an LDC on an industrial country has led to a widespread belief that dependence will retard the LDCs development.25 Fear of dependency has led many LDCs to try to change their production and trade patterns, as reflected in the opening case on Sri Lanka. Figure 4.3 shows that in...

INDEPENDENCE, INTERDEPENDENCE, AND DEPENDENCE! The concepts of independence, interdependence, and dependence help to ex-      plain world trade patterns and countries' trade policies. They form a continuum, with independence at one extreme, dependence on the other, and interdependence somewhere in the middle. There are no countries located at either extreme of this continuum; however, some tend to be closer to one extreme than the other. Independence  In a situation of independence, a country would have no reliance on others  for any g00ds, services, or technologies. Since all countries engage in trade, however, no country has complete economic independence from other countries, and all thus have at least some access to goods and services produced in a foreign country. The most recent instance of economic near-independence was seen in the Tasaday tribe, found by hunters on the island of Mindanao in the southern Philippines in 1971. Although some scien...

Pairs of Trading Relationships Although the theories regarding country differences and similarities help to explain broad world trade patterns, such as between industrial countries and LDCs, they do little to help us understand specific pairs of trading relationships. Why, for example, will a particular industrial country buy more from one LDC than another? Why will it buy from one industrial country rather than another? Although there is no single answer to these questions that will explain all product flows, the distance between two countries explains more of these world trade relationships than any other factor. This is especially true for products for which the transport cost is high relative to the production, _cost. Cultural similarity, as expressed by language and religion, also helps to explain much of the direction of trade. Apparently importers and exporters find it easier to do business in a country that they perceive as being similar. Likewise, much of the trade betwee...

Country-Similiarity Theory When we observe actual trade patterns, we see that most of the world's trade  occurs among countries that have similar characteristics. Most trade occurs among industrialized countries, which have highly educated populations and are located in temperate areas of the globe. Thus, overall trade patterns seem to be at variance with the traditional theories that emphasize country-by-country differences. The fact that so much trade takes place among industrial countries is due to the growing importance of acquired (product-technology) advantage as opposed to natural advantage in world trade. The country-similarity theory holds that, having developed a new product in response to observed market conditions in the home market, a producer will then turn to markets that are perceived to be the most similar to those at home. In other words, consumers in industrial countries will have a high propensity to buy high-quality and luxury products, whereas consum...

Country Differences Thus far in this chapter, the theories to explain why trade takes place have focused on the differences among countries. These theories tend to explain most of the trade among dissimilar countries, such as trade between an industrial country and an LDC or trade between a temperate country and a tropical one. On the basis of these theories we would expect that the greater the dissimilarity among countries, the greater the potential for trade. For example, great differences in climatic conditions would lead to greatly differr entiated agricultural products. Countries that differed in labor or capital intensities would differ in the types of products they could produce efficiently. And national differences in innovative abilities would affect how production of a product would move from one country to another during the product's life cycle. A number of factors help to explain why a country trades more with one partner than with another.19 The most important fact...

Verification and Limitations of PLC Theory In recent years there have been a number of attempts to verify the PLC theory. Studies have found behavior to be consistent with the predictions of the PLC model for certain consumer durables, synthetic materials, and electronics.16 _ The PLC model seems to hold for many industries, but there are many other types of products for which this behavior would not be expected.17 The first such type includes those products that, because of very rapid innovations, __haye extremely short life cycles, which makes it impossible to achieve cost reductions by moving production from one country to another. For example, product obsolescence occurs so rapidly for many electronic products that .jhere is little international diffusion of production. The second type is the luxury product for which cost is of little concern to the consumer. The third type of product is one for which international transportation costs are so high that there is little opportun...

As a product moves to the declining stage, those factors occurring during the mature stage continue to evolve. The markets in industrial countries decline more rapidly than in LDCs as affluent customers spend disposable income on ever-newer products. By this time, market and cost factors have dictated that almost all production is situated in LDCs, which export to the declining market in industrial countries.

STAGE 3: MATURITY In Stage 3, maturity, worldwide demand begins to level off, although it may be growing in some countries and declining in others. In the mature stage of production there is often a shakeout of producers so that product models become highly standardized, making cost a more important competitive weapon. Longer production runs become possible for foreign plants, which in turn reduce per unit cost. The lower per unit cost enables sales to increase more in LDCs. ~~ Since markets and technologies are widespread, the innovating country J, no longer has a production advantage. In fact, there are incentives to begin J ^ moving plants to LDCs where unskilled but inexpensive labor can be used effectively on standardized (capital-intensive) work processes.

STAGE 2: GROWTH  If sales begin to grow after a product is introduced, there is an incentive for competitors to break the monopoly position. They can often do this by making slight product changes, thereby overcoming the protection conferred through patents. At the same time, demand is likely to be growing substanii- tially in foreign markets, particularly in other industrial countries. In fact, demand may be sufficient to justify the capital expenditure to produce in some foreign markets in order to reduce or eliminate transport charges and tariffs. Either the innovator or the new entrant may begin producing abroad, 'but the output at this stage is likely to stay almost entirely in the foreign country with the new manufacturing unit. Let us say, for example, that U.S. production had a monopoly that has been broken by Japanese output. The Japanese output will be sold mainly in Japan because: (1) there is growth in the Japanese market; (2) unique product variations are being intr...

Stage 1: Introduction Innovation, Production, and Sales in Same Country New products are usually developed because there is a need and a market for them. Since there is generally more ready observation of nearby market conditions, the development is more apt to be in response to domestic than to foreign needs. In other words, a U.S. firm is most apt to develop a new product because of observed needs in the U.S. market, a French firm because of perceived needs in the French market, and so on. To illustrate how this works, producers in both the United States and France observed the need for longer-term food preservation as more women worked outside the home and had less time for food shopping. The prevalence of large kitchens and cheap electricity in the United States encouraged U.S. innovators to develop frozen food which could be stored in large freezer compartments. U.S. producers thus became leaders in the frozen-foodindustry. In France, however, large freezer compartments "...

Different Production Methods The factor-proportions analysis becomes more complicated when the same product might be produced by different methods, such as with either high inputs of labor or high inputs of capital. Canada produces wheat in a capital intensive (high level of machinery per worker) way because of its abundance of low-cost capital relative to labor. In India, on the other hand, the same wheat is produced by using many fewer machines because-there is abundant and cheap labor. Where there is more than one way of producing the same output, it is the relative input cost in relation to output that determines which country can produce the same product more cheaply. The fact that products can be produced in different ways is another possible explanation of the Leontief paradox in that the U.S. industries facing the most competition because of cheap foreign labor are the ones that have responded most intensively by substituting machines for labor.

Labor-Capital Relationship When labor is abundant in relation to capital, cheap labor rates and export competitiveness in products requiring large amounts of labor relative to capital would be expected. The opposite would be anticipated when labor is scarce. India, Iran, and Tunisia, for instance, excel in the production of handmade carpets that differ in appearance as well as production method from the carpets produced in the United Kingdom and the United States made by ma- chines purchased with cheap capital, Studies examining the labor-to-capital relationship have shown that ex- port competitiveness is sometimes surprising, however. For example, Wassily Leontief found that in the United States, those industries that were more suc- cessful exporters had a higher labor intensity than those that faced the most import competition.9 Because of the presumption that the United States has abundant capital relative to labor, this surprising finding is know...

Land-Labor Relationship On the basis of the factor-proportions theory, Sri Lankan authorities reasoned that they were likely to have a competitive advantage for products using large numbers of semiskilled workers. Labor was a production factor that they had in abundance. The factor-proportions theory appears logical on the basis of a casual observation of worldwide production and exports. In countries where there are many people relative to the amount of land—for example, Hong Kong and the Netherlands—land prices are very high. Neither Hong Kong nor the Netherlands, regardless of their climate and soil conditions, excels in the production of goods requiring large amounts of land, such as sheep or wheat. These products are found in countries such as Australia and Canada where land is abundant relative to the number of people. Casual observation of manufacturing in relation to the labor-land proportions also seems to substantiate the theory. In, Hong Kong, for example, the most succe...

FACTOR-PROPORTIONS THEORY In their theories of absolute and comparative advantage, Smith and Ricardo showed how output could be increased if countries specialized in the products for which they have an advantage. Their theories did not, however, help to identify which types of products would most likely give a country an advantage. They assumed that the workings of the free market would lead producers to the goods that they could produce more efficiently and away from the goods that they could not produce efficiently. About a century and a quarter later, two Swedish economists, Eli Heckscher and Bertil Ohlin, developed the factor-proportions theory, which held that differences in countries' endowments of labor relative to their endowments of land or capital would explain differences in factor costs. They proposed that if labor were abundant in relation to land and capital, labor costs would be low and land and capital costs high. If labor were scarce, then the price of labor wo...