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 CHAPTER THREE

Competing in Global
Environments

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 LEARNING OUTCOMES

In this chapter, you will learn to:

Define international trade, free trade, globalization
and trade liberalization.
Highlight the differences between absolute
advantage and comparative advantage, and explain
how nations measure international trade.
Explain why nations trade, and list the advantages
and disadvantages of international trade.

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 LEARNING OUTCOMES (cont.)

Define trade protectionism, and identify the tools

used and explain the economic arguments behind
the restricting of trade among nations.
Explain the emergence of trading blocks and
elaborate on the role of World Trade Organization
(WTO) in promoting free trade.
Identify six different strategies that may be taken to
reach the global market.

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 FUNDAMENTALS OF
INTERNATIONAL TRADE

International trade refers to transactions made

between countries.
Simply, it is the export of goods and services
among nations.
Basis of international trade no single nation can
produce all the goods and services that are needed
by the society.

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 ADVANTAGES OF
INTERNATIONAL TRADE

Increase in the countrys total output.

Aggressive competition among businesses results
in lower prices of goods and services.
Greater variety of goods and services for
consumers to choose.
Increase efficiency in local production to match
with the quality of imported products.
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 ADVANTAGES OF
INTERNATIONAL TRADE (cont.)

It promotes businesses to specialize and reap

economies of scale.
It enables countries to produce what they can
and buy the rest from trading partners in a
mutually beneficial exchange.

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 HOW DOES A NATION KNOW
WHAT TO PRODUCE AND WHAT
GOODS TO TRADE FOR?

Understanding the theories of:

Absolute advantage
Comparative advantage

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 ABSOLUTE ADVANTAGE

A nation is said to have an absolute advantage in

the production of a good if it can produce more
efficiently than all other countries.
It therefore has a pure monopoly in the
production of a particular product.

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 ABSOLUTE ADVANTAGE (cont.)

Absolute = Virtual Monopoly

South Africa

Output per Other

countries of
Unit of Input
the World

Diamond Production

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 THEORY OF COMPARATIVE
ADVANTAGE

Propounded by David Ricardo in the late 18th

century.
This theory supported the idea of free economic
exchange and explains gains from specialization.

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 COMPARATIVE ADVANTAGE

A country should sell to other countries those

products that it produces most effectively and
efficiently, and should buy from other countries
those products that it cannot produce as
effectively and efficiently.

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 COMPARATIVE ADVANTAGE
(cont.)

Malaysia
Japan

Japan Malaysia

Output per
Unit of Input

Electrical goods Cars

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 MEASURING INTERNATIONAL
TRADE

Balance of trade the ratio of total value of

exports to imports.
If exports are more than imports, there is
favourable balance of trade or trade surplus.
If imports are more than exports, the nation is said
to have unfavourable balance of trade or trade
deficit.

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 BALANCE OF TRADEMALAYSIA
JANDEC 2007

(RM billion)
Total exports 55.1
Total imports 46.0
-------------------------------------
Balance of trade * + 9.1

* Favourable balance of trade

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 MEASURING INTERNATIONAL
TRADE (cont.)

Balance of payments the difference between

money flowing into the country and money
flowing out of the country over a specified
period of time.
Malaysias balance of payments divided into
two major accounts:
current or goods and services account
capital and financial account.

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 LIMITATIONS OF INTERNATIONAL
TRADE

The danger of economic specialization

Economic and political interdependence
among trading partners.

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 TRADE PROTECTIONISM

Government policies implemented to restrict

foreign competition from affecting local industries
apart from fulfilling other social interests.
They may come in many forms, as follows:
Tariffs or taxes
Quotas
Embargoes
Subsidies and grants
Restrictive import standards and licenses
Preferential treatment
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 WHY DO NATIONS ADOPT
PROTECTIONIST POLICIES?

To protect industries in infancy

To diversify the economy
To correct a temporary unfavourable balance of
payment position
To protect declining industries
To prevent dumping

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 FREE TRADE

The movement of goods and services amongst

nations without political or economic barriers.
In simple terms, do away with protectionist
policies.

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 THE CONCEPT OF
GLOBALIZATION

The global economic integration of many national

economies into one global economy.
To globalize means to develop business, society, etc so
as to make international influence or action possible.
Global trade enables countries to produce what they
can and buy the rest in a mutually beneficial exchange
relationship.
This happens through the process of free trade or trade
liberalization.
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 TRADE LIBERALIZATION

Loosen or remove restrictions on trade.

Market liberalization initiatives:
Free trade areas (FTAs) Bilateral
Regional, e.g. ASEAN AFTA
Multilateral WTO ( whole world)
153 member countries.

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 WHY DO WE NEED TO
LIBERALIZE TRADE?

To support globalization, the global economic

integration of many economies into one global
economy.
To globalize means to develop business, society,
etc. so as to make international influence or action
possible over the world.

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 WHY DO WE NEED TO GLOBALIZE
IN THE FIRST PLACE?

Economists believe that the world will be able

to enjoy greater levels of output and higher
standards of living.
Free trade promotes competition.

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 WHY DO WE NEED TO GLOBALIZE
IN THE FIRST PLACE? (cont.)

Consequently, resources will be more

efficiently allocated and mobilized to the
places which can best produce goods and
services at the lowest cost.
Consumers enjoy lower prices.

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 EMERGENCE OF TRADING BLOCKS
IN THE GLOBAL ENVIRONMENT

While free trade is promoted in the world of

today, in reality nations group together to form
trading blocks.
They trade among themselves and regard their
trading block as one huge market.

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 TRADING BLOCKS

Organizations of nations that remove trade

barriers among member nations to promote free
trade among them.
This limits foreign competition since member
nations co-operate among themselves to promote
mutual trading benefits.

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 FOUR MOST POWERFUL
TRADING BLOCKS

The European Union (EU)

The North American Free Trade Agreement
(NAFTA)
The Association of South East Asian Nations
(ASEAN)
South Americas MERCOSUR

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 WORLD TRADE ORGANIZATION
(WTO)

Formed on 1 January 1995 to replace GATT (1947)

with the following objectives:
To reduce trade barriers.
To eliminate discrimination in international trade.
To prevent the establishment of further trade barriers.
To consult one another for unilateral benefits.

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 WORLD TRADE ORGANIZATION
(WTO) (cont.)

An organization consisting of member countries

Currently 153 members
Goal help producers of goods and services,
exporters, and importers conduct their business
Make rules on trade between nations
Agreement is legally binding
negotiated and agreed on by members
Main function to ensure that trade flows as
smoothly, predictably and freely as possible.

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 WORLD TRADE ORGANIZATION
(WTO) (cont.)

Targets:
Liberalization schedule:
Developed countries2010
Developing countries2020

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 STRATEGIES TO PENETRATE
THE GLOBAL MARKET

Importing and Joint ventures

exporting
Foreign direct
Licensing Investment

Franchising

Strategic alliances

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