COMMERCE – GLOBAL LINKS

8.1 THE GLOBAL CONSUMER

domestic trade: economic transactions that take place within Australia

exports: goods and services sold to another country
global consumer: a person who buys goods and services from other countries
imports: goods and services bought from another country
international trade: the buying and selling of goods and services between nations

Sourcing products internationally

 globalisation  news and entertainment from around the planet, clothing and footwear sold
worldwide, rapid telecommunications, trade
 last 20 years, world has experienced such rapid and widespread globalisation
 critics argue process results in a ‘race to the bottom’ in wages and conditions
o exploitation of workers (developing countries) and loss of jobs in developed countries

Trends towards a global market

 individual members are linked through mechanism of international trade
 world’s consumers also linked via modern mass communication technologies  global
consumer can now shop in global marketplace

Relationship of domestic and international trade

balance of trade: difference in value between a country’s exports and its imports
trade surplus: when the value of exports > value of imports
trade deficit: when the value of exports < value of imports

 domestic and international trade linked with business and consumers relying on being able to
purchase wide range of goods and services
 our economy linked to world economy via flow of exports and imports

8.2 AUSTRALIA’S CHANGING TRADE PATTERNS – EXPORTS

comparative advantage: gains made by countries that specialise and trade their surpluses
o Australia can produce wool and computers, however it can produce wool more efficiently
than wool, it can afford to import computers and specialise in wool

domestic market: consumers in a home country

 small domestic market compared with foreign market  cannot product all goods and services
required  need for international trade
 international trade has always played important part in Australian economic development

What does Australia export?

 since mid-1800s, Australia has relied on export of primary resources for economic survival
 importance of wool industry  Australia ‘rode on the sheep’s back’
o by 1850s, wool trade made up about 2/3 of total exports
o during this time, land was being cleared to grow crops, especially wheat, another
important export earner
 1850s Gold Rush had remarkable effect on economy of colonies
 during 1960s mineral boom, mineral exports grew quickly
 mineral exploration  discovery of rich deposits (nickel, copper, iron ore, coal, bauxite)
 mining has made up large percentage of exports
 o iron ore and coal together make up 34% of total 2011 exports
 over last 25 years, trade in services (tourism and education) has grown
 exports of manufactured products (motor vehicles and scientific and medical equipment) also
increased rapidly
o however, growth in these sectors has slowed since 2008
 GFC  decreased growth  high value of AUD  reduced demand for
Australian products
 GFC  Australia more expensive destination for overseas students and visitors and increased
price of manufactured products 21st century markets
o rapid growth in mineral exports
o below average growth in manufacturing and service exports } present greater challenges
for Australian exporters;
must look at other
exportable product options
Who are Australia’s main customers?
 Australia’s historical links with UK and EU  majority of trade used to be with these regions
 however, since end of 1940s:
o exports to UK and EU have declined relative to the total
o new markets began to emerge  move exports sold to Asian countries and US
o China is now main customer, followed by Japan and Republic of Korea
o Latin America, Middle East, Africa and Central Asia are emerging markets

Benefits of international trade

 allows businesses to grow
 provides employment
 encourages efficiency
 provides consumers with wider choice of goods and services
 delivers lower prices of goods and services

8.3 AUSTRALIA’S CHANGING TRADE PATTERNS – IMPORTS

Main trends
 1960s – UK was 27.8% imports and US was 22.9%
 2013 - 2014 – UK is 2.5% and US is 11.1%, China now 19.9%, Japan 7.3% and other Asia
29.6%
o Asia more than 50% of imports

Why do we import products?

 rise in Australian incomes and decrease in relative price of imported products and consumer
wants greater variety  increase in money spent by Australians on imports over past 20 years
 Australia imports many products and does so for several reasons:
1. cheaper products
o can purchase many products more cheaply from overseas because Australian producers
may not make product as efficiently
 over last few years, massive drop in price of TVs and other electrical products as
they are being manufactured in low-cost Asian countries
o cheaper prices also due to:
 decrease in transportation costs (significant factor in Australia)
 reductions in barriers to trade by signing of free-trade agreements
2. encourage competition
o imported goods brought into country to encourage competition with domestic producers
o lower prices  higher competition

3. lack of resources
 o Australia cannot produce some products itself because it does not have necessary
resources
o imports of energy products such as crude and refined petroleum have increased
significantly because Australian producers cannot meet demand
4. ingredients in production
o imports used as ingredients or components in products that are manufactured or
assembled in Australia
o result locally-built Holden Cruse motor vehicles were assembled with about 55%
imported parts, with engines from Austria and Korea
o Australian companies do this for cheaper prices, availability of products or better quality

What does Australia import?

 Australia has been reliant on steady flow of imported products
 over the years, there have been two noticeable trends in composition of Australian imports:
o majority of Australia’s imports consist of machinery and equipment (computers, motor
vehicles, office machines and telecommunication devices)
 result of Australia’s expanding industrial capacity
o unlike many other industrialised countries, Australia import relatively small amount (25%
of primary imports) of processed and unprocessed food
 majority of Australia’s primary imports consist of oil and petroleum

Who are Australia’s main suppliers?

 globalisation  Australian consumers can buy overseas products in stores or at home online
 while composition of imports has been much more stable than that of exports over long term,
sources of imports have changed considerably
 since late 1940s, dramatic decrease in importance of UK offset by increase in importance of
Asia Pacific region countries (China, US, Japan) and SE Asia

TRADE BARRIERS

free-trade agreements: an agreement between countries that results in reductions in barriers

to trade
 international trade barriers can take many forms for a number of reasons
o generally governments impose barriers to:
 protect domestic industry or
 to ‘punish’ a trading partner

Why protect domestic businesses?

 governments aim for sustainable economic growth
 protecting jobs, domestic producers provide employment, ensuring income for local workers
o support Australian industry
 tax income – when domestic businesses make profits, they pay taxes

Barriers to trade
* barriers aim to encourage domestic market to support domestic products

Tariffs
tariff: tax on imported goods
 tariff  raise price of imported goods  retail price more expensive  consumer more likely to
purchase domestic products
Quotas
quota: limit on the amount of goods that can be imported
 quota  demand > supply  raise price  consumer more likely to purchase domestic
products

Embargoes
embargo: a government order which prohibits trade with another country
 if necessary, military blockades to prevent trading movements
 embargo  hurt country economically  undermine leader

Australia’s FTAs
 treaties between countries that benefit Australian importers, exporters, producers and investors
by reducing and eliminating certain barriers to international trade and investors
 Australia has entered into 10 FTAs

Benefits and costs of trade barriers

Benefits
 protect jobs
 help provide extra income for government
 increase number of goods people can choose from
 decrease costs of these goods through increased competition

Costs
 tensions between countries regarding tariffs and quotas (trade war)

8.4 THE GLOBAL INVESTOR

Investing money in the global financial markets

equities (shares): ownership entitlements in a company
managed fund: money from a large number of smaller investors poled together and managed
as one large investment portfolio by a professional investment manager
 over past 20 years, much easier for local investors to purchase equities on overseas stock
markets
o either by direct purchase or through managed funds
 can invest in world’s largest economies (USA) or newly emerging economies (China and India)
 diversifies risk – one market is not performing well, there are others to fall back on
 protect you against falls in AUD
 AUD falls  value of investment rises
 AUD rises in relation to currency of selected country  value of investment falls
 managed fund’s knowledge of global markets  better return
 deposit money in fixed interest account  minimise exposure / risk

Pros & cons of managed funds

Pros
Offer diversification
Can access broad range of assets or markets
with relatively small amount of cash
Allow you to make regular contributions
Reduce paperwork and make taxes easier
Cons
May have higher fees than other investments
Able to convert investment to cash whenever
Rely on skills of other people and you do not
control investment decisions

September 2008 global financial crisis

 massive loss of confidence in US financial system
 caused by increase in number of US home owners defaulting on their mortgage payments
 hundreds of billions wiped off New York Stock Exchange
 world slipped into recession and resulted in 2011 European debt crisis
 affected Australia less than others
 economic growth in Australia slowed  unemployment rate increased, economic uncertainty
 Australia had an expansionary fiscal policy  increased spending  stimulate economy
o $10.4 billion stimulus package – $8.7 billion flow to pensioners and low-income families,
$1.5 billion to support housing construction and $187 million for new training places
 RBA cut interest rates
 government guaranteed all bank deposits  encourage Australians to keep money in their
banks
 Australian economy recovered better than most advanced economies
o March quarter 2009 – Australian economy grew by 0.4%
o only 2 out of 33 advanced economies managed to grow in March quarter

8.5 TRANSNATIONAL ORGANISATIONS (1)

gross domestic product: total value of goods and services produced in an economy in a year
parent company: a company that owns or controls another company (subsidiary)
subsidiary: a company owned and controlled by another company
transitional corporation (TNC): a large business organisation that has a home base in one
country, and operates businesses in other countries

Features of businesses with global links

 TNC represents highest level of involvement in global business
 national borders do not represent barriers to trade  TNCs conduct large percentage of their
business outside their home country
 McDonald’s, Unilever, Ford and BHP Billiton
 some TNCs have grown so large, annual revenues from sales > GDP of many nations
 intense concentration of wealth  critics accuse some TNCs of abusing power by corrupting
political processes of countries
 TNCs have major role to play in contributing to world economic growth
o approximately 67% of all international trade undertaken by top 500 corporations
o about 43% of international trade is between parent company and its subsidiary
o standard of living can be improved through investment and employment created by
TNCs
o parent companies and subsidiaries share employees, ideas, technology and resources
 less developed economies become more advanced

Reasons for expansion

Ethical issues of international trade

Environmental standards
 growing pressure for businesses to adopt ecologically sustainable operating practices
 global business community has undertaken many initiatives to put principle of sustainable
development into practice
o Levi Strauss and Co. has developed its own environmental policy, which includes strict
wastewater guidelines and reduction in greenhouse gas emissions from global
operations
o will only conduct business with partners who share commitment to environment
Jean dying
 Xintang province in China makes 300 million pairs of jeans every year
 province’s rivers have toxic mix of chemicals and dyes running through them
 environmental cost spreads across China, Bangladesh and India
 70% of Asia’s lakes and rivers are now contaminated
 region’s populations depend on same sources of water for drinking and bathing
 manufacturing distressed jeans look actually harms the health of the workers
 Spanish manufacturer, Jeanologia, now distresses jeans by engraving images on fabrics with
lasers and eliminating water without increasing costs

Human rights code of conduct

 adopting human rights code of conduct is one method of attempting to perform business in
ethically responsible way
o Adidas will only deal with suppliers who live up to its workplace standards, no forced or
compulsory labour, fair wages and benefits, safe and healthy work environment, freedom
of association and no child labour
 some businesspeople doubt whether such individual company codes can stop labour abuses

8.6 TRANSNATIONAL ORGANISATIONS (2)

Operations
Billabong International Limited
 established in QLD in 1973, originally manufactured only boardshorts
 today, designs, produces and distributes wide range of surf and extreme sports clothing and
accessories (e.g. swimwear, skateboards, clothing, sunglasses, jewellery)
 leading surf wear apparel brand in Australia
 Billabong, Element and Vonzipper, Nixon, Sector 9, RVCA and Tigerlily
 distributed more than 100 countries
 11 000 outlets worldwide and 10 000 staff around the world
 manufactured in Australia, North America, Europe, Japan, New Zealand and Brazil
 ethical and responsible business practices and requires all suppliers to abide by Social
Accountability 8000 standard (SA8000)

Employment issues
 success is very much determined by abilities and performance levels of employees
 quality, quantity and composition of available labour force are important considerations for any
business as it undergoes global expansion

Staffing
 in global business, senior management positions require people who are:
o preferably bicultural
o able to appreciate and understand business practices and customs in host country
o able to speak language of both home and host country
 must also deal effectively with cultural diversity among employees
 gender, race, ethnicity and religious diversity

Minimum standards of labour

labour standards: conditions that affect a business’s employees, or those in its supply chain
 each country has specific labour laws outlining minimum wage and non-wage conditions
 desire for greater profit margins  sweatshops
 increasing pressure to ensure employees working on low wages in low-income countries are not
exploited by unscrupulous businesses

Management issues
 commercial issues
 business practices and ethics varying between countries
 tax obligations
 social and cultural differences

Legal issues
 unique legal system
 need to understand local customs
 difficulty in resolving contract-related disputes

Employment issues
 approaches to staffing
 cultural diversity
 labour law variations
 shortage of skilled labour

Environmental issues
 ecologically sustainable practices
 location of facilities
 type of raw materials to be used

Financial issue
 currency (exchange rate) fluctuations
 methods of payment
 insurance costs
 credit risks

8.7 GLOBAL BUSINESS

Global business and environmental issues

 in many developing countries, environmental laws are often non-existent or very weak
 a number of TNCs to use these vulnerable countries to dispose of harmful or illegal products
 harmful chemicals, e-waste, poorly designed machinery and inappropriate foodstuffs dumped in
developing countries
 countries pressured into taking waste; receive incentives and revenue to repay large foreign
debts
 environmental laws of host country are so lax that hazardous materials are not treated properly
 contamination of dumping sites may be extremely high
o e.g. dumping of 500 tonnes of toxic waste in sites around Abidjan in Ivory Coast
 8 people died and 40 000 sought hospital treatment
o Ghana, Kenya and Guinea Bissau have also suffered similar toxic waste scandals
 few laws prohibiting disposal of hazardous products in many developing countries  TNCs are
not technically breaking the law, but are being highly unethical

Risks associated with selling to global markets

Currency risks
appreciation: an upward movement of a currency against another
depreciation: a downward movement of a currency against another
foreign exchange rate: the ratio of one currency to another; it shows how much a unit of one
currency is worth in terms of another
 countries have their own currency, which they use for domestic purposes
 when transactions are conducted on a global scale, one currency must be converted to another
o e.g. Australian business (exporter) sells foodstuffs to Japan, Japanese firm (importer)
must pay in AUD, not Japanese yen
 variations in supply and demand  exchange rates fluctuate over time
 depreciation  value of currency lowered  exports cheaper but imports more expensive
 appreciation  value of currency increased  exports more expensive but imports cheaper
 exchange rate fluctuations  affect profitability and production costs

Political risks
political risk: any political event which has a negative impact upon operations and profit
 tend to be greater in countries experiencing social and economic unrest
 businesses may have to find means to directly influence politically powerful people in order to
obtain permission to operate in the country

Legal risks
intellectual property: property that is created by an individual’s intellect (e.g. novel or song)
 global business is affected by many thousands of laws and regulations
 each country has its own unique set of laws and legal systems
 poses a number of risks for a global business in the areas of:
o contract law – especially methods of enforcing contracts
o legal disputes – resolving these can be very complicated due to differences in legal
systems and culture
o intellectual property rights – weak protection can cost international businesses great deal
of money

Social and cultural risks

 people work in societies and culture that differ from their own
 important that international businesspeople fully understand and appreciate customs and
traditions of countries they deal with
 failing to do so  embarrassment or lost business opportunities