There are various reasons why countries trade with other countries.

To begin, (1) no nation

can produce all the products demanded themselves. Furthermore, (2) even if a country
determines to become self-sufficient, other countries would seek trade to fulfil the demand of
their population. On top of that, trade enables a nation to produce what it is most capable of.
Import is buying products or resources from a different country. On the contrary, export is
selling products or resources to other countries. E-commerce has made it possible to access
distant global markets. Because of the internet, companies can bypass the normal distribution
channels.

Theories about international trade:

-    Comparative advantage: This means that countries should sell what they can produce most
effective and efficiently or that a country has a monopoly on a certain product. Other
products, which can’t be produced in such a manner, should be imported from other
countries.
-    Absolute advantage: The advantage that occurs when a country has a monopoly on
producing a certain product or is able to produce it, in comparison with other countries, more
efficiently.

The balance of trade is the total value of a country’s import compared with the import over a
certain period of time. There is a favourable balance of trade if the total value of the export
surpass the total value of the import.  The balance of trade is unfavourable, or the country has
a trade deficit, when the value of the imports is higher than the value of the export. If the
balance of payments is unfavourable and a nation owes other countries more than other
countries owe the nation, it is called a deptor nation. Strategies for global trade

Licensing: Allowing another company to produce your product or use your trademark for a
royalty, a financial compensation.

-    Advantages: more revenue; the royalty income; foreign licensees have to buy start-up
supplies, component materials and consulting services.

-    Disadvantages: licensing happens for a long period in which the value of the product
could increase without the opportunity for the licensor to benefit from it. The licensee could
also break the agreement and the licensor could lose its’ trade secrets.

Franchising: Sell the rights to use a business idea and the business name.
Contract manufacturing: A domestic company attaches its brand name ore trademark to a
product that was produced by a private-label in a foreign country. A company can also use
contract manufacturing temporarily to achieve an not expected increase in orders. On top of
that, labour cost are often very low.

Joint venture: Joint venture is a short-term partnership of two or more companies that
undertake a common project. In some countries it is mandatory to participate in a joint
venture in order to do business in that country.

-    Advantages: shared technology, shared management and marketing expertise, entry in
new markets, shared risk, faster growth.
-    Disadvantages: loss of flexibility, one company learns from the other, and takes advantage
or steals the ideas of the other company

Strategic alliances: A long-term partnership of two ore more companies that help each other
to establish competitive market advantages. The difference between strategic alliances and a
joint-venture is that strategic alliances do not typically involve sharing risk, costs,
management or even profits.

Foreign subsidiaries: A company owned in a foreign country by another company. All

technology and expertise will stay in direct control of the parent company. The advantage of
subsidaries is that the company maintains the complete control over any expertise or
technology it possesses.

Foreign direct investment: Buying of permanent property and businesses in a foreign country.
Multinational corporation: A company that has branches in many different countries, that are
producing and selling products. Multinationals have multinational stock ownership and
multinational management.

Obstacles in world trade:

1.)    Sociocultural forces: Cultural differences such as: religion, language, values, social
structures.

2.)    Economic and financial forces: To understand economic situations, countertrade

opportunities and currency fluctuations are crucial to a businesses success in the global
market.

3.)    Legal and regulatory forces: Bureaucratic barriers, restricting laws and regulations

4.)    Physical and environmental forces: differences in technological systems and difference
in access to technological systems. For example, computer and internet usage in developing
countries is non-consistent or barely used which is a obstacle in world trade.

Ethnocentricity is a point of view that their own culture is superior to all others.
Floating exchange rates is a system which shows how financial markets operate. It shows
which currencies ‘float’ according to the supply and demand in the global market for the
currency.

The exchange rate is the value of a countries currency in comparison with currencies of other
countries.

Devaluation means that the value of the countries’ currency has decreased relatively to other
currencies.

Bartering is the exchange of service for service or merchandise for merchandise with no
money involved. Countertrading is a more complex form of bartering in which various
countries may be involved.

The Foreign Corrupt Practices Act is a law which specifically prohibits ‘dubious’ or
‘questionable’ payments to foreign officials to secure business contracts.
Trade Protectionism: Trade protectionism means that government regulations are used to
limit the import of goods and services. This is seen as a great barrier to global trade.
There are different tools to limit import. First of all, you can impose tax on products from
foreign countries, which is called tariffs. There are two types of tariffs. Protective tariffs are
used in order to raise the retail price of foreign products. In this way, (1) jobs are saved and
(2) industries are kept in that particular country. Whereas revenue tariffs are used to raise
money for the government. Import quotas allow a limited amount of certain imported
products. An Embargo is an entire ban on the trade (import and export) of a certain product or
stopping all trade with a certain country. Non-tariff barriers are restrictive standards that
detail exactly how a product must be sold in a country.

International organizations, agreements and markets

General Agreement on Tariffs and Trade (GATT), 1948: An agreement that created an
international forum for negotiating mutual reductions in trade restrictions (founded in 1948)
World Trade Organization (WTO), 2005: An international organization that replaced the
GATT and has the duty to mediate international trade disputes among nations.
North American Free Trade Agreement (NAFTA), 1994: An agreement between The United
States, Canada and Mexico which created a free trade area among this nations.
Common markets (i.e. EU, Mercosur): Common markets are trading blocks between a group
of countries. The countries have no internal tariffs but have a common external tariff. On top
of that they have a coordination of law to facilitate exchange.

Outsourcing is the purchasing of goods and services from sources outside a firm rather
than providing them within the company.

A benefit of outsourcing is that (1) outsourced work allows businesses to create efficiencies
that in fact let them hire more workers. On top of that, (2) less-strategic tasks can be
outsourced globally so that businesses can focus on areas in which they can grow and excel.
Furthermore, (3) consumers benefit from lower prices generated by effective use of global
resources and developing nations grow, thus increasing economic growth.

Disadvantages of outsourcing are (1) Offshore outsourcing reduces product quality and can
therefore cause permanent damage to a company’s reputation. Besides, (2) jobs are lost
permanently and wages fall due to low-cost competition offshore. Also, the communication
among company members, with customers and with suppliers become much more difficult.