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