Foreign Trade

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Background

Foreign trade is the exchange of goods and services between nations. It has been an important part of national economies for centuries, helping domestic industries grow to serve foreign customers and allowing people to enjoy goods produced outside their own country. The ingredients for two favorites in the United States, coffee and chocolate, for example, come from the warmer climates of South America and the Middle East, where coffee and cacao plants grow. Tobacco was first discovered in America and was grown and shipped back by the colonists. Spaghetti noodles were supposedly brought back from China by Marco Polo.

An Information Industry

Behind every buying decision, whether that of an individual consumer or a large company, is information. This tenet of business has not changed, but the way buyers and sellers exchange information has changed greatly over the years, most recently with the proliferation of the Internet. The growth of the Internet has opened markets for companies all over the world. The number of Internet users as of September 2006 was 1.04 billion, according to Internetworldstats.com.

The U.S. Department of Commerce projects that digital delivery of goods and services will continue to grow. Software programs, newspapers, and music CDs no longer need to be packaged and delivered; they can be sent electronically over the Internet. Airline tickets and securities transactions are other transactions that already occur over the Internet in large volume. The government expects the transmission of goods and services directly over the Internet to be the largest and most visible driver of the digital economy.

Another area, retail sale of tangible goods, is expected to grow more slowly although sales of certain products, such as computers, software, cars, books, and flowers, are growing rapidly.

Trade has always been a major force behind the relations among nations. While it has often helped create alliances among friendly trade partners, fights for control over raw materials or trade routes have also been the cause of wars throughout world history. International trade developed and has continued to be practiced by countries for two basic reasons. The first is that one country can supply something that another cannot produce. The other reason for international trade is cost. Although one country may be able to produce an item, it may be cheaper to make it somewhere else and have it brought in. Tea can be grown with some difficulty in a northern climate, but most tea for the world market is still supplied by India. India has a climate and soil well suited to the production of tea, and everything is in place to grow enough tea leaves to meet the demands of the world market.

With the establishment of standard trade routes and fairly stable governments in the Western countries, international trade became regulated and controlled by the 1700s. Taxes were levied against some import items to allow local producers to compete economically against foreign producers. (Import taxes are called tariffs.)

Trade limits were set on other items to keep the local market from being flooded with foreign goods. Europe traded with the United States from the time of the first settlements in the 1600s. As the American economy and industry expanded with the industrial revolution in the early 1800s, the variety of items the United States was able to trade with other countries increased greatly. After World War II, American international business quickly expanded its manufacturing and distribution facilities overseas. In some instances, these companies were established under licensing arrangements or as joint ventures with a foreign company.

A country’s balance of trade (relation of exports to imports) is an important measure of its economic health. Most economists believe that imports and exports should be equal in value, or exports should be higher, for a healthy national economy. When export shipments are smaller than imports, it means that money spent in other countries will not be returned. In the 1960s, the United States experienced an erosion of its dominant position in world trade, and in most of the years since 1970, it has reported a negative trade balance (more imports than exports). In 1999, the U.S. trade deficit reached an all-time high of $267 billion as economic crises in other countries caused our exports of everything from soybeans to automobiles to fall. No other developed nation has had such a large difference between exports and imports. Canada, Japan, and the European Union have all experienced an export growth greater than import growth. Because of this imbalance, the United States is keenly interested in expanding the export of American goods or controlling the import of foreign goods. Since that time, the trade deficit has continued to rise significantly, reaching $725.8 billion dollars.

Before the 1940s, the United States had a largely protectionist approach to foreign trade, meaning that the government enforced high tariffs and rigorous import restrictions to protect home market producers from overseas competition. Today, protectionism is not as popular as free trade, whose proponents favor open markets and economic interdependence. In a move toward more free trade, President Clinton signed two agreements in 1993. The North American Free Trade Agreement (NAFTA) is a pact among the United States, Canada, and Mexico. Its provisions include the elimination of all tariffs over the next 15 years on goods produced and sold in North America, the barring of governments from imposing special requirements on foreign investors, and the lifting of certain restrictions on services, such as banking, telecommunications, and transportation. The second pact, which consisted of amendments to the General Agreement on Tariffs and Trade (GATT), was approved by the U.S. Congress and the governments of 116 other nations. It reduces international trade barriers, including tariffs, import quotas, and export subsidies. Opponents of agreements of this sort argue that they put American jobs at risk and increase the U.S. trade deficit.

Today, advances in information technology have made the world a smaller place. It is quite easy for anyone, even in a remote area, to communicate with anyone else across the globe. This openness has created new markets all over the world. The growth of foreign business and its importance to the national economy has created a great need for individuals prepared to handle the complex problems of international business.

Structure

Rows of imported cars at dock have just been unloaded from the ship in the background.

About one out of seven persons in private employment is engaged in activities linked to foreign trade. Foreign trade today affects almost every person in the world. It enables each country to make the best use of its most abundant resources. By selling its surplus, whether it’s a raw material such as coal, a semi-finished product like cotton stuffs, or finished products like computers, a country earns the money to import another nation’s surplus. Foreign trade involves the building of offices or plants in foreign countries, sending technical or other specialists abroad, and expanding the distribution of a product into the international market.

Large companies that have been abroad for many years have well-established programs and hiring practices. They may have programs that train within the company for work abroad, or they may be able to rely on the local nationals to run most of the organization. It is not easy to break into the international field in the large corporations, although some students are recruited occasionally for overseas service. Usually, a number of years must be spent in the domestic office learning the business and the company and often specializing in one aspect of it. Maturity and experience in decision-making ordinarily must be gained in the United States before a person is sent overseas.

With each type of trade arrangement, there are a number of jobs needed to organize, develop, and maintain the agreement. The jobs vary with the product or service offered and with the company’s goals for the product overseas. Many overseas jobs are temporary as companies send people skilled in setting up a manufacturing process or researching a new market for a few years. Professions in foreign trade include purchasers, buyers, economists, marketing research analysts, clerical support, delivery and logistics experts, and support personnel. Large companies may have these professionals on staff. Small to mid-sized companies hire these individuals through consulting firms.

Purchasers and buyers work in a number of capacities for large and small companies. Not all purchasers and buyers are involved with foreign trade. Those who are keep track of world markets to obtain the highest quality merchandise at the lowest possible purchase cost for their employers. To assist them in their search, they review listings in catalogs, industry periodicals, directories, and trade journals as well as visit manufacturers or sellers. Purchasers who specialize in commodities (raw materials such as steel, lumber, and cotton) track such things as market conditions, price trends, and futures markets.

On the opposite side of the transaction are marketing research analysts. They are concerned with the potential sale of a product or service. For example, they analyze statistical data on the buying practices of consumers in foreign markets before a company introduces its product into that market. They gather data on competitors and analyze prices, sales, and methods and costs of marketing and distribution. Is the cost of marketing and delivering a product all the way overseas worth the profit it will make? Marketing research analysts help companies make that determination.

A host of other professions make up foreign trade careers. Accountants are responsible for trade and tariff payments, investments, and currency exchange. Interpreters and translators are needed for contracts, hiring, training, sales, and almost every other aspect of the work. International affairs specialists give advice to a company on the business and political climate of a foreign country.

Four basic arrangements govern the trade of goods and services across national borders. The most basic arrangement is the single trade transaction. For example, someone in Florida has a shipment of orange juice to sell abroad. That seller either hires someone to find a buyer or personally finds someone who would like to purchase the shipment of orange juice. A buyer is found in France, a contract is signed after legal matters are settled, and the orange juice is shipped abroad. In the single trade transaction, there is only one contract and one shipment.

The second type of arrangement concerns installment sales. More than one transaction will take place between the seller and the buyer. A series of contracts for shipments may be signed, or one contract may be signed that outlines a series of sales over time. Either way, the key to an installment sales arrangement is an extended relationship between the seller and the buyer for continued supplies across the border with multiple deliveries and payments. Many products are bought with such regularity that a continued supply of an item can be counted on to sell. This pattern allows the importer to develop regular customers who rely on the continual receiving of goods from abroad. Wine, cheese, and many other food items are shipped on installment contracts.

A third type of international sales arrangement is the license arrangement. License arrangements are more complex because they involve the production of the item in the country where it is to be sold, while the rights to produce the item remain with the country that originally produced the items. Products made under patents are licensed to other companies for manufacturing, as long as the company manufacturing the product pays royalties on each item sold. For example, books may be produced in another country, or in another language, under a license agreement. If an American author has a book published in Germany, the German publisher has to get legal permission to publish, and the German company normally pays the author a set fee for each book sold.

The joint venture is the fourth type of arrangement for foreign trade. Two companies, one from each country, agree to produce something in a cooperative effort. They may choose to produce the item under one company’s name, under the two names combined, or they may choose to create a third company with an independent function from the two parent companies. Both parent companies get benefits from the sales of the items produced by the joint venture. Car manufacturers regularly have joint venture projects.

Subsidiary companies are branches set up in foreign countries. Many Fortune 500 companies have branches all over the world. Oil companies commonly have branches abroad, as do large banks, investment firms, and automobile manufacturers. Multinational corporations are companies that have operations in two or more countries. It is estimated that at least half of the 7,000 multinational corporations have branches in more than two countries and at least 300 companies operate in six or more countries. These companies may operate production branches in countries where it is cheaper to manufacture the product or where the raw materials may be close at hand. They also may produce the item in one or two locations and then use the other operations for sales and administration.

Outlook

Many imported goods are transported to their final destinations via water routes.

The international market is more than four times larger than the U.S. market and export opportunities continue to grow. According to the U.S. Department of Commerce, 15 percent of U.S. exporters account for 85 percent of the value of American-made exports. The forces that determine the demand for workers in foreign trade careers are complex. Because so many markets are involved, the outlook for foreign trade professionals is volatile.

The United States continues to import more goods and services than it exports, with an accelerating trade deficit. Because of this volatile atmosphere, the best that people interested in a foreign trade career can do is to ensure they have the basic skills needed, such as accounting, foreign language, and market research.

Many foreign trade jobs are relatively short in duration. The trend in recent years has been to send overseas only those U.S. employees who have skills and abilities not available locally. Americans go overseas to train local nationals in technical know-how and management techniques or as engineers or contractors on a project. After two or three years, perhaps longer, they are replaced by the local nationals they have trained.

Since new technology has made the world smaller, even small and medium-sized companies are now able to venture into foreign trade. They can use the Internet and interactive video to display products, solicit customers, shop for supplies, and make arrangements for credit, insurance, and transportation. The jobs are still fairly undefined because the work is new to most companies. Self-motivation, creativity, and an openness to world cultures are essential to the employee who will be breaking new territory for a company.

Words to Know


Absolute advantage theory: A country that trades internationally should specialize in producing only those goods it can produce more cheaply than can its trading partners. The theory was developed by Scottish economist Adam Smith in 1776.

Balance of payments: Relationship between all payments in and out of a country over a given period, including the movement of government and private capital between countries, such as investments and debt payments.

Balance of trade: Relationship of exports to imports; a favorable balance of trade occurs when a country exports more than it imports.

Comparative advantage theory: The theory that a country can still gain from trading certain goods even though its trading partners can produce these goods more cheaply, especially if the product will bring a better price in another country than it will at home. The theory was developed by English economist David Ricardo in 1826.

Devaluation: The practice of decreasing the value of one nation’s currency relative to gold or the currencies of other nations; generally undertaken as a means of correcting a deficit in a country’s balance of payments.

Euro: The new European currency that became effective January 1, 1999; seven bank note denominations (5, 10, 20, 50, 100, 200, 500) and eight coin denominations (1, 2, 5, 10, 20, 50 cents, and 1 and 2 euro).

European Union (EU): Modern outgrowth of the European Economic Community; the organization seeks to integrate the economies of member European countries by eliminating internal tariff and customs barriers and developing common price levels and a common currency, the euro.

General Agreement on Tariffs and Trade (GATT): The first international agreement designed to remove or loosen barriers to free trade; originally signed by 23 non-Communist nations in 1947.

Goods: Finished products, agricultural products or food, and raw materials are all things that countries trade with each other.

North American Free Trade Agreement (NAFTA): The 1993 agreement that eased trade restrictions among the United States, Canada, and Mexico.

Tariff: Tax on imported goods.

Trade deficit: An economic situation that occurs when a country imports more than it exports.

World Trade Organization (WTO): Modern replacement for GATT that was voted on by members in 1994.

For More Information

General information about international business may be obtained from the following organization:

American Association of Exporters and Importers

1200 G Street, NW, Suite 800

Washington, DC 20005-5503

Tel: 202-661-2181

Email: [email protected]

http://www.aaei.org

For trade statistics, state export data, and recent press releases, contact or visit the ITA Web site.

International Trade Administration (ITA)

U.S. Department of Commerce

1401 Constitution Avenue, NW

Washington, DC 20230-0001

Tel: 800-USA-TRADE

Email: [email protected]

http://www.ita.doc.gov

For more information on foreign trade, visit

World Trade Organization

http://www.wto.org

See Also


Accounting; Advertising and Marketing; Banking and Financial Services; Business; Sales; Accountants and Auditors; Business Managers; Buyers; Cultural Advisers; Economists; Export-Import Specialists; Financial Institution Officers and Managers; Internet Consultants; Internet Executives; Internet Transaction Specialists; Interpreters and Translators; Lawyers and Judges; Management Analysts and Consultants; Marketing Research Analysts; Merchant Mariners; Political Scientists; Purchasing Agents; Stevedores; Traffic Engineers

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