Chapter 4: INTERNATIONAL TRADE

CHAPTER 4

International Trade

NO NATION WAS EVER RUINED BY TRADE. — BENJAMIN FRANKLIN

ON THE TIME SCALE of human existence, the development of the nation-state is relatively new, and international trade probably commenced as soon as national borders were determined. As cultures (ethnic and political) bound themselves together, it was just a short additional step to start protecting their possessions and another quick leap to covet those of their neighbors. Flash ahead a few centuries and you find import tariffs and currency valuation. This chapter will look at the underlying motivations for international trade and some of the very human issues that govern those motivations. Marketeers must understand these larger scale incentives before approaching a target market.

Growth of International Markets: The Grass is Always Greener

Even the most prosperous countries seek to exchange goods and services with their neighbors. In fact, the greater the level of prosperity, the greater link to high performance in the global markets. It could be said that if a nation isn’t competitive on the international stage, that nation is chasing mediocrity. Long gone are the days when self-sufficiency was measured by the amount of shelter, food, and water a nation could garner within its own borders. Minerals, fuels, services, technology, manufacturing processes, and education have been added to the “essentials,” with no single nation having enough of what it now perceives itself to need.

It’s an accepted fact that transportation and communication have had a great deal to do with the increase in cross-border trading. Travel abroad is no longer an experience limited to a few economic and political elites. Once a general awareness of another nation’s products is in place, demand can be readily sparked. International marketeers have been this spark and have led the drive toward the globalization of business. Though feared by many and resented by some, globalization is an irresistible tide that shows no sign of ebbing. The explosive growth in international trade that has occurred in recent years has raised millions of people out of poverty, though millions more wait their chance.

Pride, Prosperity and National Industries

International trade is not without its detractors and many of the nay-sayers have reasons that aren’t completely based in the rationale of economics. Viewing globalization as a threat to homegrown prosperity is a universal pre-occupation of demagogic politicians and competition-fearing businesses. Foreign companies

are portrayed as predatory and conniving while domestic firms are painted as having the country’s best interests at heart. This ploy can work because most nations (perhaps all) have a sense of national pride about certain products.

Some industries (such as auto production and steel smelting) are considered benchmarks in a nation’s advancement. These “prestige” industries are sometimes put into production very early in development as a show of pride to neighbors. By way of example, Indonesia’s attempt at creating a “national car” seemed to analysts as a bit premature in a country that is primarily agrarian. The move has taken a toll on the economy, and it’s made it difficult for foreign auto manufacturers to market their own wares here, as the Jakarta government seeks to coddle its infant producer.

Industrial pride isn’t restricted to the emerging markets, as can be seen in Great Britain’s intransigence in the face of “mad cow disease” and the effect on its exports. Beyond the economic loss of destroying thousands of diseased cattle, much time was lost seeking to assuage the hurt pride of an industry so intrinsic to the country that “John Bull” is a national symbol. British beef is highly protected by government sanction and is a continual source of controversy between the United Kingdom and its continental counterparts. National pride, not dispassionate commercial thought, continues to protect Japan’s farmers, France’s vintners, the United States’ microchip makers, Brazil’s coffee growers, and virtually everything in China. NOTE: Marketeers must understand and take advantage of this pride factor when attempting to enter a market. It can’t be eradicated but it can be out-maneuvered. No market is completely closed or completely open. A marketeer’s job is to find a place to put “the thin edge of the wedge” that will pry things open.

Absolute and Comparative Advantage

I CAN DO ANYTHING YOU CAN DO . . . MAYBE BETTER An educated and energetic workforce can produce any product if given the raw materials necessary. Yet most nations buy finished goods and services from each other rather than the components to produce their own. This is due to the fact that the exporting nation has an advantage over the importer for a particular product. The exporter may simply do it better and in greater quantity, as is the case in Vietnam’s importation of Danish brewing equipment for local beer production. Vietnam could produce their own equipment but not at the same price as Denmark. This is an example of a “comparative advantage.” Other times, as occurs when Sweden imports Indian tea, sometimes a country simply can’t produce a reasonably priced product at all, in this case due to geography, thereby relinquishing “absolute advantage” to a foreign marketeer. Absolute advantage can be the result of climatic, educational, or developmental factors but is usually the result of the economies of scale that the exporter brings to bear. Anyone can make microprocessor chips if they’re willing and able to invest the trillions of yen necessary, but why not use those resources elsewhere?

Marketeers love to find and exploit absolute advantage, but it’s not all that common.

Comparative advantage, on the other hand, is quite common and is at the root of most international marketing plans. When the United States decided to buy 9mm Italian-made pistols to supply its military officers, they did so after being convinced by the Beretta Company that this weapon was better than any U.S.made product at the same price. Comparative marketing advantage may take the form of quality, quantity, price, delivery, warranty, or service and can be maintained as long as the marketeer remains vigilant. WARNING: Absolute and comparative advantage will get you into a market, but staying competitive is the only way to survive long-term. The Swedish may never grow tea, but the Vietnamese can eventually out-brew the Danes.

Coproduction and Trade: Buying Apples with Apples

International marketeers were quick to realize that countries often sell each other the same products. This is true for automobiles, textiles, shoes, music, foodstuffs, and, in the long-term, potentially any product. In many ways, this coproduction is the means by which nations determine comparative advantage as consumers decide which companies produce the best products for the best price. As the reader will see in the next chapter, governments (usually at the behest of troubled producers) often interfere in this “natural selection” process with tariff and trade restrictions. At this point the reasons but not the reactions to coproduction will be discussed.

Much coproduction is the result of fine-tuning the demands of consumers (which, as noted in Chapter 2, is referred to as segmentation). Shrewd marketeers can pinpoint the demands of consumers right down to the individual buyer or a major sub-group. Hence, although the United States produced and consumed much of the world’s automobile supply in the 1970s, U.S. consumers were successfully targeted by Japanese manufacturers during that period as being ripe for market penetration. The Japanese took advantage of U.S. factories’ inability to quickly and cheaply meet the demand for more fuel-efficient autos in response to OPEC’s oil price increases. The overall U.S. automobile segment was subdivided into luxury, midprice, compact, and sub-compact, with the Japanese concentrating on the lower end to seize market share. At first just sold as imports, Japanese cars quickly became a major, if not dominant, feature in the U.S. car market; eventually, the Japanese built manufacturing plants inside their new market. Over time, U.S. companies did the same thing in Asia and Europe, while European manufacturers responded in kind with a concentration on the luxury segment.

Coproduction usually takes place between countries on good political terms and only involves products that a nation doesn’t deem vital to its economic or military security. It should be stated that the word vital is interpreted against a backdrop of great political change, as can be seen in many nations’ present-day coproduction of military goods. Culture also plays a big role in deciding which products a nation will reserve for itself, but this too can change very quickly. In China, for example, the move from Mao suits to Armani suits was lightning paced. A marketeer should understand that very few markets are so saturated that another subsegment can’t be exploited, nor does any market remain closed forever.

NOTE: Being an astute observer of global economic, cultural, and political scenes is mandatory for success. Garnering and interpreting information are daily, if not hourly, processes. The spinning of the globe has produced its own “information slipstream” and international marketeers thrive in it.

Trade Among Nations: Out of Balance, Out of Sorts

The choice of which products to market abroad will depend a great deal on how your own nation views its trading partners and how those partners see themselves in relation to your domestic market. Understanding the “balance of trade” will not only affect your ability to penetrate a market but determine the long-term viability of your goods or services in the targeted segment.

Some nations buy more from foreign countries than they sell, some sell more than they buy from abroad, and a rare few have roughly equal amounts in each category. The United States regularly runs overall “trade deficits” (buys more) with its partners while its major rival and trading partner, Japan, continually has “trade surpluses” (sells more) when matching exports to imports of goods and services. The disparity between the two largest economies dispels the notion that deficits are always bad and that surpluses are necessarily good.

The United States spurs its economic growth via internal consumption and is the foremost “consumer society” in the world, with its citizens having a very small rate of savings (less than 15 percent) and a high rate of spending. Japan takes the opposite tack, preferring to maintain its markets with exports and downplaying consumerism (at least compared to the United States). Japanese citizens regularly bank upwards of 30 percent of their income. Because of this differing approach to foreign products, most of the world’s marketeers, especially the Japanese, head straight for the U.S. market because of its ease of entry and consumer potential. Japan, meanwhile, continues to protect its producers with formal restrictions and informal distribution controls, although it has become somewhat more attractive to foreign firms as these restrictions have subsided. Additionally, while Japan’s per capita income is slightly higher than the United States’, the internal purchasing power of its currency is considerably less. Which market has the greatest longterm potential when viewed by a foreign firm? It should be clear that the respective governments of the two countries have made themselves extremely attractive to foreign marketeers through differing methodologies. NOTE: No nation likes to be seen as a dumping ground for another nation’s inferior or outmoded products, and all countries believe in reciprocity of trade. However, reciprocity isn’t equality, and too much inequality has major ramifications for international marketeers of all levels.