Thursday, March 24, 2011

The Environment of Global Trade

Capital movements (not trade) are driving forces of the world economy

Production is ‘uncoupled’ from employment e.g security guards in India using webcams

Primary products have become uncoupled from the industrial economy e.g steel from South America into Europe

the world economy is in control

75-year contrast between capitalism and socialism is over

Barriers to Trade

Tariff barriers - direct taxes on imports

Bahamas has 30% on all goods

Australia and US impose on cars and agricultural goods e.g Japanese manufacture in Australia

Average now 5% was 25% in1945

Non-tariff Barriers

Increased govt. participation, US wheat subsidy

Customs entry procedures

Quotas (quantitative restriction) US textile imports from China

Forms of Market Agreement

Free Trade Area - remove all tariffs amongst members

e.g NAFTA USA/Canada Mexico

e.g EEA (European Economic Area) EU, EFTA and LAFTA

Customs Unions - as above but with common external barriers

e.g EC prior to 1993.

Common Market - as above but also the free flow of all factors of production

e.g EU since 1993

Economic Union -

common market characteristics are combined with the harmonisation of economic policy.

Supranational authority to design policy for a group of nations

objective of Maastricht Treaty in 1991. EU was formed in 1993.Monetary Union commenced in 1999. Now political union in 2000’s? More convergence and less national autonomy?

Competitive Rivalry

Entry is likely

Substitutes threaten

Buyers or suppliers exercise control

Competitors are in balance

There is slow market growth

Global customers increase competition

There are high fixed costs in an industry

Markets are undifferentiated

There are high exit barriers

Competitive Rivalry - motor industry

Buyer power

There is a concentration of buyers

There are many small operators in the supplying industry

There are alternative sources of supply

Components or materials are a high percentage of cost to the buyer leading to “shopping around”

Switching costs are low

There is a threat of backward integration

Bargaining power of buyers - Wal-Mart

Supplier power

There is a concentration of suppliers

Switching costs are high

The supplier brand is powerful

Integration forward by the supplier is possible

Customers are fragmented and bargaining power low

Bargaining power of suppliers - Bill Gates - Microsoft

Threat of substitutes

Substitutes take different forms:

Product substitution - Bt for Orange

Substitution of need - international not local calls (satellites not wires)

Generic substitution - mobiles for land based telephones

Doing without - no communication

Threat of substitutes - KFC China

The threat of entry

Dependent on barriers to entry such as:

Economies of scale

Capital requirements of entry

Access to distribution channels

Cost advantages independent of size (eg the

“experience curve”)

Expected retaliation

Legislation or government action


New Entrants - Citibank

Citibank - ‘Firstmover’

High brand recognition

More positive brand image

More customer loyalty

More distribution

Longer market experience

Country- Specific Advantages (CSAs)

E.g low cost production of Volkswagens in Portugal

Comparative advantage - e.g France apples, UK lamb

International Product Cycle (IPC) - Raymond Vernon 1966

USA production shifted over time to new locations

USA begins to export goods and technology

Countries such as Korea then become low cost producers and export back to USA

Porter’s Determinants of National Advantage (1990)

National Competitive Advantages

Factor conditions e.g skilled labour, infrastructure

Demand conditions e.g. ‘home’ demand for the product of service

Related and supporting industries e.g raw materials, components

Firm strategy, structure and rivalry

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