Introduction to Global Trade Forces

Introduction to Global Trade Forces

What you’ll learn to do: identify and describe forces that affect global trade

In this section, you’ll learn about the range of forces that affect global trade. These forces include everything from culture and politics to the natural environment.

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1. Sociocultural Differences

Culture refers to the influence of religious, family, educational, and social systems on people, how they live their lives, and the choices they make. Business always exists in an environment shaped by culture. Organizations that intend to sell products and services in different countries must be sensitive to the cultural factors at work in their target markets. Even cultural differences between different countries—or between different regions in the same country—can seem small, but businesses that ignore them risk failure in their ventures.

Culture is complex, and fully appreciating its influence takes significant time, effort, and expertise. Certain features of a culture can create an illusion of similarity, but businesses need to delve deeply to make sure they truly understand the people and environments in which they work. Even a common language does not guarantee similarity of interpretation. For example, in the U.S., we purchase “cans” of various grocery products, but the British purchase “tins.” In India, where English is one of a number of officially recognized languages, “matrimonial” is used as a noun in casual conversation, referring to personal ads in newspapers seeking marriage partners.

Several dimensions of culture that require particular attention from global businesses are listed below.

Language

The importance of language differences can’t be overemphasized, and there are nearly three thousand languages in the world. Language differences can be a challenge for businesses designing international marketing campaigns, product labels, brand and product names, tag lines, and so on. Finding a single brand name that works universally in terms of pronunciation, meaning, and “ownability” is a monumental challenge. Of course, correct and grammatical use of language in business communication is essential for a product, brand, or company to be viewed as credible, trustworthy, and of high quality.

The language issue becomes more complicated when a country has more than one officially recognized language. To illustrate, in Canada, national law requires that labels include both English and French. In India and China, more than two hundred different dialects are spoken. India has more than twenty officially recognized languages. Mainland China’s official spoken language is Standard Chinese, and several autonomous regions have designated other additional official languages. Meanwhile, in Hong Kong and Macau, Cantonese Chinese, English, and Portuguese are the official languages. Clearly, language can quickly become a very challenging issue for businesses!

Finally, businesses should be attuned to what they communicate when they choose which languages to use—or not use. In Eastern Europe, for example, the long history of Soviet occupation during the Cold War has left many inhabitants with a negative perception of the Russian language. Products that carry Russian labeling may suffer accordingly.

Customs and Taboos

All cultures have their own unique sets of customs and taboos. It’s important for businesses to learn about these customs and taboos so they’ll know what is acceptable and unacceptable for their foreign operations. For example, in Japan, the number four is considered unlucky, and product packages containing four items are avoided by many consumers. In Middle Eastern countries where Islamic law is strictly observed, images displaying the uncovered arms or legs of the female body are considered offensive. Meanwhile in Egypt, where many women wear the headscarf or hijab in public, an increasing number of younger women are in work and educational settings where gender segregation does not exist. Businesses struggle with whether to portray women with or without the hijab, knowing that they risk offending some of their target audience with either choice. Businesses should seek guidance from native experts familiar with local culture and customers.

Values

The role of values in society is to dictate what is acceptable or unacceptable. Values are part of the societal fabric of a culture, and they can also be expressed individually, arising from the influence of family, education, moral, and religious beliefs. Values are also learned through experiences. As a result, values can influence consumer perceptions and purchasing behavior. For example, consumers in some countries, such as the United States, tend to be individualistic and make many purchasing decisions based on their own personal preferences. In other countries, such as Japan, the well-being of the group is more highly valued, and buying decisions are more influenced by the well-being of the group, such as the family. Based on these differences in values, it is not surprising that ads featuring individuals tend to do better in countries where individualism is an important value, and ads featuring groups do better in countries where the group’s well-being is a higher value.

Time and Punctuality

Different cultures have different sensitivities around time and punctuality. In some countries, being slightly late to a meeting is acceptable, whereas in other countries, it’s very insulting. For cultures that highly value punctuality, being on time is a sign of good planning, organization, and respect. In cultures where precise punctuality is less important, there is often a greater emphasis on relationships. The fact that a meeting happens is more important than when it happens.

While there are cultural stereotypes about time management (such as the laid-back “island time” many residents of island nations refer to), the best rule of thumb in business is to be punctual and meet deadlines as promised. You will not insult people by following this rule. Also, it’s wise not to apply popular stereotypes to individual people for whom the cultural stereotype may or may not be true. You should let a person’s behavior speak for itself, and always treat others with the same level of courtesy you would expect from them.

Business Norms

Business norms vary from one country to the next and may present challenges to foreigners not used to operating according to the particular norms of the host country. In business meetings in Japan, for example, it’s expected that the most senior person representing an organization will lead the discussion, and more junior-level colleagues may not speak at all. The role of alcohol in business meetings varies widely by culture: in Middle Eastern cultures where alcohol is forbidden, it may be insulting to serve or even offer an alcoholic beverage. In China, many rounds of toasts are customary as part of formal dinner meetings.

Likewise, business norms around greetings and physical contact also vary. American-style handshakes have become accepted as a business norm in many cultures, but this custom is not universal. In Japan and some other Asian cultures, a respectful bow is the traditional business greeting, although the handshake is becoming more common. In Islamic cultures, contact between men and women is a sensitive issue, even in business settings. In those regions and cultures, it’s best to shake hands with a woman only if she extends her hand first. Similarly, Western women may avoid causing embarrassment by shaking hands only if a hand is extended to her. In India, the namaste (a slight bow with hands brought together on the chest) remains a respectful, if traditional, business greeting particularly when interacting with women and older people.

Always seek guidance from a trusted colleague or friend who has experience in the local customs and can offer coaching on proper etiquette.

Religious Beliefs and Celebrations

As discussed earlier in this module, religious beliefs and practice can strongly influence what consumers buy (or don’t buy), when and where they shop, and how they conduct business. It’s important for companies to understand the influence of religion on consumer culture in the markets where they operate, so that their business activities can be appropriately sensitive. Failing to respect religious beliefs or cultures can seriously undermine the reputation of a company or brand. At the same time, businesses that are attuned to the impact of religion on culture can more easily integrate their operations and employees into the local culture.

For example, all the major world religions observe holidays that include feasting and gift giving. These festival seasons tend to be prime shopping seasons as well. Holidays originating from the prominent religion of a country or region create sensitivities about certain products: in the Hindu religion, cows are considered sacred, and people refrain from eating beef. Observant Jews and Muslims consider pork unclean, and they consume only kosher or halal meats, respectively. Many religions eschew alcohol: for example, devout Sikhs, Muslims, Mormons, Buddhists, and conservative Southern Baptists all refrain from drinking.

Religious beliefs may cause sensitivities around revealing images or sexually suggestive material. Religious beliefs associated with the symbolism of different colors may create either preferences for or rejection of certain products. The link between religious practice and gender roles may affect which members of the family influence which types of buying decisions. It is important, however, for businesses not to oversimplify how decision making happens in these settings. Even if a woman, for example, is not the primary buyer, she may exercise strong influence of many consumer decisions. Here, as in other areas of cultural impact, is it crucial for businesses to educate themselves about the people and cultures they are targeting for business in order to use cultural knowledge to their advantage.

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2. Political and Economic Differences

The political economy of a country refers to its political and economic systems, together. The political system includes the set of formal and informal legal institutions and structures that comprise the government or state and its sovereignty over a territory or people.

As you know, political systems can differ in the way they view the role of government and the rights of citizens (compare, for example, the market economy of Canada with the command economy of North Korea). The economic system refers to the way in which a country organizes its economy: most are command, market, or mixed economies.

The nature of a country’s political economy plays a big role in whether it is attractive to foreign business and entrepreneurship. Historically, there has been a direct relationship between the degree of economic freedom in a country and its economic growth—the more freedom, the more growth, and vice versa. For decades, the Chinese government maintained an ironclad grip on all business enterprise, which effectively prevented foreign businesses from fully engaging with the Chinese market. That climate has tempered, however, and now the political economy of China is much more open to foreign investment, though it is still not as open as Europe or the U.S.

Businesses seeking global opportunities must consider other economic factors beyond a country’s political economy. For one thing, they will want to target the markets and countries where people have the highest incomes and the most disposable income. The world map below shows just how much variation there is in the gross national income (GNI) per person among the nations of the world.

If you want more information about GNI per country, you can download the World bank dataset of 2016 GNI (atlas method) by country or you can visit the World Bank website to browse datasets including GNI.

However, often those markets are not where new opportunities exist, so businesses have to pursue what economists refer to as “emerging markets.” The four largest emerging and developing economies are the BRIC countries (Brazil, Russia, India, and China). One means of measuring a country’s level of economic development is by its purchasing power parity (PPP), which enables economists to compare countries with very different standards of living. The PPP for a given country is determined by adjusting up or down as compared to the cost of living in the United States.

India has the world’s second-largest mobile-phone user base: 996.66 million users as of September 2015. Shown here is a rooftop mobile phone tower in Bangalore.

However, there is often more to a country’s economic story than its PPP or GNI. Consider India: as an emerging market, India is attracting significant attention from businesses all around the globe. It has the second-fastest-growing automotive industry in the world. According to a 2011 report, India’s GDP at purchasing power parity could overtake that of the United States by 2045. During the next four decades, Indian GDP is expected to grow at an annualized average of 8 percent, making it potentially the world’s fastest-growing major economy until 2050. The report highlights key growth factors: a young and rapidly growing working-age population; growth in the manufacturing sector because of rising education and engineering skill levels; and sustained growth of the consumer market driven by a rapidly growing middle class.

At the same time, surveys continue to emphasize the chasm between two contrasting pictures of India—on one side, an urban India, which boasts large-scale space and nuclear programs, billionaires, and information technology expertise; and a rural India on the other, in which 92 million households (51 percent) earn their living by manual labor. In 2014, a report by the Indian Government Planning Commission estimated that 363 million Indians, or 29.5 percent of the total population, were living below the poverty line.

Another aspect of a country’s political economy is the stability of its current government. Business activity tends to grow and thrive when a country is politically stable. When a country is politically unstable, multinational firms can still conduct business profitably, but there are higher risks and often higher costs associated with business operations. Political instability makes a country less attractive from a business investment perspective, so foreign and domestic companies doing business there must often pay higher insurance rates, higher interest rates on business loans, and higher costs to protect the security of their employees and operations. Alternatively, in countries with stable political environments, the market and consumer behavior are more predictable, and organizations can rely on governments to enforce the rule of law.

As you can see, the desirability of a country as a potential market or investment site depends on a host of complex, interrelated factors.

Exchange Rates

To further complicate matters, conducting business globally involves the uncertainty of exchange rates. An exchange rate is the value of one country’s currency relative to the value of another country’s currency. For example, the exchange rate for the U.S. dollar relative to the Japanese yen has ranged from 1:105 to 1:115 in the last year. At a current exchange rate of $1 to  ¥111.81, the United States dollar (US$) could be exchanged for 111.81 Japanese yen (JPY, ¥) and, vice versa, ¥111.81 could be exchanged for US$1.

Currency exchange rates have been based on a variety of mechanisms over time, including fixed, floating, and managed floating systems. For example, the United States used to fix the value of the dollar relative to gold, a practice known as the “gold standard.” The International Monetary Fund classifies exchange rate mechanisms based on the role of a country’s Central Bank and/or government in managing exchange rates. The two extremes are a market-based or floating system, in which exchange rates are “largely set by market forces” and a fixed system, in which the official rate is set by a country’s authorities. A third category includes all other mechanisms that are used to maintain a stable currency value relative to another currency or a composite of currencies.^[1]

Most industrialized nations now use a floating currency exchange system managed by a Central Bank. In the United States, the Federal Reserve System is the Central Bank. The Fed, as it’s known, is charged with regulating money policy, including the money supply and interest rates, and, by extension, the value of the country’s currency. Thus, the relative value of a currency is largely determined by supply and demand, including Central Bank or government action, investment and trade. For example, higher interest rates will increase demand and therefore the value of a given country’s currency. Similarly, if investment opportunities are perceived to be relatively better in a country, the desire to invest will increase demand for the currency and the currency’s relative value.

The video below will provide a complete picture of exchange rates and how they impact trade:

You can view the transcript for “Imports, Exports, and Exchange Rates: Crash Course Economics #15” (opens in new window).

As the video noted: “Trade between countries depends on the demand for a country’s goods and services, political stability and interest rates. But one of the most important factors is exchange rates.” Exchange rates are a key risk factor for multi-national and global businesses, and, as The Trump Administration’s “America First” trade policy has illustrated, for national businesses with global supply chains. If the U.S. dollar appreciates or increases in value relative to other currencies, national consumers may benefit (at least initially) because imports and international travel is relatively cheaper. However, a stronger dollar makes exports more expensive, reducing export revenue, and, potentially, resulting in a loss of jobs in related businesses or industries.

Clearly, exchange rate fluctuations can change the underlying fundamentals of a business investment or trade agreement. An unfavorable change in the exchange rate can increase the cost of resources, including labor, raw materials, and intermediate goods, and the relative value of a finished product or completed service. Relatively stable exchange rates provide an economic environment that decreases the risk inherent in working across borders and political economic systems and gives businesses the confidence to make investment and expansion decisions, and, therefore, to contribute to economic growth and prosperity.

1. "Conversion Rates - Exchange Rates - OECD Data." OECD. Accessed June 24, 2019. https://data.oecd.org/conversion/exchange-rates.htm. ↵

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3. Legal Differences

Governments around the world maintain laws that regulate business practices. In some countries, these laws are more heavy-handed, and in others, the business climate is less regulated and structured. Some laws and regulations, such as ones governing property rights and contracts, are designed to create a stable environment for business (both domestic and international)—by establishing and enforcing property rights and contracts, for example. Others are designed to protect consumers and the environment, requiring businesses to adhere to responsible, safe, and ethical practices. Still other laws and regulations privilege domestic businesses and protect or partially shield them from foreign competition. There are even laws and regulations that affect what marketers are allowed to include in marketing communications, although these are more strict in some countries than in others. And of course, some laws and regulations deal with taxation and other costs of conducting business.

Businesses must understand and conform to the legal and regulatory environments of the countries and regions in which they operate. The following is a short list of common regulatory areas that affect businesses globally:

In some cases, international laws and regulations designed to simplify these issues among regional allies and economic partners may also apply.

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4. Physical and Environmental Differences

Physical and environmental factors can have a significant impact on a company’s ability to do business in a foreign country. Some developing countries lack the infrastructure, such as roads, railways, and port systems needed to transport goods, or they may not have adequate storage facilities. You can imagine that this would be a major barrier for businesses trying to sell fresh food or perishable goods. Add to that the limited access to electricity, clean water, and sanitation in many parts of the world, and you begin to understand some of the practical and logistical challenges of doing business globally.

A country’s natural environment and the surrounding regulations aimed at protecting it may pose additional challenges. Many governments require foreign companies to undergo a complex permitting process if any of their planned activities will adversely affect the environment. Even in developing countries, minimum standards for air emissions, waste disposal, and hazardous-material handling are becoming the norm, and in places where such regulations are weak or lacking, companies often face considerable pressure from local residents and consumer groups to clean up their act or leave. While all of these challenges can make companies think twice about setting up shop in a foreign country, the growing trend of corporate social responsibility shows that more companies are devising creative, collaborative solutions to doing global business more sustainably.

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5. Tariff and Nontariff Trade Restrictions

Although many people find it hard to imagine, not every nation welcomes the expansion of businesses into their country. When a nation seeks to restrict the flow of incoming foreign goods and services, economists refer to this as trade protectionism. Protectionism is the economic policy of restraining trade between countries through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to foster fair competition between imports and domestically produced goods and services.

According to proponents, protectionist policies protect the businesses and workers within a country by restricting or regulating trade with foreign nations. The doctrine of protectionism contrasts with the doctrine of free trade, according to which governments reduce the barriers to trade as much as possible. There is a broad consensus among economists that the impact of protectionism on economic growth and prosperity is largely negative.

Let’s take a closer look at several of the most common tools used by nations hoping to protect local industry through trade restrictions.

Import Tariffs

Import tariffs are simply a type of tax that is levied on goods and services coming into a country. They increase the price of imported goods and services, since the businesses pass the cost of the tariff on to consumers. Tariffs benefit local producers of goods and services while generating revenue for the government. They are one of the oldest forms of trade protectionism, one of the easiest to implement, and the most common subject of trade-agreement negotiations.

Nontariff Restrictions

Import quotas are another means of restricting the flow of foreign goods into a local economy. An import quota is exactly what its name implies: a limit on the amount or quantity of a particular good or service that can be imported into a country. Although not as common today as they have been historically, import quotas seek to protect local businesses from a flood of cheap foreign imports. Many countries have passed “antidumping” laws aimed at foreign imports that they believe are priced below fair market value. Dumping is when a company exports a product at a price lower than the price it normally charges in its own home market. The economic impact of an import quota is similar to that of a tariff, except that the tax revenue generated by a tariff is instead paid to those who possess import licenses.

When a country is reluctant to impose quotas and tariffs, another way it can protect domestic markets is with local content requirements. Local content requirements are set by the government and require foreign businesses to use a certain quantity of local labor, resources, and/or suppliers in their operations. This kind of trade restriction has been a point of contention in recent trade negotiations between the United States and India. India’s government has been aggressive about using local content requirements to its “Made in India” program, which it hopes will establish India as an international manufacturing hub. The United States and other countries argue that India’s policies are detrimental to foreign competition. The situation is currently under review by the World Trade Organization, and given the size of the Indian economy, the rest of the world is watching.

The most extreme form of trade restriction is the embargo. An embargo is an official ban on trade or other commercial activity with a particular country. The reasons for a country to place an embargo on another country range from human rights violations to ideological differences to national security interests. Embargoes are considered strong diplomatic measures imposed in an effort, by the imposing country, to elicit a given national-interest result from the country on which it is imposed. Although trade and commercial activities are barred under an embargo, medical and humanitarian supplies are usually exempt. The most enduring of all trade embargoes is the United States’ embargo against Cuba, which has been in effect for almost 59 years. Although diplomatic relations were re-established and some restrictions eased under President Barack Obama, the trade embargo, which requires an act of Congress to rescind, has remained in force. Restrictions were re-established by President Trump, and diplomatic relations with Cuba have deteriorated. This embargo has not come without contest. For the last 26 years, the UN General Assembly has passed an annual resolution condemning the embargo and declaring it a violation of international law.

As you can see, global trade restrictions can be as narrow as a tariff on a particular imported good or as broad as an embargo, which stops the flow of goods and services between countries altogether. Since these types of restrictions are imposed by governments, businesses have no choice but to follow their rules—even when it means walking away from a lucrative opportunity.

The following video discusses the effects of different kinds of trade restrictions.

You can view the transcript for “Episode 36: Types of Trade Restrictions” (opens in new window).

LICENSES AND ATTRIBUTIONS

CC LICENSED CONTENT, ORIGINAL

• Introduction to Global Trade Forces. Authored by: Linda Williams and Lumen Learning. License: CC BY: Attribution
• Revision and adaptation. Authored by: Linda S. Williams and Lumen Learning. License: CC BY-SA: Attribution-ShareAlike
• Political and Economic Differences. Authored by: Linda Williams and Lumen Learning. License: CC BY-SA: Attribution-ShareAlike
• Exchange Rates. Authored by: Nina Burokas. Provided by: Lumen Learning. License: CC BY: Attribution
• Legal Differences. Authored by: Linda Williams and Lumen Learning. License: CC BY: Attribution
• Reading: Physical and Environmental Factors. Authored by: Linda Williams and Lumen Learning. License: CC BY: Attribution
• Tariff and Nontariff Trade Restrictions. Authored by: Linda Williams and Lumen Learning. License: CC BY: Attribution