International Trade

International Trade -the importing and exporting of goods and services from and to other countries Open Economy -an economy that engages in international trade through importing and exporting -goods and services are traded in the international community -Ireland is a small open economy and is inter...

International Trade -the importing and exporting of goods and services from and to other countries Open Economy -an economy that engages in international trade through importing and exporting -goods and services are traded in the international community -Ireland is a small open economy and is interdependent with other economies -a measure of a country's openness is the fraction of GDP devoted to imports and exports -nearly 80% of Ireland's goods are exported (as we do not have a large enough domestic population to consume all of our outputs) while some countries like the USA and the United Kingdom are more closed economies with a smaller percentage of GDP devoted to imports and exports -Unit 6 Notes page 25 Benefits of Irish International Trade -economies of scale = large scale production enables Irish firms to produce goods at a cheaper price and compete on world markets, firms like Kerry Group enjoy economies of scale because they are producing for far larger markets than the domestic one -access to larger markets = business risks are reduced because of reduced dependence on the Irish domestic market of 5 million customers, the EU market alone of over 500 million consumers gives the opportunity for increased sales and profits for Irish firms, if Irish firms are to expand and grow they must do so on world markets -increased efficiency = increase in efficiency in production and therefore lower prices for consumers, trade increases competition, businesses are encouraged to be efficient because there are opportunities available for growth, if there were no free trade in a particular commodity then the opportunity for a business to control and exploit the 2 domestic market would be greater, Irish firms will have to become more efficient to survive -Ireland’s green image = Ireland's image abroad as a green, healthy and environmentally- friendly country is particularly helpful when marketing abroad, particularly in relation to tourism and food industries, our unspoilt pollution free image provides a USP for companies like Kerry Group plc when marketing abroad -IT developments = developments in information technology have made instant global communication possible for new and existing businesses, marketing and distribution have been helped enormously by the internet-email, videoconferencing etc -language of trade = English is an important international trading language and gives Ireland an advantage when doing business internationally, it is considered the language of trade and business -emerging markets = the opening of new emerging markets such as China (which is now the second biggest economy in the world) has created new opportunities for Irish exporters particularly in the food and drinks area -variety = international trading provides greater access to raw materials, skills, gods and services to Irish businesses as well as a variety of choice to Irish consumers Challenges for Irish International Trade -high cost base = raw materials, labour and insurance costs are higher in Ireland than in a lot of other countries thus making Irish products more expensive and less competitive in international markets, Irish manufacturers must maximise output and sustain high quality in order to remain competitive. -distribution costs = because of Irelands location, an island on the edge of Europe, distribution costs for exports are high, making Irish products less competitive,Irish firms must control cost to remain competitive -competition = global companies with their quality produce at competitive prices are a challenge for Irish exporters, Irish exporters will have to become more efficient and invest in R&D in order to provide products with a unique selling point -language differences = selling abroad often requires selling through a foreign language, this is especially true of the EU where 28 member states use 20 different languages, language differences affect many aspects of marketing such as product name, packaging, labelling advertising and selling 3 -exchange rate fluctuations = if the Euro increases in value, the price of Irish products in non-Euro countries increases, this leads to lower sales and profits for Irish exporters, if the value of the Euro decreases the price of foreign materials imported into Ireland increases, this increases costs for Irish businesses that have to import materials from non-euro countries (Unit 6 Notes page 33) -payment problems = Irish Companies may have difficulties getting paid for exports, different countries have different legal systems and the rules for recovering money from a debtor may be harder to enforce abroad than here in Ireland -customs duties = goods traded between EU and non-EU countries are subject to certain customs duties which increases the selling price of exports making them less competitive abroad -cultural differences = Irish firms must gain knowledge and consider the customs and culture of different countries when marketing products in foreign markets Barriers to International Trade -free trade between EU members didn't always exist, before joining the EU, countries protected themselves by imposing restrictions and barriers on foreign trade -protectionism refers to trade barriers imposed by governments to protect their home industries from foreign competition Protectionism -the imposing of trade barriers by governments to protect their home industries from foreign competition -measures are put in place to reduce imports and/or make them more expensive in the domestic market to protect home country jobs, protect specific domestic industries and to improve the nation’s balance of payments -imposing trade barriers may also be done for political or health reason -all protectionism barriers are imposed to protect home industries Protection Barriers 1. Tariffs 2. Quotas 4 3. Embargoes 4. Subsidies 5. Administrative Regulations Tariffs -taxes on imports which make them more expensive than home produced goods -this makes the imported goods less competitive on the domestic market thus consumers are more likely to buy the more competitive home produced products -eg the EU puts a tariff on New Zealand beef, US puts a tariff on Irish Whiskey Quotas -these limit the quantity of a particular product which may be imported in a specified period of time -limiting imports should help to increase the sale of domestically produced goods instead -eg EU has placed a quota on the amount of clothes from China that can be imported into the EU, US puts a quota on import of Japanese Cars Embargo -this bans certain products from being imported or exported into or out of a country -embargoes may be used as a protest against a country or for political, economic or environmental reasons -eg the EU placed a blanket embargo on the import of UK beef into the EU due to high levels of BSE in the UK Subsidies -this is financial assistance given to companies to help them keep prices low and help them become or remain competitive with international traders in home market -grants and payments from national governments to domestic firms to help them with their day-to-day operating costs -they allow businesses to lower their selling price to be more competitive and can give them a price advantage over imports 5 -eg the EU subsidises Irish agriculture industry to protect farmers from rival non-EU competition (EU subsidises almost €1.2 billion to Irish farmers annually) -Unit 6 Notes page 36 Administrative Regulations -these are administrative delays, such as customs checks and excessive paperwork, put in place to slow down imported goods -they make the importation of goods more cumbersome and time consuming this dissuading international competition from entering the market -eg if goods were held in Irish ports for weeks before customs approved them, the imports would be slower to market and it would add more shipping costs Deregulation -this is the reduction or elimination of legal trade barriers to entering an industry -it creates more competition which leads to increased efficiency and lower prices for consumers -eg EU deregulated the airline industry to allow more competition and to remove monopolies, this led to more choices for consumers and lower prices, in particular it led to the emergence of Ryanair Trading Bloc -a group of participating countries that allow free trade between them -there are no tariffs or trade barriers in place between them -countries can organise a free trade area, a customs union or a common market in order to reduce or eliminate barriers to trade Trading Bloc Types 1. Free Trade Area 2. Customs Union 3. Common Market 6 Free Trade Area -in a free trade area a group of countries agrees that the member countries can trade freely with either reduced or no tariffs or barriers imposed on one another -eg the North American Free Trade Agreement (NAFTA) is an agreement between North America, Canada and Mexico, this agreement is due to become the USMCA (the United States-Mexico-Canada Agreement) Customs Union -this is more advanced than a free trade area -in a customs union, member countries agree to trade freely (without tariffs on trade between them) and impose common tariffs on countries that are outside the union -eg the European Union is a customs union and impose common tariffs on countries such as USA (Unit 7 Notes page 5) Common Market -also known as a single market -this is the first significant step towards full economic integration -member countries trade freely in all economic resources, not just tangible goods -all barriers to trade in goods, services, capital and labour are removed -it can have common policies and harmonisation of taxes (members agree to have the same taxes, such as corporation tax) -eg EU has a Common Fisheries Policy (CFP) that applies to Member States (Unit 7 Notes page 21) Imports -the purchase of goods and services by someone in Ireland from abroad -money leaves Ireland -imports can be visible or invisible Reasons for Importing -raw materials = to avail of natural resources and raw materials that are not available in Ireland eg oil 7 -unsuitable climate = to avail of products and raw materials that cannot be produced in Ireland due to our climate eg coffee -unfeasible domestic production = to avail of products and services that would be unfeasible to produce in Ireland due to our population size and geographic location eg no cars are manufactured in Ireland -services = certain services simply cannot be availed of in Ireland eg ski holidays -choices = to provide greater variety choice to Irish consumers eg German beer Visible Imports -the purchase of physical goods by someone in Ireland from abroad -money leaves Ireland and goes to foreign countries -goods enter Ireland from foreign countries -eg Irish people buying wine from France Invisible Imports -the purchase of foreign services by someone in Ireland from abroad -money leaves Ireland and goes to foreign countries -foreign services are sold to Irish customers -eg Irish people holidaying in Spain Import Substitution -when domestic producers start to make and sell a good that is currently imported into the country -they offer an Irish version of a product to compete with foreign competition -eg Ireland used to rely on Clarins, Filter by Molly Mae and St. Tropez for fake tan, but Cocoa Brown and Bare by Vogue are Irish-produced fake tans that have been launched to compete with these imported goods Exports -the purchase of Irish goods and services by someone abroad -money enters Ireland -exports can be visible or invisible 8 Reasons for Exporting -foreign currency = to obtain foreign currency needed to buy our imports -market access = the domestic Irish market is small with a population of 5 million, exporting to countries like China with a population of 1.4 billion means more potential customers and more potential sales -diversification = business risks are reduced because of reduced dependence on the Irish domestic market of 5 million customers, businesses can diversify their market portfolio to not only rely on the Irish market for sales -business expansion = if Irish firms are to expand and grow they must do so on world markets beyond our market of 5 million potential customers, selling to more markets and customers means more job creation, business expansion and profits -economies of scale = large scale production to meet export demands enables Irish firms to produce goods at a cheaper price and compete on world markets Opportunities for Irish Exporters -technology = improvements in technology have had a positive impact on Irish exporters, making communications simpler and instantaneous worldwide, internet allows Irish exporters to market their goods internationally online, it has made communication between different branches of the business across different locations cheaper because of video-conferencing and email, business websites and selling through Facebook and Google has made it easier to reach new markets -new emerging markets = the growth of China and Japan has given Irish exporters big opportunities to move into new markets, such as Irish food and drink products. Ireland is Europe's largest exporter of powdered infant formula -world trade organisation WTO = a forum for governments to negotiate trade agreements, its goal is to encourage global trade between countries, it wants countries to trade more openly and tries to encourage the removal of any barriers to trade, which helps new markets emerge -reduced risks = diversification occurs by selling in new markets and Irish exporters will also benefit from economies of scale by increasing output for larger markets, which should increase the competitiveness of their business. 9 -green image = Ireland's ancient Celtic culture and unspoiled, pollution-free image provides a unique selling point for companies such as Kerry Group PLC when marketing food products abroad Challenges for Irish Exporters -globalisation = Irish businesses have higher costs of production than many other countries, this means that the growth of global companies with their quality produce at competitive prices is a challenge for Irish exporters, Irish export companies will have to become more efficient and invest in research and development in order to provide products with a unique selling point to survive the competitive threat from global companies -currency fluctuations = as the euro strengthens, for example, against the US dollar or sterling, Irish exports become more expensive, leading to a decline in sales to these very important international markets -international differences = a knowledge of customs, culture and language is important in order to market products without causing offence in new markets, Irish exporters might need to adapt their products, making some foods sweeter or changing the colour of the packaging, to suit different markets' tastes Visible Exports -the purchase of physical Irish goods by a foreigner abroad -money enters Ireland from foreign countries -goods leave Ireland to foreign countries -eg Irish beef exported to the United Kingdom Invisible Exports -the purchase of Irish services by a foreigner -money enters Ireland from foreign countries -Irish services are sold to foreign customers -eg a French person using an Irish online personal trainer 10 Measuring International Trade -the balance of payments and the balance of trade measures Ireland’s levels of international trade Balance of Trade -measures the difference between physical goods being sold out of and into a country during the course of a year -the difference between visible exports and visible imports -if visible exports are greater than visible imports, there is a balance of trade surplus -if visible exports are less than visible imports, there is a balance of trade deficit -BOT = visible exports - visible imports -BOT = VX - VM -VX > VM = BOT surplus -VX < VM = BOT deficit Balance of Invisible Trade -measures the difference between services being sold out of and into a country during the course of a year -the difference between invisible exports and invisible imports -if invisible exports are greater than invisible imports, there is a balance of invisible trade surplus -if invisible exports are less than invisible imports, there is a balance of invisible trade deficit -BOIT = invisible exports - invisible imports -IX > IM = BOIT surplus -IX < IM = BOIT deficit Balance of Payments -measures the total amount of money entering and leaving a country during the course of a year -the difference between total exports (visible and invisible) and total imports (visible and invisible 11 -if total exports are greater than total imports, there is a balance of payments surplus -if total exports are less than total imports, there is a balance of payments deficit -BOP = total exports + total imports -or calculated as BOP = balance of trade +/- balance of invisible trade -TX > TM = BOP surplus -TX < TM = BOP deficit Measuring Trade € € Visible Exports 3420 Invisible Exports 1840 Total Exports 5260 Visible Imports 2880 Invisible Imports 2010 Total Imports 4890 Balance of Trade € Visible Exports 3420 Visible Imports 2880 Balance of Trade 540 surplus Balance of Invisible Trade € Invisible Exports 1840 Invisible Imports 2010 Balance of Invisible Trade (170) deficit Balance of Payments € Balance of Payments € Balance of Trade 540 Total Exports 5260 Balance of Invisible Trade (170) Total Imports (4890) Balance of Payments 370 surplus Balance of Payments 370 surplus 12 International Economy Effects on Ireland Trend Explanation Irish Impact Currency Fluctuations Sterling weakened versus the Euro between 2015 and 2019. This lowered the spending power of UK citizens who wanted to buy Irish exports. Irish exports have become more expensive compared to domestically produced goods in the UK. MNCs in Ireland Ireland's skilled workforce, language, EU membership and low corporation tax (12.5%) has attracted huge MNCs, such as Facebook, Google and Pfizer. Ireland exports a lot of the goods and services MNCs produce. If they choose to relocate due to rising costs or changes to tax rates, Irish exports would fall. Protectionism Increases Donald Trump has introduced tariffs on imports and the United Kingdom has voted to leave the European Union, which might lead to the introduction of trade barriers. If tariffs are imposed on exports to the United Kingdom, Irish sales will fall, as Irish goods will be more expensive for UK consumers. The agri-food sector will be hit hard. Emerging Markets The economies of China, India, Brazil, Russia and Turkey are all growing and they are transitioning from developing to developed countries. This presents opportunities for Irish exporters, as income levels will rise in these markets, but Ireland will also face more competition from increased imports. New EU Member States Eastern European countries, such as the Czech Republic, Hungary and Slovakia, have opened their economies and have lower wage rates and costs than lots of Irish exporters. Many of these countries are excellent producers of agricultural products and can offer quality at a lower price to the European consumer. Technology Developments in technology such as email, internet & video conferencing have speeded up communication and decision making. This makes it easier for Irish firms to market their products/services in foreign markets. E-commerce/business has enabled Irish businesses to advertise business worldwide. Employees can now work from anywhere in the world through technological advancements such as Teams, reducing business office costs. New Trading Blocs The EU is a trading bloc which allows free trade among its members. Other trading blocks NAFTA (soon to be USMC) and APEC (Asia Pacific Economic Cooperation). As an EU member, Ireland can trade freely with other countries in the EU without any barriers or restrictions and offers a wider marketplace (500million) for Irish foods and services due to the growth in membership. Provides greater challenges in competing abroad in non-EU blocs eg APEC