International Business and E-Business

In Year One, you were introduced to the concept of international business, including its meaning, importance and the operations of multinational corporations. In this section, we are going to delve into different approaches to international business such as franchising, joint venturing, licensing and wholly owned subsidiaries. During these lessons, we will also cover the meaning and differences between domestic and international trade, the reasons and basis for international trade and introduce you to the types of documents used in trading and specific to international trade. Finally, we will start to look at the various restrictions in international trade, why they are in place, as well as looking at the benefits and challenges of international trade.

Key Ideas

• Acquisition: This is when one company buys another company. The acquiring company takes over the purchased company’s assets and operations.

• Franchising is a way of doing business where one person (the franchisee) buys the right to operate a company using the brand and business methods of another person or company (the franchisor).

• Joint venture: This is when two or more companies come together to work on a specific project or business. They share resources, risks and profits but remain separate businesses.

• Local market: The area or community where a business sells its products or services. It focuses on the customers who live and work in that particular region.

• Wholly owned subsidiary (WOS): A business that is fully owned by another company (parent).

In this lesson, we will start by looking at franchising and explore its advantages and disadvantages as an approach in international business.

Franchising Franchising is an approach to international business which involves a party or company (the franchisor) expanding its brand and business operations into foreign markets by granting local businesses (the franchisees) the rights to use or operate under its brand name and use its business model. The franchisor gives the right to the franchisee to use its trademark, products, etc., for the franchisee to pay a royalty (fee) to the franchisor for using the business model. It allows the franchisee to start a business without facing much risk as the franchisee has access to the established brand, products and systems.

Table 4.1: Key Elements of Franchising in International Business Franchise Agreement The franchise agreement is a contract which outlines the terms and conditions of the franchise relationship, including the duration, fees, royalties, territory and obligations of both parties.

The contract ensures that the franchisee adheres to the franchisor’s established business practices and standards.

Franchisor The franchisor is the company that owns the brand, business model and intellectual property.

They provide the franchisee with the rights to operate a business using their established systems, trademarks and support services.

For example, KFC could give the right to local businesses to use their name to operate.

Franchisee A franchisee is the person or business that buys the rights to operate a branch of a larger company (called the franchisor).

The franchisee pays fees and agrees to follow the rules and guidelines set by the franchisor to sell the company’s products or services.

In return, the franchisee gets to use the brand name and benefits from the company’s support and reputation.

Advantages of franchising as an approach to international business The advantages of franchising in the context of international business include:

1. Brand Recognition and Market Penetration: Franchising helps build brand recognition and achieve market penetration more effectively. As franchisees open new locations, the brand becomes more visible and accessible to a broader market, which enhances brand recognition, loyalty and drives overall business growth.

2. Operational Efficiency: Within the franchise model, franchisors provide franchisees with a proven business model, comprehensive training and ongoing support. This makes it possible for the franchisor to maintain operational efficiency and quality control through established systems and processes. This ensures that the franchisee operates well and upholds the brand’s standards, leading to efficiency and customer satisfaction.

3. Rapid Market Expansion: Businesses can quickly expand and move into new markets without bearing the full cost and risk of opening new locations themselves. By leveraging the resources and local knowledge of franchisees, companies can establish a presence in multiple locations simultaneously.

Franchising is good in international markets where local expertise is needed to help navigate regulatory and cultural differences.

4. Reduced Financial Risk: Securing the right to use the brand name of a well- established company minimises the financial risk for the franchisor as the franchisee typically provides the capital needed to open and operate the new unit. This risk-sharing model allows the franchisor to grow its brand and business footprint without significant capital investment, reducing the financial burden and exposure associated with direct expansion.

5. Local Market Knowledge: The local businesses (franchisees) bring with them valuable local market knowledge and expertise, which can enhance the franchisor’s ability to succeed in diverse markets. Franchisees are often local entrepreneurs who understand their market, local regulations and competitive dynamics. This local insight can help tailor the franchised business to better meet the needs of the local market.

6. Economies of Scale: When a franchisor has many franchisees, they can get better deals from suppliers, spend marketing money more wisely and create consistent training programs. This helps both the franchisor and franchisees save money and earn more profit.

7. Enhanced Innovation and Adaptability: Different opinions from franchisees in different markets can create new ideas and ways of doing things that make the whole business better. Franchisors can use this feedback to change and improve what they offer, helping them stay relevant and competitive in the market.

Disadvantages of franchising as an approach to international business Whilst there are many advantages to operating as a franchise in international business, there are potential drawbacks, as listed below.

1. Conflict: Disagreements can occur about issues like fees, area rights, marketing plans and how to run the business. These conflicts can hurt relationships and disrupt business activities, sometimes needing legal help or mediation. They could also reduce profits for both businesses.

2. Loss of Control: Franchisees need to follow the rules set by the franchisor, but they can still make some decisions on their own. Since franchisors do not have much control over how franchisees run their businesses every day, this can sometimes lead to differences in the quality of service. If franchisees do not stick to the brand’s standards, it could harm the brand’s reputation.

3. Quality Control Issues: Making sure that every franchise location provides the same level of quality can be tough. Differences in how local managers run things and their experience and dedication to the brand can lead to different levels of service and product quality. This can harm the brand’s reputation and make customers less satisfied.

4. Intellectual Property Risks: Protecting trademarks and brand identity in foreign countries can also be hard. Franchisees might not use the franchisor’s intellectual property properly, which could lead to legal problems and loss of business advantages.

5. High Initial and On-going Costs: Both franchisors and franchisee may face high startup and ongoing costs. Franchisors spend a lot on setting up and supporting the franchise system, including training and marketing. This can be a heavy financial burden, especially if profits fall short.

6. Dependency on Franchisees: If franchisees do not succeed, it can hurt the franchisor’s income and reputation. Underperforming franchisees may lead to a lower presence in the market and reduce customer trust.

7. Complexity of International Operations: Running franchise operations internationally can be difficult and demanding. Expanding into new countries means dealing with different cultures, laws and logistics, which can be tough and expensive for both franchisors and franchisees.

Case Study

KFC (Kentucky Fried Chicken) is one of the largest and most successful fast- food chains in the world. The brand entered Ghana in 2011 through a franchise agreement with Masco Foods, a subsidiary of Mohinani Group. By leveraging KFC’s globally recognised brand, established operational procedures and extensive training programs, Masco Foods successfully expanded KFC’s presence across Ghana, with multiple outlets in Accra, Kumasi, and other major cities. Through the Franchise Agreement, Masco Foods signed an agreement with Yum! Brands (KFC’s parent company) to operate KFC outlets in Ghana. Masco Foods is allowed to use KFC’s brand name, recipes, marketing strategies and operating systems. The franchisee (Masco Foods) paid the initial franchise fees and ongoing royalties to Yum! Brands.

KFC, on the other hand, provides training, marketing support, and quality control to ensure consistency in operations. While maintaining its core menu, KFC Ghana has introduced locally inspired items such as Jollof Rice and Spicy Chicken Wings to cater to Ghanaian tastes.

Figure 4.1: KFC Restaurant in Accra

https://images.app.goo.gl/Ar3TZfw6dS9UrM138

Activity 4.1

Meaning of Franchising

1. In pairs, brainstorm the meaning of franchising.

2. Write your answers and share with another pair. Refine your definition if needed as a result of your discussion.

3. Continue your discussion in your pairs to identify the key elements of a franchise. You could record your answers in a table such as the one below.

4. Share your answers with the wider class for discussion and feedback.

Meaning of franchise Elements of a franchise Description

Activity 4.2

Advantages and disadvantages of franchising

1. In small groups, discuss the advantages and disadvantages of franchising as an approach to international business.

2. Write down your responses and share your responses with the class for discussion and feedback.

Activity 4.3

Extension Activity

Identify an example of a successful international franchise. Carry out research to find out more about their business and how it has utilised the advantages of the franchise model. How successful have they been, and what risks do the disadvantages of franchising present to them?

Summarise your research in a short report and present it to your teacher for feedback.

In this concept, we will start by looking at joint ventures and explore their advantages and disadvantages as an approach in international business.

Explanation of Joint Venture

A joint venture is an agreement between two or more parties to work together and form a partnership. They combine their resources, knowledge and skills to reach common goals in a foreign market. The parties can be companies, governments, or individuals from different countries. A joint venture can be set up as a new company, a partnership, or a strategic alliance where the partners share their resources and expertise.

Table 4.2: Key Features of Joint Venturing

Shared Ownership The parties forming the joint venture share ownership of the business, with each party contributing capital, technology, know- how and other resources for the business to succeed.

Collaborative Management

Managing the joint venture usually involves teamwork, where each side has a say in decision-making at all levels.

Defined Objectives

and Scope Joint ventures are usually formed with specific objectives and a clear scope of work.

These objectives can range from product development and market entry to research and development and large-scale projects.

Fixed Duration

or Long-Term Arrangement Joint ventures can be established for a specific project with a fixed duration or as a long-term business arrangement.

Shared Risks and

Rewards The groups involved share the financial risks and benefits of the joint venture.

Profits and losses are usually divided according to how much each group owns.

Advantages of joint venturing as an approach to international business The advantages of joint ventures in the context of international business include:

1. Innovation and Synergy: Joint ventures bring about combinations of different strengths, capabilities and perspectives that can lead to innovative solutions and collaborations which can result in new products, services and business models that neither partner could have developed independently. Joint ventures can enhance research and development capabilities by combining the research and development resources and expertise of both partners.

2. Access to New Markets and Customers: Joint ventures facilitate entry into new geographic markets that may be difficult to penetrate independently. Again, local partners often have established customer bases and brand loyalty and can provide immediate access to these customers, enhancing market reach and sales potential and business growth.

3. Market Entry and Expansion: The initiative to collaborate with a local company offers crucial understanding of the local market, consumer habits, regulatory landscape and cultural differences. This regional knowledge enables the customisation of products and services to better align with market needs.

Furthermore, local partners typically possess established distribution networks and connections with suppliers, retailers and customers. This allows businesses to capitalise on these networks, expedite market entry and shorten the duration required to gain a foothold in the market.

4. Resource Sharing: Joint ventures allow companies to pool financial resources, reducing the financial burden on each partner. This shared investment can fund large-scale projects, research and development and market expansion activities.

That is, partners involve bring unique technology, expertise and intellectual property to the joint venture to combine knowledge and take the lead to innovation and customer satisfaction.

5. Regulatory and Compliance Advantages: It is easy for a local partner to navigate regulatory requirements, obtain necessary permits, ensure compliance with local laws, mitigate political and legal risks by involving local stakeholders.

This local involvement can improve relations with government authorities and reduce the risk the business could have faced.

6. Operational Efficiency: Joint ventures can achieve cost savings through shared resources, economies of scale, streamlined operations which can reduce operational costs and improve profitability. Additionally, it can enhance supply chain management by utilising local suppliers, reducing transportation costs and improving supply chain resilience.

7. Risk Sharing and Mitigation: The financial risks associated with entering a new market or undertaking a large project are distributed between the partners.

In addition, joint ventures allow companies to vary their risk across different markets and projects. This can protect against market or product-specific decline.

Disadvantages of joint venturing as an approach to international business Whilst there are many advantages to operating as a joint venture in international business, there are potential drawbacks, as listed below.

1. Profit Sharing: When the joint venture makes profits, it must be shared between the partners involved, which can reduce the overall financial benefits for each party compared to operating individually. Partners may have different financial goals and expectations, leading to disagreements over profit distribution and reinvestment of earnings into the joint venture.

2. Cultural and Operational Differences: Different company cultures can lead to disagreements between partners. For instance, one partner might have a strict structure, while the other prefers teamwork. Mixing different ways of working can also cause problems and make things less efficient. This can hurt productivity and the success of the joint venture.

3. Complexity and Conflict: Joint ventures require partners to work together in managing operations and making decisions, which can be challenging. This is especially true when partners have different ways of managing, different company cultures and different goals. Disagreements may come up over things like sharing resources, dividing profits, setting a strategy and controlling operations. These conflicts can negatively affect the joint venture’s success and may even cause it to end sooner than planned.

4. Loss of Control: In a joint venture, each partner has a say in the decision- making process which means businesses cannot easily apply strategies quickly and efficiently. Furthermore, partners may have to compromise on their individual business strategies to align with the joint venture’s goals. This loss of autonomy can be particularly challenging for companies that are used to making independent decisions.

5. Regulatory and Compliance Risks: A joint venture often means working in different places, which can lead to different legal rules that must be followed.

Keeping up with all these laws can be complicated and expensive. In some countries, joint ventures might also deal with problems like political issues, economic changes, changes in currency value and government involvement.

6. Financial and Operational Risks: To establish and maintain a joint venture requires important financial investment and ongoing operational costs. If the joint venture does not perform up to expectations, these costs can lead to financial strain for the partners. The success of the joint venture depends on the performance and co-operation of both partners. If one partner fails to meet expectations, it can negatively affect the joint venture.

7. Integration Challenges: Combining different systems, processes and technologies can be challenging and time-consuming. Ensuring compatibility and efficiency requires significant effort and resources. Again, integrating the workforce from different companies can lead to issues related to communication, alignment of objectives and morale. Employees may struggle to adapt to new management styles and organisational cultures.

Case Study

Toyota Tsusho Corporation, a Japanese trading company, identified an opportunity to expand its market presence in West Africa by establishing a local vehicle assembly plant in Ghana. CFAO Ghana Limited, a subsidiary of CFAO Group (a French multinational), had an established presence in the Ghanaian automobile distribution sector, including retail and after-sales service. Recognising the mutual benefits of collaboration, the two companies entered into a joint venture (JV) to establish Toyota Ghana Company Limited. Toyota Tsusho Corporation partnered with CFAO Ghana Limited to create Toyota Ghana Company Limited, with both parties contributing expertise and resources. Toyota Tsusho holds a controlling stake, while CFAO Ghana provides local market knowledge and distribution infrastructure.

Toyota Tsusho Corporation provides technology and expertise in automobile manufacturing. It also supplies parts and technical support for assembling Toyota vehicles in Ghana and ensures compliance with Toyota’s global quality standards.

CFAO Ghana Limited on the hand offers local market knowledge, including customer preferences and regulatory insights. Furthermore, CFAO provides an established distribution network and sales channels in Ghana as well as manages after-sales services, including maintenance, spare parts and customer service.

Figure 4.2: CFAO Service Centre in Accra https://images.app.goo.gl/VobWtPXXyWDDwSa29

Activity 4.4

Meaning and key elements of joint venture

1. In pairs, brainstorm on the meaning of joint venture.

2. Write your agreed-upon definition in your workbook and share with another pair.

Activity 4.5

Advantages and disadvantages of joint venture

1. In small groups, discuss the following:

a. The key elements of joint ventures

b. Advantages and disadvantages of joint ventures

2. You may use digital tools and the internet to support your work. Are there examples of international joint ventures that can give you context?

3. Summarise the outcomes of your discussion on a flip chart and present your answers to the larger class.

In this lesson, we will start by looking at licensing and explore its advantages and disadvantages as an approach in international business.

Explanation of licensing as an approach to international business Licensing is a form of contractual agreement where a company (the licensor) allows another company (the licensee) to produce and sell its products, use its brand name or utilise its intellectual property (such as patents, trademarks, or technology) in exchange for royalties or a fee. This method provides a way for companies to expand their market reach without the need to invest heavily in foreign operations.

Table 4.3: Key Elements of Licensing

Licensor This is the business or company that owns the intellectual property or product.

Licensee This is the company that receives the rights to produce and sell the licensor’s products or use its intellectual property.

Intellectual Property The licensor’s patents, trademarks, technology, brand name or proprietary knowledge.

Royalties/Fees Payments made by the licensee (the company) to the licen- sor (the owner of the product), often based on a percentage of sales or a fixed fee.

Advantages of licensing as an approach to international business The advantages of licensing in the context of international business include:

1. Brand Recognition and Market Presence: Licensing agreements can help a brand to be more visible and recognised in other countries. Successful licensees help promote the brand, making it better known around the world. Also, by working with local companies, licensors can reach more customers and connect with them better than if they tried to do it all by themselves.

2. Revenue Generation: By licensing your product, the licensor can earn regular income from royalties and fees, which offers a consistent revenue stream without needing to get heavily involved in operations. Royalties are usually a percentage of sales, which means both parties benefit together. Licensing lets companies make money from their inventions, trademarks and technologies without having to handle production or sales themselves.

3. Low Investment and Risk: Licensing makes it possible for businesses to enter foreign markets without the need to invest heavily in infrastructure, manufacturing facilities, or distribution networks. The licensee typically handles these aspects, reducing the financial burden on the licensor. In addition, the financial risks associated with market entry, such as economic fluctuations, political instability and cultural differences, are largely borne by the licensee.

This reduces the risk for the licensor.

4. Market Entry and Expansion: It helps businesses quickly enter new markets by using the licensee’s existing production and distribution strengths. This fast entry can be very important in competitive industries. Additionally, the licensee knows the local market well, including customer habits, rules and cultural details. This knowledge can improve market reach and support business growth and success.

5. Focus on Core Competencies: When businesses license out activities that are not their main focus, they can concentrate on what they do best, like research, innovation and planning. Meanwhile, the company they license to takes care of making and distributing products. This arrangement can also improve efficiency, allowing businesses to use their resources better and focus on areas where they excel.

6. Strategic Partnerships: Licensing a business can help build strong partnerships with important companies in other countries. These partnerships can give helpful market information, distribution options and local assistance. Successful licensing deals often result in lasting relationships that promote growth and teamwork over time.

7. Compliance and Regulatory Advantages: The licensee is typically responsible for complying with local regulations, standards and legal requirements. This reduces the complexity and burden of regulatory compliance for the licensor.

Licensing can help overcome trade barriers and restrictions that might otherwise delay market entry. Local licensees can navigate these challenges more effectively than foreign business organisation.

Disadvantages of licensing as an approach to international business Whilst there are many advantages to licensing in international business, there are potential drawbacks, as listed below.

1. Loss of Control: The company that owns the product (licensor) has little control over the company (licensee) that is allowed to make and sell it. This can lead to problems with how the product is made, its quality and how it is marketed.

These issues can hurt the brand’s reputation. Additionally, the success of the licensing deal relies a lot on how well the licensee performs. If the licensee does a poor job of marketing or selling the products, it can harm the owner’s presence in the market and their earnings.

2. Intellectual Property Risks: Licensing an activity means allowing someone else to use your ideas or inventions. This can increase the chance that they might steal or misuse your work. Protecting your ideas in other countries can be hard and expensive. Also, when you share your technology or special knowledge, you might unintentionally help the other company become a competitor if they use what they learned to create similar products on their own.

3. Market and Brand Risks: Licensing helps keep quality the same in different markets, but this can be difficult. If the licensee does not meet the quality standards, it can hurt the licensor’s brand reputation. Additionally, if the licensee uses the brand poorly—like using bad marketing or providing poor customer service—it can weaken the brand’s image and reduce its value.

4. Regulatory and Legal Challenges: Licensing is an agreement that must follow the laws and regulations of both the country of the person granting the license (licensor) and the person receiving it (licensee). Dealing with these complexities can take a lot of time and money. Additionally, making sure that the terms of the licensing agreement, especially those related to intellectual property, are upheld in other countries can be difficult. This can lead to legal disputes that may need a lot of resources to settle.

5. Cultural Differences: The differences in culture practices and consumer behaviour between the licensor and licensee can lead to misunderstandings and operational inefficiencies. Adapting the product or service to fit the local market’s cultural preferences and needs can be difficult. Failure to do so can result in poor market acceptance and performance.

6. Limited Long-Term Benefits: Licensing agreements are written to cover a specified time period (limited in duration). Once the agreement expires, the licensor may lose the market presence it had built through the licensee, unless a renewal or a new agreement is reached. After the expiration of the licensing agreement, the licensee might have gained enough knowledge and market understanding to continue operating without the licensor, potentially becoming a competitor.

7. Dependency Risks: It is risky to rely heavily on a single licensee for market entry and expansion. If the licensee faces financial difficulties or strategic changes, it can severely impact the licensor’s market position.

Case Study

Danone, a multinational food-products corporation headquartered in France, is a global leader in dairy products and was looking to expand its presence in Africa without establishing a full-scale manufacturing operation from scratch. Instead of direct foreign investment, Danone entered the Ghanaian market through a licensing agreement with FanMilk Ghana. Danone granted FanMilk Ghana the license to produce, distribute and sell Danone-branded dairy products, including yoghurt and other nutritional beverages, under strict quality and operational guidelines. This agreement allowed FanMilk to access Danone’s proprietary formulas, production techniques and brand identity while continuing to operate as a local company. FanMilk Ghana manufactures the licensed Danone products using local production facilities, manages distribution and retail through its well- established supply chain, as well as handles regulatory compliance and customer engagement in Ghana. Danone, on the other hand, provides the proprietary technology, brand name and product formulas, ensures quality control by monitoring production processes, as well as supports marketing strategies based on global brand standards.

Figure 4.3: FanMilk Factory in Tema https://images.app.goo.gl/1BZEchmFDTgBCLPW6

Activity 4.6

Meaning and key elements of licensing

1. In pairs, brainstorm on the meaning of licensing.

2. Refine your definition if needed as a result of your discussion.

3. Continue your discussion in your pairs to identify the key elements of licensing. You could record your answers in a table such as the one below.

4. Share your answers with the wider class for discussion and feedback.

Meaning of licensing Elements of licensing Description

Activity 4.7

Advantages and disadvantages of licensing

1. In groups, discuss the case study and answer the question that follows Sam and Selina Partnership Sam, a leading sports apparel and footwear manufacturer, sought to expand its global presence through licensing agreements. Sam entered into an agreement with Selina, a Ghanaian-based manufacturing and distribution company, allowing them to produce and distribute goods in Africa using the Sam brand.

2. Explain the advantages and disadvantages of licensing.

3. Write your answer and present your responses to the larger class.

In this lesson, we will start by looking at wholly owned subsidiaries and explore the advantages and disadvantages of these as an approach to international business.

What is a wholly owned subsidiary (WOS) as an approach to international business?

A wholly owned subsidiary is a company whose entire stock is owned (100%) by another company, known as the parent company. This approach involves the parent company establishing or acquiring a fully controlled business entity in a foreign market. This strategy allows the parent company to retain complete control over the subsidiary’s operations, policies and strategic direction.

Establishing a Wholly Owned Subsidiary (WOS)

Wholly owned subsidiaries are normally created in one of two ways:

• Greenfield Investment: The parent company creates a new business in another country. This means buying land, buildings and hiring local workers.

This approach lets the company set things up exactly how they want, but it takes a lot of time and money.

• Acquisition: This is when a parent company purchases another company in a foreign market. It allows for quick access to that market and the ability to operate right away, but it can also come with difficulties in combining the two companies and with higher upfront costs.

Advantages of a wholly owned subsidiary as an approach to international business The advantages of wholly owned subsidiaries in the context of international business include:

1. Complete Control: The parent company maintains full control over the subsidiary’s operations, strategic decisions and management practices, ensuring alignment with corporate goals and standards.

2. Protection of Intellectual Property: Unlike joint ventures or licensing agreements, a wholly owned subsidiary allows the parent company to protect its intellectual property.

3. Brand and Quality Consistency: The company can ensure that its brand and product quality are consistent across all markets, helping to maintain its reputation and customer trust.

4. Gain Market Knowledge: The parent company can gain in-depth knowledge of the foreign market over time, which can be used to refine strategies and enhance the competitiveness of the market.

5. Profits Retained: The profits made by the subsidiary are retained within the parent company, leading to higher overall profitability compared to shared ventures.

Disadvantages of a wholly owned subsidiary as an approach to international business _(Whilst) ₜₕₑᵣₑ ₐᵣₑ _(many) advantages to operating wholly owned subsidiaries in international business, there are potential drawbacks, as listed below.

1. High Costs and Investment: It is costly to establish a wholly owned subsidiary business as it requires higher capital investment for infrastructure, staffing and higher operational costs.

2. Risk Exposure: All the risks associated with the subsidiary’s operations are normally borne by the parent company. These risks include economic and market changes and political instability.

3. Cultural and Regulatory Challenges: Understanding the cultural, legal and regulatory environment can be complicated and needs considerable local knowledge and adjustments to successfully navigate a foreign market.

4. Exit Barriers: Exiting the market can be difficult and costly due to the large investments made and the potential need to separate assets or shut down operations.

5. Integration and Management Challenges: It is not easy to integrate the subsidiary into the parent company’s overall operations and manage it effectively across different time zones and cultural contexts.

Case Study

Nestlé, a Swiss multinational food and beverage company, initially operated in Ghana through distributors and partnerships, but to have greater control over its operations, branding and quality, the company established Nestlé Ghana Limited as a wholly owned subsidiary (WOS). The company set up its own production and distribution facilities in Ghana, eliminating dependence on third-party distributors by registering under the corporate laws of Ghana as a fully owned subsidiary of Nestlé S.A. (Switzerland). Consequently, Nestlé S.A. owns 100% of Nestlé Ghana Limited, maintaining direct control over operations, finances and strategic decisions. Though Nestlé Ghana Limited is a subsidiary of the Nestlé Group, it operates as a separate legal entity and complies with local regulations.

However, the subsidiary benefits from Nestlé’s global research, product development and advanced manufacturing processes, as well as follows Nestlé’s strict quality assurance policies to ensure food safety and compliance with both Ghanaian and international standards.

Figure 4.4: Nestlé Ghana Ltd. Office in Accra

https://images.app.goo.gl/8Keu98g8SKwZ2kuP8

Activity 4.8

Wholly owned subsidiary

1. In groups, use any electronic device (desktop, laptops, smartphones or tablets) to carry out online research on wholly owned subsidiaries to

a. Define what is meant by a Wholly Owned Subsidiary in the context of international business.

b. Find examples of wholly owned subsidiaries operating in the international market

c. Explain the advantages and disadvantages of wholly owned subsidiaries as an approach to international business

2. Present your findings to the larger class for discussion and feedback. Present your work in an engaging way, for example as a poster, presentation or on a flip chart

In this lesson, we will define the meanings of domestic and international trade, looking at the differences between the two and the types of transactions that are carried out in each.

Meaning of Domestic Trade

₁. Domestic, or local or internal trade, is the exchange of goods and services within the borders of a country.

2. It refers to the buying and selling of goods and services within a country’s borders, involving transactions between businesses, governments and individuals.

3. Another term for domestic trade is national trade.

Meaning of International Trade

₁. International trade is the exchange of goods, services and capital between different countries.

2. This type of trade allows nations to expand their markets for both goods and services that otherwise may not have been available locally or domestically.

3. International trade is also known as foreign trade.

What does international trade involve?

₁. Importing: This is the buying of goods or services from another country for consumption.

2. Exporting: This involves the selling of goods or services to another country for consumption.

3. Entrepot trade: This refers to the importation of goods and services for re- export to another country e.g. A businessman in Mali imports goods to Ghana for re-export to Mali.

Differences between Domestic and International Trade There are a number of features of trade that differ when operating domestically and internationally. These include

1. Geographical Scope

Domestic trade occurs within the borders of a single country whiles international trade involves trade between different countries across national borders.

2. Currency Domestic trade transactions are conducted in local money of that country, but international trade transactions often involve different currencies, requiring currency exchange and managing exchange rate risks.

3. Transportation and Logistics

Domestic trade generally involves shorter transportation distances and simpler logistics. In the case of international trade, it often involves longer transportation distances, more complex logistics and international shipping regulations.

4. Regulations Domestic trade is governed by the country’s internal laws and regulations however, international trade is subject to international laws, treaties, trade agreements and customs regulations.

5. Market Knowledge

Businesses have a good understanding of local market conditions, consumer preferences and cultural differences in domestic trade. But international trade requires knowledge of different markets, consumer behaviours and cultural differences in various countries.

6. Trade Barriers

Domestic trade faces fewer trade barriers whereas international trade is often subjected to tariffs, quotas and other trade barriers imposed by governments.

7. Economic Impact

Domestic trade directly affects the national economy, contributing to GDP and employment within the country while international trade influences the global economy and affects the trade balance, economic growth and development of all of the countries involved.

8. Risk Factors

Risks are primarily related to the national economy and local market conditions in the case of domestic trade, whereas international trade is subject to additional risks such as political instability, currency exchange risk and differences in legal systems.

Table 4.4: Differences between domestic trade and international trade (Summarised table) Feature Domestic Trade International Trade Definition It involves exchange of goods and services within a single country It involves exchange of goods and service between different countries Scope It is internal or national It is foreign or global Currency Single currency is used Multiple currencies are used Regulations National laws and policies International laws, agreements and tariffs Transportation It involves shorter distances and simpler logistics It involves longer distances, complex logistics Market Understanding There is better local market understanding It requires understanding of diverse markets Risk Factors National economic risks Political, currency and international trade risks Feature Domestic Trade International Trade Barriers to Entry Fewer barriers, easier entry Many barriers, complex entry Economic Impact It contributes to national GDP It influences global economy, trade balance Examples of Transaction in Domestic and International Trade Some examples of transactions in domestic and international trade have been listed below. Can you think of examples of businesses or brands that you know that would fit any of these transactions?

Domestic Trade

1. A furniture manufacturer in Ghana sells chairs and tables to retail stores in the country.

2. A Ghanaian film production company releases movie in theatres across the nation.

3. A national telecommunications company provides internet and phone services to consumers and businesses within the country.

4. A university offers courses and degrees to learners from various parts of the country.

5. A domestic e-commerce platform sells products to customers nationwide, offering home delivery and local pick-up options.

6. A construction company builds homes and commercial properties within the country and sells or leases them to local buyers and businesses.

7. A national hospital chain provides medical services to patients across different states or regions within the country.

International Trade

1. A Ghanaian company exporting gold and other minerals to Europe.

2. A pharmaceutical company in Switzerland exports medications and vaccines to various countries worldwide.

3. A Saudi Arabian oil company exports crude oil to refineries in Japan, South Korea and India.

4. A Nigerian-based software company licenses its software to businesses and government agencies in South Africa and Asia, providing technical support and updates remotely.

5. An electronics company based in Japan exports televisions and smartphones to the United States, Europe and Ghana.

6. A steel manufacturing company in Germany imports iron ore from Brazil to produce steel products.

7. A German car manufacturer exports luxury car to dealerships in China, the United States and the Middle East.

Activity 4.9

Example of domestic and international trade product

1. In pairs, identify and write down twenty products.

2. Classify the products into products manufactured in Ghana (local) and those manufactured outside Ghana (foreign).

3. Consider how you are able to buy or have access to goods manufactured in other countries.

4. Share your responses with another pair.

Activity 4.10

Meaning of domestic and international trade

1. In pairs, discuss the meaning of domestic and international trade.

2. Make a note of your definitions in your workbook and share with another pair. Refine your answers if needed as a result of your discussion.

Activity 4.11

Differences between domestic and international trade

1. In small groups, discuss the differences between domestic and international trade. Consider examples to help contextualise your answers.

2. Write your responses on a flip chart and present to the larger class. You may also choose to present your responses digitally by creating a short PowerPoint presentation.

Activity 4.12

Self- Assessment

Answer the following question to support the review of your learning from this lesson: Explain domestic and international trade, giving examples of transactions for each type of trade.

The underlying principles or economic theories that explain why countries trade with each other the basis for international business are.

These theories provide a framework for understanding how trade benefits countries.

The basis for international trade includes:

Comparative Advantage

This is the ability of a country, individual, or firm to produce goods or services at a lower opportunity cost than others. A country has a comparative advantage in producing goods if it can produce them at a lower opportunity cost compared to another country.

It should be noted here that it is not necessarily about producing more efficiently but about sacrificing less of one good or service to produce another. This is a foundation theory of international trade developed by economist David Ricardo.

Example 4.1: Assume Countries A and B can produce cars and computers.

Country A:

10 units of resources = 1 car 40 units of resources = 1 computer Country B:

15 units of resources = 1 car 30 units of resources = 1 computer Opportunity costs calculations:

For Country A:

Opportunity cost of 1 car = 0.25 computer Opportunity cost of 1 computer = 4 cars For Country B:

Opportunity cost of 1 car = 0.5 computer Opportunity cost of 1 computer = 2 cars Conclusion:

Country A has a comparative advantage in cars because it sacrifices fewer computers to produce cars (0.25 vs. 0.5).

Country B has a comparative advantage in computers because it sacrifices fewer cars to produce computers (2 vs. 4).

Absolute Cost Advantage

This is the ability of a country, individual, or firm to produce goods or services more efficiently (using fewer resources such as labour, capital, time, etc.) than another entity.

This concept was introduced by Adam Smith and suggests that specialisation and trade can benefit all parties involved by allowing each to focus on what they can produce most efficiently.

Example:

Country A:

10 units = 1 car 40 units = 1 computer Country B:

15 units = 1 car 30 units = 1 computer Conclusion:

Country A has an absolute advantage in producing cars because it uses fewer resources or produces cars more efficiently (10 vs. 15).

Country B has an absolute advantage in producing computers because it uses fewer resources or produces computers more efficiently (30 vs. 40).

Table 4.5: Summary

Country Resources

for 1 Car Resources for 1 Computer Opportunity Cost of 1 Car Opportunity Cost of 1 Computer Absolute Advantage Comparative Advantage Country A 10 units 40 units 0.25 computer 4 cars Cars Cars Country B 15 units 30 units 0.5 computer 2 cars Computers Computers The Basis for International Trade According to the principle of absolute advantage, Country A should specialise and focus on producing cars while Country B should specialise and focus on the production of computers since they are most efficient in the production of these commodities.

This specialisation allows Country A to maximise its production output in cars and potentially export surplus to Country B or other markets and Country B maximises its production output in computers and export surplus to Country A. This leads to international trade.

Competitive Advantage

This is the ability of a firm or entity to generate greater value for customers compared to its competitors. It is often based on factors such as quality, price, innovation, brand reputation and customer service. Unlike comparative and absolute advantage, which focuses on production efficiencies, competitive advantage emphasises the ability to outperform competitors in the market. It involves strategies that enable a company to differentiate itself and attract customers, ultimately leading to increase in productivity, market share and profitability for the business organisation.

Example 4.2: Company X has a competitive advantage in the smartphone market because it offers innovative features, superior quality and excellent customer service compared to its competitors. These factors allow Company X to charge higher prices while maintaining strong customer loyalty and market demand.

Reasons for International Trade

The reasons for international trade are the drivers that prompt countries to engage in trade with each other. They emphasise the real-world motivations and goals that lead countries to participate in international trade.

Table 4.6 summarises some of the reasons for countries engage in international trade.

Table 4.6: Reasons countries engage in international trade Specialisation Countries can focus on industries where they are most efficient, leading to better resource allocation. By so doing, they have to engage in international trade to sell their products to other countries and buy what they do not have from other countries.

For instance, Brazil focuses on agriculture and exports products like coffee and soya beans to other countries for foreign exchange.

Access to Resources Countries are gifted with different natural resources e.g., Ghana has oil, minerals, timber, etc that other countries lack.

For example, Ghana has fertile lands for the production of cocoa when compared to the US whilst the US are farther advanced in technology than Ghana.

Technological Differences Nations with advanced technology and innovation can produce high-tech goods that other countries need. For instance, the United States exports medical devices and software due to its advanced technology sector.

Taste for Variety of Goods Consumers in one country may demand products that are produced in another country, leading to trade.

For instance, European countries import tropical fruits that cannot be grown in their climate. Ghana also imports apples from other countries where those fruits can do better.

Market Expansion With the help of international trade, businesses seek to expand their markets beyond domestic borders to increase sales and profits. For example, a German car manufacturer exports cars to other countries to increase its market share.

Political and Economic

Relationships Two-sided (bilateral) and many-sided (multi-lateral) trade agreements reduce trade barriers and encourage exchange of goods and services. An example is the European Union which allows free trade among its member countries.

Efficient Resource

Utilisation Foreign trade allows countries to utilise their resources more effectively by exporting surplus and importing goods they do not have.

An example is Saudi Arabia who export surplus oil and imports food products.

Risk Diversification As a country is trading with other nations, businesses can diversify their markets and reduce economic risk.

For example, a company that export goods and services to various countries can mitigate the impact of an economic decline in any single market.

Activity 4.13

Reasons why countries engage in international trade

1. In pairs, brainstorm why countries engage in international trade?

2. Write down your responses and share your answer with another pair.

Activity 4.14

International trade Organise yourselves into groups of not more than five. Your group will be allocated with flashcards that give an overview of a country’s resources and production capabilities.

For each of your allocated countries, consider their areas of specialisation and their production capacity for each of the listed goods. Within your groups ask:

1. How much resource would it take to produce the first unit of goods.

2. How much would be required to produce 10, 50, 250 units?

3. How does this compare for different goods, and between countries?

4. What are the implications for international trade?

Make notes of your working and present your answers on flip charts to the rest of the class for discussion and feedback.

Activity 4.15

Bases for international trade

1. In your groups, discuss the following bases for international trade

a. Comparative advantage

b. Absolute advantage

c. Competitive advantage

2. Consider how the examples in the previous activity may have exemplified one or more of these models.

3. Write down your explanations for comparative, absolute and competitive advantage in your workbooks and compare your answers with another group for feedback.

Activity 4.15

Extension Activity

Write a short reflection on what you have learned about international trade in this lesson. Consider how this gives context to businesses you are familiar with and how one or more of the models of competitive, comparative or absolute advantage underpin their trading. Share this with your teacher for feedback.

Trade documents Letter of enquiry Material requisition form Quotation Purchase Order Invoice Debit note Credit

note

Receipts Cheques

Delivery

note

Goods received

note

Figure 4.5: Examples of trade documents

1. Letter of Enquiry: A letter of enquiry is normally prepared by a buyer who is in need of goods or services and sends it to the seller, or supplier, asking for information about products, prices, availability and terms involved.

2. Material Requisition Form: This is a document used by staff to request the supply of raw materials or components needed for production or other purposes within a business organisation.

3. Quotation: A supplier, or seller, of goods or services prepares a quotation to a potential buyer, detailing the prices and terms for specific goods or services available for sale.

4. Purchase Order (PO): An order is a trading document in the form of a formal request from a buyer to a supplier or seller to purchase goods or services as per the terms agreed on.

5. Invoice: The seller or supplier prepare this trading document (invoice) and send it to a buyer, detailing the goods or services provided and requesting payment for the goods to be supplied. It is a response to a quotation.

6. Debit Note: A debit note is a trading document that is prepared and sent by a buyer to a supplier or seller indicating a return of goods received or requesting a reduction in the amount payable due to discrepancies.

7. Credit Note: This is a trading document sent by a supplier to a buyer acknowledging that a certain amount has been credited to the buyer’s account, usually due to returns of goods or overcharges.

8. Receipts: A receipt is a trading document issued by a seller to a buyer acknowledging that payment has been received for goods or services supplies or sold.

9. Cheques: A cheque is a written, dated and signed document that instructs a bank to pay a specific amount of money to the bearer, or the entity named on it.

10. Delivery Note: This is a document that accompanies a shipment of goods, listing the items delivered and their quantities. It confirms the delivery of goods to the buyer.

11. Goods Received Note (GRN): A GRN is trading document used by the buyer to confirm the receipt of goods ordered. It verifies that the delivered items match the purchase order and so on.

Activity 4.16

Documents used in trading

1. In groups, read the case below and answer the questions.

Akua Nyamesem is a new member staff with HOIS Company Ltd. She was tasked with buying some stationery items for the company but did not keep any records of the transaction. She has realised she needs to understand more about the documents used in business and has approached you, to help her with the following:

a. Explain three documents used in business.

b. Discuss the purpose of the documents used in business

2. Write down your responses and share with another group.

Activity 4.17

Types of documents used in trading Your teacher will present you with sample copies of the types of documents that are used in trading, for example a purchase order, delivery note, invoice. You can also follow this link to download some of the documents (https://letstranzact.com )

1. In your groups examine these documents and make a note of the key information they contain. Consider why this is important and why it is critical for businesses to use and keep records of these document.

2. Make notes from your discussion and share your responses with the class as part of a wider group discussion.

3. Note the key points for each kind of document discussed by each group in your workbook.

International trade documents are very important documents when transacting business or trade internationally as to ensure that transactions are legal, transparent and compliant with the regulations of the countries involved.

International trade documents are used to facilitate the smooth movement of goods across borders, ensuring that all parties understand their rights and obligations.

Documents used international trade Some of the key documents in international trade are outlined below.

International Trade

Documents Letter of

credit Bill of lading Consular invoice Certificate of origin Certificate of insurance Export license Shipping

note

Import license Airway bill Inspection certificate Customs declaratio n

Figure 4.6: Examples of International trade documents

1. Letter of Credit: This is an international trading document issued by a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount, reducing the risk of non-payment in international trade transactions.

2. Bill of Lading: A bill of lading is an international business document issued by a carrier to acknowledge receipt of cargo for shipment. It serves as a shipment receipt when the carrier delivers the goods at the destination and outlines the terms for transporting the goods. It provides proof of shipment and details the terms and conditions under which the goods are transported or conveyed.

3. Consular Invoice: This is a foreign business document required by some countries, signed by the consul of the importing country stationed in the exporting country. It certifies the value, quantity and nature of the shipment.

Its purpose is to verify the value and origin of the goods and to ensure that the goods comply with the regulations of the importing country or nation.

4. Certificate of Origin: A certificate of origin is a document declaring the country where the goods were manufactured. It is often required by customs authorities to determine whether the goods are eligible for import or subject to duties.

5. Certificate of Insurance: This certificate of insurance is a document issued by an insurance company certifying that shipment is insured against loss or damage during transit of goods.

6. Export License: An export license refers to a government document that authorises the export of specific goods in specific quantities to a particular destination. It is required for goods that are controlled or regulated such as guns, narcotics, chlorine gas etc.

7. Import License: This document is usually prepared and issued by a government authorising the import of certain goods into its country. It is required for goods that are subject to import restrictions.

8. Shipping Note: This is a document mostly used in international trade prepared by the shipper that provides detailed instructions to the carrier about the handling and delivery of the shipment.

9. Airway Bill: This is a document issued by an airline to acknowledge receipt of cargo for shipment by air. It serves as a contract of carriage and a receipt for the goods or items.

10. Inspection Certificate: This is issued by an independent third-party inspection company or agency verifying that the goods meet the specified quality and quantity requirements. Its purpose is to assure the buyer that the goods meet the agreed-upon specifications and standards.

11. Customs Declaration: In international business, customs declaration must be submitted to the appropriate authorities for the goods to be transported to the appropriate destination. It is a document submitted by the importer or exporter to customs authorities detailing the goods being imported or exported, including their nature, value and origin.

Activity 4.18

Documents used in international trade Organise yourselves into groups of not more than five. Your group will be assigned a set of flash cards. On one set will be the names of documents used in international trade and on the other will be descriptions of documents and their purpose.

Working in your group, match the description to the type of document. Stick your pairs of flash cards on the wall or on a flip chart and present your answers to the class for feedback.

Take time to move around the class and look at the documents assigned to other groups.

Make notes in your workbooks of the key documents and their purpose.

In your notes, make sure you can differentiate between an import license and an export license.

Activity 4.19

Importance of documents used in international

1. In your groups, discuss the importance of the documents used in international trade.

2. Agree three reasons and present these on a flip chart and present to the larger class for discussion and feedback.

International trade is regulated by set of rules and agreements with the intention of facilitating the exchange of goods and services between countries involved. There are restrictions that can be imposed on parties engaged in international trade to ensure that the parties conduct themselves as specified in the agreement.

Foreign trade restrictions are policies implemented by governments to regulate and control the flow of goods and services across borders.

Some of the restrictions used in international trade ₁. Tariffs: Tariffs are taxes the government of a country impose on imported goods and services. These tariffs may be in the form of ad-valorem (a percentage of the value) or specific (a fixed fee per unit). The primary purpose of tariffs is to protect domestic industries from foreign competition by charging higher tariff or taxes on imported goods to make them more expensive. This encourages consumers to buy domestically produced products. They can also provoke retaliatory tariffs from other countries, leading to trade wars that disturb global supply chains.

Example 4.1: In 2018, the U.S. imposed tariffs on Chinese imports, including steel and aluminium, under Section 301 of the Trade Act. This move aimed to counter unfair trade practices but led to retaliatory tariffs from China, affecting U.S. agricultural exports like soybeans.

2. Quotas: These are limits on the amount or quantity of a specific product that can be imported or exported from one country to another during a given timeframe.

Quotas protect domestic producers by controlling the volume of foreign goods entering the local market, preventing market saturation and maintaining price stability. Quotas can create shortages or surpluses, leading to higher prices for restricted goods. They can also lead to inefficiencies as companies rush to import within quota limits and can lead to smuggling if demand exceeds supply.

Example 4.2: The European Union (EU) has a quota on the import of Chinese textiles to control the flood of low-cost clothing into its markets, ensuring fair competition for local manufacturers.

3. Trade Embargoes: Embargoes are official bans on trade, usually imposed for political or non-political reasons such as human abuses etc. Embargoes are used to exert economic and political pressure on governments to change policies or behaviour or to prevent the importation of a particular product into a country.

Trade embargoes can be imposed on specific sectors of a region or sub-region.

This can limit access to goods and services, leading to shortages and economic hardship in the targeted country.

Example 4.3: The U.S. has maintained a trade embargo on Cuba since the 1960s due to political differences. This embargo limits U.S. businesses from trading with Cuban entities, affecting Cuba’s economy and restricting access to American goods.

4. Subsidies: Subsidies are financial support provided by governments to domestic industries to help them compete against foreign imports. They can take the form of direct cash payments, tax breaks, or low-interest loans. Subsidies given to local companies to lower production costs, allowing domestic business organisations to offer products at a cheaper price relative to foreign products. This will help control and reduce the quantity of foreign products into a country.

Example 4.4: The U.S. government provides subsidies to its farmers, particularly in the corn and soybean sectors, allowing them to sell their produce at lower prices than competitors from developing countries.

5. Import Licenses: These are government-issued permits required for the importation of certain goods or services into the country. They help the country to control the entry of products that might be harmful or not needed. The importing country can decide to reduce the number of licenses issued to importers for the importation of certain goods and services or raise the standard high for the acquisition of import license. Import licenses can add administrative costs for businesses, delaying shipments and reducing the efficiency of supply chains.

They can also be used as a protection tool to limit competition from companies from other parts of the world.

Example 4.5: India requires import licenses for certain electronic goods to ensure they meet quality and safety standards, preventing the influx of substandard products.

6. Controls: This regulation limits the export of certain goods, technologies, or information, particularly those with military or dual-use potential. Export controls are designed to protect national security, prevent the spread of weapons and sensitive technologies and comply with international treaties. Exporters in the country must obtain government authorisation, often in the form of export licenses, before controlled goods and services can be imported into the country.

These controls are usually based on lists of items that are subject to restrictions.

Export controls can limit companies’ ability to access international markets, especially in high-tech industries. They can also strain political relations if countries perceive them as unfair barriers.

Example 4.6: The U.S. has strict export controls on semiconductor technology to China, restricting access to advanced microchips used in military applications.

7. Technical Barriers to Trade (TBT): These are regulations, standards, testing and certification procedures that good or services must meet to be sold in a particular market. Technical barriers to trade ensure the safety, quality and compatibility of products, protecting consumers and the environment. These include labelling requirements, performance standards and conformity assessment procedures.

They often require products to meet specific technical specifications. They can also act as non-tariff barriers that impede trade by increasing compliance costs and requiring technical modifications to meet local standards of making goods or services available for public consumption.

Example 4.7: The EU requires that all cosmetics be tested and certified according to stringent safety standards. This regulation makes it difficult for companies from countries with different safety norms to export their products to Europe.

8. Trade Sanctions: Sanctions are measures imposed by one or more countries against a targeted country, group, or individual to restrict trade and economic transactions. Trade sanctions are used to achieve political, economic, or security objectives and can range from comprehensive trade embargoes to targeted measures like travel bans and asset freezes of nations or officers.

Example 4.8: The United Nations imposed trade sanctions on North Korea, restricting the export of luxury goods and military-related materials to curb its nuclear weapons program.

9. Anti-Dumping Duties: Anti-dumping duties are tariffs imposed on foreign imports believed to be of inferior quality and priced below fair market value.

The purpose of imposing anti-dumping duties on goods dumped into a country is to protect domestic industries from unfair competition, market distortion and consumption of products that are not good.

Example 4.9: The EU imposed anti-dumping duties on Chinese solar panels in 2013 after investigations revealed they were being sold at artificially low prices, undercutting European manufacturers.

10. Sanitary and Phytosanitary Measures (SPS): These are measures to protect humans, animals and plants from diseases, pests, or contaminants. They are particularly relevant in agriculture and food trade. They ensure food safety and prevent the spread of diseases and pests that could harm agriculture or ecosystems. These measures include quarantine requirements, inspections and testing. They must be based on scientific principles and risk assessments. SPS measures can restrict imports of agricultural products and increase compliance costs, but they are essential for maintaining health and safety standards. However, if not properly justified, they can be perceived as protection tools.

Example 4.10: Following the 2001 outbreak of foot-and-mouth disease in the UK, several countries banned British beef imports to prevent the disease from spreading.

11. Customs Regulations: These regulations are requirements for customs declarations, payment of taxes and duties and inspection of goods. Customs regulations are used to raise or collect revenue for the government and also to prevent illegal goods from entering the country.

Example 4.11: The U.S. enforces strict customs regulations on luxury goods entering the country, requiring high-value imports to be declared and taxed accordingly.

In sum, international trade restrictions are designed to protect local businesses or industries, consumers, environment and promote trade practices which are fair. On the other hand, trade restrictions can make it expensive and difficult for companies to transact business internationally and lead to retaliatory measures from other nations.

Activity 4.20

Restrictions in international trade Case study: Cocoa Trade Dispute Between Country A and Country B.

Background: Country A and Country B are two of the world’s largest producers of cocoa. Recently, the government of Country A have imposed a 25% tariff on cocoa beans imported from Country B, citing concerns over unfair trade practices and intellectual property theft. This move has the potential to affect trade and consumption of cocoa beans on the world market.

Scenario: You are a trade analyst for a cocoa bean exporting company in Country B and have been tasked with evaluating the situation. The newly imposed tariffs have increased the cost of importing cocoa beans from Country B, leading to 15% decrease in exports to Country A.

Response: In light of these developments, the government of Country B has threatened to impose retaliatory tariffs on products imported from Country A. Your company is now considering various options to mitigate the impact of these tariffs and maintain its market position.

Organise yourselves into small groups.

Working in these groups, analyse the case study and prepare a presentation that evaluates the situation.

Your presentation should cover.

1. The meaning and application of tariffs

2. Other trade restrictions that could be applied

3. The potential short- and long-term effects of the situation described in the case study for both countries.

4. How Country B might mitigate the impact of the tariffs and maintain its market position.

Consider the economic impact, political considerations and long-term sustainability of the situation in your analysis.

Consider how you will present your analysis to your class for discussion and feedback (for example as a PowerPoint presentation, role play discussion between the analyst and representatives from the cocoa industry etc.)

Share your written notes and evaluation with your teacher for feedback.

As you have learned from the previous lesson, trade restrictions are measures adopted by government of a country to regulate and limit international trade in order to protect local industries. The reasons for imposing and implementing trade restrictions in international trade often reflect the economic, political and social objectives of governments.

Some of the reasons why restrictions are used in international trade ₁. To Protect Domestic Industries: The government of a country may impose trade restrictions to protect young industries. This allows these young industries to grow, establish themselves and be prepared to face foreign business competition.

Restrictions such as tariffs and quotas can protect local industries from unfair competition from foreign companies.

2. Safeguarding National Security: Export controls and restrictions on sensitive technologies help prevent the spread of weapons and ensure that military goods do not fall into the hands of adversaries. The government of the various countries can maintain greater control over essential sectors critical to national security, such as energy, agriculture and technology as those nations reduce reliance on foreign goods.

3. Protecting Public Health and Safety: Sanitary and Phytosanitary Measures are restrictions that prevent the spread of diseases, pests, or contaminants that are harmful to human beings, animals, or plants. These measures ensure priority on food safety and public health thereby promoting the wellbeing of the citizens in the country. Technical Barriers to Trade are also regulations and standards applied to ensure that imported goods meet safety and quality standards, protecting consumers from poor quality products that are dangerous to human health.

4. Encouraging Domestic Employment: Restricting imports into the country means that the governments can support local industries and preserve domestic jobs. This is very important in sectors facing international competition. By imposing restrictions like embargoes on certain foreign products and granting subsidies to local industries, governments can help boost these industries and create domestic employment opportunities fostering economic development.

5. Responding to Political and Diplomatic Concerns: When trade sanctions are imposed on countries or goods, it means these sanctions are used as a tool to put pressure on those countries to change policies or behaviours, such as human rights violations or aggressive military actions. The government of a country may impose trade restrictions in response to unfair practices by trading partners, aiming to force them to change their policies or reach a negotiation.

6. Revenue Generation: Taxes or tariffs imposed on goods and services are sources of revenue to government. For some countries, especially developing ones, tariffs on imports are a significant source of government revenue. These funds support public services, infrastructure and economic development.

7. Promoting Fair Trade Practices: Foreign business organisations could produce inferior goods and dump them on the markets for sale and consumption.

Anti-dumping duties are imposed to reduce the negative effects of dumping and foreign subsidies, ensuring fair competition for domestic producers. Restrictions help enforce intellectual property rights, preventing the illegal distribution and sale of inferior goods that can harm local industries and citizens.

8. Environmental Protection: Business restrictions in international trade can be used to enforce environmental standards, preventing the importation of products that do not meet sustainability or contribute to environmental degradation.

9. Cultural and Social Considerations: Trade restrictions may be placed on the import of cultural goods that could undermine or dilute a country’s cultural heritage and identity. These restrictions can reflect social and ethical standards, such as banning products that violate labour rights or animal welfare standards.

10. Promoting Economic Stability: When a country imposes trade restrictions on particular goods, it can help manage the country’s balance of payments by reducing imports and encouraging exports. This improves foreign exchange reserves and stabilises the economy of the country.

Activity 4.21

Importance / Reasons for Trade Restrictions

1. Organise yourselves into small groups. In your groups, discuss the reasons for imposing restrictions on international trade.

2. Identify five reasons and agree a justification for each one. Exchange your work with another group for comparison and discussion. Edit your list and add any additional reasons.

3. Share your work as part of a wider class discussion, re-editing your list to ensure you have captured all reasons discussed by your peers.

Activity 4.22

Extension Activity

Case study: Economic transformation of Amasia Kingdom The Amasia Kingdom was once an underdeveloped nation. However, it decided to implement strategic policies to boost economic activities and growth. Among these policies were trade restrictions designed to support and protect local industries.

For instance, Amasia imposed tariffs on imported agricultural products such as rice and wheat, encouraging local farmers to increase production. The government also provided subsidies for the cultivation of cocoa and coffee, which are now major export commodities. Additionally, Amasia restricted the import of textiles and garments, leading to the growth of a robust domestic textile industry.

Today, Amasia is a thriving nation that produces essential goods and services for its citizens. The country has become self-sufficient in food production, manufacturing high-quality textiles, and exporting surplus cocoa and coffee to other countries.

These policies have not only boosted the local economy but also positioned Amasia as a key player in the global market.

1. Analyse how trade restrictions support economic stability in a country like Amasia.

2. Write your analysis as a report and share it with your teacher for feedback.

Benefits or Importance of International Trade

The benefits of international trade cannot be ignored, and this makes it very important for countries, businesses and consumers as it drives economic growth and improves quality of life.

Table 4.7: Importance of international trade Economic Growth and Development Trade is an important activity that helps countries grow their economies.

It increases their Gross Domestic Product (GDP) and allows countries to focus on producing goods and services that they do best.

This attracts foreign investment and improves productivity.

Access to

Variety of

Goods and

Services Trade makes available different varieties of goods and services and offers consumers a broader selection of products at competitive prices, improving quality and affordability.

Efficient Resource

Allocation:

Trade allows countries to focus on production of goods and services which have comparative advantage.

Countries can use resources more efficiently by producing what they can produce best for sale to other countries and buy from other nations what they cannot produce efficiently increasing overall economic welfare.

Economies of

Scale Good trading policies and practices help businesses grow by allowing them to sell more products in international markets.

They also help lower costs and promote creativity, innovation and research to develop new goods and services that improve people’s lives.

Employment Opportunities

One of the reasons why trade is considered very important is that it creates jobs in export industries for people to earn a living.

Business activities promote skill development and exposure to international markets.

Enhanced Political and

Economic Relations

Trade brings about economic interdependence and co-operation among nations engaged in it.

It can be a means of reducing conflict and encouraging global collaboration on shared challenges.

Innovation and

Technology Transfer

Today, technology is considered paramount to most nations.

Trade facilitates the exchange of technology and competitive pressure, driving innovation and increasing productivity.

Increased Market Access

Trade makes it possible for businesses to produce goods and services, expand beyond domestic borders, increasing revenues and reaching diverse customer bases.

Improved Quality of Life

To promote citizens’ well-being, good trading practices should be followed.

This makes sure that essential goods and services are available, which helps improve living standards.

Environmental benefits Trade encourages cultural exchange, efficient use of resources and the sharing of green technologies, supporting sustainable development.

Challenges of International trade International trade also presents several challenges. These challenges can impact economies, businesses and consumers in various ways. Some of these challenges include:

Table 4.8: Challenges of International trade Trade Barriers Trade barriers include tariffs, quotas and non-tariff barriers such as regulatory standards and import licenses.

These trade barriers can increase the cost of goods, limit the quantity of goods that can be traded and complicate the trading process.

Changes in

Currency Exchange Rates

When a country’s currency exchange rates are not stable, it can impact how much international transactions cost and how much profit businesses make.

Changes in exchange rates can create uncertainty in prices and profits, making it hard for businesses to plan and manage their budgets.

High Transportation

and Logistics Cost In international trade, different countries are involved, and goods can be transported over long distances, often across multiple borders or countries.

In this light, high transportation costs, delays and logistical difficulties can increase the overall cost and risk of trading internationally.

Political and

Economic Instability

Political instability, economic crises and changes in government policies can disrupt trade.

Such instability can lead to sudden changes in trade regulations, increased risk of non-payment and breaks in supply chains.

Regulatory Compliance and

Standards Different countries are involved in international trade with varying standards and regulations for products, including safety, health and environmental standards.

Businesses are expected to operate smoothly by navigating complex regulatory environments and ensure compliance with multiple standards, which can be time-consuming and costly.

Intellectual Property Rights

(IPRs) The protection of intellectual property rights, like copyrights, trademarks and trade secrets, differs from country to country.

In some places, weak protection can result in problems such as counterfeiting and theft of ideas, which can hurt businesses and innovation.

Cultural Differences

Differences in language, customs, business practices and consumer preferences can pose challenges to nations involved in foreign trade.

Disagreements and miscommunications can occur, making it difficult for fruitful negotiation, marketing and customer relations to take place.

Activity 4.23

Benefit and challenges of international trade Organise yourselves into groups of no more than five Each group will be asked to analyse either the benefits or the challenges of international trade.

Discuss your assigned topic and record your ideas for either benefits or challenges.

Can you think of any examples to support your answers?

Present your groups’ response to the class for discussion and feedback. Make notes of the other groups’ presentations and record your summary of all of the benefits and challenges discussed in your workbook.