Foreign trade.

The principle of comparative cost proposes that countries can improve their living standards if they specialize in producing those goods and services in which they have the highest relative productivity. This theory explains why countries export and import. There are several ways to establish products in the foreign market.

Firstly, a company can start by cooperating with local experts as sole agents or multi-distributors. Being residents of the country they are aware of the market and sell on behalf of the company. Secondly, successful operating in the foreign market can lead to creating a local branch or a sales office as well as selling or giving permission to use patents and licenses. Thirdly, a company may set up its own production facilities by opening a joint venture or a local subsidiary. This is also called direct foreign investment. Another form of investment is for portfolio (in the form of securities). The most important private investors are TNC’s (transnational corporations). They set up their production facilities globally in order to take advantages of the best resources. In order to avoid exploitation and protect domestic producers governments control the types, scopes and ownership terms of foreign investment. In most countries foreign investors are allowed into the domestic market only after political agreements between the governments, which shows following the policy of laissez-faire a rare practice. Besides, governments affect foreign trade imposing tariffs and quotas. A tariff is a tax on imported goods, and a quota is the maximum quantity of product that can be imported into the country. These are called protectionism measures.

Protectionism supports strategic industries that are necessary for countries’ survival in the case of a war. Besides, tariffs and quotas help to avoid structural unemployment in industries where countries do not have comparative advantages as well as shield from dumping (the selling of goods abroad at a price below cost), protect infant industries and reduce a balance of payments deficit.

Tariffs and non-tariff barriers (such as quotas, safety norms, deliberate creation of customs difficulties and delays) are points of prolonged discussions between governments. Some of them establish extra restrictions as counter-measures, others try to exercise principles of so-called free trade proclaimed by various organizations. There are trade blocs, and other international organizations whose functions are to facilitate trade and solve problems. The UNO (The United Nations Organization), Organization for

Economic Cooperation and Development (OECD), International Monetary Fund (IMF), International Bank for Reconstruction and Development (World Bank), the WTO (The World Trade Organization and other regional development banks are among them.

The UNO provides means for discussing and addressing grievances among nations. The IMF supervises and monitors global monetary affairs. World Bank assists in planning and financing development projects. The WTO, that was founded on January 1, 1995, administers and enforces the multilateral trade agreements. The question of Russia’s entering the WTO is being widely discussed in mass media.

1. Find English equivalents for the following words and learn them:

контрмеры/ нетарифные барьеры торговые/ проволочки и задержки на таможне/ сравнительные преимущества/ торговое представительство / вводить тарифы и квоты/ развивающиеся отрасли/ политическое соглашение/ дефицит торгового баланса/

2. Explain the following terms:

Dumping; relative productivity; multi-distributor; strategic industries

3. Answer the questions:

What does the theory of comparative advantages imply?

How can companies penetrate foreign markets?

What is protectionism?

Why do governments establish trade barriers?

What organizations regulate international trade?

Up to you…

You work as a marketing manager at a factory that produces ball bearings and spare parts for machinery. It employs 20 people with only 4 managers to deal with customers, suppliers, production and managerial problems. Your product is comparatively cheap and that is why may be popular with foreign companies. That is why the idea of entering foreign markets seems reasonable. You have to choose a suitable export strategy among the suggested: 1) Passively filling orders from domestic buyers who then export the product; 2) Seeking out domestic buyers who represent foreign end users or customers; 3) Exporting indirectly through intermediaries; 4) Exporting directly. Give your reasons.

Links

Russiajournal.com This site is a good resource on Russian issues.

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