the handbook of international trade.pdf

the handbook of

international trade

the handbook of

international tradea guide to the principles and practice of exportConsultant Editors:

Jim Sherlock & Jonathan Reuvid

GMB

Publishers note Every possible effort has been made to ensure that the information contained in this publication is accurate at the time of going to press and neither the publishers nor any of the authors, editors, contributors or sponsors can accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result of the material in this publication can be accepted by the editors, authors, the publisher or any of the contributors or sponsors. Users and readers of this publication may copy or download portions of the material herein for personal use, and may include portions of this material in internal reports and/ or reports to customers, and on an occasional and infrequent basis individual articles from the material, provided that such articles (or portions of articles) are attributed to this publication by name, the individual contributor of the portion used and GMB Publishing Ltd. Users and readers of this publication shall not reproduce, distribute, display, sell, publish, broadcast, repurpose, or circulate the material to any third party, or create new collective works for resale or for redistribution to servers or lists, or reuse any copyrighted component of this work in other works, without the prior written permission of GMB Publishing Ltd. GMB Publishing Ltd. 120 Pentonville Road London N1 9JN United Kingdom www.globalmarketbriefings.com This edition first published 2004 by GMB Publishing Ltd. GMB Publishing Ltd. and contributors Hardcopy ISBN 0-7494-4144-5 E-book ISBN 1-905050-96-8

British Library Cataloguing in Publication Data A CIP record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Handbook of international trade / edited by Jonathan Reuvid and Jim Sherlock. p. cm. ISBN 0-7494-4144-5 1. Export marketingGreat BritainHandbooks, manuals, etc. 2. Export marketingHandbooks, manuals, etc. I. Reuvid, Jonathan. II. Sherlock, Jim. HF 1416.6.G7H36 2004 382dc22 2003028086

Contents

Foreword Adriaan Vickery, National Chairman, The Institute of Export About the Editors PART 1 The global economy 1.1 The rationale for foreign trade and its organization 1.2 Balance of payments measurement and management 1.3 Patterns of world trade PART 2 International marketing principles and practice 2.1 Principles 2.2 Methods of market research 2.3 The marketing plan 2.4 Practice distribution PART 3 The legal environment 3.1 An overview of UK law 3.2 The law of contract 3.3 Sale of goods in international trade 3.4 EU competition law 3.5 The law of agency PART 4 The export order process 4.1 The export office 4.2 The export quotation 4.3 Incoterms PART 5 International transport 5.1 Modes of international transport 5.2 Packing and marking for export 5.3 International transport documentation

vii viii

3 12 17

39 54 70 90

103 108 127 148 163

171 176 192

207 225 233

vi

Contents

PART 6 Customs controls 6.1 Export procedures and documents 6.2 Import procedures and documents PART 7 Risk management 7.1 Cargo (marine) insurance 7.2 Credit insurance 7.3 Exchange risk management PART 8 Export finance 8.1 Business finance 8.2 International payment methods 8.3 Documentary letters of credit 8.4 Forms of countertrade PART 9 New horizons looking ahead 9.1 ICT and export documentation 9.2 EU expansion 9.3 Global trading trends Appendices Appendix I Web sites for exporters Appendix II Kogan Page International Business Publications Appendix III Recommended Reading Lists for Advanced Certificate and Diploma in International Trade Appendix IV SITPRO Top Form standard documents Index

251 267

289 303 307

315 328 339 350

355 366 382

403 406 415 418 431

Foreword

The Institute of Export is pleased to present and commend this most useful primary source of reference and advice to all international traders, and to students studying for the Institutes Advanced Certificate in International Trade examinations. The Institute of Export is committed to the enhancement of export performance by setting and raising professional standards in international trade management and practice, principally through the provision of education and training programmes. Indeed, the Institute is the only professional body in the United Kingdom offering recognized formal qualifications in International Trade. Dedicated to professionalism and recognizing the challenging and, often, complex trading conditions in international markets, the Institute believes that the real competitive advantage lies in competence underpinned by a sound basis of knowledge. Doing business internationally is different, but, if approached correctly, need not be difficult. The Institutes general knowledge of cultural differences, language, local business methods and differing channels of distribution, ever developing as a result of global communication, serves as a foundation for a professional and enlightened approach, and augurs well for progress in the broadest sense. The authors of this Handbook are recognized experts in international trade, training and business support. Adriaan Vickery F.I.Ex. National Chairman, The Institute of Export

About the Editors

Jim Sherlock, a Fellow of The Institute of Export, is a full-time trainer and consultant in International Trade with extensive experience in the UK manufacturing sector. For 20 years a Senior Lecturer in International Trade at Manchester College, he is the author of Principles of International Physical Distribution and a regular contributor to a number of international trade publications. Jonathan Reuvid is a well-known and respected sinologist, internationalist, strategy consultant and educationalist. Engaged in the design and delivery of academically accredited educational business and management programmes, as an editor and publisher he has involved himself in a variety of international trade and business books of the highest quality.

PART 1 The global economy

1.1

The rationale for foreign trade and its organization

WHY COUNTRIES TRADEThere are two basic types of trade between countries: the first in which the receiving country either cannot produce the goods or provide the services in question, or where it does not have enough; and the second, in which it has the capability of producing the goods or supplying the services, but still imports them. The rationale for the first kind of trade is very clear. As long as the importing country can afford to buy the products or services, it is able to acquire things that otherwise it would have to do without. Examples of differing significance are the import of bananas into the United Kingdom, in response to consumer demand, or copper to China, an essential for Chinese manufacturing industry. The second kind of trade is of greater interest because it accounts for a majority of world trade today and the rationale is more complex. The United Kingdom imports motor cars, coal, oil, TV sets, clothing and many more products, which it is well able to produce domestically. At first sight, it would seem a waste of resources to import goods from all over the world in which it could perfectly well be selfsufficient. However, the reasons for importing these categories of products generally fall into three classifications:l the imported goods may be cheaper than those produced domestically; l a greater variety of goods may be made available through imports; l the imported goods may offer advantages other than lower prices over domestic

production better quality or design, higher status (eg, prestige labelling), technical features, etc.

Comparative advantageThe law of comparative advantage was first articulated by the 19th-century economist David Ricardo, who concluded that there was an economic benefit for

4 The global economy

a nation to specialize in producing those goods for which it had a relative advantage, and exchanging them for the products of the nations that had advantages in certain kinds of products. An obvious example is coal, which can be mined in open-cast Australian mines or in China with low-cost labour and shipped more than 16,000 kilometres to the United Kingdom where a dwindling supply of coal can be extracted only from high-cost deep mines. With regard to coal, therefore, Australia and China have comparative advantages. The theory of comparative advantage can be extended on a macro-economic scale. Not only will trade take place to satisfy conditions of comparative advantage, but also, in principle, the overall wealth of the world will increase if each country specializes in what it does best. Stated at its most simplistic, of course, the theory ignores many factors, of which the most important is that there may be limited international demand for some nations specialized output. Nevertheless, the question arises as to why specialization has not occurred on a greater scale in the real world. The main reasons, all of them complex, may be summarized in order of significance, as follows:l strategic defence and economic reasons (the need to produce goods for which

there would be heavy demand in times of war);l transport costs that preclude the application of comparative advantage; l artificial barriers to trade imposed to protect local industry, such as tariffs and

quotas.

The evolution of world tradeIn Chapter 1.3 the pattern of world trade over more than a century, from 1870 to 2001, is discussed in detail. Overall, merchandise trade grew by an average of 3.4 per cent per annum from 1870 to 1913 in the period up to World War I. Two World Wars interspersed by the Depression and a world slump effectively reduced the annual rate of growth in international trade to less than 1 per cent in the period 1914 to 1950. Then, as the international institutions that were established in the immediate post-1945 period began to introduce some financial stability and impact on world trade, there followed a 23-year period of more buoyant growth, averaging 7.9 per cent up to 1973. In the next 25 years to 1998, the average growth rate in merchandise trade fell back to 5.1 per cent. More recently, a less stable period of global economic slowdown saw merchandise exports fall by 4 per cent in 2001 after rising by an exceptional 13 per cent in 2000. Current trends that have surfaced in the early years of the 21st century are identified in Chapter 9.3. Aside from the period between the two World Wars and up to 2001, trade has continuously outstripped growth in the world economy as a whole.

The rationale for foreign trade 5

PROTECTIONISMTo analyse what happened in the inter-war years of the 1920s and 1930s it is necessary to understand that the reaction of many governments to economic slump was to protect jobs at home by raising the protection against imports. The most common method of protection is the introduction or increase of tariffs on imported goods. In the 1920s and 1930s, the widespread use of tariffs caused job losses, in turn, in other countries a reiterative process. In the second half of the 1930s the prolonged world slump was alleviated, particularly in Europe, by the heavy public spending on defence equipment and munitions in the lead-up to World War II. After 1945, there were concerted international efforts to put in place organizations that would reduce the effects of trade protection and any future reductions in world economic activity. The first of these were the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), now known as the World Bank, which were established by the Bretton Woods Agreement in 1947. These institutions, which have become the cornerstones of international macro-economic management, were largely the brainchild of the British economist John Maynard Keynes, who was among the first to recognize that reductions in government spending and increases in protection had been major causes of the pre-war Depression.

Methods of protectionThe tools of protection may be categorized as either tariff or non-tariff barriers.

TariffsA tariff is a tax or import duty levied on goods or services entering a country. Tariffs can be fixed or percentage levies and serve the twin purposes of generating revenue for governments and making it more difficult for companies from other countries to do business in the protected market. The moves towards free trade of the 19th century were largely offset by the reintroduction of tariffs in the early part of the 20th century at rates sometimes as high as 33 and 50 per cent. Since 1945, tariffs have been lowered significantly as a result of eight successive rounds of multilateral trade negotiations under the General Agreement on Tariffs and Trade (GATT), the third institution established following the Bretton Woods Agreement, and its successor the World Trade Organization (WTO).

Non-tariff barriersAlthough progress was made in dismantling tariff barriers under the GATT in the period up to 1995 when the WTO was established, the use of non-tariff protection

6 The global economy

increased during the 1980s, mostly as a substitute for the tariffs that were outlawed. The following is a list of non-tariff measures that have been deployed by both developed and developing countries:l Quotas. Numerical limits in terms of value or volume imposed on the amount

l

l

l

l

of a product that can be imported. Chinese quotas on imported automobiles or French quotas on Japanese VHS equipment during the 1980s are well-known examples. Voluntary export restraints. Agreed arrangements whereby an exporter agrees not to export more than a specific amount of a good to the importing country (usually to pre-empt the imposition of more stringent measures). Such agreements are common for automobiles and electronics but are also applied to steel and chemicals. Domestic subsidies. The provision of financial aid or preferential tax status to domestic manufacturers, which gives them an advantage over external suppliers. The most obvious example is agriculture where both the European Union (EU) and the United States have consistently employed subsidies to help domestic producers. Import deposits. The device of requiring the importer to make a deposit (usually a proportion of the value of the goods) with the government for a fixed period. The effect on cash flow is intended to discourage imports. Safety and health standards/technical specifications. This more subtle form of deterrent requires importers to meet stringent standards or to complete complicated and lengthy formalities. The French bans on lamb and then beef imported from the United Kingdom during the 1990s will long be remembered by the British farming industry.

REGIONS IN WORLD TRADEAlthough the multilateral trading system promoted by the GATT and now the WTO has been broadly successful in overcoming protectionist regimes at least up to the current Doha Round it has failed to prevent the concomitant proliferation of regional pacts and regional trade agreements (RTAs). More than 60 per cent of world trade is regional and almost all major countries belong to at least one RTA. In 2001, 61 per cent of the EUs trade was between member states and 55 per cent of North American trade was between the three NAFTA (North American Free Trade Association) countries. The jury is still out on whether RTAs can be viewed as stepping stones towards multilateral integration or as discriminatory arrangements that fracture the multilateral trading system. The failure of the WTO summit meeting in Cancun, Mexico in September 2003 to reach agreement was not encouraging. The four basic models of trading bloc are described below.


Free trade areaMembers agree to reduce or abolish trade barriers such as tariffs and quotas between themselves but retain their own individual tariffs and quotas against non-members.

Customs unionCountries that belong to customs unions agree to reduce or abolish trade barriers between themselves and agree to establish common tariffs and quotas against outsiders.

Common marketEssentially, a common market is a customs union in which the members also agree to reduce restrictions on the movement of factors of production such as people and finance as well as reducing barriers on the sale of goods.

Economic unionA common market that is taken further by agreeing to establish common economic policies in areas such as taxation and interest rates, and even a common currency, is described as an economic union. The original European Economic Community (EEC) in the mid-1950s, comprising six members, was the forerunner of a number of such agreements. In 2003, the European Union is still the most advanced economic grouping with its 15 existing members accounting for more than 40 per cent of world trade. However, some of the more recent groupings, notably the Association of South-East Asian Nations (ASEAN) and NAFTA, having created regional trading agreements, account for increasingly significant proportions of world trade. Figure 1.1.1 lists the principal trading blocs in date order of their formation together with details of their membership. Regional arrangements are an important factor in the organization of world trade. They are beneficial in allowing countries inside the arrangement to acquire some goods at lower prices through tariff reductions than they could from the rest of the world. However, they may also cause trade to be diverted away from efficient producers outside the arrangement towards less efficient sources within. A case can be made that the proliferation of self-protecting trade blocs reduces the levels of potential benefits to be gained from world trade.

THE UNITED KINGDOMS CHANGED STATUS IN WORLD TRADEThe EU is now the most important market for most UK exporters, accounting for around two-thirds of the United Kingdoms trade. The ratio represents the most

8 The global economy European Union (EU) 1957 Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, United Kingdom. From 1 May 2004: also Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovak Republic, Slovenia Norway, Switzerland

European Free Trade Agreement (EFTA) Latin American Free Trade Area (LAFTA) Central American Common Market (CACM) Association of South-East Asian Nations (ASEAN) Andean Pact

1959

1960 1961

Now known as LAIA (Latin American Integration Association) and superseded by MERCOSUR Agreement between a number of Central South American states, which have agreed a free trade area with Mexico (part of NAFTA) Brunei Darussalem, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam Bolivia, Colombia, Ecuador, Peru and Venezuela. Established a four-tier common external tariff in 1994 A free trade agreement that has aspects of a common market but which has suffered from regional instability Now signed up to APEC

1967

1969

Economic Community of West African States (ECOWAS) AustraliaNew Zealand Closer Economic Relations Trade Agreement (ANZCERTA) North American Free Trade Association (NAFTA) Mercado Commun Del Sur (MERCOSUR) ASEAN Free Trade Area (AFTA) South Asian Association for Regional Cooperation (SAARC) Preferential Trading Agreement (SAPTA)

1975

1983

1989 1995 1991 1993

Canada and the USA with Mexico since 1993 Argentina, Brazil, Paraguay and Uruguay Planned successor to ASEAN from 2003 Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, Sri Lanka

Figure 1.1.1 The principal regional trading blocs


dramatic difference between the United Kingdom in 1970 and the United Kingdom today. In 1970 most of the United Kingdoms trade was with markets beyond Europe, mainly Commonwealth countries including Australia, New Zealand, Canada, the Caribbean, West and East Africa. Within the 20 years following, as a result of the United Kingdom joining the then EEC, the situation was reversed, with UK trade focused on Europe, and the Commonwealth countries becoming relatively minor trading partners. The consequences for both UK manufacturing industry and the Commonwealth have been far-reaching:l The countries of the Commonwealth have had to make trading arrangements of

their own, having lost previously captive UK markets.l Much of the agricultural product previously imported by the United Kingdom

from the Commonwealth is now sourced from within Europe.l The United Kingdom has lost many of its markets for low-tech, low-cost goods. l UK exports have tended to become higher-tech and more expensive. l UK exporters have had to learn to do business in foreign languages and, with

the advent of the EU monetary union, in euros rather than sterling. In fact, the United Kingdom has always experienced difficulties with trade in manufactured goods. Even during the halcyon British Empire days of the late 19th and early 20th centuries, the United Kingdom was heavily dependent on the import of cheap raw materials from the colonies and Commonwealth in larger volume than the goods exported. However, throughout that period it continued to run substantial surpluses on its trade in services, which largely offset the deficits on merchandise trade. During the period 1816 to 1995 the United Kingdom registered surpluses on goods account in only six years but only three deficits on services and investments. During the past 50 years the United Kingdom has drifted into deeper deficits in merchandise trade, alleviated to some extent by the production of North Sea oil and gas. At the same time, the City of London no longer dominates world financial markets and the invisible earnings that it generates are no longer sufficient to offset the deficits in trade of goods. The advent of the Eurozone and the installation of the European Central Bank (ECB) in Frankfurt has moved Europes financial centre of gravity, but, so far, London has maintained its dominant position in securities and money markets. However, it is significant that the traditional UK investment banks and brokerage houses are now mostly in foreign ownership. Of course, commercial services comprise much more than banking, insurance and other financial services. They also include:l l l l

the tourist trade UK expenditure by foreign visitors less spending abroad; shipping and aviation freight services; communication services (telecommunications, postal and courier); computer and information services;

10

The global economy

l royalties and licence fees; l personal, cultural and recreational services; l other business services.

In arriving at the net effect of invisible transactions on the balance of payments, government disbursements, interest and profits earned abroad and emigrants remittances are also taken into account. Their role is referred to again in Chapter 1.2. The interplay of the deficits on merchandise trade and surpluses on commercial services since 1990 is detailed in the various figures of Chapter 1.3.

ORGANIZATIONS IN WORLD TRADEEarlier in this chapter the significance of the three key international organizations (IMF, World Bank and the GATT) formed in the immediate post-World War II period was discussed in the context of the campaign against protectionism. The aim of all three organizations was to attempt to establish international approaches to trade and to economic development, which would enhance world wealth while helping countries to adjust to economic fluctuations.

The IMFThe IMFs prime task is to try to regulate the way in which countries adjust to fluctuations in exchange rates. The IMF was set up to provide a way in which countries experiencing trade deficits could borrow funds to pay their debts from a central source. Member countries subscribe amounts of their own currencies and gold, which are used, in theory, to assist deficit nations. For that purpose, the IMF also established a regime of currency rates and a form of world money called special drawing rights (SDRs). Over the last 60 years the IMF has undoubtedly contributed significantly to the way in which world trade has been able to expand. It has also played a crucial role in helping to rescue the economies of countries from bankruptcy through external debt. Indeed, it is difficult to imagine how Argentina or Brazil could have survived their present post-millennium financial crises without continuing IMF intervention.

The World BankThe World Bank was established as its original title implies to help with postwar reconstruction. It was initially known as the International Bank for Reconstruction and Development (IBRD). Since 1945, the World Bank has taken on the role of providing loans at preferential rates mostly to developing countries for projects that will assist and accelerate their economic development. Typical projects are irrigation and hydro-electricity schemes, roads and power supply.


From the 1980s onwards the World Bank has taken on a new role supporting the IMF in debt relief. Between 1960 and 1980 many countries, particularly in South America and Africa, had accumulated substantial external debt on which the annual interest alone created real hardship. The scale of the debt was also creating the risk that a country would simply renege on its debt, which would create a domino effect as others followed suit. The IMF and the World Bank jointly have been active in negotiating a long series of agreements with debtor countries, which have allowed them to restructure their debt and pay less interest.

The General Agreement on Tariffs and Trade (GATT)The GATT, which was superseded by the World Trade Organization (WTO) on 1 January 1995, was set up to try to avoid the competitive tariff wars of the 1930s. The GATT was signed at Geneva in 1947 and came into operation in 1948. Over a series of protracted negotiations, known as rounds, from 1945 onwards the GATT established binding agreements on its members to reduce tariffs. Each round reduced general tariffs further, thereby creating the conditions for steady increases in world trade. Under the GATT arrangements, any proposal to impose a new tariff had to be submitted to the GATT and any disputes between members were, in theory, to be settled by reference to the GATT. GATT rules for preventing infringements of tariff concessions and keeping the channels of trade open are based on two principles: most-favoured nation treatment for members and non-discrimination. However, many exceptions are allowed. Controls in conflict with the rules are permitted if they were in operation when the General Agreement was concluded, or in the case of new members, when they first enter into negotiations. New restrictive measures of a discriminatory nature are allowed under certain conditions, the most important being safeguarding the balance of payments. Since the conclusion of the Uruguay Round in December 1993, progress has been slower, although WTO membership has continued to grow, notably with the addition of China in December 2001, and more effective dispute resolution procedures have been adopted. The more recent problems of the WTO, which have been exposed during the current Doha Round, not least those related to EU subsidies for agricultural products, are discussed later in the book.

12

The global economy

1.2

Balance of payments measurement and management

MEASURING TRADEIn Chapter 1.1 we distinguished between international merchandise trade and trade in commercial services. The interplay between the two is the key element in national trade and balance of payments accounting, of which the main elements are illustrated in Figure 1.2.1. In the past it was common UK practice to distinguish between visible and invisible trade, meaning effectively the tangible items and the intangible items. The formal published trade figures now have the two headings balance on goods and balance on services as in Figure 1.2.1. Other items of what used to be part of the invisibles account are now treated under the new heading of UK assets and liabilities.

International balance of payments ratiosThere are three yardsticks of international trade that are commonly quoted by economists and others seeking to compare trade performance between countries relative to their economies:l Ratio of trade at market prices to gross domestic product (GDP). For example,

China now has a surprisingly open economy with a ratio of 44 per cent in 2001, while Japans ratio of trade to GDP was only 18 per cent. l Ratio of current account balance to GDP. The ratios of the UKs and USAs deficits to GDP are 1.7 per cent and 5.1 per cent currently while those of some of the European Union (EU) accession states exceed 40 per cent. l Terms of trade. This more sophisticated measurement is the ratio of a countrys prices of exports to those of its imports and is an indicator of competitiveness.

Balance of payments

13

Balance on goods Balance on services Current account

The account for trade in manufactured goods and raw materials The account showing balances on trade in services The account that includes virtually everything that would be recognized as trade as well as some other things such as net investment income. Included are: Balance on goods Balance on services Balance on investment income Balance on government transfers

UK assets and liabilities A new account introduced in the mid-1990s to show the account UKs net earnings or net payments in respect of what it owns in the rest of the world Balance of payments The overall accounts for the UKs trade with the rest of the world

Figure 1.2.1 Balance of payment accounting

Imbalances in trading accountsThe surplus or deficit resulting from the sum of the balance on goods and the balance on services is known as the balance of trade. The ultimate result of the collection of UK trade figures is a net total known as balance of payments. This figure formally represents the final surplus or debt resulting from all UK transactions with the rest of the world in any given year. It is customary to apply the term current account balance to the reported net surplus or deficit for a given period or the current year to date. The objective for trade balances is to achieve equilibrium or sufficient surpluses to pay off a countrys debts but not over such a period as to damage trade by affecting the exchange rate. A country whose balance of payments shows consistent deficits is said to be in disequilibrium. Technically, the term disequilibrium applies equally where consistent surpluses are experienced, but this is a more desirable result and is rarely referred to under the heading of disequilibrium.

MANAGING DISEQUILIBRIUMA country with a surplus in its balance of payments is said to be a creditor nation. It can add this surplus to its reserves or lend it to other nations to enable them to

14

The global economy

improve their economies. Conversely, if a country incurs a deficit in its balance of payments, it is said to be a debtor nation because it has spent more than it has earned. It must finance this deficit either by drawing upon its reserves or by borrowing externally. Clearly, a countrys reserves of gold and foreign currencies are not inexhaustible and sooner or later it would have to negotiate loans and eventually repay them. We have already mentioned the role of the IMF as a provider of loans for this purpose. IMF loans are generally granted with stringent conditions attached as to the management of the borrowing countrys economy. In the 1970s, the United Kingdom negotiated significant loans from the IMF in order to cover accumulated deficits. Changes in domestic economic policy, in agreement with the IMF, enabled the loans to be repaid quite soon. A country with a persistent balance of payments deficit must take appropriate measures to rectify the situation, which would depend upon the causes of the deficit. If it is due to its imports, measures must be taken to restrict imports while stimulating exports. If it has been caused by an excessive outflow of capital, then measures must be taken to control overseas investment. As we shall discuss in Chapter 9.3 at the end of this book, both the United Kingdom and the United States were in deficit at the end of 2003 and remedial action is likely to become necessary. Some of the measures that a country may take are summarized under the following headings.

Import controlsIn theory, there are two methods of controlling imports, the protection tools described in Chapter 1.1: import quotas and import duties (tariffs). Import quotas provide restrictions to the total number or value of goods that may be imported into the country during a specified period. The imposition of import duties is intended to reduce demand for the commodities in question by increasing the price to the ultimate user. As signatories to the General Agreement on Tariffs and Trade (GATT) and its successor the World Trade Organization (WTO), the boundaries within which the United Kingdom or the United States can impose import controls or tariffs, even to address disequilibrium, are severely restricted. As a full member of the EU, the United Kingdom can depart from the common external tariff only in the most exceptional circumstances.

Export incentivesA government might grant its exporters generally, or in specific industries, subsidies or taxation reductions to enable them to reduce their prices and undercut foreign competitors. Such incentives are also outlawed by the WTO and would certainly contravene EU agreements if applied to trade within Europe.

Balance of payments

15

Monetary measuresSince the use of import controls and export incentives is constrained, the United Kingdom usually resorts to monetary measures when there is a balance of payments deficit. Recognizing that the fundamental cause of current account deficits is usually excessive home demand for imported goods and the absorption of home-produced goods, which may otherwise have been exported, the government may adopt one or more of the following measures:l Increasing interest rate. Thereby discouraging borrowing and consequently

tightening and reducing spending power. Higher interest rates also attract foreign short-term capital. l Open market operations. By selling securities in the open market the government reduces the amount of money in circulation, which diminishes purchasing power. l Special deposits. In the form of directives to the banks to deposit a certain proportion of their funds with the Bank of England, where they are frozen. This reduces the liquidity of the banks, which in turn restricts bank lending and diminishes purchasing power.

Fiscal measuresA government can also reduce spending power more directly by means of higher taxation, hire-purchase controls, etc.

DevaluationThe purpose of devaluing a currency is to make a countrys exports cheaper to overseas buyers and, at the same time, its imports dearer. This method is applicable when a system of fixed exchange rates is in place, but is usually the measure of last resort. Under a system of floating exchange rates, the exchange value of a currency will gradually depreciate if it is overvalued, which will have the same effect as a devaluation. The currencies of developing countries, which are pegged by a fixed rate (or within a narrow fixed band) to a more stable hard currency, such as the US dollar, are effectively insulated from the market forces related to its own countrys economy.

MANAGING EXCHANGE RATESThe history of exchange rates is complex. In the early days of trade, exporters would accept payment only in commodities that were considered to have intrinsic value, such as gold, silver or jewels. This approach continued until well into the 19th

16

The global economy

century when certain currencies came into use for trade, notably the pound sterling, the Dutch guilder and the French franc, reflecting the growth of empires during that century. The British Empires wealth enabled the government to back every single pound note with an equivalent amount of gold. The level of trust in paper currency became so great that large areas of the world traded and maintained reserves in sterling. These territories became known collectively as the Sterling Area, a vast expanse of British government-backed paper, which became a major embarrassment to successive governments of the 1950s and 1960s when countries began to convert their reserves to gold or US dollars. In about 1873, the need to know the value of a trading currency led to the establishment of the gold standard, with currencies pegged in terms of their value in a specific weight of gold and against each other. The gold standard created the first system of fixed exchange rates and provided the confidence required for a significant expansion in world trade. The standard began to break down after 1918 and disappeared during the 1930s. The lack of formal exchange rate mechanisms contributed to the collapse in world trade during that inter-war period. After World War II, the IMF established a new system of fixed exchange rates, which was also fixed against gold but more remotely. Each country assigned a value to its currency in terms of an ounce of gold (which was valued then at $35). Nations were only allowed to adjust their exchange rates significantly in extreme circumstances but could make minor adjustments (up to 10 per cent) in circumstances that were described as fundamental disequilibrium. Few countries used this facility (only six between 1947 and 1971) and by the 1960s the system had become highly unstable. By 1971, continuing US difficulties caused the United States to announce that the dollar would no longer be convertible into gold. Soon afterwards the UK and French governments also came off the gold standard. Since that date the main system of exchange rate management has been to allow currencies to float within reasonable limits against other currencies. In its European Community phase the EU operated several fixed and semi-fixed systems during the 1970s and 1980s, the last of which deteriorated into a smaller Deutsche Mark area. However, the establishment of the European Monetary Union with the formation of the European Central Bank (ECB) and the launch of the euro-currency from 1 January 1999 has put in place a single currency throughout the Eurozone, which currently includes all members of the EU15 except for Denmark, Sweden and the United Kingdom. The United Kingdom retains the pound sterling, which the UK government allows to float whilst monitoring its position closely. The 10 members of the Eurozone have foregone the ability to devalue or revalue a national currency individually.

Pattens of world trade 17

1.3

Patterns of world trade

INTERNATIONAL TRADE IN THE 20TH CENTURYThe endeavours of participating nations in the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO), to expand the free trade environment in the past 60 years may be appreciated best in the historical context of the growth in trade throughout the 20th century. In Table 1.3.1 the rate of growth in the volume of merchandise exports for 11 countries and the world is summarized for the period from 1870 to 1998. In global terms, the annual average compound growth rate between 1913 and 1950 was less than 1 per cent, compared to pre-1913 growth of 3.4 per cent. The following 23year period was one of strong international trade expansion with annual compound growth averaging 7.9 per cent, which then eased off to 5.1 per cent over the 25-year period 197398. Comparing the two most recent periods, among developed economies annual average growth fell back, with the exception of the United Kingdom where the growth rate increased from 3.9 to 4.4 per cent. In Europe, most striking was the fall in the growth rate of merchandise exports from Germany from 12.4 to 4.4 per cent as the post-war reconstruction period of German industry came to a close, while the annual growth in exports from the United States remained at the 6.0 per cent level. However, the fall in merchandise export growth has been most marked in the case of Japan, where the annual rate fell by almost two-thirds from 15.4 per cent over 195073 to almost European levels (5.3 per cent) during the 197398 period. By contrast, the volume of merchandise exports from developing countries in Asia and Latin America soared. Chinas annual growth rate more than quadrupled from 2.7 to 11.8 per cent, while Mexican export growth rose from 4.3 per cent to 10.9 per cent. The growing significance of merchandise exports to the economies of individual countries is illustrated in Table 1.3.2, which charts over six selected years in the same span of the past 130 years how exports as a percentage of GDP at 1990 prices fluctuated. Globally, exports fell back from 9.0 per cent of GDP in 1929 to 5.5 per cent in 1950, before recovering to 10.5 per cent in 1973 and moving forward to 17.2 per cent in 1998.

18

The global economy

Table 1.3.1 Rate of growth (%) in volume of merchandise exports, 11 countries and world, 18701988 (annual average compound growth rates) 18701913 France Germany Netherlands United Kingdom Spain United States Mexico Brazil China India Japan World 2.8 4.1 2.3 2.8 3.5 4.9 5.4 1.9 2.6 2.4 8.5 3.4 191350 1.1 2.8 1.5 0.0 1.6 2.2 0.5 1.7 1.1 1.5 2.0 0.9 195073 8.2 12.4 10.4 3.9 9.2 6.3 4.3 4.7 2.7 2.5 15.4 7.9 197398 4.7 4.4 4.1 4.4 9.0 6.0 10.9 6.6 11.8 5.9 5.3 5.1

Source: Derived from Appendix 1.6.1 of A Handbook of World Trade, 2nd edn (Reuvid, 2004), and 195098 IMF International Financial Statistics, supplemented by UN Yearbook of International Trade Statistics, various issues.

Table 1.3.2 Merchandise exports as a percentage of GDP in 1990 prices, 11 countries and world, 18701998 1870 France Germany Netherlands United Kingdom Spain United States Mexico Brazil China India Japan World 4.9 9.5 17.4 12.2 3.8 2.5 3.9 12.2 0.7 2.6 0.2 4.6 1913 7.8 16.1 17.3 17.5 8.1 3.7 9.1 9.8 1.7 4.6 2.4 7.9 1929 8.6 12.8 17.2 13.3 5.0 3.6 12.5 6.9 1.8 3.7 3.5 9.0 1950 7.6 6.2 12.2 11.3 3.0 3.0 3.0 3.9 2.6 2.9 2.2 5.5 1973 15.2 23.8 40.7 14.0 5.0 4.9 1.9 2.5 1.5 2.0 7.7 10.5 1998 28.7 38.9 61.2 25.0 23.5 10.1 10.7 5.4 4.9 2.4 13.4 17.2

Source: Appendix 1.6.1 of A Handbook of World Trade, 2nd edn (Reuvid, 2004), sources for Fig. 1.5.1 and Maddison (1997), Table 13


Broadly, the developed countries conformed to this pattern with much higher rates of export ratios in Europe and lower rates in the United States and Japan. By 1998, the exports/GDP ratio had reached 25 per cent in the United Kingdom and 38.9 per cent in Germany. For the United States and Japan the ratios were 10.1 and 13.4 per cent respectively. The highest export/GDP ratio for 1998 among developed countries was recorded in the Netherlands at 61.2 per cent. Among developing countries, in spite of their superior rates of export growth since 1973, export/GDP ratios are comparatively modest. In 1998 Mexicos merchandise exports represented 10.7 per cent of GDP, while Chinas export/GDP ratio was only 4.9 per cent, giving a foretaste of the likely impact of Chinese exports on world trade as its per capita industrial output approaches more developed economy levels. More detail on the evolution of exports round the world is given in Table 1.3.3, where the value of merchandise exports at constant 1990 prices for 35 countries is tracked for the same six years over the 18701998 period.

TRENDS IN MERCHANDISE TRADE AND COMMERCIAL SERVICES BY REGIONThe growth by region in the value of world merchandise trade and world trade in commercial services between 1990 and 2001 in terms of annual percentage change are charted in Tables 1.3.4 and 1.3.5.

Merchandise tradeAfter increased exports of merchandise in all regions in 2000, of which the European Unions increase of 3 per cent was lowest, all the groupings in Table 1.3.4 except for Central and Eastern Europe, the Baltic States and the CIS (Commonwealth of Independent States) (5 per cent) and China (7 per cent) suffered export declines in 2001.

The EUIn terms of merchandise trade, the EU (within Western Europe) was the worlds biggest grouping in 2001 in both exports ($2,291 billion) and imports ($2,334 billion), with imports marginally exceeding exports. The rate of growth of imports was 6 per cent in 2000 but fell by 3 per cent in 2001, while exports declined in 2001 by 1 per cent against 4 per cent growth the previous year.

AsiaAsia is the second largest exporting region ($1,497 billion), with exports exceeding imports by $122 billion in 2001. Following the 1997/98 Asian financial crisis, the

20

The global economy

Table 1.3.3 Evolution of world exports from 1870 to 1998 at constant 1990 prices1870 Austria Belgium Denmark Finland France Germany Italy Netherlands Norway Sweden Switzerland United Kingdom Total Australia Canada United States Total Spain USSR Argentina Brazil Chile Colombia Mexico Peru Venezuela Total Bangladesh Burma China India Indonesia Japan Pakistan Phillippines South Korea Taiwan Thailand Total 467 1,237 314 310 3,512 6,761 1,788 1,727 223 713 1,107 12,237 30,396 455 724 2,495 3,674 850 n.a. 222 854 166 114 242 202 n.a. 2,126 1,398 3,466 172 51 55 0 88 5,230 1913 2,024 7,318 1,494 1,597 11,292 38,200 4,621 4,329 854 2,670 5,735 39,348 119,482 3,392 4,044 19,196 26,632 3,697 6,666 1,963 1,888 702 267 2,363 409 1,374 8,966 4,197 9,480 989 1,684 180 171 70 495 17,266 1929 1,746 7,845 2,705 2,578 16,600 35,068 5,670 7,411 1,427 4,167 5,776 31,990 122,983 3,636 7,812 30,368 41,816 3,394 3,420 3,096 2,592 1,352 811 3,714 1,142 2,593 15,300 6,262 8,209 2,609 4,343 678 1,292 261 640 24,294 1950 1,348 8,182 3,579 3,186 16,848 13,179 5,846 7,411 2,301 7,366 6,493 39,348 115,087 5,383 12,576 43,114 61,073 2,018 6,472 2,079 3,489 1,166 1,112 1,999 1,172 9,722 20,739 284 269 6,339 5,489 2,254 3,538 720 697 112 180 1,148 21,030 1973 13,899 61,764 16,568 15,641 104,161 194,171 72,749 71,522 11,687 34,431 38,972 94,670 730,235 18,869 60,214 174,548 253,631 15,295 58,015 4,181 9,998 2,030 2,629 5,238 4,323 23,779 52,178 445 235 11,679 9,679 9,605 95,105 1,626 2,608 7,894 5,761 3,081 147,733 1998 69,519 175,503 49,121 48,697 329,597 567,372 267,378 194,430 58,141 103,341 78,863 277,243 2,219,205 69,324 243,015 745,330 1,057,669 131,621 119,978 23,439 49,874 18,228 11,117 70,261 6,205 29,411 208,535 4,146 1,075 190,177 40,972 56,232 346,007 9,868 22,712 204,542 100,639 48,752 1,025,122

Source: Volume movement in Western Europe, Western offshoots and Japan from A. Maddison, Dynamic Forces in Capitalist Development, OUP, 1991, Appendix F, updated from OECD, Economic Outlook, December 1999. Spain 18261980 from A. Carreras, ed., Estadisticas Historicas de Espaa: Siglos XIXXX, Fundacion Banco Exterior, Madrid, 1989, pp. 3467. USSR, Latin America and Asia from sources cited in A. Maddison, The World Economy in the Twentieth Century, OECD Development Centre, 1989, p. 140, updated with volume movements derivable from IMF, International Financial Statistics, various issues. Brazil 18701913 from R.W. Goldsmith, Brasil 18501984: Desenvolvimento Financeioro Sob um Secolo de Inflaco, Harper and Row, So Paulo, 1986, pp. 545 and 110111. Peru 18701950 from S.J. Hunt, Price and Quantum Estimates of Peruvian Exports, 18301962, Discussion Paper 33, Research Program in Economic Development, Princeton University, January 1973 (1929 weights for 190050, 1900 weights for 18701900). Venezuela 191329 from A. Bapista, Bases Cuantitativas de la Economica Venezolana 18301989, C. Corporativas, Caracas, 1991, and 192992 from ECLAC sources. 199098 movements from ADB, OECD, ECLAC, IMF.

Table 1.3.4 Growth in the value of world merchandise trade by region, 2001 (billion dollars and percentages) Imports Value 2001 6270 1408 380 2524 2334 267 159 54 136 180 1375 349 244 532 5 7 11 4 4 6 10 3 5 6 4 15 6 19902001 2000 13 18 16 6 6 14 12 13 4 13 23 22 36 26 Annual percentage change 2001 4 6 2 3 3 11 9 20 2 4 7 8 8 13

Exports

Value

Annual percentage change

2001

19902001

2000

2001

5984 991 347 2485 2291 286 129 103 141 237 1497 403 266 568

5 6 8 4 4 7 8 3 5 7 3 14 7

13 14 20 4 3 26 14 39 27 42 18 14 28 19

4 6 3 1 1 5 12 2 5 9 9 16 7 12

World North Americaa Latin America Western Europe European Union (15) C/E Europe/Baltic States/CIS Central and Eastern Europe Russian Federation Africa Middle East Asia Japan China Six East Asian traders

a

Excluding Mexico throughout this report. Note: It should be mentioned at the outset that there are breaks in the continuity of the figures at the country and regional levels.


Source: WTO (www.wto.org)

22

The global economy

annual growth in exports recovered from 6 per cent negative to 18 per cent positive in 2000 before falling back 9 per cent in 2001. The decline in 2001 was attributable to a reduction in Japanese exports of 16 per cent. Likewise, imports revived from 1998s decline of 18 per cent and peaked at 23 per cent growth in 2000 before declining 7 per cent in 2001.

North AmericaConversely, North America (excluding Mexico) was the worlds second largest importing region in 2001 ($1,408 billion), although only third in exports ($991 billion). However, export growth recovered by 4 per cent in 1999 (1998 1 per cent negative) and peaked at 14 per cent growth in 2000, before declining by 6 per cent in 2001. Imports achieved 18 per cent growth in 2000 against 5 per cent in 1998.

Central and Eastern Europe (CEE)Although exports from Central and Eastern Europe increased only marginally in 1999 by 1 per cent against a 10-year average growth rate of 8 per cent, growth was more robust in 2000 and 2001 (12 per cent) to a total of $129 billion. Imports declined by 1 per cent in 1999 against 10 per cent average for the decade, but grew strongly in 2000 and 2001 to a total $159 billion. Thus, the annual trade deficit for the region was maintained at the level of $30 billion from 1999. The Baltic States and CIS countries together achieved an export surplus of $31 billion in 1999 with exports slowing by 2 per cent and imports by 24 per cent, and in 2001 the trade surplus expanded to $49 billion.

Middle EastThe Middle East trade surplus in 2001 was $57 billion, with OPEC (Organization of Petroleum Exporting Countries) oil exports accounting for most of the export total of $237 billion. Although exports grew by 42 per cent in 2000, significantly higher than in other regions except the oil-producing Russian Federation (39 per cent), they fell away by 9 per cent in 2001.

AfricaAfrican imports were at a similar level ($128 billion) to the CEE in 1999 but grew more modestly in 2000 and 2001 to $136 billion. Exports from Africa grew more rapidly from $117 billion (1999) to $141 billion (2001), thereby achieving a small trade surplus.

Latin AmericaLatin Americas exports grew by a healthy 20 per cent in 2000 but fell back by 3 per cent in 2001 to $347 billion, resulting in a trade deficit of $33 billion.


Commercial servicesThe pattern of 2001 world trade in commercial services was rather different, as Table 1.3.5 demonstrates. Although the world average annual growth rate in the value of exports over the 10-year period to 2000 at 6.5 per cent was the same as for merchandise trade, the decline in the export of commercial services in 2001 was only 0.5 per cent compared to 4.5 per cent in the case of merchandise. Both Western Europe and North America (again excluding Mexico), the first and third exporting regions, were net exporters of commercial services to the values of $32 billion and $70 billion respectively. By contrast in 2001, Asia, now the second-ranking region in commercial services, was a net importer to the value of $52 billion. Neither Central and Eastern Europe nor the Baltic States and the CIS registered as significant in commercial services world trade.

FOREIGN TRADE BETWEEN TRADING BLOCS AND THEIR MEMBERSRegional merchandise trade may also be analysed in terms of intra- and extraexports and imports between the principal trading groups and their members: APEC, EU, NAFTA, ASEAN, CEFTA, MERCOSUR and ANDEAN. The data for 1990, 1995 and 2001 is displayed in Table 1.3.6 in respect of percentage share of exports/ imports and annual percentage change, and in value for 2001. In the case of APEC (Asia-Pacific Economic Cooperation), the most diverse of the groupings, exports between the 21-country membership in 2001 exceeded exports to other regions in the ratio 71.8 to 28.2. Similarly, the ratio of intra-imports to extra-imports was 69.9 to 30.1. Exports between the 15 members of the EU in 1999 exceeded exports to other regions in the ratio 61.85 to 38.15, while intra- and extra-imports followed a closely similar pattern. Given the comparatively recent formation of the NAFTA (North American Free Trade Agreement), it is encouraging to find that in 2001, intra-exports and intraimports represented 55.5 per cent and 39.5 per cent respectively of total exports and imports. Among the four other trade groups the incidence of intra-exports and imports is less dominant. The proportion of intra-exports between the 10 ASEAN (Association of South East Asian Nations) and four MERCOSUR members was 23.5 per cent and 17.3 per cent; similarly, the proportion of intra-imports was 22.8 per cent and 18.9 per cent respectively. Intra-trade between the seven members of the CEFTA (Central European Free Trade Agreement) (exports: 12.4 per cent; imports: 9.9 per cent) and five members of the ANDEAN group (exports: 11.2 per cent; imports: 13.3 per cent) were less significant but have been growing quite strongly in the case of the ANDEAN five. Clearly, there are potential foreign trade benefits for all trading blocs from enhanced

24

Table 1.3.5 Growth in the value of world trade in commercial services by region Imports Value 2001 1445 229 71 647 605 59 37 45 355 107 39 133 5 6 7 5 5 3 6 2 23 8 19902001 2000 7 14 12 2 2 19 7 8 8 1 16 13 Annual percentage change 2001 1 6 0 1 2 13 3 7 3 7 9 3

Exports

The global economy

Value


2001

19902001

2000

2001

1460 299 58 679 612 56 31 33 303 64 33 146

6 6 6 5 5 5 8 4 17 9

6 9 11 2 1 11 0 16 12 13 15 12

0 3 3 1 1 11 0 7 1 7 9 0

World North Americaa Latin America Western Europe European Union (15) C/E Europe/Baltic States/CIS Africa Middle East Asia Japan China Six East Asian traders

* Excluding Mexico throughout this report. Note: It should be mentioned at the outset that there are numerous breaks in the continuity of the figures at the country and regional levels due to frequent revisions to the trade in services data.



Table 1.3.6 Merchandise trade of selected regional integration arrangements, 2001(billion dollars and percentages)Share in total exports/imports 1990 1995

Value 2001 APEC (21) Total exports 2700 Intra-exports 1938 Extra-exports 762 2969 Total importsa Intra-imports 2076 Extra-imports 893 EU (15) Total exports Intra-exports Extra-exports Total imports Intra-imports Extra-imports NAFTA (3) Total exports 1149 Intra-exports 637 Extra-exports 512 1578 Total importsb Intra-imports 624 Extra-imports 954 ASEAN (10) Total exports Intra-exports Extra-exports Total imports Intra-imports Extra-imports 385 90 295 336 77 260 100.0 20.1 79.9 100.0 16.2 83.8 100.0 42.6 57.4 100.0 34.4 65.6 2291 1417 874 2334 1421 913 100.0 64.9 35.1 100.0 63.0 37.0 100.0 67.5 32.5 100.0 65.4 34.6

Annual percentage change 2001 19902001 2000 2001

100.00 73.06 26.94 100.00 71.74 28.26

100.00 71.78 28.22 100.00 69.92 30.08

7 7 5 7 8 6

17 20 11 21 20 24

8 9 4 7 8 2

100.00 64.01 35.99 100.00 65.23 34.77

100.00 61.85 38.15 100.00 60.89 39.11

4 3 5 4 3 4

3 1 7 6 1 15

1 2 0 3 2 4

100.00 46.06 53.94 100.00 37.72 62.28

100.00 55.46 44.54 100.00 39.55 60.45

7 9 4 8 9 7

15 18 11 18 17 19

6 6 6 6 7 6

100.00 25.52 74.48 100.00 18.89 81.11

100.00 23.46 76.54 100.00 22.77 77.23

9 11 9 7 10 6

19 28 16 22 28 21

10 12 9 8 12 7

26

The global economy

Table 1.3.6 (continued)Share in total exports/imports 1990 1995

Value 2001 CEFTA (7) Total exports Intra-exports Extra-exports Total imports Intra-imports Extra-imports MERCOSUR (4) Total exports Intra-exports Extra-exports Total imports Intra-imports Extra-imports ANDEAN (5) Total exports Intra-exports Extra-exports Total importsc Intra-imports Extra-importsa b

Annual percentage change 2001 19902001 2000 2001

138 17 121 168 17 151

100.00 14.54 85.46 100.00 11.28 88.72

100.00 12.37 87.63 100.00 9.91 90.09

13 14 13 12 13 11

11 14 11 8 12 8

88 15 73 84 16 68

100.0 8.9 91.1 100.0 14.5 85.5

100.00 20.51 79.49 100.00 18.07 81.93

100.00 17.26 82.74 100.00 18.88 81.12

6 13 5 10 13 9

14 17 13 8 12 8

4 14 9 6 11 5

53 6 47 44 6 38

100.0 4.2 95.8 100.0 7.7 92.3

100.00 12.16 87.84 100.00 12.88 87.12

100.00 11.19 88.81 100.00 13.32 86.68

5 15 4 9 14 8

34 30 34 9 29 7

9 14 12 12 8 12

Imports of Canada, Mexico (199099), Peru, and Australia are valued f.o.b. Imports of Canada and Mexico (199099) are valued f.o.b. c Imports of Peru and Venezuela are valued f.o.b. Note: The figures are not fully adjusted for differences in the way members of the arrangements in this table record their merchandise trade. Source: WTO (www.wto.org)


free trade between them if the Doha Round of WTO negotiations can be revived and pursued to a positive conclusion.

EXTRA- AND INTER-REGIONAL MERCHANDISE TRADE North AmericaNorth Americas biggest regional export markets are Asia and Western Europe, accounting respectively for 19.0 per cent and 20.9 per cent of total exports in 2001. Asia accounted for 32.7 per cent of total US imports, of which 9.9 per cent were sourced from China. A further 19.5 per cent originated from Western Europe.

Western EuropeFor Western Europe, extra-trade accounted for about one-third. The 32.5 per cent of exports shipped in 2001 from Western European countries to external markets were diffused relatively evenly between North America (10.2 per cent) and Asia (7.9 per cent), with the remainder distributed between Latin America, Africa and the Middle East in almost equal proportions. Of the 33.6 per cent of imports sourced outside Western Europe, 11.3 per cent were imported from Asia, 8.0 per cent from North America, 6.7 per cent from Central and Eastern Europe and CIS countries and 3.0 per cent from Africa.

Central and Eastern Europe, the Baltic and CIS statesThe exports of Central and Eastern European countries, the Baltic and CIS states outside the region are sold primarily into Western European markets. The two other significant regional markets are Asia and North America.

Latin AmericaBy contrast, more than 60 per cent of Latin Americas exports are sold to North American markets, with Western Europe and Asia its more important secondary regional markets.

AsiaNorth America is also the primary extra-export market for Asian goods, with Western Europe the dominant secondary market. Asia is the primary export region for Middle Eastern merchandise, with Western Europe and North America its major secondary markets.

28

The global economy

AfricaFinally, Africa follows a similar pattern to Central and Eastern Europe, the Baltic and CIS states with more than half of export goods shipped to Western Europe and the bulk of remaining extra-exports to North America and Asia.

THE WORLDS LEADING EXPORTERS AND IMPORTERS Merchandise tradeThe top 50 exporting and importing countries in world merchandise trade, excluding intra-EU trade, are identified in Table 1.3.7. The EU and United States head both league tables, the EU as a net importer (2001 $39 billion deficit) and the United States with the worlds largest trade deficit (2001 $449 billion). Japan ranks third both in merchandise exports and imports with the largest trade surplus (2001 $54 billion), followed by mainland China in fourth place with a surplus of 23 billion. Canada holds fifth place with a surplus of $32 billion and Hong Kong is listed sixth with a net deficit of $11 billion after accounting for re-exports and retained imports. Mexico ranks seventh with a deficit of $18 billion and the trio of former Asian tigers, Korea, Taiwan and Singapore, make up the remaining top 10. Germany, France and the United Kingdom were previously listed individually in the WTO top 10 but are now grouped within the EU.

Commercial servicesThe rankings of the top 10 lists of exporters and importers of commercial services, before the exclusion of EU intra-trade, within the 40 countries listed in Table 1.3.8 are somewhat different to those for merchandise trade. The United States ranks first both as an exporter and importer of commercial services with a net surplus in 2001 of $76 billion. The United Kingdom ranks second as an exporter but fourth in imported services with a surplus of $17 billion, which offsets the running deficit in merchandise trade. Conversely, Germany, second as an importer and fourth in exports, reported a deficit of $53 billion. France, ranking third in exports and fifth in imports, achieved a similar net result to the United Kingdom with a surplus of $18 billion. Japan, lying third in imported services and fifth in exports echoed Germanys performance with a net deficit of $43 billion. Of the remaining top10 in exported commercial services, Spain (sixth) and Italy (seventh) delivered surpluses of $24 billion and $1 billion respectively. The Netherlands (eighth) was just in deficit and BelgiumLuxembourg (ninth) recorded a surplus of $3 billion. As last of the top 10, Hong Kong China achieved an equivalent surplus to France and the United Kingdom of $17 billion. Among the remaining Western European economies Austria, Denmark and Portugal showed small surpluses and Switzerland a larger surplus of $10 billion in

Table 1.3.7 Leading exporters and importers in world merchandise trade (excluding intra-EU trade), 2001 (billion dollars and percentages)

Rank 1 2 3 4 5 6 7 8 9 10

Exporters

Value

Share

Annual percentage change Rank Importers Value Share


1 2 3 4 5 6

7 8 9 10

United States Extra-EU imports Japan China Canada Hong Kong, China retained importsa Mexico Korea, Rep. of Singapore retained importsa Taipei, Chinese

1180.2 912.8 349.1 243.6 227.2 202.0 31.2 176.2 141.1 116.0 60.4 107.3

23.5 18.2 7.0 4.9 4.5 4.0 0.6 3.5 2.8 2.3 1.2 2.1

6 4 8 8 7 6 11 4 12 14 20 23


11 12 13 14 15 16 17

Extra-EU exports United States Japan China Canada Hong Kong, China domestic exports re-exports Mexico Korea, Rep. of Taipei, Chinese Singapore domestic exports re-exports Russian Fed. Malaysia Switzerland Saudi Arabia Thailand Australia Brazil 11 12 13 14 15 16 17 Switzerland Malaysia Australia Thailand Brazil Russian Fed. Poland 84.1 74.1 63.9 62.1 58.3 53.9 50.3 1.7 1.5 1.3 1.2 1.2 1.1 1.0

874.1 730.8 403.5 266.2 259.9 191.1 20.3 170.8 158.5 150.4 122.5 121.8 66.1 55.6 103.1 87.9 82.1 68.2 65.1 63.4 58.2

18.4 15.4 8.5 5.6 5.5 4.0 0.4 3.6 3.3 3.2 2.6 2.6 1.4 1.2 2.2 1.9 1.7 1.4 1.4 1.3 1.2

0 6 16 7 6 6 14 5 5 13 17 12 16 6 2 10 1 12 6 1 6

1 10 11 0 0 20 3

Table 1.3.7 (continued)

Rank 3 9 3 2 14 15 19 12 9 2 8 14 1 11 9 9 4 12 17 23 4 3 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 India United Arab Emirates Turkey Czech Rep.c Israel Hungary Norway Philippines Saudi Arabiab Indonesia South Africa Argentina Venezuela Iran, Islamic Rep. ofb Chile Ukraine Vietnam Romania Slovak Rep.c New Zealand Colombia Egypt 49.6 41.7 40.6 36.5 35.1 33.7 32.4 31.4 31.2 31.0 28.4 20.3 18.0 17.5 17.2 15.8 15.6 15.6 14.8 13.3 12.8 12.8 1.0 0.8 0.8 0.7 0.7 0.7 0.6 0.6 0.6 0.6 0.6 0.4 0.4 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3

Exporters

Value

Share

Annual percentage change Rank Importers Value Share 3 9 26 14 7 5 6 7 3 8 4 20 11 22 5 13 2 19 16 4 11 9


18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39

Norway Indonesia India United Arab Emiratesb Poland Czech Rep. Philippines Turkey Hungary South Africa Israel Venezuela Argentina Iran, Islamic Rep. ofb Algeria Nigeriab Chile Ukraine Kuwait Iraqb Vietnam New Zealand

57.9 56.3 43.6 42.9 36.1 33.4 32.1 31.2 30.5 29.3 29.0 27.4 26.7 25.3 20.1 19.2 17.4 16.3 16.1 15.9 15.1 13.7

1.2 1.2 0.9 0.9 0.8 0.7 0.7 0.7 0.6 0.6 0.6 0.6 0.6 0.5 0.4 0.4 0.4 0.3 0.3 0.3 0.3 0.3


Rank 0.3 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.1 Iraqb Morocco Pakistan Slovenia Algeria Tunisia Dominican Republicb Peru Bangladesh Belarus Total of aboved World (excl. intra-EU trade)d 4603.0 5020.0 5 91.7 100.0 6 6 13 10 2 6 6 2 5 4 15 40 41 42 43 44 45 46 47 48 49 50 Nigeriab 11.2 11.0 11.0 10.6 10.1 9.7 9.6 8.8 8.6 8.4 8.0 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2

Exporters

Value

Share

Annual percentage change Rank Importers Value Share 28 1 5 6 0 6 11 7 2 0 7 5


40 41 42 43 44 45 46 47 48 49 50

Slovak Rep. Colombia Libyan Arab Jamahiriyab Romania Oman Qatar Slovenia Pakistan Kazakhstan Morocco Angola

12.6 12.3 11.7 11.4 11.1 10.9 9.3 9.2 8.6 7.1 6.7

Total of aboved

4553.0

96.1

World (excl. intra-EU trade)d

4738.0

100.0

a

b

Retained imports are defined as imports less re-exports. Secretariat estimate. c Imports are valued f.o.b. d Includes significant re-exports or imports for re-export.


Table 1.3.8 Leading exporters and importers in world trade in commercial services, 2001(billion dollars and percentages)

Rank 3 6 2 1 7 8 2 0 1 2 5 9 5 0 10 2 4 9 15 2 20 1 12 17 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 United States Germany Japan United Kingdom France Italy Netherlands Canada BelgiumLuxembourg China Ireland Spain Korea, Rep. of Austria Hong Kong, China Taipei, Chinese Denmark India Sweden Russian Fed. Singapore Malaysia Mexico Australia 187.7 132.6 107.0 91.6 61.6 55.7 52.9 41.5 39.3 39.0 34.8 33.2 33.1 31.5 25.1 23.7 23.5 23.4 22.9 21.1 20.0 16.5 16.5 16.4 13.00 9.2 7.4 6.3 4.3 3.9 3.7 2.9 2.7 2.7 2.4 2.3 2.3 2.2 1.7 1.6 1.6 1.6 1.6 1.5 1.4 1.1 1.1 1.1 7 0 7 4 0 2 2 3 2 9 21 7 0 6 2 8 6 19 2 20 6 0 1 8

Exporters

Value

Share



1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

United States United Kingdom France Germany Japan Spain Italy Netherlands BelgiumLuxembourg Hong Kong, China Canada China Austria Korea, Rep. of Denmark Singapore Switzerland Sweden India Taipei, Chinese Ireland Greece Norway Turkey

263.4 108.4 79.8 79.7 63.7 57.4 57.0 51.7 42.6 42.4 35.6 32.9 32.5 29.6 26.9 26.4 25.2 21.8 20.4 20.3 20.0 19.4 16.7 15.9

18.1 7.4 5.5 5.5 4.4 3.9 3.9 3.5 2.9 2.9 2.4 2.3 2.2 2.0 1.8 1.8 1.7 1.5 1.4 1.4 1.4 1.3 1.1 1.1


Rank 1.1 1.0 0.9 0.9 0.8 0.8 0.7 0.6 0.6 0.6 0.5 0.5 0.4 0.4 0.4 0.3 1 0 Total of above World 1315.0 1445.0 91.1 100.0 12 3 6 7 14 21 9 9 1 4 23 4 6 8 18 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Brazil Norway Switzerland Thailand Indonesiaa Israel Greece United Arab Emiratesa Poland Finland Argentina Saudi Arabia Egypt Turkey Portugal Czech Rep. 15.8 15.3 14.9 14.5 14.5 12.3 11.2 10.5 8.7 8.1 7.9 7.2 6.5 6.4 6.0 5.5 1.1 1.1 1.0 1.0 1.0 0.9 0.8 0.7 0.6 0.6 0.5 0.5 0.4 0.4 0.4 0.4 0 6 3 6 1 2 2 3 8 35 10 16 5 3 1 1

Exporters

Value

Share



25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40

Australia Malaysia Thailand Mexico Poland Israel Russian Fed. Egypt Brazil Portugal Hungary Czech Rep. Finland Saudi Arabia Indonesiaa Croatia

15.7 14.0 12.9 12.5 11.9 11.3 10.9 8.8 8.7 8.7 7.6 6.9 5.7 5.2 5.2 4.8

Total of above

1340.0

91.9

World

1460.0

100.0

a

Secretariat estimate. Note: Figures for a number of countries and territories have been estimated by the Secretariat. Annual percentage changes and rankings are affected by continuity breaks in the series for a large number of economies, and by limitations in cross-country comparability.

Source: STO (www.wto.org)

34

The global economy

commercial services for 2001. The three largest transition economies, Poland, Hungary and the Czech Republic, were also in surplus. Most other countries, except for Norway, Turkey, Greece, Singapore and Egypt, were in deficit. One of the largest deficits ($25 billion) was recorded by Ireland.

MERCHANDISE TRADE BY PRODUCT GROUP Selected long-term trendsMerchandise trade is classified into three primary groups: agricultural products, mining products (including petroleum) and manufactures. Average annual percentage changes in volume terms of trade and world output for each group and total merchandise trade over four periods between 1950 and 2001 are shown graphically and in histogram form in Figure 1.3.1. Together the graph and histogram show that the increases in volume of trade for each product group have consistently outpaced increases in output, except for mining products between 1973 and 1990, the period of the world oil crises. The strongest period of growth for mining products and manufactures was 1963 to 1973 and for agriculture 1950 to 1963. The weakest period of growth overall was 1973 to 1990 and growth in all sectors of world merchandise trade during the final decade of the 20th century did not return to 195063 or 196373 levels. The growth of trade in manufactures consistently outpaced mining and agricultural products over the second half of the 20th century. The growth in volume of world merchandise exports against volume production and GDP is detailed in Table 1.3.9 for the period 1990 to 2001. Table 1.3.9 Comparison of merchandise trade growth vs volume production and GDP (19902001) 19902001 1998 World merchandise exports Agricultural products Mining products Manufactures World merchandise production Agriculture Mining Manufacturing World GDP 5.5 3.5 3.5 6.0 2.0 2.0 1.5 2.5 2.0 4.5 2.0 5.5 4.5 2.0 1.5 1.0 2.5 2.5 1999 4.5 1.0 2.0 5.0 3.0 3.0 1.0 3.5 3.0 2000 11.0 4.5 3.0 13.5 4.5 1.0 3.5 6.0 4.0 2001 1.5 1.5 1.5 2.5 1.0 0.5 0.0 1.5 1.5

Note: World merchandise production differs from world GDP in that it excludes services and construction. Source: WTO (www.wto.org)

Pattens of world trade 35Log scale 10,000

Volume indices, 1950 = 100

Manufactures 1000 Mining products

Agricultural products

100 1950 55 60 65 70 75 80 85 90 95 2001

Average Annual Change 12 10 8 6 4 2 0 195073 197390 199091 Agricultural products Mining products Manufactures


Figure 1.3.1 World merchandise trade by major product group, 19502001 (average annual percentage change in volume terms)

36

The global economy

Over the whole period, trade in both agricultural and mining products grew by an average of 3.5 per cent and manufacturing by 6.0 per cent annually. After growing by 13.5 per cent in 2000, trade in manufactures fell back by 2.5 per cent in 2001. As well as outpacing production, export growth has consistently exceeded the growth of world GDP throughout the period.

PART 2 International marketing principles and practice

2.1

Principles

THE MARKETING CONCEPTThere is no argument about the concept of marketing but there are constant arguments about the best way to define it. The consequence of this is that there are literally hundreds of definitions of marketing, all of which can claim to be correct. This does not mean that opinions differ about the essence of marketing but that we can have different attitudes towards a single concept. Whilst we have the old clichs such as Marketing is selling goods that dont come back, to customers who do, it is, in fact, possible to classify definitions into three basic attitudes: groups one, two and three.

Group oneThis consists of definitions with the strong implication in them that a producer is doing something that involves consumers as nothing more significant than pawns in a game, with profit as the end goal:The income-producing side of the business. (Mcnair, Brown, Leighton and Englent) The process of determining consumer demand for a product or service, motivating its sale, and distributing it into ultimate consumption at a profit. (L. Brech) The planning, executing and evaluating of the external factors related to a companys profit objectives. (G.M.E. Ule in D.W. Ewing [Ed.]) The primary management function which organizes and directs the aggregate of business activities involved in converting customer purchasing power into effective demand for a specific product or service and in moving the product or service to the final customer or user so as to achieve company-set profit or other objectives. (L.W. Rodger) Deciding what the customer wants; arranging to make it; distributing and selling it at the maximum profit. (Durham University Careers Advisory Service)

40

International marketing

Group twoThis consists of a number of definitions with the implication that the producer is doing something for consumers rather than to them, but still doing it to suit their own purpose. These definitions are, like those in group one, very much concerned with a means to a profitable end. They are completely company-centred:Getting the right goods to the right people in the right places at the right time and the right price. (Anon) In a marketing company (as distinct from one which has simply accepted the marketing concept), all activities from finance to production to marketing should be geared to profitable consumer satisfaction. (R. J. Keith) Marketing development is systematic forward planning to ensure matching of resources to fit market trends and to ensure continued growth for the enterprise. (R. Glasser) The total system of interacting business activities designed to plan, price, promote and distribute want-satisfying products and services to present and potential customers. (W. J. Stanton) The activity that can keep in constant touch with an organizations consumers, read their needs and build a programme of communications to express the organizations purpose. (Kotler and Levy)

Group threeThese definitions move us significantly forward by introducing the idea that there is an element of willingness on the part of consumers as well as producers to join in the process. The vital words transfer, society and needs of consumers appear in these definitions, although they remain company-centred. Marketing is seen by these authors as a transaction of some kind:The economic process by means of which goods and services are exchanged and their values determined in terms of money prices. (Duddy and Revzan) Selling is preoccupied with the sellers need to convert his product into cash; marketing with the idea of satisfying the needs of the customer by means of the product and the whole cluster of things associated with creating, delivering and finally consuming it. (T. Levitt) The business activities involved in the transfer of goods or the acquisition of services. (R. Webster) The organization and performance of those business activities that facilitate the exchange of goods and services between maker and user. (L. W. Rodger)

Principles

41

All activities intended to stimulate or serve demand (G. A. Fisk)

To go just one stage further there are definitions that consolidate the tendency of group three to think in terms of transactions. They say that marketing can in fact be thought of as a social exchange process:The medium through which the material goods and culture of a society are transmitted to its members. (J. Kelley) The establishment of contact. (T Cherrington)

The latter is included because it is probably the shortest definition you could find. However, these last two, while being interesting in their own right, have little practical value to the exporter. The group that contains definitions that are most appropriate for international marketing is undoubtedly group three, in that it not only contains a need for consumer satisfaction but also the need for the establishment of some sort of relationship or partnership with overseas buyers. This will have some resonance with most practising exporters.

THE EXCHANGE PROCESSThe idea that international marketing can be seen as an exchange process can be broken down into its constituent elements in the diagrammatic form shown in Figure 2.1.1. This demonstrates the two sides of the exchange: the business on one side using its expertise and resources to offer products and services on to a market made up of potential customers who have their own ideas about what they need and do not need. The business that most closely matches its products and services to the buyers perceptions of their needs will be more likely to achieve its goal of profits and will be more likely to produce satisfied customers. The other point about this diagram is that it is not a process that has a start and a finish. Businesses should be constantly questioning what they do with their expertise and resources in terms of offers on to the market simply because the perceived needs of the customers are dynamic, that is, subject to change, and, in international trade, may be very volatile.

THE MARKETING PROCESSIn fact we could take this a stage further. Perhaps the most important question any business should be continually asking itself is What business am I in? You may

42


Business

Customer

Expertise/ Resources

Perceived needs

Offers

Evaluation and choice

Exchange for value

Profit

Satisfaction

Figure 2.1.1 The exchange process

think that this is a pointless question and that every business knows its business. But you could be wrong. The fact is that many businesses can be so focused on their products and services that they can be very short-sighted regarding the actual expertise and resources that they possess. There are a number of case studies illustrating this, one of the more obvious ones being Bic, which, when asked by consultants what business it was in, replied, of course, that it was in the pen business, more specifically the low-price pen business. The consultants conducted a marketing audit, an in-depth investigation of the strengths and weaknesses of the marketing function of a business, and came back with their perception of Bics business. They said that Bics expertise and resources were in disposable plastic. Not a very revolutionary statement but one that revolutionized Bics attitude towards its business. It was not a pen manufacturer

Principles

43

but a disposable plastic manufacturer, more specifically extruded plastic containing metal inserts. What came next, the very first disposable razors, to be followed by disposable lighters, disposable toothbrushes, disposable perfume dispensers, etc. Fundamental questions can sometimes produce answers that fundamentally change the nature of a business. Back to our marketing definitions. While there may be innumerable definitions of marketing, it is possible to pick out a couple of elements that are common to all of them, in fact, the elements of a concept of marketing: customer orientation and profit (or other objective). That is to say that all of a marketing companys activities are centred on the needs of the consumer and the whole process starts by finding out what the customer wants. This is the opposite of a product-orientated company, which attempts to produce what it chooses to produce and then sell it into the market. Another clich: Marketing is about making what we can sell, not selling what we can make. All of this is not because we like to please our customers, which of course we do, but is primarily based on the fact that a satisfied customer is a more profitable customer. However, it has to be said that definitions of words can help understanding, but the more practical question concerns the HOW? of marketing rather than the WHAT?. That is, if a company were to accept the need to be responsive to market demand, to be customer-orientated, as a means of becoming more successful in competitive markets, then how would it go about doing it? Firstly, the difference between selling and marketing is important. Figures 2.1.2 and 2.1.3 illustrate the basic difference in the processes, the major point being that selling starts with production, followed by the need to sell enough to make a profit, whilst marketing starts with market research in order to identify current market needs and profits from a satisfied customer.PRODUCTION SELLING PROFIT THROUGH SALES VOLUME

Figure 2.1.2 The selling process

MARKETING RESEARCH

INTEGRATED MARKETING PLAN

PROFIT THROUGHCONSUMER SATISFACTION

Figure 2.1.3 The marketing process The other important distinction is the fact that selling is totally a one-way process, whilst marketing is based on a continuous feedback from the customer and adaptation by the company to changes in consumer demand. Figure 2.1.4 is perhaps more instructive as an overview of the marketing process and helps us introduce physical distribution as a vital element of that process.

44


Customer

Marketing plan

Product

Price

Promotion

Marketing action

Physical distribution

Field sales force

Customer

Figure 2.1.4 Overview of the marketing process The beginning of this process is research carried out as a continuous activity in the marketplace, often underpinned by the internal research and development that improves a companys capability to produce. Once research has identified where demand exists, and the company is capable of producing goods or services to meet that demand, then decisions need to be made as to how that demand might be serviced successfully.

Research & development

Sales opportunity

Market research

Distribution

Advertising & promotions

Principles

45

The so-called 4 Ps approach is a simplistic, but nevertheless useful, interpretation of the basic decision-making areas of the marketing plan. All important strategic decisions that successful companies make can be categorized into the four elements of:l l l l

PRODUCT; PRICE; PROMOTION; PLACE (or DISTRIBUTION. . . the 3 Ps and a D doesnt really have the same ring to it!).

Often referred to as the marketing mix, this is a cluster of elements that all have to interact together in a cohesive plan. The right mix is the recipe for success! There are other structures for the elements of the mix, notably the concept of the 7 Ps, which adds to the above:l PEOPLE considerations of the personnel involved and their responsibilities

and needs;l PROCESS administrative processes necessary for implementation; l PHYSICAL actual evidence of implementation, change and outcomes.

And a list of 12 elements produced by Professor Neil Borden of the Harvard Business School, all of which are contained within the more simplistic 4Ps approach:l l l l l l l l l l l l

product planning; pricing; branding; channels of distribution; personal selling; advertising; promotion; packaging; display; servicing; physical handling; marketing research.

No amount of planning is beneficial without real implementation of the plan in practice and Figure 2.1.4 illustrates the more obvious and visible activities of a company. Planning is not a process that can be seen but it does result in the highprofile activities of selling, promotion and physical distribution, which are clearly visible as the practical results of the planning.

46


Later in this chapter we will look a little more closely at the elements of the plan with specific reference to overseas markets, but first the point should be made that the process is the same whether we consider home or overseas trade. It is not the marketing process that changes from home to export markets, or even from one export market to another, but the application of that process, which will differ from one market to another. The concept of market orientation, by definition, means that companies will attempt to discover the differences exhibited from one market to another and adapt to them in order to maximize profitable business. The differences encountered between the UK home market and overseas markets form a formidable list, and it is an ignorance of these differences that very often explains the failures of UK companies overseas.

THE INTERNATIONALIZATION PROCESSAll trading organizations exist in a market environment that is always dynamic, that is, subject to change, and often volatile. In many cases, these market movements are very unpredictable and adapting to them is a difficult task for even the most flexible of companies. The market environment is made up of a whole range of uncontrollables, and the elements of the marketing plan, the controllables, represent the companys attempt to operate with maximum success in the face of the uncontrollable elements of the market. A comprehensive list of the factors that may differ between the UK and overseas markets, and in fact between one overseas market and another, would occupy a disproportionate section of this book, but a brief list of the most obvious points is provided through a useful acronym PEST:l Political/legal leading to a wide variety of regulations and legislation. May also

affect the stability, or otherwise, of the commercial environment.l Economic type of economy mixed private and public, state planned, etc; level

of economic development primary, secondary, tertiary; competition the number, size and quality will vary. l Socio-economic cultural/religious in many markets these two factors may be the same thing. They can lead to many problems in product design, packaging and promotion in particular. Commercial practices what is perceived as sharp, or even illegal, practice is not the same in all markets. Taste very few products are sold in exactly the same form all over the world. Language totally innocent words in one language can be quite offensive in another. Climate there are obviously extreme differences from one part of the world to another. l Technological what is obsolete in one market may be state of the art in another. The ways in which products are used may be not quite as intended. Levels of maintenance will differ enormously.

Principles

47

Another version of the acronym is PESTLE, which lists Legal as a distinct category and adds Environment, which addresses things like green issues, health and safety, levels of recycling, etc. Whilst it could be argued that many of these distinctions could also apply to the regions of a domestic market, like the United Kingdom for example, there is little doubt that the extent of the differentials is invariably far greater when operating in overseas markets. This is by no means a full list but does serve to illustrate the point that the international trader is attempting to operate in a potentially infinite number of differing commercial environments, each market segment requiring individual approaches, which means that what is successful in one market is by no means sure to work in others. It is the companys ability to make the right decisions in those areas within its control, in order to accommodate the differences in the range of markets with which it deals, which makes the difference between success and failure. One of the first things the exporter has to accept is the need to differentiate from one market to another if profitable sales are to be maximized. It is the decisions made in the areas actually under the control of the exporter that illustrate this differentiation in practice, that is, within the areas i

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