This book has aimed to provide a brief guide to international economics for business students and corporate managers. The study of international economics is more vital today than in previous times. After decades of trade liberalization, countries have become more protectionist. The issues of jobs, intellectual property protection, barriers to trade in services, access to domestic markets, immigration, and currency manipulation have again emerged as major economic and political issues. Many countries have engaged in negotiating trade agreements on a bilateral or regional basis rather than multilateral negotiations under the WTO. The United States has imposed tariffs on a range of finished products and intermediate inputs from China, Canada, Mexico, and the European Union. In turn, these nations have retaliated by levying their tariffs on American goods. The United States withdrew from the Trans-Pacific Partnership Trade Agreement and renegotiated the NAFTA, renaming it the United States-Mexico-Canada Agreement. Another significant development is Brexit, the United Kingdom’s vote to withdraw from the European Union.
Parts I and II of the book focused on international trade theory and policy. Chapter 2 examined the pattern of trade based on the theory of comparative advantage and factor endowments and the effects of trade on the distribution of income. Chapter 3 introduced new trade theories that integrated the role of firms in international trade. The effects of tariffs and other trade instruments were covered in Chapter 4. A tariff can be placed on an imported finished product or an intermediate good. The objective of a tariff on a finished imported good is to protect the domestic industry by increasing the price of the imported product. This is different if a tariff is levied on an imported input used by a domestic company, which then increases the costs of production, putting the company and the industry at a competitive disadvantage at home and abroad.
A tariff can shift production away from the country that is protecting its domestic firms when other countries retaliate and levy tariffs of their own on the final product. For example, when the European Union placed a duty on Harley Davidson, in retaliation to the tariffs set by the United States on European steel and aluminum, the company decided to move production to other countries to avoid the European Union tariffs. The rise of global value chains means that any tariffs implemented by a single country or sector will likely affect other regions and sectors. Tariffs by the United States and China are likely to affect companies in Vietnam, Malaysia, or other countries that are part of the global value chain. This makes the job of multinational corporate managers more complicated as they must assess the short-run and long-run effects of tariffs on their overall operating and corporate strategies.
Chapter 5 examined the arguments for trade protectionism and the political economy of trade policy. Companies, industry associations, and unions spend millions of dollars to influence lawmakers responsible for passing trade legislation. Corporations must analyze the effects of proposed trade policies on their costs and revenues to lobby for or against the policies. Chapter 6 introduced the World Trade Organization and trade issues. The WTO’s Doha round of negotiations failed due to disagreements over agricultural subsidies and intellectual property rights. There are no rules or agreements on digital trade, services trade, and trade in products that can help achieve environmental and climate protection goals.
Parts III and IV of the book focused on international finance and open economy macroeconomics. It explained the foreign exchange market and the determination of exchange rates in the short run and the long run. Exchange rate changes affect the operating profits of companies in globally competitive industries and domestic companies that have no foreign operations or exports but face significant foreign competition in their home market. While changes in the exchange rate are beyond the control of corporate managers, there are strategies that managers can implement to manage exchange rate risks. But more importantly, it is vital for managers to understand the underlying causes of changes in the exchange rates both in the short run and in the long run to be able to be proactive rather than reactive to exchange rate fluctuations. For example, managers must pay attention to changes in a country’s monetary policy that affect interest rates and hence the exchange rate. They must also be aware of a country’s rate of economic growth and inflation rate and their effects on the long-run exchange rate.
The last chapter briefly described the international capital markets and the role of banks in the global economy. Companies can raise funds by issuing stocks or bonds in domestic markets or foreign markets. Another option for companies is to obtain loans from commercial banks. Corporate financial managers must then weigh the costs and benefits of each financing option.
For the past 30 years, “globalization,” defined as the international flow of goods, money, and people, has steadily increased, yet this trend has slowed down recently. Trade and capital flows as a percentage of world GDP have decreased and the capacity of supply chains that ship intermediate goods has decreased.
Part of this decline was due to the financial crisis and the Great Recession of 2008–2009. The United States, the European Union countries, Japan, China, and other industrialized nations experienced a decline in exports and imports.
Services are becoming a major sector of most industrialized nations. Unlike trade in goods, many services are more difficult to trade due to domestic legal and licensing restrictions. While the export of services has not grown over the past decade, e-commerce has been growing. Companies like Alibaba, Netflix, and Facebook have millions of international customers. Technology services are also subject to protectionism and politics. The United States discourages Chinese technology companies from operating in the country, and Facebook and Twitter cannot operate in China. India does not allow Walmart and Amazon to own inventories in India to protect its domestic retailers.
Emerging economies are going beyond being locations to assemble intermediate products to producing the intermediate inputs. Multinational companies must reevaluate their supply-chain activities, and some are exploring ways to shift production from China to other countries. Furthermore, the share of cross-border supply-chain foreign inputs that are from the same region is rising.
The dollar is still the world’s dominant currency, and the decisions of the Federal Reserve on interest rates influence interest rates and exchange rates in other countries. Yet the United States is losing its dominance in the global economy. China has replaced the United States as the major trading partner of many countries, and changes in Chinese GDP affect the exports of these nations. China has embarked on a massive program of infrastructure development known as the Belt Road Initiative by assisting Asian countries in building roads, ports, and bridge to connect it to Europe. It is possible that in the foreseeable the future, the Chinese currency may challenge the dollar in the global financial system.