Introduction
What is international trade and how is international trade significant to a mature, robust economy such as that of the United Kingdom’s. We know that experts say that international trade is an essential cog that keeps the wheels of the economy turning, and that wheel is an essential contributor to keeping the global economic machine in motion. It is therefore imperative that the concept of International Trade be fully understood and presented with respect to the UK economy and the world.
P10: The Significance of International Trade to UK Business Organisations
International trade is defined as the exchange of goods and services between two or more countries (Investopedia, 2013). A country would develop its own capabilities around the resources available to it and over time would improve its capacity to produce that particular good or service. Trade happens when another country, which is lacking in one particular good or service because of limitations both natural and artificial, seeks this particular good or service elsewhere. These two countries meet in agreement to trade one product for another thereby leading to international trade. With all countries needing to trade with other countries and with the basic economic laws of demand and supply taking effect, a complex system of trade and cross-trades are developed, maintained, amended, expanded or truncated to arrive at its most efficient state.
The obvious benefit of international trade is an exposure to goods and services that are not available in one particular country, thereby creating new demand and opportunities to supply. This is why international trade is such an important component of all national economies. Once demand is established, a country will seek sources of the product (goods or service) wherever it is viable to do so. Unfortunately, some countries do not have the necessary goods and services to provide as counter-trade. This phenomenon is known as “trade balance”. Investopedia (2013) defines trade balance as the difference between a country’s imports (goods and services consumed by the country bought or traded from another country) and exports (goods and services produced by the home country and sold to another country). Balance of trade includes items such as actual goods and services consumed or sold foreign aid, domestic spending abroad and domestic investments abroad, foreign spending in the domestic economy, and foreign investments in the domestic economy among others. A country will have a “trade deficit” if the value of its imports are larger than its exports and a “trade surplus” if the situation is reversed.
Another benefit of international trade is the improvement in terms of use of resources. Global trade will motivate a country to use its resources efficiently. Resources are always limited and scarce and the demand for a particular good or service will force a country to rationalize the use of its resources to obtain the highest returns from it. Because a country is forced to become efficient in resource use, it leads to specialization. A country with very high degrees of specialization in the production of a specific product would find trading with other countries easier due to this comparative advantage. Comparative advantage is defined by the US Library of Economics and Liberty (2013) as that ability of producing something cheaper than anyone else.
While the importance of international trade is not debatable, its degree of significance varies from one country to the next. In each and every purpose of a particular country to trade, whether that purpose is to expand the domestic market, to provide aid to an ailing economic sector, to gain revenue for the national purse or to dispose of its surplus production, the effect of international trade is always positive for the economy and often leads to an improvement of a country’s living standards.
If international trade is perceived as highly essential for national and global economic development, why is it so hard for countries to conduct trade effectively? This is because international trade is a regulated economic activity. When Adam Smith (The Wealth of Nations, 1776) first postulated about free trade, he proposed that it be accomplished in a utopian scenario where there are no barriers to trade and that trade is encouraged through cooperative actions between countries. In real life, this is not so. National governments establish trade barriers to protect domestic industries from what are perceived to be invasive traders thus limiting trade. In a few instances, trade is limited to push prices up thus setting abnormal trade gains. In most instances, international trade is hampered for a less-altruistic purpose that profoundly affects the global economy.
P11: The Impact of Global Factors on UK Business Organisations
In a domestic economy, the private sector is chiefly responsible for the production of goods and services that are domestically consumed or internationally traded. Corporations that seek to participate in global commerce are influenced by global environmental factors and this is analysed by experts through a formalized evaluation structure called global environmental analysis. This framework works hand-in-hand with other corporate analyses tools such as the market analysis (for evaluating clients and competitors) however unlike other methods of analysis; the global environmental analysis focuses on the macro-economic factors affecting a company. One of the most effective stratifications of macro-economic factors that affect the global environment of the firm is the analysis of the PESTLE factors, which is a set of factors that provides a general overview of a firm’s economic environment.
PESTLE is a mnemonic that stands for the following:
- Political – an examination of the factors that answer the question of how the political situation in a particular country can affect the firm
- Economic – an examination of the factors that are influenced by prevalent domestic economic indicators as it relates to the firms well being
- Social – an examination of the critical social and cultural factors that may affect the firm
- Technological – an examination of the innovations that may affect the competitive environment that a particular firm operates in
- Legal – an examination of the changes in the regulatory policies that may affect a firms competitive standpoint in a particular industry
- Environmental - an examination of the ecological requirements that may affect a firm’s viability in a particular domestic economy
UK companies should take a good look at all these factors when planning their investments and operations. There is no single factor that stands out so the prudent approach is to go through the rigors of evaluating the current political, economic, social, technological, legal and environmental factors in the UK.
International trade is of course essential for the UK and UK corporations. Analysing the factors that affect international trade is an imperative for UK companies in able to retain market leadership and long-term viability. The United Kingdom’s foray into international trade started in the colonial period making the country a global super power hence. However because of the dynamic movements in the global market place, any economy, including the UK is susceptible to global risks that may prove disastrous for the country if left unmanaged. Thus an understanding of the global factors that affect businesses, including that of UK companies leads to the development of a global business strategy. Economy Watch (2013) defines global business strategy as the strategy undertaken by businesses (companies) for the purpose of serving its clients that are located in various areas around the world. These strategies have emerged because of globalization and the participation of once domestic-only corporations into international commerce. With UK companies now standardizing its operations as a pre-requisite to specialization and with additional pressure to adapt to global market trends, global business strategies have taken the front seat in terms of importance for corporations in the UK.
P12: The Impact of Policies of the European Union on UK Business Organisations
Another concept that has taken importance is the affectivity of trade blocks. Investopedia defines a trade block as an inter-governmental agreement for the purpose of establishing more efficient trading systems. A trade block is often geographically determined. Examples of trade blocks are the North American Free Trade Agreement between the US, Canada and Mexico and the European trade block which is an essential component of the European Union.
The European Union (EU) is described in their official website as a “unique economic and political partnership between 27 European countries that together cover much of the continent.”(European Union, 2013). This regional block was created after World War 2 for the purpose of fostering economic improvement in Europe. Since then, the EU has become an organization that governs the region with appropriate economic and geo-political policies and has delivered peace, stability and progress in Europe. In the EU, people can travel freely, has similar laws, promotes human rights internally and throughout the rest of the world, and most importantly has unified the economies of its member countries into one machine that utilizes each countries resources and capabilities for free trade of goods, services and even resources. The EU is influential in raising Europe’s average living standards and until recently, was effective in unifying the region’s currency through the Euro.
The members of the European Union are:
- Austria
- Belgium
- Bulgaria
- Cyprus
- Czech Republic
- Denmark
- Estonia
- Finland
- France
- Germany
- Greece
- Hungary
- Ireland
- Italy
- Latvia
- Lithuania
- Luxembourg
- Malta
- Netherlands
- Poland
- Portugal
- Romania
- Slovakia
- Slovenia
- Spain
- Sweden
- The United Kingdom
The objectives of the EU, taken from Article 2 of the Treaty of the EU from the online resource Folketinget (2013), are as follows:
- “to promote economic and social progress and a high level of employment and to achieve balanced and sustainable development, in particular through the creation of an area without internal frontiers, through the strengthening of economic and social cohesion and through the establishment of economic and monetary union, ultimately including a single currency in accordance with the provisions of this Treaty,
- The objectives of the Union shall be achieved as provided in this Treaty and in accordance with the conditions and the timetable set out therein while respecting the principle of subsidiarity as defined in Article 5 of the Treaty establishing the European Community.”
There are five treaties of the EU. The first is on common provisions which establish the EU as a legitimate entity. The second is on democratic provision which establishes the equality of national citizenship and EU citizenship. The third treaty is on the provision for institutions. The EU operates through a system of independent national (supranational) institutions and inter-governmental decision making made through representatives of each member state. The EU has established separate institutions that perform specific tasks, such as the European Commission, the Council of the EU, the European Council, the European Central Bank, the Court of Justice of the EU, and the EU Parliament. The EU has developed a standardized single market that ensures free movement of people, goods, services and money. It also maintains common polices and enact legislation for critical issues surrounding trade, agriculture, regional development, economics, equality, and others. The fourth treaty is enhanced cooperation between member states. The fifth treaty is on common security and protection.
The Economic and Monetary Union (EMU) is an agreement among the members of the European Union to adopt one single currency for the entire European Union. The main objectives of the EMU (EC, 2013) are to:
- Maintain an effective monetary policy for the purpose of stabilizing prices
- Coordinate EU member economic policies
- Faciliate smooth single market operations
Adopting one currency, the Euro, means that these countries would unify their monetary policies as well. This policy was arrived upon after the member states of the EU decided that the adoption of a single currency and monetary system is critical in achieving their collective economic and social development goals. The EU members that subscribe to the EMU are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain (Rosenberg, 2011).
The entry of the United Kingdom to the European Union and the use of the Euro and the adoption of the EMU monetary policy is summarized by a paper published by HM Treasury in 2003. This paper states that the UK’s entry into the European Union was based on the potential opportunities presented to UK’s industries. The opportunity presented benefits as well as challenges but UK’s leaders believed that the benefits would outweigh the risks. For example, joining the EU and adopting the Euro meant that there will be a trade barrier, that is the foreign exchange, would be removed making invasive technologies to enter the UK market. On the other hand, the removal of the barrier to trade may increase the amount of trade generated between the UK and its co-members of the EU, which would ultimately benefit UK’s domestic economy. Another potential effect would be increase in the degree of competition between UK’s industries trading under the EU and competitors in EU member countries. This would be an inevitable occurrence, one that UK industries could not prepare for in any other way except to become more competitive, highly efficient, and ultimately specialized. UK’s industries would go through a Darwinian state with the strong surviving and the weak falling into demise.
However the most serious implication for UK industries with respect to the United Kingdom’s participation in the European Union and the adoption of the EMU is the loss of its autonomous monetary policy and flexible exchange rate. This has serious implications on the UK economy and its industries since the UK would have limited capabilities to adjust to economic shock. If the UK government is disabled to react then the domestic industries would be affected.
The effect of the UK’s adoption of the EMU and the Euro must be viewed with respect to how the UK’s industries are characterized with respect to industries of countries that have prescribed to the use of the Euro. HM Treasury’s paper states that:
- UK industries are similar to industries in other EU member countries in that manufacturing is neither UK nor these countries primary industry (except for Germany);
- Trade with non-EU countries have decreased in the UK as well as in other EU countries because of the EU trade policies, which signify a freer movement of trade between EU countries;
- UK has a higher rate of foreign investments into its economy, which is a distinct feature not found in other EU member countries. The UK’s financial services sector is one of its largest sectors which are not found in other EU countries.
These factors are important in determining the effect of global trade factors to UK industries. The difference between the UK and other EU countries may mean that UK’s domestic economy, being led by the financial services sector, may be affected relatively less than other EU economies in cases of global economic shock. Of course, the recessions experienced by the world in the last few years showed us that all economies will be affected, regardless of the mix of industrial sectors. The effect on UK’s industries however, is dynamic meaning the effects may be immediate, short term, medium term and even long term. Immediate effects are those that involve currency conversion costs, currency volatility, etc. for industries that trade internationally. Short and medium term effects include increased investments and macroeconomic policy adjustments. Long-term effects are those that include specialization and trade efficiencies. All of these are important effects to UK industries upon adoption of the EMU policies and the use of the Euro.
The study states that UK industries that are currency sensitive would be the first to be affected. An example of an industry that is currency sensitive is tourism. The tourism industry’s benefits from its direct reliance on foreign currency are practically negated when the differences in currencies are removed through the use of the Euro. Conversely, an industry that has less reliance on currency, say health care, would be less affected because of the lesser degree of reliance to foreign currency.
In addition, adoption of the EMU policies means that there will be a uniform treatment for pricing for similar industries. This simply means that the EMU policy will strive for price parity in any location, i.e. the price of a car in the UK will be the same price a person will pay for in France. The EMU would have different pricing policies for different industries. A pricing policy for an industrial sector that is producing differentiated product will be different from EMU pricing policies for commodities, branding, or national regulation.
Different market structures would also have an effect. The market structure of key industries in the UK may be different from other countries and the difference would determine whether the adoption of an EMU policy would be detrimental or beneficial. For example, UK industries that are heavily segmented by national regulations (such as domestic electrical appliances is 220V in the UK and 110V elsewhere) or industries where scale is required to be productive (such as research and development companies) would be less affected than firms whose market structures are affected by customer arbitrage (such as luxury and travel).
The size of the firm would also be a factor. If a UK company is large, it would benefit from EMU policies because it can drive efficiency and become more competitive. Companies that are smaller may face difficulties if it cannot adapt to competition. Related to this is the firm’s ability to find financing. The adoption of EMU policies would mean that UK industries would have different reactions if they use external finance extensively, are ready for direct investments or have separate management ownership.
Conclusion
UK industries would either be saved by the UK’s adoption of EMU policies and the use of the Euro or cause its demise. The effect of the EMU policies are affected by a particular industry’s relative dependency on foreign exchange, the pricing behaviour within that industry, the market structure, the size of the firms in that industry, its ability to find financing and the company’s ownership structure.
References
- Investopedia, 2007. International Trade. Retrieved from http://www.investopedia.com/articles/03/112503.asp#ixzz2JZHqP4NS
- European Commission, 2013. Economic and Monetary Union. Retrieved from http://ec.europa.eu/economy_finance/euro/emu/how/index_en.htm
- Folketingent, 2013. Article 2 of the Treaty of the European Union. Retrieved from http://www.eu-oplysningen.dk/euo_en/spsv/all/1/
- HM Treasury, 2003. EMU and Business Sectors. Retrieved from http://news.bbc.co.uk/2/shared/spl/hi/europe/03/euro/pdf/11.pdf
- McDonald, D., Hazelkorn, E., 2007. The Impact of League Tables and Ranking Systems on Higher Education Decision Making. Higher Education Management and Policy 19(2).
- JISC infoNet. 2009. PESTLE and SWOT Analyses Tools & Techniques Retrieved from jiscinfonet
- Rosenberg, M. 2011. Members of the Eurozone. About.Com. Retrieved from http://geography.about.com/od/lists/a/euro.htm
- Smith, A. 1776. Book I: On the Causes of Improvement in the Productive Powers. On Labour, and on the Order According to Which its' Produce is Naturally Distributed Among the Different Ranks of the People. An Inquiry into the Cause of the Wealth of Nations. Retrieved from http://www.marxists.org/reference/archive/smith-adam/works/wealth-of-nations/book01/ch02.htm
