GLOBAL BUSINESS: THE FLOW OF MONEY & COMMERCE INTRODUCTION With globalization continuing at near full throttle, the need for global business knowledge is at a high. The University of Notre Dame has experts on staff who specialize in specific areas of business on a global scale. Professor Jeffrey Bergstrand is one such expert, teaching in Notre Dame’s 100% online course, Principles of Business, the first of three courses required to receive the Executive Certificate in Business Administration. This comprehensive professional development program, offered through the Stayer Center for Executive Education within Notre Dame’s Mendoza College of Business, is designed to increase your proficiency in key business concepts and techniques including economic globalization. In this four-part series, Bergstrand expands on this content to walk you through several aspects of business that every leader must know before joining the globalization movement. NotreDameOnline.com | 855-300-1475 | INTL. +1 813-612-5304
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GLOBAL BUSINESS: THE FLOW OF MONEY & COMMERCE
INTRODUCTION With globalization continuing at near full throttle, the need for global business knowledge is at a high.
The University of Notre Dame has experts on staff who specialize in specific areas of business on a global scale. Professor Jeffrey Bergstrand is one such expert, teaching in Notre Dame’s 100% online course, Principles of Business, the first of three courses required to receive the Executive Certificate in Business Administration.
This comprehensive professional development program, offered through the Stayer Center for Executive Education within Notre Dame’s Mendoza College of Business, is designed to increase your proficiency in key business concepts and techniques including economic globalization.
In this four-part series, Bergstrand expands on this content to walk you through several aspects of business that every leader must know before joining the globalization movement.
WHAT IS GLOBALIZATION AND HOW DOES IT AFFECT BUSINESS?
Blueberries from Florida get loaded onto airplanes and are delivered to South Korea in time for breakfast. Chemicals and cosmetics arrive in U.S. ports from France regularly. U.S.-based automobile manufacturers receive parts from other countries. Widgets are shipped in and out around the world.
The U.S. shipped $1.5 trillion worth of goods around the globe in 2017, according to the World Top Exports in a 2018 article entitled “United States Top 10 Exports.” That amount represents a 6.6% uptick from 2016 -2017 and a -2% decrease since 2013.
Globalization in the business world is not new, but it is much more robust than it was 20 years ago and shows no signs of slowing down. The term represents the interaction between people, culture and trade, all driven by technology.
Notre Dame Professor Jeffrey Bergstrand, an expert on the U.S. economy, macroeconomics and international trade, says globalization is “fundamentally about long-run change and the process of increased international integration.”
THE IMPACT OF GLOBALIZATIONGlobalization is not exclusively about increased economic interactions, Bergstrand teaches in the Principles of Business course offered 100% online through the Mendoza College of Business’s Stayer Center for Executive Education.
“It entails economic, political and social interaction, cultures, ideas and values, peace treaties and economic treaties moving between nations.”
The flow of goods is the aspect of globalization discussed most, but there is also a flow of capital and labor. Some people and businesses benefit from it, while others suffer because of globalization.
This whole process affects the environment, culture, prosperity, political systems, economic development and human physical well-being around the world.
A cursory search of today’s job sites like Indeed, LinkedIn and SimplyHired, shows an abundance of job openings for those with training in intercultural management, an important component for companies working in international commerce.
While it is common for Europeans to know more than one language and have experience with different cultures, U.S. companies are at a disadvantage in that respect, which has prompted more training opportunities in intercultural management.
AN OLD PRACTICE GROWING EVER LARGERGlobalization began thousands of years ago with people from lands thousands of miles apart carrying goods to their far-off neighbors. The famed Silk Road across Central Asia connected China to Europe during the Middle Ages.
And for centuries, people, then corporations, have invested in enterprises in other countries.
As technology has continued to develop rapidly, so have global business enterprises. Trade policies coupled with that technology over the past few decades have spurred ever-flowing cross-border trade, as well as investment and human migration.
Pulitzer Prize-winning journalist and author Thomas Friedman called this newer phase of globalization “farther, faster, cheaper and deeper.”
THE STARBUCKS STORYFor coffee giant Starbucks, globalization was game-changing. The company opened with one Seattle shop in 1971 and now has 15,000 stores in 50 countries. The company’s success meant success for numerous jobseekers, suppliers and coffee fans.
But in 2012, it found itself in a public relations crisis when a Reuters investigation revealed it paid few taxes in the United Kingdom where it had nearly 1,000 shops, according to the World Economic Forum.
In that case, it was citizens of the UK who lost out with globalization because while Starbucks was making millions there, it was giving little back that could be used to pave roads, build hospitals or fund other infrastructure or services.
In another instance of loss due to globalization, the once-flourishing steel jobs in the UK fell off when China began producing cheaper steel and shipping it around the world. Plants in the UK closed and thousands of jobs disappeared.
There are many more examples of the ebb and flow globalization brings to the business world. There are both advocates for it and those who see it as dangerous because of its impacts on the environment and because it works in the interest of the richest countries and at the expense of developing countries.
Mike Collins, a Forbes contributor who writes about manufacturing and government policies, offers some insight in to the pros and cons of globalization:
Even with many pros and cons, globalization appears to be here to stay.
We are all affected by globalization every day, from the gas station to the grocery store and the retail shop, says Paul Slaggert, executive director of the Stayer Center for Executive Education at Notre Dame’s Mendoza College of Business.
“It provides both choice and value and is a major economic force and it is the way we will all be doing business from now on.”
PROS
– Free trade helps reduce barriers such as tariffs, value-added taxes and more between nations
– It creates jobs, makes companies more competitive and results in lower prices for consumers
– There is a worldwide market for companies and consumers
– Most people agree that speedy travel, mass communications and the ability to quickly disseminate information through the internet is a benefit
CONS
– Globalization has made the rich wealthier and the not-so-rich poorer
– Jobs move to countries with cheaper labor
– Large multi-national companies exploit tax havens in foreign countries
– Manufacturing abroad puts U.S. technology at risk of being copied or stolen
International trade – the flow of goods and services from one country to another - is a big part of the U.S. economy. More than 41 million American jobs depend on trade, and are considered critical to the success of numerous parts of the economy, according to the U.S. Chamber of Commerce.
Globalization is “increased international interactions,” says Bergstrand, in the online Principles of Business course, offered through the Mendoza College of Business’s Stayer Center for Executive Education.
“It is about flows that go from one nation to another. It has been around, literally, for centuries. World trade has a value of about $10 trillion and has grown very rapidly.”
As globalization continues to expand, more training opportunities for business people are becoming available. The Notre Dame Principles of Business course, for example, offers an entire module on trade and globalization.
WHY IS INTERNATIONAL TRADE IMPORTANT?
JobsMore than 41 million American jobs depend on trade, and trade is critical to the success of many sectors of the U.S. economy.
GrowthAccording to economic data from the Federal Reserve Bank of St. Louis, U.S. real manufacturing output has risen by nearly 80% over the past 25 years. This represents the continuation of a long trend: U.S. manufacturing value-added has grown eightfold since 1947 in real terms.
Business98% of the roughly 300,000 U.S. companies that export are small and medium-sized businesses, and they account for one-third of U.S. merchandise exports, according to the U.S. Department of Commerce. The number of small and midsized firms that export has risen about threefold over the past two decades. – U.S. Chamber of Commerce
The U.S. has national firms that trade with businesses in other countries and has multi-national firms that have physical bases both here and in other countries, Bergstrand explains. “There could be a plant in China, but it is owned by a corporation headquartered in the U.S.”
The two areas most responsible for the growth in foreign trade are technology in transportation and decreased trade barriers, according to the Notre Dame course. When traders began to use shipping containers to transport goods, it reduced the cost of doing business. Tariffs and national policy barriers have decreased since World War II, contributing even more to more robust world trade.
ARE YOU READY TO BECOME AN EXPORTER?Export-ready companies can follow these guidelines, set by Export.gov:
Have commitment from the company owners and be prepared to fund exporting activity
Know the added demands exporting and other international business can place on your company’s resources
Have realistic expectations on the return on investment your company will receive from international trade
Become familiar with U.S. government export promotion and compliance resources
Be prepared to modify products and services based on specific markets, train employees for such and provide after-sales service
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Export.gov is the federal government’s export portal.
The U.S. Commercial Service can assist companies working globally who wish to add exporting to their portfolios.
To learn which countries import which goods, use Country Commercial Guides.
Contact your Small Business Development Center or Score for help in developing your business plan.
Download A Basic Guide to Exporting to help you devise an export plan.
The International Trade Administration also assists U.S. businesses in international markets to increase economic prosperity. It has trade promotion and policy professionals in 70 countries and 100 U.S. locations to promote U.S. exports, focusing on small and medium-sizes companies. It also advances commercial interests abroad and works to attract inward investment in to the United States.
USE THESE RESOURCES TO PREPARE FOR GLOBAL BUSINESS
HOW NATIONS BENEFIT FROM TRADEIncreased specialization of production benefits the nations involved. There are basically two types of trade: intra-industry trade and inter-industry trade.
More than half of all world trade is done by the 30 richest nations in the world and it is mostly intra-industry trade, Bergstrand says. That means that different companies in various countries make the same product, like men’s suits or SUVs, but sell them to each other for different prices and with a variety of quality.
Inter-industry trade typically occurs in more economically disadvantaged countries that need specific goods imported and have specific goods to export. For example, a country might import cars because it has no automobile manufacturers, while it exports dragon fruit, because it has an abundance of the fruit to sell.
Prepare before jumping into international trade by learning how it works and where it works, through advanced training. Do research about the country or countries you wish to trade in and conduct a marketing study to ensure there is a demand for your product.
As the global business movement continues to surge, the need for advanced knowledge in global finance is also growing.
In addition to finding the right people for the team and the right location to market goods or services, global business leaders also must have a firm grasp on global finances, from exchange rates to financial exposure, says Notre Dame’s Bergstrand, an expert on the U.S. economy and international trade.
There are long-run structural changes that should be addressed, said Bergstrand, who teaches about global finance in the 100% online course Principles of Business.
“The impact of globalization on the U.S. changes over time because the global economy is constantly in flux. This is why we need to be aware, as business managers and employees, of what is going on in terms of the international economy.”
WORLD ECONOMIC CYCLESThe world’s business cycles are not in perfect sync. For example, even if two countries have similar per capita incomes, they may be growing at very different rates and have different rates of inflation – and a change in foreign currency values.
Four major factors give rise to trade deficits and surpluses: economic growth rates, per capita income, inflation rates and interest rates.
Differences in Economic Growth Rates At different points in time, when an economy is growing faster than the rest of the world, that economy may import at a faster rate than the rest of the world. That gives rise to a trade deficit – imports exceed exports.
Effects of Per Capita IncomeBecause China is labor-abundant, its per capita income is lower and the prices of goods are much lower than in the U.S. When a country is price-competitive, it is favored, in terms of exports. The U.S., on the other hand, has higher per capita income and is less competitive. This can result in a U.S. trade deficit in relation to China.
Difference in Inflation RatesWhen demand exceeds supply in a rapidly growing country, it can lead to more inflation. This can lead to a loss in price competitiveness and a worsening trade balance.
Higher Interest Rates Attract Global Investment
When a country has high interest rates, other countries find it attractive for investing. Investors from abroad will demand dollars, say, to purchase U.S. Treasury bills, in order to benefit from those higher returns. This causes the U.S. dollar to appreciate in foreign exchange markets, exports to become less competitive and imports to become cheaper – a widening of the trade deficit.
Any country that is consistently running much higher imports than exports must borrow from the rest of the world, Bergstrand said. That country becomes a riskier investment. It would face higher interest rates. That will reduce income and standards of living.
Countries can alleviate trade imbalances by using exchange rate policies or other macroeconomic tools to adjust growth and inflation rates.
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FX Risk Management Options A variety of options are available for reducing short-term FX exposure. The following sections list FX risk management techniques considered suitable for new-to-export U.S. SME companies. The following FX instruments are available in all major currencies and are offered by numerous commercial banks. However, not all of these techniques may be available in the buyer’s country or they may be too expensive to be useful.
PROS – Enhances export sales terms to help exporters
remain competitive
– Reduces non-payment risk because of local currency devaluation
CONS – Cost of using some FX risk management
techniques
– Burden of FX risk management
Characteristics of a foreign currency‑denominated export sale:
Risk Exporter is exposed to the risk of currency exchange loss unless FX risk management techniques are used
Applicability Recommended for use (a) in competitive markets and (b) when foreign buyers insist on purchasing in their local currencies
$
FOREIGN EXCHANGE RATESThe prices of foreign currency fluctuate from day to day and month to month. There are 200 countries in the world with 150 different currencies.
The price of a common basket of goods and services in China is one third of what it is in the U.S. due to the exchange rate and one reason we import a lot of goods, Bergstrand explained. Also, he said, there are many different interest rates around the world which can determine when it might be a good time to invest in a foreign country.
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FINANCIAL EXPOSURES
There are three types of financial exposure in global business:
Transaction Exposure Suppose you, as a firm, decide to buy a good from Europe and that good is priced in Euros. You order it and time passes before it arrives at your office. You contracted at a certain price, but before it gets here the value of the Euro goes up. That could change by 10%, so your cost is much higher. The risky exposure is in the time it takes between the contract and the delivery.
Translation Exposure If you have a plant in China and you are a U.S. corporation, that plant is valued in Chinese yuan. If the yuan depreciates, it is worth fewer dollars. You now have an asset in China that from one quarter to the next falls in value, because you must operate in local currency. The change in value of assets and liability is a major concern for multinationals.
Economic Exposure When the dollar is appreciating against the Chinese yuan, that makes imported goods relatively cheaper from China and makes our exports more expensive in China. That is called economic exposure, which worsens the U.S. trade deficit.
The key to all of this, Bergstrand said, is getting more education on global finance before stepping in to that realm of the business world.
RAISING INTEREST RATES COOLS THE ECONOMY
The U.S. economy is operating at a very high level of employment and economic activity. “We see this through the very low unemployment rate - a 50-year historical low and well below the 4.5-5% we would consider full employment,” Bergstrand said.
“We are running red hot currently, but one implication of that is the economy has both drivers from a fiscal side, government and central bank side and our central bank (The Federal Reserve) is really starting to raise interest rates to cool off that economy.”
Because of the hot economy, imports are very strong and that causes our trade deficit to be very strong.
By contrast, Europe, Japan and Latin America still have high unemployment. Even China is beginning to cool, Bergstrand said. “What does that mean? They are trying to gear up their economy while we are trying to slow ours down.”
With the rest of the world operating below its potential, other countries are not importing as many goods, which hurts U.S. exports.
A trade deficit, though, is a symptom of strength, Bergstrand explained.
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PART 4
THE COMPLICATED U.S.-CHINA TRADE RELATIONSHIP
U.S.-China trade relations deteriorated in 2018 with both sides slapping huge tariffs on imports, bickering over trade deficits and surpluses. The two countries have a complicated relationship. But keeping up with what’s going on in both Washington, D.C. and Beijing is critical to those in global business, said Notre Dame’s Bergstrand.
The tariffs, China’s membership in the World Trade Organization and the U.S. trade deficit are all trending and critical topics for those in global business, Bergstrand said during a discussion on the issue.
“The U.S. and the European Union, which is currently 28, soon to be 27 countries, is our biggest trading partner,” he said. “We have good relationships with them and relatively stable exchange rates and low tariff barriers.”
The U.S. also has massive economic interactions with the European Union and strong skilled worker migration.
Meanwhile, regarding China, there may be yet more gripping drama on the horizon.
“When China’s economy opened up, we faced 40 years of this dynamic relationship. When properly measured, accounting for the exchange rate and price level differences, China is actually now the largest economy in the world.”
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It joined the World Trade Organization in 2001, agreeing to be more transparent. Depending on who you ask and when, China’s admittance in to the WTO has had good and bad effects on the global economy.
A previous U.S. administration views China as the second-largest importer in the world, giving a boost to both the rich and the poor, even during the Great Recession. The current administration believes the U.S. erred in joining the WTO in the 1990s and that China has failed to become a more open society with a more open economy.
China’s very poor economy has evolved through the years in to a middle-income economy with a per capita income of $17,000-18,000. In some very poor countries, per capita income is closer to $500, Bergstrand said.
“China has made enormous strides because of the growth rate of economic activity - 7-10% a year and currently 6.5% per year.”
Both countries now have population growth rates of less than 1% a year. But China’s yearly economic growth far exceeds that of the U.S., Bergstrand said.
Massive MarketAs U.S. firms dealt with the growth of China, two things were very important. The first was the potential market size. “When you are a firm you can potentially export to China, but when you have such a massive economy to deliver U.S. goods and services to, you can save a lot of transport costs and tariffs by building a plant there,” Bergstrand explained.
Building In‑Country Makes Economic Sense“Over the last 40 years, what we’ve seen is firms deciding not to produce here in the U.S. and simply opening up an affiliate in China. All are joint ventures with China.”
Save on Labor CostsThe cost of labor and production in China is much lower than in the U.S. “Our international economic relationship with China moves much more rapidly through foreign direct investment because their economy is so large it made more sense to have the jobs move to China, saving all those transportation costs,” Bergstrand said.
3 Reasons You Should Understand International Business Relations with China
He called those points “very strong motivations” for doing business in China.
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This trade relationship with China has hurt the U.S. economy in the sense that the U.S. is at full employment, but it has put downward pressure on salary levels and the growth of salaries for people in manufacturing, Bergstrand said.
“It is one of the concerns over globalization. In the political arena there is growing nationalism because jobs are moved.”
It is legitimate to say that America’s international economic integration has had a negative effect on workers in the U.S., especially in manufacturing, Bergstrand said. “That said, China also has higher tariff rates than we do. As with most developing economies – it is still a quarter of our per capita earnings – they will eventually lower those tariff rates.”
China has a strong interest in having a workable trading system, said Simon Lester, a policy analyst at the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies.
“If China wants to ensure that trade barriers such as these (solar panel tariffs) are not used
in an abusive manner, it will need a trade regime that can provide effective oversight,” Lester said in an opinion piece for MarketWatch entitled “Why China’s entry into the WTO has been good for the U.S.” “In order to be sure the existing trading system is there when it needs it, China might need to commit to more than it has so far.”
This is an important point international business people need to know: In some sense, today’s trade situation with China is no different than with Japan in 1950s and 60s, when Japan had a much lower standard of living, Bergstrand said. “As their economy grows, their standard of living rises and they buy more goods and services from the United States and other trade partners.”
So, as China develops and its standard of living rises, it will boost U.S. exports to China.
“If we avoid a trade war, in the long run, the U.S. will benefit and this erosion of salaries here will likely abate over time when China’s standard of living rises and their cost of labor gets closer to ours.”
CHINA LEARNED A BALANCING TRICK FROM THE U.S., U.K.The U.S. has raised tariffs on imports from China about $250 billion, Bergstrand explained. “We import about $500 billion. If we add tariffs, that would reduce imports and abate our trade deficit. We export $125 billion” in goods and services. “But, in the face of those rising tariffs China faces, that makes their goods less competitive, which is the purpose of the administration raising those tariffs,” he said.
“However, what China can do is change its exchange rate with the U.S. to offset it.”
A recent New York Times business article noted that China has allowed the yuan to depreciate to offset the tariffs, he said.
“If you go back over the centuries, more than not, countries, including the U.S., have set their exchange rates. Post 1945, we had a fixed exchange rate system. The system was designed by the U.S. and U.K. and stayed that way until the 1970s. “It is often the case that developing economies keep their currency under-valued,” Bergstrand said.
Devaluation carries risks, though, according to an article in the New York Times entitled “How China’s Currency Could Help it Weather a Trade War, at a Cost.”
The July 2018 article states that the Chinese said they were not deliberately devaluing the yuan. But that currency does not trade freely and its value is set by the Chinese government. The slide in the yuan began just as the trade rift heated up.
“The decline of the past three months has potentially benefited all of China’s exports to the United States, which last year totaled over $500 billion, and partly offset the impact of the tariffs imposed so far,” the Times article states.
Complicated issues like these are all over the map in the global business sphere, so keeping up with them as much as possible is important to protect your own business, Bergstrand says. It could mean the difference between making good business decisions and bad ones, success and failure.
As global business continues to grow and evolve, it is pertinent that those getting into international markets keep abreast of the latest news and get the education necessary to learn how to get in to the game and make it successful.
Do your research up front, so you know how to work with people of various cultures and look for executive education courses that will teach you about the complicated issues you’ll be facing.
The University of Notre Dame has experts, including Dr. Jeffery Bergstrand, who specialize in specific areas of global business. Consider registering for the 100% online Executive Certificate in Business Administration, which includes Principles of Business and Dr. Bergstrand’s Globalization content.
