Skill Practice: Noticing Definitions

 When reading at university, you need to pay attention to keywords and technical vocabulary. Professors often want you to learn these important words, and while they may be new to you, they are usually defined in the reading. Look at the example from “Reading 1” below. How does the passage define “franchise”?

• “Domino’s Pizza has more than 14,000 stores worldwide. These are franchises where individuals pay Domino’s in order to use their brand, advertising, and recipes.”

The word where introduces the definition. In this case, the definition is specific to the Domino’s Pizza example, but we can infer that a franchise is a business that pays a larger company to use their brand, advertising, and products/recipes.

Look for the following clues that show a keyword is being defined:

Pre-Reading

 The following words will be defined in the reading. Do you know any of these words?

• goods
• trade surplus
• exchange rates
• imports
• exports
• trade deficit

Reading 2: Global Trade in the U.S.^[1]

Today, global revolutions are happening in many areas of our lives: management, politics, communications, and technology. The phrase global business has assumed a new meaning, referring to a boundless mobility and competition in social, business, and intellectual arenas. The purpose of this chapter is to explain how global trade is conducted. We also discuss the barriers to international trade and the organizations that promote global trade. The chapter concludes with trends in the global marketplace.

Global Trade in the United States

• Why is global trade important to the United States, and how is it measured?

Having a global vision has become a business requirement. It’s no longer optional. Having a global vision means recognizing and reacting to international business opportunities, being aware of threats from foreign competitors in all markets, and effectively using international distribution networks to obtain raw materials and move finished products to the customer.

Managers around the world must develop a global vision if they are to recognize and react to international business opportunities, as well as remain competitive at home. Often a company’s toughest competition comes from foreign companies. Moreover, a global vision enables a manager to understand that customer and production networks operate worldwide. Over the past three decades, world trade has climbed from $200 billion a year to more than $1.4 trillion[2]. U.S. companies play a major role in this growth in world trade, with 113 of the largest U.S. companies, called Fortune 500 companies, making over 50 percent of their profits outside the United States. Among these companies are recognizable names such as Apple, Microsoft, Pfizer, Exxon Mobil, and General Electric[3].

Starbucks Corp. is among the fastest growing global consumer brands and one of the most visible signs of U.S. commercial culture overseas. Of Starbucks’s 24,000 total stores, almost 66 percent are international stores. These contribute a substantial amount to the company’s revenues, which have grown from $4.1 billion in 2003 to $21.3 billion in 2016[4].

Another example is McDonald’s. When they expand internationally, they adjust the menu and décor. Go into a Paris McDonald’s and you may not recognize where you are. The plastic tables and chairs are gone. The restaurants have hardwood floors and comfortable armchairs. Most restaurants have TVs with continuous music videos. You can even order an espresso, beer, and focaccia bread sandwich with chicken. It’s not America.

Many countries depend more on international commerce than the United States does. For example, France, Great Britain, and Germany all derive more than 55 percent of their gross domestic product (GDP), a measure of a country’s economic activity, from world trade, compared to about 28 percent for the United States[5].

Global business is not a one-way street, where only U.S. companies spread throughout the world. There are also more foreign companies in the United States. Foreign competition is now present in almost every industry. In fact, U.S. makers of electronics, cameras, automobiles, fine china, leather goods, and a variety of other products have struggled to compete with foreign companies. Toyota now has 14 percent of the U.S. auto market, followed by Honda at 9 percent and Nissan with 8 percent[6]. Nevertheless, the global market has created profitable new business opportunities for many U.S. firms.

Measuring Trade between Nations

International trade improves relationships with friends and allies; helps ease tensions among nations; and—economically speaking—improves economies, raises people’s standard of living, provides jobs, and improves the quality of life. The value of international trade is over $16 trillion a year and growing. This section takes a look at some key measures of international trade: exports and imports, the balance of trade, the balance of payments, and exchange rates.

Exports and Imports

The developed nations (those with mature communication, financial, educational, and distribution systems) are the major players in international trade. They account for about 70 percent of the world’s exports and imports. Exports are goods and services made in one country and sold to others. Imports are goods and services that are bought from other countries.

Each year the United States exports more food, animal feed, and beverages than the year before. A third of U.S. farmland is devoted to crops for export. The United States is also a major exporter of engineering products and other high-tech goods, such as computers and telecommunications equipment. For more than 60,000 U.S. companies (the majority of them small), international trade offers exciting and profitable opportunities. Among the largest U.S. exporters are Apple, General Motors Corporation, and Ford Motor Company[7].

Despite a great variety of American products, imports to the United States are also growing. Some of these imports are raw materials that the U.S. lacks, such as manganese, cobalt, and bauxite, which are used to make airplane parts, exotic metals, and military hardware. Other times, it is cheaper to import industrial supplies (such as steel) and production equipment than to produce them at home because of labor and production costs. Most of Americans’ favorite hot beverages—coffee, tea, and cocoa—are imported. Lower manufacturing costs in China have resulted in huge increases in imports from there.

Balance of Trade

The difference between the value of a country’s exports and the value of its imports during a specific time is the country’s balance of trade. A country that exports more than it imports is said to have a favorable balance of trade, called a trade surplus. A country that imports more than it exports is said to have an unfavorable balance of trade, or a trade deficit. When imports exceed exports, more money from trade flows out of the country than flows into it.

Although U.S. exports have been booming, the U.S. still imports more than it exports. The country had an unfavorable balance of trade throughout the 1990s, 2000s and 2010s. In 2016, the exports totaled $2.2 trillion, yet the imports were $2.7 trillion. Thus, in 2016 the United States had a trade deficit of $500 billion[8].

America’s exports continue to grow, but not as fast as its imports. The export of goods, such as computers, trucks, and airplanes, is very strong, but the sector that is slow to grow is the export of services. America exports many services—ranging from airline trips, to education of foreign students, to legal advice. However, some companies are hesitant to export services because of concerns about piracy. They worry foreign companies will quickly copy their services, which leads companies to restrict the distribution of their services to certain regions. The Federal Bureau of Investigation in the U.S. (FBI) estimates that the theft of intellectual property from products, books and movies, and pharmaceuticals totals in the billions every year[9].

Balance of Payments

Another measure of international trade is called the balance of payments, which is a summary of a country’s international financial transactions showing the difference between the country’s total payments to, and its total receipts from, other countries. The balance of payments includes imports and exports (balance of trade), long-term investments in overseas plants and equipment, government loans to and from other countries, gifts and foreign aid, military expenditures made in other countries, and money transfers in and out of foreign banks.

From 1900 until 1970, the United States had a trade surplus, but still didn’t have a balance of payment. This is because of government spending abroad, including military presence, which required the U.S. to send money to other countries. Hence, almost every year since 1950, the United States has had an unfavorable balance of payments. And since 1970, both the balance of payments and the balance of trade have been unfavorable. What can a nation do to reduce an unfavorable balance of payments? It can encourage exports, reduce its dependence on imports, decrease its military presence abroad, and/or reduce foreign investment. The U.S. balance of payments deficit was over $504 billion in 2016,[10] meaning they sent billions more abroad than they brought in.

The Changing Value of Currencies

The exchange rate is the price of one country’s currency, or money, in terms of another country’s currency, or money. If a country’s currency appreciates, less of that country’s currency is needed to buy another country’s currency. If a country’s currency depreciates, more of that currency will be needed to buy another country’s currency.

How do appreciation and depreciation affect the prices of a country’s goods? If, say, the U.S. dollar depreciates relative to the Japanese yen, U.S. residents have to pay more dollars to buy Japanese goods. To illustrate, suppose the dollar price of a yen is $0.012 and that a Toyota is priced at 2 million yen. At this exchange rate, a U.S. resident pays $24,000 for a Toyota ($0.012 × 2 million yen = $24,000). If the dollar depreciates to $0.018 to one yen, then the U.S. resident will have to pay $36,000 for a Toyota.

As the dollar depreciates, the prices of Japanese goods rise for U.S. residents, so they buy fewer Japanese goods—thus, U.S. imports decline. At the same time, as the dollar depreciates relative to the yen, the yen appreciates relative to the dollar. This means prices of U.S. goods fall for the Japanese, so they buy more U.S. goods—and U.S. exports rise.

However, a country’s currency may be undervalued, giving its exports an unfair competitive advantage. Many people believe that China’s huge trade surplus with the United States is partially because China’s currency is undervalued. People in the U.S. have an increased buying power because of the exchange rate.

Despite many challenges, international trade improves relations between countries, helps bolster economies, raises people’s standard of living, and improves the quality of life.

Reading Comprehension