Commerce for Cambridge O Level Coursebook with Digital Access (2 Years)

SAMPLE

Introduction

Introduction to command words

How to use this book

Topic 1 Commerce and production

1.1 Trade and commerce

1.2 Production

Topic 2 Commercial operations

2.1 Different types of enterprise and outsourcing

2.2 Retailing and wholesaling

2.3 Trading documents

2.4 Communication

Topic 3 Globalisation of trade

3.1 Globalisation of trade

Topic 4 Logistics in commerce

4.1 Transportation

4.2 Warehousing

Topic 5 Aids to trade that support commerce

5.1 Advertising

5.2 Banking and insurance

5.3 Sources of finance and commercial performance

Topic 6 Sustainability and ethics

6.1 Sustainability

6.2 Ethics and consumer protection

Commercial calculations: Formulae

Glossary Index

Acknowledgements

Unit 3 Globalisation of trade SAMPLE

Chapter 3.1 Globalisation of trade

LEARNING INTENTIONS

In this chapter you will learn about:

• exports, imports and visible and invisible trade

• why countries want imports and exports

• why businesses want to export and/or import

• challenges for exporters and importers

• the Balance of Trade and Balance of Payments

• free trade, trading blocs and trade restrictions

• support of exporters

• global supply chains

• benefits and risks to global supply chains.

3.1.1 International trade

Buying and selling goods and services across different countries is called international trade. International trade occurs because each country differs in its demand for goods and services and in its ability to supply them.

International trade enables countries to obtain goods and services that are not available in their home country, are available only in limited quantities or are too expensive or difficult to produce in their own countries.

Over time, countries have become more aware of the benefits of international trade. In general, countries have become wealthier, allowing people’s standard of living and expectations to rise. This has led to greater demand for a wider range of goods and services that are available from across the world. Consumers then choose to buy goods and services from other countries to meet their needs and wants. There has been a growth of multinational businesses that operate in multiple countries. For example, Toyota and Coca-Cola both manufacture and sell their products in many different countries.

International trade has grown over time. This growth has been supported by developments in technology, such as quicker communication through email and other digital methods. Moving goods from one country to another has also become easier and cheaper as transport and communication have improved.

The world is becoming a global market, which means one large market for goods and services. As the whole economy of the world is becoming more integrated into a single ‘global market’, globalisation is taking place. Globalisation encourages more connections between businesses and consumers in different countries. The same goods and services can be found in many countries throughout the world. A traveller going round the globe is likely to see many of the same types of cars, mobile phones, fast-food restaurants and soft drinks whatever country they are in. Businesses often focus on what is happening in the global market rather than in the home market. For example, a business might decide to relocate the manufacturing of its products in a country with lower wages.

Each country has its own currency that is used to buy and sell goods and services. For example, USA uses dollars, Japan uses the yen and Pakistan uses rupees. When people visit other countries or businesses trade internationally, they will need to use foreign currencies.

KEY TERMS

international trade: trade in goods and services between countries.

global market: one market for goods and services that includes different countries around the world.

globalisation: the development of world trade into a single global market.

currency: a country’s system of money used to buy and sell goods and services.

Exports, imports and visible and invisible trade

Exports are goods and services sold to other countries that bring money to the country. For example, Apple Inc. is an American company however many Apple products, such as mobile phones, are manufactured in China and exported to countries around the world.

Imports are goods and services bought from other countries that are paid for by paying money to other countries. Lots of countries need to import raw materials and food that they are not able to produce themselves. For example, tea is a popular drink in the UK. The country’s cold climate makes growing tea difficult so the UK imports tea from several countries including Kenya, India and Zimbabwe.

Visible exports are goods sold to other countries whereas visible imports are goods bought from other countries.

KEY TERMS

exports: goods and services sold to other countries.

imports: goods and services bought from other countries.

visible exports: goods sold to other countries. visible imports: goods bought from other countries.

Invisible exports are services sold to buyers in other countries, for example, insurance and transport, whereas invisible imports are services bought from sellers in other countries, for example, holidays abroad and films made by foreign companies.

Visible exports and visible imports make up visible trade. Trade in goods is known as visible trade because goods can be seen moving in and out of a country.

Invisible exports and invisible imports make up invisible trade. The trade in services is known as invisible trade because unlike goods, services offered overseas are not seen.

Why countries want imports and exports

Each country’s government decides its own policies and laws to control its international borders. Countries will use their laws to decide which goods, services and people are allowed into the country and which are allowed out of the country.

Most countries allow and encourage international trade because of the many benefits it can bring to a country and its people.

As international trade has increased over time, the global market has become larger with many countries now importing from and exporting to all over the world. According to the World Trade Organisation, the volume of world trade grew by 4% in 2021. The biggest exporting countries are China, the USA, Germany and Japan. China is the world’s largest manufacturer, making over a quarter of all manufactured goods produced worldwide, many of which are exported. China’s biggest exports include machinery, computers, furniture and plastic goods and vehicles.

There are several benefits that countries can receive from importing and exporting goods and services:

• wider choice of goods

• lower cost of imports

KEY TERMS

invisible exports: services sold to other countries.

invisible imports: services bought from other countries.

visible trade: the import and export of goods.

invisible trade: the import and export of services.

TIP

It is easy to mix up imports with exports, and visible trade with invisible trade. It is worth spending time learning the definitions and differences so that you always use the terms correctly.

• job creation

• higher standard of living

• greater investment.

1 Wider choice of goods

Importing gives countries the opportunity to have goods that would otherwise be unavailable, or only available in small quantities or for a high price. The size of a country affects its ability to produce the wide range of goods it needs. Very small countries tend to be especially dependent on international trade and appreciate the benefits.

Some raw materials are only found in certain countries. Countries that do not have a particular raw material, or only have small quantities, must import it or go without. For example, Zimbabwe imports oil, Bangladesh imports iron and chemical products and Brunei imports gas.

Countries differ in their climate and amount and types of land. Many countries do not have the right climate or enough land to produce all the food they need for their population. In these circumstances, it is essential to import the rest of the goods that they need:

1 Climate including temperature and rainfall affects the ability to produce all the food a country’s population needs. For example, European countries import bananas from countries with tropical climates where bananas grow best.

2 Some countries do not have enough land to produce all the food needed for their population. The Maldives imports food including rice and sugar as it cannot grow all the food its population needs on its small islands. China has the world’s largest population and needs to import some food, such as soybeans and corn, from the USA and Brazil. Different countries’ populations have varying levels of education, skills and specialist knowledge. For example, Japan and South Korea have developed a workforce with high levels of technological expertise, and have developed businesses that can produce many electronic products of high quality at low cost. As a result, other countries are keen to import their mobile phones, televisions and robotics. Germany and USA have expertise in the pharmaceutical industry and other countries import their medicines. See Chapter 1.2 for further details of specialisation.

produce many of the fruits and flowers that it demands throughout the winter. It is much cheaper for the UK to import fruit and flowers from other countries instead. Products are more expensive to manufacture in some countries than others. The cost of employing people is a large part of the cost of producing many products. Wages vary a lot between counties. Countries that have higher wage levels are more likely to find that it is cheaper to import some goods than to produce their own. For example, European countries import many manufactured goods from countries like China and India that have lower labour costs and have welldeveloped manufacturing industries. Some countries that have high wages can still produce products at lower cost provided they efficiently use skilled labour and invest in the right equipment. For example, wages are high in Germany, but successful businesses in Germany still produce and export highquality vehicles, machines and chemical products at lower costs than many other countries.

3 Job creation

A growing export market for a business’s products can lead to the business growing and employing more staff. The growth of many businesses in a country due to exports will then lead to a reduction in unemployment and an increase in wages.

Other businesses that provide services to exporters, such as insurance, banking, transport and warehousing, also grow and create more jobs. These export services have expanded over the years as international trade and the global market have increased.

4 Higher standard of living

Standard of living is a measure of how wealthy people are and what they can afford to have. The higher the standard of living, the wealthier people are. International trade allows countries to specialise in making the goods and services that they are best at producing. If a country concentrates on producing a few goods and services, it is likely to become more efficient at producing those goods and services. However, the country will also become less focused and produce less

2 Lower cost of imports

Climate and land differences mean that some countries can produce many primary goods more efficiently and at lower cost than other countries. For example, the UK would need to use expensive greenhouses to

KEY TERM

standard of living: a measure of how wealthy people are and what they can afford to have.

of other goods. As a result, the country may become less self-sufficient. It will need to export more of the goods it does produce so that it can afford to import other goods that it is less efficient at producing.

By concentrating on producing what it is best at, and exporting these goods and services, a country will have growing businesses, leading to more jobs, increases in wages and a higher standard living for its population. If a country remained self-sufficient, it would be less efficient at providing the wider range of goods it needs for all its population. As a result, the country will have a lower standard of living.

Some countries also use exporting to diversify from the products they have traditionally produced. Expansion into new products and markets can encourage economic growth and reduce risks from producing a small range of products. For example, Dubai is a big exporter of oil. It has also developed other industries and its re-export trade, resulting in a high and growing standard of living. Its airport is now an international hub serving many parts of the world. Dubai has also become a popular destination for tourists.

TIP

Refer back to Chapter 1.2 and remind yourself of the meaning of specialisation and its advantages to a country. An understanding of specialisation will help you to understand why international trade can lead to a wider choice of goods and a higher standard of living.

5 Greater investment

Businesses that sell in many countries can benefit from bigger markets and more customers. Growing demand for a business’s products means that the business can afford to invest more in itself, such as new machinery, technology and staff training, resulting in the efficient production of large amounts of goods. Many of the world’s biggest businesses have grown through international trade. For example, Amazon has grown by focusing on e-commerce, Apple Inc. manufactures and

sells computers and phones and Volkswagen produces and sells vehicles. All of these companies trade in many countries across the globe.

International trade can also lead to greater investment into a country from foreign investors, who will choose to invest anywhere in the world where they see opportunities for a good return on their investment. For example, Nissan is a large Japanese company that has invested large amounts of money in overseas manufacturing sites including in Mexico and the UK. This investment is beneficial to Mexico and the UK and can lead to more local jobs, higher wages and a higher standard of living.

Why has international trade become easier?

Circumstances that have encouraged the growth in international trade include the following:

1 Better electronic communication, such as business websites, email and video calls, have improved marketing and contact between sellers and potential buyers.

2 The faster movement of products through improved coordination and the use of quicker methods of transport, such as air freight, makes it easier to transport products. This is especially useful for perishable goods, such as fruit and cut flowers.

3 Trade agreements between countries have reduced trade protection (see Section 3.1.3).

We often focus on the export and import of goods, but remember that services are also exported and imported. High skill levels required by some services, such as engineering, financial and business management, and telecommunications, make these services particularly common for international trade in many countries.

Key exports: cotton textiles including clothes, bed sheets and pillow cases, rice and cereals, leather goods

Big export markets: USA, Germany, China, UK and United Arab Emirates

Pakistan

Key imports: machinery, iron and steel, pharmaceuticals and chemicals, food, petroleum, oil

Main suppliers of imports: USA, Saudi Arabia, China, United Arab Emirates and Indonesia

Key exports: platinum and iron, gold, coal, cars

Big export markets: China, USA, Germany, Japan and UK

South Africa

Key imports: petroleum, cars and trucks, phones

Main suppliers of imports: China, Germany, USA and India

Key exports: clothing, sugar, meat and fish, clothes, gems and precious metals

Big export markets: South Africa, France, UK and USA

Mauritius

Key imports: machinery, petroleum products, chemicals, vehicles

ACTIVITY 3.1.1

Working with a partner or in a small group, choose three countries and research each country’s imports and exports.

For each country, include the following:

i What goods and services are its biggest exports?

ii Which countries does it sell most exports to?

iii What goods and services are its biggest imports?

iv Which countries does it import most goods and services from?

Main suppliers of imports: China, United Arab Emirates, India and South Africa

a Which of your three researched countries has the most imports and exports? Give reasons for your answer.

b Present your findings to the class.

c After listening to the presentations from others in your class, did you find that some countries imported and exported more than others? Why might the amount of international trade vary between countries? Were there some types of goods that were internationally traded more than others?

REFLECTION

Discuss your answers to c with another student. Did they reach the same conclusions, or did they have different views? If your conclusions differed, why might this have happened?

How would you defend your conclusion? Or can you now criticise your conclusion?

Why businesses decide to export and/or import

Many businesses choose to export or import goods and services rather than only operate in their home market. International trade may be more challenging than home trade for exporters and importers, but there are many potential benefits of trading internationally that make it worthwhile.

Table 3.1.1 describes common reasons why businesses choose to import or export.

Why do businesses export? Why do businesses import?

To grow by having access to more customers in a bigger market

To make a profit from importing goods or services. For example, a business might be able to import goods that are cheaper than homeproduced products or of higher quality.

Why do businesses export? Why do businesses import?

To extend the life of a product that has declining sales in the home country but has not been sold in other countries

Table 3.1.1: Reasons why businesses import and export TIP

When you are thinking of the reasons to trade internationally, be clear about whether you are considering the benefits from the point of view of a business, consumer or country.

Challenges for exporters and importers

Exporters and importers typically have many more challenges than home businesses, which only buy and sell in one country. Businesses trading internationally must have knowledge of overseas markets and enough understanding to overcome problems of operating in other countries.

To reduce risk of business failure by diversifying into different goods and services and new markets

To increase sales by exporting to countries with better market conditions. For example, exporting to countries with lower taxes, less competition or wealthier customers

To benefit from demand for a product in a country where the product is not currently available

To obtain raw materials or components for use in manufacture that are not available in the home country

Businesses must make decisions about which countries to trade with. The amount of trade that businesses choose to do with a country may be determined by the costs of operating in particular countries, which is influenced by economic factors. Economic factors include the amount of industry in the country, the standard of living, market size and population trends, and the wealth of the country.

There are several main challenges to businesses that come from importing and exporting goods and services:

• distance

• language

• documentation

• transport

• customs duties

• non-payment

• different currencies and methods of payment

• foreign exchange rates

• competition

• different legal systems.

1 Distance

Distance can be a huge difficulty for exporters and importers, especially where large or heavy goods need to be moved long distances, for example, businesses based in Asia buying from and selling to the UK. Distances can cause both transportation and communication problems:

Weights, measures and technical specifications can all vary from country to country. Sorting out these differences can add to a business’s costs. For example, some countries use grams and kilograms while others use pounds and ounces. Voltages for electrical appliances may differ and products may need to be modified, such as cars that might need to be right- or left-hand drive depending on the country. Differences are likely to lead to increased paperwork requirements.

4 Transport

• Goods travelling long distances may be more likely to get damaged, lost or stolen. Longer distances also increase the costs of getting the goods to the customers.

• Distances make it harder for buyers and sellers to meet face-to-face. However, developments in electronic communication, such as online meetings, have reduced these problems.

2 Language

There are often language barriers in international trade, and interpreters may have to be employed. Labels, instructions, advertisements and any other documents will all have to be produced in each importing country’s language. This will add to a business’s costs.

3 Documentation

Commercial documents, such as air waybills and bills of lading and letters of credit, are often required for international trade but are not required for home trade. The country of origin of a product will need to be identified for customs purposes, so certificates of origin are used to prove where the goods originally came from. All these additional requirements add to the complexity and costs of trading internationally.

See Chapter 2.xx for further details on documents of international trade.

TIP

Check your notes and revise Chapter 2.xx on documents of international trade. Revision of this topic will help you understand the additional paperwork required for international trade.

Road and rail transport is often used for importing and exporting across countries within the same continent, for example, from France and Germany to other countries in Europe. Sea and air transport is more commonly used for exporting between continents, such as from Africa to Asia. Transport adds to the costs of the products and insurance costs will be higher than home-produced products because there are more risks associated with the movement of goods. Goods that must go long distances often need to be transferred from one type of transport to another as they travel to their destination. Transfers add to the complexity of transporting goods, although this complexity can be helped using container transport Standardised containers are transferred from one form of transport to another without unpacking the goods. The containers are used for bulky goods and can help to reduce the costs of transport.

Deliveries can take much longer than for homeproduced products and delivery dates may be less predictable. More packaging may be needed to transport goods between countries.

KEY TERM

container transport: use of standardised boxes (or containers) to move goods using more than one mode of transport, such as by sea and rail.

SAMPLE

5 Customs duties

Many countries operate some forms of trade restrictions on imports. Trade restrictions may raise money for the government and support home businesses. Customs duties are a type of taxation that the consumer must pay on imported goods that they buy. Customs duties will make imported goods more expensive to consumers. This higher price will make it more difficult for an importer to compete with home businesses.

KEY TERM

customs duty: a type of taxation that the consumer must pay on imported goods.

6 Risk of non-payment

International trade is usually conducted on credit, and customers do not pay invoices until several weeks after the purchase has been made (see Chapter 2.xx for details of invoices and credit). Whenever goods are sold on credit, there is always a risk that the customer does not pay the money they owe. This risk is even higher when selling overseas because it can be more difficult to find out whether the customer is trustworthy and will pay for the goods.

The risk of non-payment is particularly high if there is political instability in a country, such as riots or an attempt to overthrow the government. Any uncertainties can affect the confidence that a business has about trading internationally and the risk of non-payment for goods that have been sold. See Section 3.1.5 on global supply chain risks for further details of political instability.

7 Different currencies and methods of payment

When businesses purchase goods from suppliers, they will commonly receive an invoice then have a few days or weeks before they must pay. Possible methods of payment include cash, cheque, credit card, debit card, electronic transfer and documentary credit. These methods are explained in Chapter 5.2, Section xx.

Payment problems may happen because it is more complicated to use different countries’ banking systems and different currencies. Imports and exports are often paid for in highly trusted currencies that are used widely for international trade, such as the US dollar or the Japanese yen. The trusted currency is then exchanged into local currencies. Importers and exporters will need to use methods of payment that can manage differences between currencies. These methods of payment, such as electronic transfer or letters of credit, can be more complex than those payment methods used by businesses that only operate in one country.

currencies

8 Foreign exchange rates

An exchange rate is the price of one country’s currency expressed in terms of another country’s currency. The rate at which one currency is exchanged for another currency is called the rate of exchange, for example, the price of the US dollar against the Zimbabwean dollar.

KEY TERM

exchange rate: the price of one country’s currency expressed in terms of another country’s currency.

In home trade, one currency is used. In international trade, different currencies are usually required. Exchange rates can change at any time, and there are always risks that the rate of exchange will change between the time that the prices were quoted and the time that payment is due. A change in the exchange rate will lead to a change in the value of the import or export. This may lead to unexpected losses for the importer or exporter.

Foreign exchange rates affect the types and quantities of goods and services that are exported and imported. For example, if the Bangladeshi taka becomes stronger than the Singapore dollar, the Singapore importer may not be able to import the same quantity of goods as before, since the Bangladeshi goods will be more expensive. The Singapore trader may therefore look elsewhere for cheaper products.

9 Competition

The more businesses that trade internationally the more competition there is likely to be. It can also be especially challenging for a business trading internationally to compete against competition from local businesses that operate in the country where the goods will be sold. The home business will not have incurred some of the costs that an importer has, such as transportation. Advertising and other promotional material must be designed for the customers in the country where the goods and services will be sold. Home businesses may also be able to compete by providing better after-sales service that is available locally.

10 Different legal systems

Each country has its own laws affecting how businesses operate and the products and services that can be sold. There are laws governing safety standards, saleable quality, protection of consumers and how goods can be advertised. These laws will vary from country to country. For example, children’s toys imported into the UK will have to prove that they conform to UK toy safety legislation.

A government may also change its laws on international trade. There may be changes in the regulations that affect imports of particular goods, causing problems for the importer. For example, a foreign government may suddenly introduce limits on the use of foreign currency or new trade restrictions (see Section 3.1.3).

Despite the problems and challenges, international trade is often worthwhile as it can help businesses grow and become very profitable.

3.1.2 The Balance of Trade and Balance of Payments

The Balance of Trade and the Balance of Payments are both calculations that countries make to assess their international trade.

Balance of Trade

The Balance of Trade (balance of visible trade) is the difference between the money received from a country’s exported goods (visible exports) and the payments made for a country’s imported goods (visible imports) over a period of time.

Goods include:

• primary products, such as crops, oil and fish

• semi-manufactured products, such as steel and chemicals

• finished goods that have been manufactured, such as clothes, vehicles and processed foods like sweets and packets of instant noodles.

The Balance of Trade can be calculated as follows.

FORMULA

Balance of Trade = receipts from visible exports − payments for visible imports

If a country’s receipts from the exports of goods are greater than payments for imports of goods in a specific time period, it means that visible exports are greater than visible imports and there is a positive Balance of Trade. This is called a favourable or surplus Balance of Trade.

KEY TERMS

Balance of Trade: the difference in financial value between the total exported goods and the total imported goods.

surplus Balance of Trade: when the value of a country’s visible exports is greater than the value of its visible imports.

If a country’s receipts from the exports of goods are less than payments for imports of goods in a specific time period, it means that visible exports are less than visible imports and there is a negative Balance of Trade. This is called an adverse or deficit Balance of Trade

KEY TERM

deficit Balance of Trade: when the value of a country’s visible exports is less than the value of its visible imports.

Balance of payments

A country’s Balance of Payments is a record of its total foreign trade including both goods and services over a period of time.

Table 3.1.2 gives examples of services that are commonly imported or exported.

Invisible exports Invisible imports

Transport, such as shipping, and flights provided to people in other countries

Financial, banking, communications and insurance services provided to other countries

Tourists visiting from other countries

Receipt of aid from other countries

Payments to overseas businesses for use of their transport, such as shipping and flights

Financial, banking, telecommunications and insurance services received from other countries

People going abroad on holiday

Aid given to other countries

Table 3.1.2: Examples of services that are commonly imported or exported

KEY TERM

Balance of Payments: the difference in financial value between the total exported goods and services and the total imported goods and services over a period of time.

The Balance of Payments can be calculated as follows.

FORMULA

Balance of Payments = Balance of (visible) Trade + Balance of (invisible) Trade where

Balance of (invisible) Trade = receipts from invisible exports − payments for invisible imports

As with the Balance of Trade, the Balance of Payments calculation may show a surplus or a deficit.

If a country’s receipts from the exports of goods and services are greater than payments for imports of goods and services in a specific time period, there will be a positive Balance of Payments. This is called a surplus or favourable Balance of Payments.

If a country’s receipts from the exports of goods and services are less than payments for imports of goods and services in a specific time period, there will be a negative Balance of Payments. This is called a deficit or adverse Balance of Trade.

WORKED EXAMPLE

Calculating Balance of Trade and Balance of Payments

The following information is available for a country.

000

Required:

a Calculate the Balance of Trade in i 2023 and ii 2024.

b Calculate the balance of invisibles in i 2023 and ii 2024.

CONTINUED

c Calculate the Balance of Payments in i 2023 and ii 2024.

It is important to be aware that the Balance of Trade focuses on goods only. The Balance of Trade does not focus on services. However, the Balance of Payments considers both goods and services.

The impact of international trade on the Balance of Trade and the Balance of Payments

The more successful a country’s businesses are at producing and exporting goods and services the stronger the country’s Balance of Trade and Balance of Payments are likely to be. Each country must be able to afford any imports that it needs or wants to buy. Having a Balance of Payments deficit (imports are greater than exports) for several years can lead to problems for a country, as it will find it difficult to afford to buy imports. Therefore, the country’s government will need to take action to increase exports and/or decrease imports.

• To increase exports, the government can support and encourage home businesses to produce and export more goods and services.

In the worked example, the Balance of Trade deficit for 2023 shows that the value of goods that the country imports is greater than the value of goods that it exports. However, the Balance of Trade is in surplus in 2024 because the value of goods that the country imports is less than the value of goods that it exports. The country’s Balance of Payments changes from a deficit in 2023 to a surplus in 2024. The Balance of Payments is also in surplus in 2024 because its surplus in visible trade is bigger than its deficit in invisible trade. Sometimes a country can have a Balance of Trade deficit and a Balance of Payments surplus at the same time. This combination will occur if the Balance of Trade deficit is smaller than the surplus on invisible items (services).

• To decrease imports, the government can encourage consumers to purchase products made in the home country. The government can also reduce imports by increasing customs duties on imports or introducing other trade restrictions (see Section 3.1.3 for an explanation of trade restrictions).

Some countries regularly have a Balance of Trade surplus. Other countries regularly have a Balance of Trade deficit and find it difficult to alter the situation, especially in the short term.

Pakistan has had a Balance of Trade deficit for many years. This is partly because the value of the country’s exported clothing and other goods has not been enough to offset country’s demand for significant amounts of imported oil. However, China produces huge quantities of manufactured goods for export, which allows it to import what it wants while keeping a Balance of Trade surplus.

Countries that have a deficit on their Balance of Trade sometimes have a surplus on invisible trade, which helps their overall Balance of Payments. For example, the UK imports many goods but is a big exporter of services, such as finance and insurance.

3.1.3 Free trade, trading blocs and trade restrictions

• supervise the movement of goods across a country’s borders. This involves the inspection of goods and relevant documentation to prevent smuggling and enforce any bans on goods such as firearms or agricultural products.

• enforce quotas. Quotas are limits placed on the amount of goods allowed to be imported into a particular country over a particular time period.

KEY TERMS

customs authority: an organisation that is responsible for controlling a country’s imports and exports, collecting trade statistics, preventing smuggling, and collecting tariffs.

tariff: a type of taxation that an importer must pay on goods brought into a country.

quota: a limit on the amount of a product that is allowed to be imported into a country in a year.

TIP

It is easy to mix up customs duties with tariffs. Check the definitions for both terms so that you can use each of them correctly.

3.1.6: Checks made on imports and exports

Many countries have checks and controls on goods that are imported and exported. Each country will use its own customs authorities to carry out the following functions:

• Assess and collect tariffs on imports. A tariff is a type of taxation that must be paid whenever an importer brings goods into a country. The tariffs imposed are decided by the government.

• Keep records of exports and imports. This information can be used to:

• calculate the volume and value of imports from each country, and the volume and value of exports to each country to which they are being sent

• calculate the Balance of Trade and Balance

of Payments

• assess trends in international trade, which the government can use to decide trade policies and calculate tax revenue from import tariffs.

Free trade

Free trade means trading between countries without any barriers to trade. Barriers to trade can include import tariffs or other trade regulations aimed at protecting a country’s home businesses. Free trade allows the import and export of goods without government interference.

Free trade encourages more international trade to occur. This leads to a country benefiting to a greater extent from all the advantages of international trade, such as wider choice of goods, higher standard of living and lower unemployment.

KEY TERM

free trade: trading between countries without any customs duties, tariffs or other trade restrictions.

3.1.7: Trade between countries

In practice, many countries impose some restrictions on goods or services coming into their country. Countries impose restrictions because while free trade can bring lots of benefits to a country, there are also disadvantages.

Disadvantages of free trade include the following:

• Some home businesses are more likely to fail because they find it difficult to compete with goods and services that are produced more cheaply in other countries.

• Free trade encourages an uneven distribution of wealth, with some people benefiting from increased trade while others become poorer.

• Some products are ‘dumped’ in a country. These products are very cheap imports, such as clothing. Home businesses cannot keep their prices low enough to be able to compete and as a result the country then becomes reliant on these imported goods.

Trading blocs

A trading bloc is a group of countries that work together to promote trade between themselves. The countries that are members of the bloc make free trade agreements between each other. The trading bloc also creates a common tariff to countries outside the bloc to discourage imports from countries that are not members of the bloc.

KEY TERM

trading bloc: a group of countries that have made a free trade agreement between themselves and have agreed a common external tariff to non-member countries.

Types of trading bloc

• Free trade areas are groups of countries that have no obstacles to trade, such as customs duties, between member countries. For example, Australia has several free trade agreements with countries including Singapore and Malaysia.

• Customs unions are groups of countries where there is free trade between member countries and an external tariff against goods from outside the customs union. An example is the South African Customs Union. Its members are South Africa, Lesotho, Namibia, Botswana and Eswatini.

• A common market or single market is a customs union that also allows free movement of capital and labour, and reduces other difficulties associated with international trade, such as documents and technical standards between member countries.

KEY TERMS

free trade area: an area within which there are no restrictions to trade.

customs union: a group of countries where there is free trade between member countries and an external tariff against goods from outside the group.

common market: a customs union that also allows free movement of capital and labour within the member countries.

Year established 1967 1980 1985

Member countries

10 member countries: Singapore, Malaysia, Indonesia, Brunei, Thailand, the Philippines, Vietnam, Cambodia, Laos and Myanmar

Tariffs ASEAN uses a common preferential tariff scheme, which only charges low tariffs between member countries (0–5%).

Table 3.1.3: Examples of trading blocs

16 member countries: Angola, Botswana, Comoros, Eswatini, Lesotho, Malawi, Mozambique, Namibia, Seychelles, Tanzania, Zambia, Zimbabwe, South Africa, the Democratic Republic of the Congo, Madagascar and Mauritius

SADC has a free trade agreement between member countries.

8 member countries: Afghanistan, Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan and Sri Lanka

SAARC has a free trade agreement between member countries.

There are both advantages and disadvantages for a country joining a trading bloc.

Advantages of joining a trading bloc

• It encourages more trade between member countries.

• There is free access to larger markets.

• The removal of controls such as quotas or import tariffs means more competitive prices. This encourages businesses to compete by becoming more efficient.

• There is a wider choice of goods for consumers living in the trading bloc.

• Sales and profits may increase for some businesses in the trading bloc.

• Businesses have greater access to cheaper land, skilled labour and raw materials in other countries, and can produce wherever it is most cost effective.

• Trade is easier because member countries may agree factors such as trading laws, measures, weights, documents, equipment and sometimes currency.

• There are more employment opportunities for the people who live in member countries if they can work and move freely between countries.

• A trading bloc is in a stronger bargaining position to negotiate good trade deals with other countries or trading blocs.

Disadvantages of joining a trading bloc

• Tariffs on products from outside the trading bloc make those products more expensive to import.

• Competition from other businesses in the trading bloc may cause some businesses to fail.

• Businesses may lose grants and subsidies previously given by their own government.

• Businesses may have to change their goods or services to suit the preferences of consumers in the trading bloc.

• The trading bloc may impose extra rules and regulations on each country in terms of how their businesses operate.

• Each country must contribute to the trading bloc’s budget.

Free ports

Some countries do not have free trade for the country as a whole but will have free ports. Free ports are specific geographical areas inside a country where the production and processing and packaging of goods can occur without the requirement to pay any taxes, including export tariffs on goods.

Free ports are often seaports, but can also be inland areas, such as airports. Examples of free ports are Dubai, Hong Kong, Singapore, Liverpool in the UK and Port Louis in Mauritius.

Free ports are important in international trade because they encourage trade and make trading easier. Trading is cheaper because no customs duties are charged on goods entering or leaving the freeport.

KEY TERM

free ports: geographical areas inside a country where the production and processing and packaging of goods can occur without the requirement to pay any taxes, including on goods.

Trade restrictions

Trade restrictions occur where a country puts tariffs or other barriers on international trade, particularly imports. Such restrictions on international trade are called protectionism. The aim of protectionism is to protect a country and its businesses from foreign competition. The main risk of protectionism is that other countries may retaliate and also impose protectionist policies. Protectionism leads to less trade between countries.

Table 3.1.5 describes the main types of protectionism.

KEY TERM

protectionism: the placing of restrictions, such as quotas, on international trade to make trade more difficult and to protect industries within a country.

Types of protectionism Explanation

Tariffs on imports Tariffs increase the cost of the imported goods and services. This leads to higher import prices, making it more difficult for foreign goods to compete against homeproduced goods that do not pay the tariff. This encourages customers to buy home-produced goods rather than more expensive goods from overseas.

Quotas A quota is a limit on the amount of a product that can be imported or exported. Import quotas lead to less imports of a particular product being available. This encourages home industries to produce and sell more to the home market.

Embargoes An embargo is a complete ban on the import of a product, the export of a product or any trading with a particular country. Embargoes with a country are usually for political reasons.

KEY TERM

embargo: a ban on the import of a product, the export of a product or any trading with a particular country.

The effects of trade restrictions

There are several reasons why countries decide to put trade restrictions in place:

• To protect domestic industry from businesses that operate in other countries that are able to keep costs down by paying workers much lower wages. More developed countries often use this argument to put protectionist policies in place against imports from countries where very low wages are paid. Some international companies refuse to buy goods from businesses that provide their workers with poor working conditions or pay extremely low wages to their employees.

• To protect industries that are of strategic importance to the country. For example, agriculture and fuel are considered essential products. Some countries are not willing to risk a reduction in supply of these products, especially in times of war, by relying on foreign supplies of the products.

• To protect infant industries, which are industries that are in the early stages of development. New businesses often have higher costs than established competitors. A country may choose to protect home businesses in a new or growing industry to give them time to develop. For example, if a country has not previously produced computers, it might choose to support new home computing businesses in their first few years by imposing some form of protectionism on computing imports.

• To deter import dumping. A product is said to be ‘dumped’ when it is exported at exceptionally low prices, often below cost. Dumping may occur when a foreign business has excess of its goods. For example, farmers in one country may have excess supplies in a year with a very good harvest. The business chooses to get rid of the excess by selling it cheaply abroad rather than selling it at a lower price in its home market. Dumping may also occur when a foreign business charges very low prices in the short term to try to make its competition fail. Once the competition has had to close down, the foreign business may put its prices back up and make large profits.

• To protect employment. This may occur in countries where there is a significant risk of high unemployment without protectionism.

• To improve the country’s Balance of Trade. If the value of imports is greater than the value of exports in the longer term, protection may be used to reduce imports, leading to an improvement in the Balance of Trade.

• To provide the government with more revenue by creating import tariffs.

KEY TERMS

infant industry: an industry that is in the early stages of development within a country.

dumping: occurs when a product is exported at much lower prices than it charges in its home country.

Trade restrictions can also have other impacts on commercial activities:

• Overall trade restrictions lead to less international trade and less output across the world.

• A country will produce a wider range of goods and services itself instead of specialising in industries that it is best at.

• There will be higher prices for goods that rely on imported raw materials that are subject to import tariffs.

• There is likely to be retaliation by other countries that may put their own protectionist policies in place. This may lead to reduced exports along with job losses in export industries that are affected by other countries putting on their own protection policies in retaliation.

• There will be a lower standard of living for the population than if there had been more international trade.

3.1.4 Support of exporters

Exporters must manage many challenges when they export their products and services. However, there are several sources of support that are available too:

• international trade fairs

• insurance guarantees

• cheaper bank loans.

International trade fairs

A trade fair is an opportunity for businesses in the same industry to gather and meet each other in one place and promote their goods. A trade fair might take place over a few days. At a trade fair, many businesses in the industry will set up stalls with leaflets, posters and other promotional material giving information about their products and services. Employees or representatives of other businesses in the industry will visit many different stalls to find out about potential suppliers or customers as well as competitors.

Employees might travel overseas, especially for large or specialist international trade fairs. Exporters can use trade fairs as an efficient way to meet and talk with suppliers or customers, promote their products and find out about competitors.

KEY TERM

trade fair: an opportunity for businesses in the same industry to gather and meet each other in one place and promote their goods.

Insurance guarantees

Exporters face many risks. Goods can be damaged while being transported long distances, there can be lower receipts or higher payments due to changes in foreign exchange rates and there can be greater risks from nonpayment from foreign customers.

Businesses can buy insurance cover from insurance companies to help protect against many of these losses. For example, insurance that covers losses from overseas customers who do not pay for the goods they have bought is called export credit insurance. Insurance is explained in more detail in Chapter 5.2.

Sometimes risks are high, and exporters are unable to buy insurance. However, exporters may be able to get support from their country’s government. Many governments recognise the benefits of international trade to their country and are willing to offer insurance guarantees to support businesses that export. Guarantees are usually organised through a country’s export credit agency. They will insure a business against risks such as the failure of a foreign business customer, or the inability to deliver an export because of political issues, including new trade restrictions or political unrest.

Cheaper bank loans

Commercial banks offer a range of advice and support to exporters, including suitable methods of payments and the buying and selling of foreign currency. Banks also offer loans to businesses and will charge interest in return. Bank loans are explained in more detail in Chapter 5.2.

Each bank will decide what interest it will charge on any bank loan. Interest rates depend on several factors, but in general the higher the risk that a business is unable to repay a loan the higher the interest rate.

As with insurance guarantees, exporters may be able to get support from their country’s government. Support

might be in the form of guarantees to the banks and other direct lending, which reduces the risks to the banks and allows exporters to have cheaper bank loans with a lower rate of interest.

ACTIVITY 3.1.2

Choose one of the following topics of global trade:

i benefits and challenges of imports and exports

ii Balance of Payments

iii trading blocs and trade restrictions. Review your notes and the textbook information then produce a mind map on your chosen topic. Explain your mind map to another student.

REFLECTION

When answering Activity 3.1.2, how did you choose which topic to review? Did you pick the topic you knew most or least about?

How useful was it to create a mind map? Did it help you to learn the topic? Do you think there are better ways of learning this topic? If so, why?

3.1.5 Global supply chains

A supply chain considers everything involved in getting a product or service, from the initial raw materials through to the final customer receiving the finished item. One supply chain can include several different commercial enterprises. A supply chain involves the physical movement of raw materials and finished products from one enterprise to another, such as from supplier to manufacturer or from wholesaler to retailer. A supply chain also involves the flow of information between the enterprises. Information is important to help coordinate the different activities. Each party needs information about the progress of earlier activities so that they can prepare their operations to efficiently work on their required task.

Local supply chains are used for products that can go through all their stages in one country. Global supply chains involve more than one country, as goods may be moved or information shared internationally.

TIP

Global supply chains build on your earlier knowledge of this topic. Review your notes on local and global supply chains from Chapter 1.2.

Global supply chains can be grouped into two different types:

• simple supply chains

• complex supply chains.

A simple supply chain involves three stages: supplier to manufacturer to consumer. The initial supplier(s) will provide the raw materials. These raw materials are transported to the manufacturer who will turn them into finished goods. The finished goods are then delivered to the consumer.

For example, a furniture maker may be part of a simple supply chain. The furniture maker will buy its wood, metal and other items from suppliers. The furniture maker can then sell its furniture directly to consumers. The furniture maker will be part of a global simple supply chain if any of the suppliers or consumers are in other countries.

TIP

Remember that although a simple supply chain only has three stages (supplier to manufacturer to consumer), it can have more than one supplier and more than one customer.

A complex supply chain involves more stages than a simple supply chain. There are usually five stages in a complex supply chain: supplier to agent to wholesaler to retailer to consumer.

Having more stages in a supply chain can make it more challenging to communicate and coordinate between the enterprises involved at different stages. This can mean that problems such as delays are more likely to occur. An agent (sometimes known as a supply chain manager) is used to manage and coordinate the activities carried out at each stage and among the different businesses involved in a supply chain.

KEY TERMS

simple supply chain: a supply chain that involves three stages: supplier to manufacturer to consumer.

complex supply chain: a supply chain that involves more stages than a simple supply chain. There are usually five stages: supplier to agent to wholesaler to retailer to consumer.

See Chapter 1.2 for further information on the role of agents, wholesalers and retailers in a supply chain. The type of supply chain may vary according to the nature of the product and the demand for the product. For example, a coffee wholesaler will be part of a complex supply chain. The wholesaler may use agents to buy coffee from lots of individual farmers. The wholesaler will sell large quantities of coffee to retailers who sell smaller quantities to each consumer. Coffee is part of a global complex supply chain because coffee grows better in some climates than others. Much of the world’s coffee is grown is Brazil, Vietnam, Columbia, Indonesia and Ethiopia however coffee is consumed worldwide, with huge quantities being consumed in the USA and much of Europe.

Supply chain management

Supply chains can involve many different enterprises and all sectors of production, from primary to manufacturing and construction to services like retailing. Planning and coordinating all these enterprises and different stages can be challenging. The more complex the supply chain the more challenging the process is likely to be. Supply chain management describes the organising of all the stages that products or services must go through until they eventually reach the final customers.

KEY TERM

supply chain management: the organising of all the stages that products or services must go through until they eventually reach the customers.

The supply chain is divided into two elements, which are referred to as upstream and downstream operations.

Upstream operations focus on getting the materials to the enterprise that is a producer/manufacturer. Downstream activities support the process of distributing the products from the enterprise (producer/ manufacturer) to the consumer. The enterprise divides the upstream and downstream operations.

different countries, for instance due to extreme weather events in one or more countries or port delays/congestion.

• Communication. It is important that all businesses/ people share information to support the efficient distribution and flow of goods through the global supply chain. This can be more challenging if the supply chain is global due to time differences, for example.

Trade barriers often affect global supply chains. These government restrictions affect the profitability of operations and the efficiency of the movement between the stages. Supply chains where all businesses/people are based in the same country do not face trade barriers.

The importance of suppliers

Choosing suppliers is an important part of manging global supply chains. Having reliable suppliers that provide their products on time and to the correct standard is very important. If the wrong supplier is chosen, products may arrive late or the products may be poor quality. This means that the supply chain is broken, and there are likely to be negative effects on other businesses in the supply chain. Ultimately the customer may not get the products they wanted.

KEY TERMS

upstream operations: activities that support the delivery of the materials and/or other resources to the producer/manufacturer.

downstream operations: activities that support the process of distributing the products from the producer/manufacturer to the consumer.

In a global supply chain, the businesses/people providing the upstream and/or downstream operations are based in different countries.

There are additional challenges when operating as part of a global rather than local supply chain, which include:

• Delays to the transportation of materials and/or products. Although there can be transportation delays in any supply chain, the risk of disruption increases if the businesses/people are based in

As an example, many fast-food brands rely on having food that tastes identical whichever restaurant a consumer visits. This relies on having suppliers that can consistently produce ingredients of an agreed standard over time, including colour and taste, etc.

Any issues with suppliers or transportation or storage can lead to a restaurant running out of products for their customers. There have been occasions when wellknown brands have had negative publicity because of problems with suppliers, such as McDonald’s running out of milkshakes or KFC (Kentucky Fried Chicken) running out of supplies of chicken.

Benefits to global supply chains

Well-managed supply chains can lead to several advantages for businesses.

Lower costs of production

Some countries specialise in particular industries and products. They may have developed a skilled workforce or benefit from the availability of natural resources.

Supply chains will often make use of goods and services from countries and businesses that specialise in the production of a particular product, leading to lower costs of production. For example, the furniture industry requires skilled labour and a supply of bulky raw materials. Over time, Vietnam has developed a skilled workforce that can use the local supply of good-quality wood to specialise in producing good-quality furniture at lower costs than many other countries. Bangladesh also effectively uses its climate and land to specialise in growing rice and tea, and can do so much more cheaply than countries that have colder climates.

Lower labour costs

Labour costs depend on the efficiency of workers and on wage rates. The efficiency of workers will depend on the workers’ skills and motivation and the equipment that they have available to use.

Wage rates vary from country to country. In general, people in wealthy countries, such as Singapore and Brunei, have a higher standard of living and higher wage rates. People in less wealthy countries, such as Nepal and Malawi, have a lower standard of living and lower wage rates.

Businesses will carefully consider labour costs when deciding where to source goods. Supply chains often include suppliers based in countries with lower labour costs for the production of goods that require a lot of labour. For example, clothing bought in wealthy countries is often manufactured in lower-wage countries, many miles away.

Lower cost of purchasing

Suppliers may be able to offer lower prices because of lower labour and other production costs. Businesses may also be able to negotiate lower purchase prices with their suppliers for other reasons. Being able to buy from anywhere in the world means that there are more suppliers competing for sales. By researching lots of potential suppliers, businesses can find and choose the cheapest. Suppliers may offer lower prices if they know there is lots of competition for their products. Suppliers may also agree to offer a discounted price if a customer purchases a large quantity.

Improvements in logistics

Logistics involves the planning and coordinating of the transportation and storage of goods throughout the supply chain. Global supply chains can be very complicated and challenging to organise. They may involve suppliers in several countries, with different time zones and languages. A problem with any one link in the chain can affect the ability to get goods to their eventual consumer.

KEY TERM

logistics: the planning and coordinating of the transportation and storage of goods throughout the supply chain.

Well-organised logistics will result in efficient use of storage space for goods and quicker deliveries with less hold-ups. For example, goods can be tracked as they travel across the world, helping to coordinate different types of transport in different locations.

Good logistics will lead to lower costs and goods that are more likely to arrive at their destination on time and in good condition. The benefits of having good logistics have encouraged businesses to invest in their continuous improvement over time so that further savings can be made. (See Chapter 4.1 for further information on logistics.)

Improvements in communication

Improvements in communication, especially electronic communication, including emails, video calls and websites, are all useful when communicating with other parts of the supply chain. Suppliers can communicate with customers more easily, and having supply chains across several countries is eased by instant electronic communication. Technology can also help to overcome language differences, with electronic tools that translate text or speech into different languages.

As with logistics, the benefits of having good communication have encouraged businesses to invest in their continuous improvement over time so that further benefits can be made.

Risks to global supply chains

All supply chains have risks. The more complex the supply chain the more things can go wrong. Supply chains that work across several countries have additional risks due to the distances and differences between countries.

Environmental risks

Environmental risks occur because of the actions people take and the way people and businesses use the environment. There are many different environmental risks, including water and air pollution and deforestation. Deforestation involves cutting down and removing many trees in one area without replacing them. This might occur because the land is needed for other reasons, such as roads or farming.

The environment can affect suppliers’ ability to supply their products to businesses and for products to reach consumers. For example, a manufacturer of furniture may find it more difficult to find suppliers that can provide high-quality wood, such as teak wood, because of shortages of supply caused by deforestation. As a result, manufacturers will need to pay high prices, search expensively for suppliers or use alternative types of wood.

Pollution in the sea may cause a decrease in the number of fish available for fishing. This will affect the whole supply chain for getting fish to consumers. Fishing boats will catch less fish, and this will affect the number of fish available for wholesalers, retailers and ultimately consumers, leading to higher costs per fish and higher prices for the fish that is available.

Businesses are increasingly aware of the importance of acting in ways that minimise harm to the environment. Many consumers prefer to buy from businesses that have a reputation for protecting the environment. For example, consumers may choose to buy goods that may have been supplied locally rather than transported across the world. This is further explained in Chapter 6.1 on sustainability in the supply chain.

Natural disasters

While environmental risks can have long-term effects, specific natural disasters, such as hurricanes or floods, can have a big effect on supply chains in the short term.

For example, a manufacturer of packaged food, such as breakfast cereal, will rely on farmers to supply the raw materials that they need to make their goods. Farmers may agree to provide a set amount of raw materials needed. A natural disaster such as a flood or drought will affect the amount of produce that the farmers can grow. This will affect the supply chains as it will affect the ability and reliability of farms to supply produce to food manufacturers and to supply food of the right quality.

As well as the availability of products themselves, natural disasters can disrupt the transportation of goods and their punctual arrival to customers. For example, adverse weather conditions such as a storm or fog may affect sea or air transport and cause delays. The more complex the supply chain the greater the impact one disruption can have on other parts of the supply chain.

Financial risks

All businesses have financial risks. However, these risks are often bigger for businesses that have global supply chains. Financial risks that worry many international businesses often focus on the payment or non-payment of invoices. For example, a business may pay its suppliers when the order is placed however the goods may not arrive or they may not arrive in good condition. Financial risks may also arise from changes in foreign exchange rates, which can result in businesses having to pay more than expected for their supplies.

See Section 3.1.1 on challenges for exporters and importers for financial risks from non-payment and foreign exchange rates.

Ethical risks

Ethics in business means making decisions about what is the morally right or fair thing to do. Many consumers make ethical decisions about their purchases. Many businesses also aim to make ethical decisions that reflect the values of their stakeholders, including those of their customers.

A business may use ethics when making decisions about its supply chain. While ethical decisions may relate to the environment, ethical decisions might also consider social factors and the impact on people, including workers. For example, a business might be considered to behave ethically by paying suppliers punctually or by only using suppliers that treat their workers fairly, such as those who pay workers sufficient wages to live on, provide good working conditions and do not use child labour.

Ethical decisions may be more expensive. However, making unethical decisions can also risk higher costs along with an effect on the business’s reputation and sales. For example, if consumers find out that a wellknown brand of clothing uses suppliers that rely on cheap or child labour then there is likely to be critical publicity and sales will fall.

Technological risks

Advances in technology have supported the growth in international trade over time. For example, advances in electronic communication methods such as email and video calls have helped supply chains to improve because information about purchases and sales can be transferred easily and quickly from one country to another.

Customers can access business websites from anywhere in the world and order goods delivered to their home. Businesses that sell goods to key international markets have further developed their websites to direct customers to the part of their website specific to consumers in that country, with their language and prices in the country’s currency. Goods can be tracked as they are transported across the world.

Increasingly, reliance on technology to support the supply chains comes with risks. Any problems with the technology can cause a lot of disruption. For example, introducing a new computer system can lead to many unexpected problems, such new software that has errors or staff who are not fully trained. As a result, goods may not be ordered correctly from suppliers, or a transport link is not arranged for the correct time. These problems might lead to a shortage of goods, unhappy customers and higher prices.

Cyberattacks are a particular risk of technology. Cyberattacks are caused by people who illegally try to damage a business’s computer system. An attack might cause a business to lose important information about its suppliers or supplies. An affected business may find it difficult to find and correct the attack. For example, a cyberattack on a bank might mean that businesses cannot get access to their money and pay their suppliers.

Political risks

Political factors include stability or instability of the government and the attitude to corruption and to democracy in the country. Instability might be caused by a change of government, or riots or an attempt to overthrow the government. Any uncertainties can affect the confidence that a business has about trading internationally and concerns over possible disruption to supply chains, such as the reliability of supplies and the price of goods supplied. For example, a new government might put an embargo in place or set new tariffs. Significant instability such as a civil war can have a big impact by cutting off transportation routes or power supplies, which might stop the safe movement of supplies altogether.

Risk assessments

Many of these difficulties and risks to global supply chains can be managed and overcome. Large businesses such as multinational companies may overcome many of the difficulties by having specialised staff and

departments that focus on purchasing and logistics (see Chapter 4.1). Smaller businesses can still manage risks if they organise supply chains carefully and use computer software to help.

Specific risks can often be overcome or minimised, provided they are identified and assessed.

Businesses may carry out a risk assessment of their supply chains. A risk assessment is a careful study that aims to identify things that might go wrong and assess what the impact might be. The business can use the information to decide whether to accept the risk, find solutions to reduce the risk or get rid of the risk altogether. For example, a risk assessment could identify that a cyberattack would cause a lot of problems to a business that relies heavily on its computer systems to manage its supply chains. As a result, the business might decide it is worthwhile to buy a security system to reduce the risks. Another business’s risk assessment might identify financial risks from the possible theft of goods while in transit and recommend purchasing insurance to manage this risk (see Chapter 5.2 for further details on insurance).

KEY TERM

risk assessment: a careful study that aims to identify things that might go wrong and judge what the impact might be.

SELF-EVALUATION CHECKLIST

After studying this unit, complete this table.

You should know about:

exports, imports and visible and invisible trade

why countries want imports and exports

why businesses want to export and/or import

challenges for exporters and importers

the Balance of Trade and Balance of Payments

free trade, trading blocs and trade restrictions

support of exporters

ACTIVITY 3.1.3

Have a class debate to discuss and decide which is the biggest risk to global supply chains.

To prepare for the debate, work in a small team and do the following.

a Research the risks to global supply chains.

b Choose one risk that you can argue is the biggest risk to global supply chains.

c Plan your arguments ready for a classroom debate.

d Choose one member of the team to represent the group and speak in the debate.

The representative of each group should give an introductory argument (2 minutes each). The rest of the class may then join in for questioning and debate.

At the end of the debate, all students should vote to decide which team gave the strongest argument for its chosen risk being the biggest risk to global supply chains.

Note: your teacher may facilitate the debate itself and each team’s choice of risk, to ensure that each team chooses a different risk.

You should know about:

global supply chains

benefits and risks to global supply chains

Knowledge check

1 What is an exchange rate?

2 Complete the following sentences:

A surplus Balance of Trade means the value of a country’s visible exports is ……………… than the value of its visible imports.

A deficit Balance of Trade means the value of a country’s visible exports is ……………… than the value of its visible imports.

3 What is a customs duty?

4 Explain two disadvantages of free trade.

5 Name two benefits of global supply chain management.

6 What is a disadvantage of joining a trading bloc?

a Exporters must have insurance guarantees.

b It enables free access to larger markets.

c There is more competition from other businesses in the bloc.

d Tariffs increase.

7 Free trade can be defined as:

a a customs union

b a group of countries that agree a common external tariff

c a product that is exported without transportation costs

d international trade without trade restrictions.

8 An international trade fair is an example of:

a a source of support for exporters

b a trade restriction

c globalisation

d supply chain management.

9 International trade can benefit a country through:

a changing foreign exchange rates

b different legal systems

c improvements in communication

d a wider choice of goods.

10 What is a risk to global supply chains?

a free trade

b lower costs of production

c natural disasters

d tariff reduction.

Practice questions

1 The following information is available for Country X in 2024.

2 XY Trading Ltd is a medium-sized manufacturer of children’s toys. It sells to retailers in its home country. XY Trading Ltd has been growing in recent years and has now decided to begin exporting its products. The business has heard that its country’s government encourages businesses to trade abroad.

a Explain three benefits of international trade to a country. [6]

b State two sources of support for exporters. [2]

Use the information to answer the following questions:

a i Calculate the Balance of Trade. [1]

ii Calculate the balance of invisibles. [1]

iii Calculate the Balance of Payments. Show your working. [2]

b Analyse why Country X has a Balance of Payments deficit or surplus in 2024. [3]

c State two types of trade restrictions. [2]

d Country X is considering joining a trading bloc with neighbouring countries. Evaluate whether joining a trading bloc is a good idea for Country X. [6]

c Do you think it is a good idea for XY Trading Ltd to begin exporting its goods? Give reasons for your answer. [3]

d Evaluate the challenges to XY Trading Ltd of starting to export their products. [6]