The way countries trade is based on a couple of key concepts.
EXAMPLEThink about Saudi Arabia and oil. They have an absolute advantage because they can produce more oil with the same amount of resources as other countries around the world.
EXAMPLEConsider China and shirt manufacturing. There's less of an opportunity cost loss in China to manufacture shirts than other places around the world, which is one way to think of it.
However, you can only have him play one position. Do you put him as a tight end, or do you make him a quarterback?
Well, he can only throw a little bit farther than the other quarterbacks but can run a lot faster than the other ends you're going to be playing against. So, you put him in the tight end position, because that gives your team a comparative advantage over the rest of the teams in the league.
Now, countries also talk about a national competitive advantage, and it's a combination of conditions that support an industry.
EXAMPLEConsider Toyota and the manufacture of cars. In the early 1980s, Toyota was producing a product that specialized in quality--the quality of their automobiles was better than anybody else's. So, when it came time to trade and compete against the United States in their own backyard, they had an absolute advantage in the amount of quality that they had. However, choosing to produce these cars and specialize in that industry gave the nation of Japan a comparative advantage over the U.S. and auto production.
When thinking about trade between the products of two countries, we first need to consider the products in or out:
EXAMPLEThe U.S. grows a lot of peanuts, and they're exported and sold all over the world. On the other hand, if you want to buy a bottle of good French wine, you're going to have to import that from France.
When it comes to international trade, countries examine the balance of trade between themselves and other countries--one country at a time, specifically. They have trade surpluses and trade deficits.
Look at the graph below, which shows net imports and exports for Japan from 1979 to 2008. The imports are shown in red and the exports are in blue.
As you could see, for this period of time, Japan had a balance of trade that was positive, so they had a trade surplus.
Globalization is the expansion of business into international markets. Now, much of this is due to less restriction, both physical and nonphysical. We have better modes of transportation and fewer trade restrictions on countries around the world. It's becoming a flattening world.
This process started happening since World War II when international trade really started to take off because of many different trade agreements.
Now, international business is essentially what we've been discussing this whole time, and it's defined as business that is conducted between two or more nations. The simple fact that we're talking about globalization, and the fact that it's become such a significant part of everyday business, no matter what company you work for, goes to show that Friedman is probably right.
Now, let's discuss business and trade on an international level. International management of trade is rather unique. You see, products that work well at home may not necessarily work well overseas. You also have to consider the actual demand for that product you're going to sell overseas, depending on the cultures and the norms of that particular nation. Will the product be accepted? Are there any changes that you have to make in packaging or marketing that will improve the acceptance of that product overseas?
Here are some other issues to consider in the context of business and trade:
EXAMPLEPepsi Cola works with drink manufacturers in other countries who already understand the taste preferences and uniqueness of that culture in the country to help move their products along in that nation.
Source: adapted from sophia instructor james howard