Video Transcript: Lecture 2

Hello everybody. Welcome back for lecture two. As I promised, today, we're  going to be talking about international trade and investment, and this is going to  be a very, very, very statistics heavy discussion, so I apologize in advance, but I  think it's very important to go through some of these numbers to help us  understand what's happening. So let's, let's just for a second, let's think about  international trade and the volume of international trade, and these numbers  obviously change every year, and again, more significant every year, but, but I  think you'll find them in my notes, I use the word staggering, and I think you'll  find them staggering the volume of international trade, and this is 2017, the  volume of international trade in goods and services was 4 trillion in 2000 in 2017 23 trillion. I mean, that's staggering, right? That's 17 years. 23 point you go from  4 trillion to 23 trillion in volume alone, trade in physical goods accounted for 17.5 trillion of the 23 trillion in 2017 while trade in services was 5.4 trillion. So one of  the things that I think you're noticing is that companies are obviously trading in  goods. But services are becoming even more important, and we are becoming a service based economy. We are shifting from manufacturing to service now,  there's always a need for manufacturing. We need to wear clothes, for example.  But certainly, services is becoming a higher part and a more prevalent part of  not only a national economy, but a global economy as well. While smaller in  absolute terms, trade and services has come faster, that's what I just said, over  the past 20 years, than merchandise trade. So 60% nearly 60% of global output  is now destined for international trade. So if you think about over half of the  things produced are traded internationally, the implications of this kind of thing is far reaching, and it's especially important when we talk about services as the  economy shifts from a good based goods based economy to a service based  economy, again, this is going to be important. So if services are becoming more  and more important as the economy shifts, you may be wondering, what is the  difference between a good and service? And remember that a good is  something tangible, like bottle of water, like a shirt, where a like a new computer, a service would be something like text report for that computer, or a repair,  repair plan for your phone or for your computer. So thinking about trade, one of  the questions that is asked often is, how has trade changed or grown over the  past few years? Right? We asked that question last lecture. We're going to ask it again. So here's some information. Again, I said that this is going to be a very  statistics heavy lesson, and I mean it. So here are some things to keep in mind.  The proportion of exports from North America, Latin America, Africa and the  Middle East, has decreased since 1983 so as you see, some of these countries  are not producing as much and and they are not exporting as much as they did  in the past. But Asia has nearly doubled since 1983 exports from Asia has nearly doubled since 1983 and specifically China, which has accounted for I'm just  going to go silent for a minute. I'm going to let you think of what percentage  China has accounted for since 1983 got it all right, the proportion so I'm just 

going to read straight from my notes on this one, the proportion of merchandise  exports from Asia has nearly doubled since 1983 with China accounting for over  83% of this increase so China since 19 the 1980s until today, China has has  really transformed their marketplace and their exporting ability and what they're  doing. Rapid expansion of international trade has made countries like  Singapore, Taiwan and South Korea go from poverty in the 1950s to now they're considered leaders and very developed countries, 500 million Chinese have  been lifted out of poverty by China's trade driven policies. So trade is a really  good thing for most of the people. If you look at countries that are not very  developed, and I'm not going to name any, but you can think about countries  that are not very developed, they don't have very mature trade policies or trade  structures, I can think of one that's that trading partner is primarily China. I  mean, that's one that does not have a very developed country, and as a result,  their people have a tougher time than then countries with fully developed trade  structures where where people are able to be ripped out of poverty and those  kind of things. And we talked about that last lecture as well, the European Union. Sorry, can't say that word the European Union. There we go. Increased the  proportion of world trade and and even though the European Union is now  trading more, most of that is because of their 28 member countries, and as they  continue to expand member countries, then they will continue to trade more and  have a more prevalent role in the international economy, which, which they have always had but, but as they band together, then they're a larger collective voice.  All regions and all primary world nations experience an absolute increase in $1  volume of their service exports, the proportion of world exports of commercial  services from Latin America, EU, Africa and the Middle East has declined, as we talked about. That means that the trade world is shifting. It's primarily shifting to  Asia for goods and services is becoming more prevalent. So this is what we  talked about. I'm just reiterating the fact here that that when we talk about  international trade, keep in mind that the world is shifting, and what the world  looks like today, with Asia playing a larger role, manufacturing could completely  shift in the next 30 years, just like it shifted now. So exporting is a viable growth  strategy for company and also for foreign nations. So we have seen here. You  know, like I mentioned Singapore earlier in the 1950s they were poverty. Now  their leader, or at least have a developed economy. So having very free and  open trade policies have a positive impact on an economy and on the people of  that economy. I always found this statistic to be surprising, and yet I should  know it, right. I should instinctively. I should have have known this, and I should  have been able to figure this out, but I still find it surprising, and maybe you will  as well, the 10 largest exporters and importers collectively account for over 50% of the world's imports and exports. Those top importers and exporters are  generally developed countries, and then just keep in mind that the United States will be obviously on that list, but China is also in the top five, and India is also in 

the top 10. So China and India are considered emerging markets, but certainly  they are major players on the world stage, and they account for, as I said, over  not just them, but those larger players account for 50% of the world's imports  and exports. I again, I found that surprising. I think it is surprising when you think about how large this world is, how many countries there are, that two countries  can have such a major impact, I think is incredible. So let us shift focus for a  second and speak about the direction of trade. So this is something to think  about. Is, well, where does trade go? Are countries? Importing and exporting. As I said, the United States is exporting less and less and importing more and  more. Obviously, labor costs drive that. Obviously. Certain consumerism drives  that. Certain policies, economic policies drive that as well. We talked about  drivers last lecture. We will talk about it again and talk about it in subsequent  lectures as well. But if you think about it, more than half of exports from  developed nations go to developed countries, but this proportion has been  declining, so 72% of developed nations export to other developed nations, but  now it's 43% in 2015 so about two thirds of exports from developed countries go to other developed countries. So you can see that there's a decrease of  developed countries giving to other developed countries. Because as the global  economy raises, as more people open up trade policies, as more people, as the  standard of living increases, then there is a desire to have those products. So,  you know, I've taught classes in the past where I've asked people to do projects  on certain things. And somebody said, and may say, I want to open up a Tiffany  Company, which, if you don't know, Tiffany makes very expensive jewelry. I want to open up Tiffany in, you know, pick a country that's not very developed. And  somebody may come back and say, or I might say back to that person. Well  that's interesting. When the average worker makes $2.50 US, dollars a month,  how can they ever afford a $50,000 piece of jewelry? And I think that's a  legitimate question to ask now. But what? But what we're finding is that the  standard of living is increasing. So somebody who makes $2.50 now in 20 years might be an emerging market like India, like China, like Singapore, like those  countries that have gone from a very poor economy to a a economy that is rich  and thriving. World Trade is dominated by exchanges within not between  geographical regions. So regional trade dominates that which makes sense, and here is why. Last lecture, we talked about a candy store, right? And we said that  a local candy shop has a customer base that operates locally. Well, let's say that that local candy shop imported all of their products from South Korea, and this  little candy shop is located in the middle of the United States, and let's say that  that another candy shop down the road got all their products from, let's say,  Illinois and Michigan and Indiana and and kind of places in that region. Well,  which one would have the lower cost of shipping those products, one would  think that regionally, they would have a lower cost. One would also conclude that it's better for the environment to obviously, ship something from Illinois to 

Michigan, as opposed to shipping something from South Korea to Michigan. So  there's that there's emissions and there's that, there's that kind of impact as well. Also, one thing to think about is regional trade agreements, which also make it  easier to trade between regions. If you think about in the United States, formerly NAFTA, now, the agreement between the United States, Canada and Mexico,  certainly makes it easier for goods and services to flow between those three  countries as a regional partner, as opposed to getting stuff from other countries  that are foreign markets. So these are all things to consider. Is that regional  trade obviously dominates the world trade market, and that makes sense, if you  think about it. In 2017, about half of the exports from North American nations  went to other nations in North America. And the US has many trade agreements, but we will talk about those later, and I just alluded to one, but it's just not the  US. Over half of Asian nations, exports went to other Asian nations. In fact, 70%  of exports from European nations went to other European nations. Again,  regionally, this makes sense, and also because of the trade agreements and the free trade agreements between nations that are regional, that are regional trade  agreements, this makes even more sense. Regionalization is trade is reinforced  and expanded by regional trade associations and agreements. And I'm going to  name some of those that I just talked about for a few minutes. ASIN is obviously  one that is between the Asian nations, MERS core, the EU and USMCA, the  USMCA trade agreement between us, Mexico and Canada replace NAFTA.  What is interesting that in this agreement, it generates about 68 billion in  revenue and accounts for 176,000 jobs. So I want to say that again, this  agreement alone accounts for 176,000 jobs. I mean, that's incredibly good stuff  for these nations that are involved. So this is just, this is just the USMCA that  that is creating these 176,000 jobs. Now think about all the other trade  agreements and how they're all working together, and you can see how trade  agreements are a good thing for nations. And they're employing workers, they're raising standard living, they're doing all these things, these types of agreements, though, one thing to keep in mind this is a criticism of them is that strong  countries generally benefit more than weak countries in the agreement and and, you know, and sometimes that is the nature of it. We will discuss that a little bit  as we continue on. There are more than 260 regional trade agreements on  operation worldwide and the share of world trade that they account for is 70% in  2018 so 260, regional trade agreements account for 70% of world trade. So as  you can see, regional trade agreements are massively important for  international businesses, for nations, for the global economy, growth of exports.  So growth of exports have have changed the nature of things. Again, we've  talked about, we've talked about how it used to be that developed nations would  trade with other developed nations, but obviously that has changed, and that is  changing. So think about the growth of exports in developing countries and  those markets. As those markets continue to open up, then that's going to be 

new opportunities for countries and companies to get in there, and then those  companies have an opportunity to be first to market internationally and convert  resources there and then establish a competitive advantage over other  countries. So you see a lot of trade. You see a lot of international companies  going into developing and emerging markets. So what is the relevance of these  major trading partners? So, you know, one of the things to think about is the  advantages of focusing intention on a nation that is a purchaser of goods.  There's certainly advantages there one, there's no cultural objection. So you  don't have to go in there and understand the cultural nuances, because you're  already working with them. The foreign exchange rate is already set up, so you  don't have to worry exchange rates. Transportation facilities have already been  established, because they're already a trade partner with them. And the  business of climate, and claim climate is relatively favorable. So if you think  about it, if you're already trading with country, if you already have this, then a  business wants to go in and establish it, then those those lines have already  been set up and they're already operating. It makes it a lot easier for the  company to go in there and established new trade than they would if they were  starting from scratch. So now we're going to shift, and I want to talk about the  major trading partners of the United States, so you can see them listed here, the European Union, Canada, Mexico, China, United Kingdom, etc. And the  important thing to remember about these major trading partners is that they  have been trading partners with the United States for a very, very, very long  time. So keep in mind that seven. Of the 15 nations that I just showed you on  that list have remained on the list as the top trading partner with the United  States for the last 45 years. So that that's pretty significant. Top 10 accounted  for 66% of US exports and 70% of US imports in 2017 but something else to  keep in mind is that the trading partners of the US are changing because, you  know, there's there's a contentious there's contentiousness between China and  United States as they both try to establish themselves as world powers, or are  world powers. But as they establish themselves and their their place on the  world stage, then there's some contentiousness in there which could affect  things. So 2019, and 2020, for example, there were tariffs that were  implemented between the two countries on goods, and a lot of people were  concerned about a trade war and that could affect trade. So remember, as we  talked about in the last term, all those are in the last lecture, about all those  drivers, about all those different forces, about all those different things that when you have things like trading partners, when you have things like political forces  and economic forces and all these things that could radically disrupt or change  your trading partners based on policies that exist. For instance, if the US  imposed a 90% tariff on all imports, then that certainly would affect the trading  partners, and our relationships with those trading partners. China is the is, it's  it's a major, major, major, major trading partner for the United States. So 

between 1991 and 2017 China rose from six to first place in exports to the US  and third place for the importer of US goods. And there was a substantial trade  deficit for the United States, which led to the tariffs and changes in policies. Most Asian countries are becoming major importers of US goods. Rising standards of  living enable their people to afford more imported goods. We talked about this  with the jewelry shop. Earlier that jewelry shop opens in a place that doesn't  have a high standard of living, but the center of living increases, and people  have more money than they have more disposable income to buy jewelry and  things like that. They are importing raw materials and components to assemble  sub assemblies or finished goods and export to the United States. So a lot of  these, a lot of Asia, success is they're importing the goods and services they  need. Then they're finishing the projects, and then they're exporting this project  products, the US, which us buys them, and then, and then that continues. So,  you know, think about some of the parts come from for a computer, come from  parts of Africa are imported to Asian countries who then put them together and  then sell those parts or sell those finished products to the United States.  International business opportunities can be identified by examining the trade  statistics. So if you notice that a country who was historically resistant to trade  then opens up and has very free market policies and very free trade policies.  Then, then that's going to offer, open up, certainly open up, tons of  opportunities. One of my favorite TED talks of all time was from a few years ago, where lady was speaking. She was a international speaker, and she was from  Africa. And she was talking about that, if you want to help Africa, then come do  business there, come invest there, come, you know, build infrastructure there  and do those things there, because that will mean better things for the African  people. So, you know, that's one of the things to consider as well. Is the  importance of understanding as markets open, what the implications of that are,  and then pouncing on that as an international business. So international trade is  important. So I just wanted to talk a little bit about a couple theories. We're not  going to go in depth on these. We are not not going to go in depth on these. But  I just want to introduce. Some because you can't really understand international  business unless you understand some of the theories that exist around it. Some  one Mercantilism was one of the first economic doctrines. So you may have  heard the term mercantilism, and what that means is pressure. Precious metals  were viewed as the source of wealth and nations. So you would have heard this  referred to as the gold standard. Governments should control foreign trade to  ensure a favorable balance, trade balance. So governments should absolutely  control the flow of trade and how trade exists, because that will lead to a good  trade balance, absolute advantage, which was Adam Smith. He came out with  this in 1776 so obviously, we're going back a while. The age of mercantilism was even previous to that. It said that, said that in trade, in order to accumulate gold  and other precious metals, was foolish. Free, unregulated trade is the way a 

nation could acquire what it did not produce. So what this said is, hey, look,  trade and precious metals. Yeah, that's great, whatever. But if a country doesn't  have something, they can import it, they can export it. If they have free trade  policies, then they can get what they need. That was Adam Smith. He said that a nation should produce only those goods of which it was most efficient, and that  means it's its specialization and in everything else that they could then trade  those products and get what they needed. So, you know, for example, if your  country is really good at producing Oranges, Oranges, then then you should be  really good at producing those oranges. And if you need, I don't know,  cucumbers, then you can import those cucumbers because you're selling off  your extra oranges. Then came along the theory of comparative advantage. This was 1817, so it said that if a nation was less efficient in the production of two  products, it could still gain from international trade if it were not equally less  efficient in the production of both goods. So you may say, what does that mean? And what that means is, say, you produce two products, and in one product  you're efficient, and then the other products are not as efficient. Well, that's okay, because you can still sell that product and get and get means and things like  that. It's okay that you're not the most efficient in producing that product. So  that's what that says. So newer explanation. So now we're now we're getting  newer. So you know, there's, there's things that that you have to consider  overlapping demand is one of them, and that's the consumers, taste preferences and their nations per capita income affected market demand. So you know, if  you're in a country that does not like fish, then then that's obviously going to  drive trade. If your country says, you know, like, no shellfish, then then you're  not going to or any better example, Singapore with gum. If, if chewing gum is  illegal in Singapore, then obviously you're not going to manufacture a gum and  ship it to Singapore. It does not make sense to do so. You know, one of the  things to think about we and we've talked about this, is the clustering around  regional trade, around regional sources, around partnerships with R & D, around those kind of things. And Alfred Marshall came out with this theory, and he said  that many industries or firms cluster together geographically because of three  reasons, and there's advantages gained from pulling a common labor force. So,  you know, there's a reason why most RVs are sold in Indiana, specifically in  Elkhart, Indiana, in that region, there's a reason for that, because most of the  labor force is there is already skilled. You don't have to trade and train you can  just get somebody that's in another company and they can do the job. You don't  have to train them, etc. Gains attained from the development employing a  specialized labor, which can be coordinated with the needs of the buyer. And  then there's also a benefit for sharing technological information, and that helps  things as well. So if you pull some companies together in a region and they start sharing technology, they're sharing the labor pool, they're sharing this or sharing that, then that benefits most companies. you know, there are things of 

competitive advantage, and there's other things of differentiation, and all those  things. We'll discuss all that later, but that's the basic theory. And I just wanted to tell you Porter. You may have heard the name Michael Porter. He is very  famous. He is at Harvard University. And Michael Porter talks about four  variables that will impact a local firm's ability, abilities to use the country's  resources to gain a competitive advantage. So this is a national advantage  model from Porter. He says that there's demand conditions, there's factor  conditions, and that would be like the makeup of the production and then the  availability of support industries, and then the firm strategy, structure, strategic  rivalry, all those things. So also, there's other things that Porter says that can  affect a competitive advantage, and that would be government and chance. So  obviously, if there is a natural disaster that's going to affect your competitive  advantage and or give you a competitive advantage if it tax your competitor. So I want to, I want to stop for a second, because I know this is a lot to process, and  we're talking a lot about these different factors, these different theories, these  different statistics, and I've been throwing a lot of that at you. So I just want to, I  just want to talk for a second and step back and kind of see if I can talk about a  couple of these terms, which hopefully will help make this a little more clear. So  let's step back for a second and let's just talk about basic international trade  theory. So international trade theory shows that a nation will attain a higher level  of living by specializing in goods for which they possess a competitive  advantage. For instance, you're not going to grow oranges in Russia and  importing those to which they have a disadvantage. In other words, importing  oranges to Russia, you do what you're good at, and you hire for what you're not. So you'll see this in a lot of businesses, that if you are really, really, really good  at accounting and finance, but you are not good at marketing, then you're gonna hire somebody, or you're gonna partner with a firm, or you're gonna use  somebody to come in and help you with the marketing piece. So that's that's  what's occurring with these nations, with these international businesses, with  these kind of things. So if you're an international business, and you realize that  Russia cannot grow oranges because of the climate, and for the record, I have  not researched whether Russia can grow oranges or not. So, you know, I'm just  using this as an extreme example, or I'll use an even better example. I know for  a fact you cannot grow oranges in Antarctica, so let me use Antarctica. So if you  find out that you can't grow oranges in Antarctica, then you're gonna and you  are Tropicana, which is an orange manufacturer, or manufacturer of orange  juice, and grows oranges and those kind of things, and it makes products based  on your orange juice or oranges that you harvest then, then it's a natural fit for  you to go into Antarctica and then offer those oranges make sense. So that's,  that's everything I talked about, you know, from, from the from the original  mercantilism, which said you need to add as much gold and precious metals as  possible, all the way to Adam Smith, who said, No, you don't need to do that. 

You do what you're good at, you i and you get what you aren't good at. And that  theory continued to which, well, if you're not really good at something, but you  can still be okay at it, and you can trade it. Then you saw some advantages, all  the way to Porter, who said, look, there's a bunch of factors out there that relate  to whether you should import, export, operate, what those things and that's  going to be things like your strategy, the availability of services, your  infrastructure, and then the demand and and then also, don't forget that there's  also government, and there's also chance which you might roll the dice and be  lucky, or you might, you know, be unlucky. So all those basically say is, if you're  a company and you can find something that a country is missing, and you're  able to provide that, and people have a desire for that product and the need for  that product, and they want that vitamin C, and they want that orange juice, then you know what Tropicana you can go sell some orange juice in Antarctica.  That's all saying. So I hope by taking a step back and kind of, you know, coming  back from the kind of the words and all the language that we can kind of see  that the way it works is, if the demand is there, if a country does not have the  product and the demand is there, they're not good at it, then there's an  opportunity for businesses to come in and import that product and provide that  need that is missing from that country. There are a bunch of talk about different  investments. So foreign direct investment, we will there's portfolio investment,  there's direct investment, and there's a distinction between the two, but that's  beginning to blur. But one of the things that portfolio investment is primarily  concerned about is return on investment. So if you hear the term and you think  about foreign investment. You hear the term portfolio investment that's really  that's concerned with return on investment. And then foreign direct investment  is, is something that is very popular, and the foreign direct investment worldwide was 30.8 trillion at the beginning of 2018 and the US is, and I'm sure you could  have guessed this, the US is the largest investor with 7.8 trillion, and the second largest investor in foreign direct investment is Hong Kong. So I thought you  would find that that interesting. So let's see. That is basically it. I wanted to just  talk about a couple things related to foreign direct investment in kind of some of  the theories and kind of continue to set that stage and define those terms and  talk about how massive trade is as we continue to talk about some of the  complexities of international trade and actual firm operating in those countries.  So one of the things that I want to do is I want to highlight companies every  single term or every single lecture. So I am going to bring up soon as I can  forgive me I am having a little bit of trouble. I'm going to bring up pets or Coca  Cola's website, and we are going to discuss Coca Cola, because it is a global,  global company. And one of the things that you often hear people say is, if you  want a Coca Cola, you can get that anywhere. So anywhere in the world, you  can get a Coca Cola roll. In fact, there was a, there was a comedian several  years ago that was making a joke about that. He was talking about how he was 

on, he was on the in in the Middle East, and he was in Israel, and he was on top of this mountain, and it was holy. And, you know, the Bible talks about all these,  these beautiful things that God did on this mountain. And then he has a kid  come up to him and ask him if he wants a Coca Cola and a Snickers bar. And he made the joke that, you know, here I am in this mythical, magical place, and  somebody's offering me a Coca Cola. So Coca Cola is a very, very, very, very  well known international brand. You can get cokes everywhere, and you can see that from their website that they are promoting the fact that they are very  international, and they are willing to, you know, to invest in other communities.  Obviously, you know, better shared future where they talk about why people  matter, and some of the things that they're doing globally now, as we talk about  international companies, one of the things that we will discuss over the next  several lectures is the importance of giving back sustainable practices, those  kind of things. So Coke's a good example of that. You can see here that they  have been giving programs to for water. They have they have offered women  programs, I believe in empowerment, doing good for the communities and those sort of things. They also talk about their values, human rights, people values. To  diversity, inclusion and those things as well. But one of the things that I just  wanted you to see was that Coca Cola as an international brand from 1886 has  become quite iconic and and has become iconic very quickly. And again, they  are focused not only on delivering a product globally across the world, but they  also are focused on human rights and making a difference. So I thought that  they were a good example. I did want to show you just one other thing.  Obviously, James Quincy is the Chief Executive Officer, but I wanted to show  you stuff like this, when we're talking about international companies, you got a  global chief marketing office officer. You got the president of Latin America. You  got president of Global you got a global chief people officer, senior vice  president. You can see here that President of Japan and South Korea, President of Europe. You know, obviously McDonald's is a huge brand as well. You got  South Pacific. But in order to run this company, this international company, you  have to have people all over the place that can run it. I just wanted you to see  that. I found that very interesting. So I picked Coca Cola as an international  brand because I thought, you would find some of their sustainability work that  they're doing interesting, as well as looking at the global nature of their  workforce. So with that, we are going to conclude with lecture number two, and  in the next lecture we will be talking about socio culture forces, sociocultural  forces. So before we get to that, as always, I want to close us in prayer and just  thank God for our time together. Dear Heavenly Father. Thank you so much for  this class again. Thank you for the individuals that are taking the time to view  this lecture to to learn how international business is working in the global world.  Thank you for for giving us the opportunity to come together and talk about so  many staggering statistics and what global trade means and and how how much

this global impact is having an impact on our world, and is changing our world.  Lord. So I pray that as we go into lesson three, as we consider lesson two, as  we think about lesson two, as we think about what we have learned so far, that  

we will keep you first and we'll keep you at the center of everything we do. So  thank you so much for your time and attention. Thank you so much for taking the time to participate in this lecture, and I look forward to seeing you in lecture  number three. So thank you so much and have a wonderful day.