Page 87 - Introduction to Business

CHAPTER 2 The Environment of Business 61

EXHIBIT 2.3
World Trade of Goods: Distribution by Regions and Industrialization, 2001

World Exports for 2001 World Imports for 2001
DEVELOPING DEVELOPING
COUNTRIES: COUNTRIES:
Western Western
Hemisphere 6% Hemisphere 6%
Middle East 3% Middle East 3%
Europe 5% Europe 5%

Asia 18% Asia 17%

Africa 2% Africa 2%
INDUSTRIAL INDUSTRIAL
COUNTRIES 66% COUNTRIES 66%

Source: IMF, Direction of Trade Statistics Yearbook, 2002, pp. 2–6, derived from Exhibit 2.2.

reality Do you think that you are benefitting from free trade? Why or why not?
CH ECK

Barriers to International Trade and Investments

LEARNING OBJECTIVE 4
Evaluate the different forms of trade and foreign investment barriers and their
impact on business, consumers, and governments.
Trade theory clearly shows how free trade has a positive effect on the economic wel-
fare of all trading partners by essentially improving the standard of living of people
in those countries. Free trade also has positive effects on business, since it provides
opportunities for entrepreneurs to be directly involved in the export-import busi-
ness (of goods and services). Also, the volume of domestic business is enhanced
through the domestic sales of imported products (and services) and exports of
domestic goods (and services). Apart from business opportunities generated
through exports and imports, trade also encourages domestic businesses to explore
the possibility of investing in plant and equipment abroad in order to either serve
that market or even export from the international location. This type of investment
is called foreign direct investment (FDI). There are literally hundreds of thousands foreign direct investment (FDI) An
of companies, domestic as well as foreign, that are involved in FDI. McDonald’s of overseas investment in plant and
equipment to produce goods or services
the United States, Sony of Japan, and DaimlerChrysler of Germany are good exam-
for local consumption or for exports
ples of companies that have massive FDI.
While free trade is the best form of conducting business with partners overseas,
quite often countries try to restrict trade as well as FDI for various political reasons.
When a government tries to restrict trade by creating barriers to trade through vari-
ous mechanisms, it is called protection. Whom is the government trying to protect, protection The government practice of
and why? Obviously, it is the domestic producer (e.g., the U.S. textile or sugar indus- imposing trade barriers (e.g., tariffs) to
shield domestic producers from
tries that have lost comparative advantage over the years, but are politically well
international competition
connected) that the government is trying to shield from international competition.
Barriers to trade have a cost and also distort market-based trade patterns. While
domestic firms (for example, textile firms in the United States) gain because the
competitive pressure from abroad is reduced through protection (and domestic
firms can conduct business less efficiently), the person who ultimately pays
for this inefficiency, in the form of higher prices or lower-quality goods or services

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