Trading in Other Countries and Trading Blocs
One of the most underestimated opportunities for developing countries is trade facilitation.
—Karrien Van Gennip
At the early stages of starting and establishing a business, entrepreneurs tend to focus on selling their goods and services in the domestic markets. This is a significant step in “proving the concept” and can then be used as a springboard to look at exploring the international markets. It is important to note that this is another area where there is a lot to consider before deciding whether to pursue international trade and how you may best approach it. There are many opportunities and potential pitfalls in this area of entrepreneurship. So, it requires a great deal of research, and it is best to stay away from bland sayings such as “I only need to sell to 1 percent of the market to make it worthwhile.” Sayings like this mean very little and even the “only 1 percent” will likely mean a lot of time and resource and a lot of work to make it happen successfully.
Trading internationally can be an enlightening and positive experience and have benefits for your business. However, it can also be complicated and bureaucratic in some cases. International trade can be defined as allowing countries to expand their markets to access products or services that may not have been available in the domestic markets. For countries and governments that are in favor of international trade, it can be said that this is beneficial and makes markets more competitive.
International trade was an important part in the establishment of the global economy. In the global economy, supply and demand, and as a result prices, both impact and are impacted by global events. For example, political change in Asia could result in an increase in the cost of labor. This could increase manufacturing costs for a clothing company based in Malaysia. This could then increase the purchase price of a t-shirt in shops in America. So the knock on effects of a particular change can be wide ranging.
Being able to trade between countries can potentially be easier if your domestic country is part of a trading bloc. A trading bloc is usually a group of countries in specific regions that manage and promote trading activities. This leads to liberalization of trade (this is the freedom of trade from protectionist measures) and creation of trade between members. The underlying principle being that member countries are treated favorably in comparison to nonmembers.
The World Trade Organization (WTO) allows the existence of trading blocs on the condition that they provide for lower protection against outside countries than existed before the creation of the trading bloc.
There are several trading blocs. The most significant are as follows:
• The European Union (EU): This is made up of a single market, single currency, and a customs union. The EU has 27 European member states and is a unique economic and political union that covers much of the continent. The original creation was the European Economic Community (EEC) in 1958 and what began as a purely economic arrangement now spans policy areas such as health, climate, environment, migration, justice, and security.
• The European Free Trade Area (EFTA): This is an intergovernmental organization which was established in 1960 by the EFTA convention. This was to promote economic integration and free trade between member states (Switzerland, Iceland, Norway, and Liechtenstein) both within Europe and globally. Unlike the EU, EFTA does not foresee political integration and does not issue legislation or have a customs union.
• North American Free Trade Area (NAFTA): This trade agreement between United States, Mexico, and Canada was signed in 1992 and eventually eliminated all trade barriers and tariffs between member states. This agreement was replaced in 2020 by USMCA which was viewed as a new agreement that encompassed much of NAFTA but included some significant renegotiations and changes, with a key change coming in the area of automobile manufacture.
• Mercosur: A customs union between Brazil, Argentina, Paraguay, Uruguay, and Venezuela. Since its creation, the main objective has been to create a space where investment and business opportunities are generated through competitive integration of national economies into the international market.
• Association of Southeast Asia Nations (ASEAN): Established in 1967, by the founding fathers of ASEAN: Malaysia, The Philippines, Indonesia, Thailand, and Singapore. Key aims include to accelerate economic growth between regions, to promote regional peace and collaboration, and to promote Southeast Asian studies.
• Common Market of Eastern and Southern Africa (COMESA): Formed in 1994, the main focus of COMESA is on the establishing of a large trading and economic unit that is capable of overcoming some of the barriers that its 21 member states are facing. COMESA priority areas are on a free trade area, a customs union, and trade liberalization and promotion.
• South Asian Free Trade Area (SAFTA): Established in 2006, between member countries: Afghanistan, Bangladesh, Sri Lanka, India, Bhutan, Nepal, Maldives, and Pakistan. This is a free trade agreement with a focus on trade liberalization.
• Pacific Alliance: Established in 2011, this is a regional trade area between Mexico, Chile, Columbia, and Peru and views itself as a strategic platform that is open to free trade.
It is also important to note that your home country may be a member of more than one trading bloc and may have separate individual arrangements or trade agreements with other countries. This is an important point and one that must be thoroughly checked before making an overall decision about whether to proceed.
Arrangements within trading blocs can change due to internal and external factors. One of the largest recent changes to a trading bloc came when the United Kingdom voted to leave the EU following a referendum. While it is beyond the scope of this book to cover “Brexit” in vast detail or to cover the many differing political and economic viewpoints, it is important to illustrate the impact the period of negotiation had on in business in terms of uncertainty and planning. Following a referendum and the UK voting to leave the EU in 2016, many years of negotiations followed until the eventual full departure on January 1, 2021. This was a complex negotiation, which at times threatened to turn bitter, and the eventual free trade agreement was not fully agreed by the United Kingdom and the EU until December 24, 2021. And even now, there are still areas that have to be negotiated decisions still need to be made on data sharing and financial services, and the agreement on fisheries only lasts five years. There is also the issue of the border between the Republic of Ireland and Northern Ireland, which has still not been fully resolved. In terms of rules, the United Kingdom and the EU have agreed to some identical rules; however, they do not have to be identical in the future, so if one side decides to change that can trigger a dispute and that in turn could lead to tariffs being introduced as punishment.
During this time period, many different plans for Brexit were proposed from each side, with stringent (and it could be argued sometimes idealistic and politically motivated) negotiating positions being taken.
With areas such as tariffs, movement of people and product standards (among many other things) on the table, and the length of time taken for discussions, businesses, both from the United Kingdom and the EU, through no real fault of their own, faced enormous uncertainty and as a result issues with forward planning. This is likely to continue as both parties seek resolution to outstanding issues. But businesses still have to operate and continue to trade as efficiently as they can while this process is ongoing. This affects businesses not only in the United Kingdom and the EU but also in countries who have arrangements with the EU and who seek to continue trading on satisfactory terms with the United Kingdom after Brexit.
Prior to the 2016 referendum, the polling and most opinion strongly suggested that the United Kingdom would vote to remain in the EU. Subsequent negotiations were only due to last for two years. Both predictions have since been proven to be incorrect.
Regarding Brexit, it is fair to conclude that while this is an extreme example of how things can unexpectedly change, it is also fair to say that expecting the unexpected is an important aptitude to have in this particular area of entrepreneurship.
This also raises the point of ability to negotiate. Being able to negotiate is an important aspect of running in a business and is relevant in a lot of areas. Nevertheless, it is very likely to be needed if you decide to trade overseas. An example of this could be negotiating a bulk buying rate with an outsourcing company to manufacture your product.
In many business scenarios, being able to negotiate and see what you can give the other party without giving away what you don’t want to is a vital but sometimes tricky skill to master. Ultimately, being able to negotiate is a critical part of business success. Being well prepared, having a strategy, being disciplined, and finding the leverage are all vital parts of negotiating. Sometimes there needs to be compromise, sometimes from both sides, and just as importantly a willingness from both sides to do a deal. But if that’s the case, the key is to find a genuine “win–win” situation, or the closest possible to a “win–win” that suits all parties. That can then, in some cases, be a positive foundation for a long-standing business relationship.
There is a lot to consider before pursuing international trade, not just in terms of whether it is a good idea but also in terms of how you may wish to approach it. For example:
• Have the goods or service the business offers truly shown high demand in domestic markets? This is something to assess honestly. If there is proven and ideally sustained demand for your good or service, then that shows proof of concept. Having a healthy profit margin is also an important consideration here. However, if it is not the case that there is real high demand at the time, that is not necessarily a reason to abandon the idea of international trade altogether. It may just mean holding off until you have a better idea of the proof of concept.
• Is there sufficient demand for the goods/services that you offer in other countries? This can be tricky to estimate in some cases and you may have to go with the most informed guess possible, with the information you have available at the time. The critical starting point will be having a reasonable proof of concept in your domestic market as a gauge, as in most cases it is preferable to have good foundation for your business domestically before committing time and resources to selling abroad.
• What will it cost to trade internationally? This can be in terms of tariffs and taxes or increased bureaucracy, outsourcing, and staffing costs and will largely depend on which countries you wish to start trading with. It will be important to ensure that there is balance here and to have a full understanding of what your costs may look like. So, what you will potentially make in terms of income has to make the increased outgoings worth the investment.
• Is your business prepared for international trade? Does your business have the staff and the expertise within to organize, manage, and deal with all of the elements that international trade will bring? Setting this up can be similar in some ways to the initial start-up phase as it is standing up a new part of the business operation. The reality is that trading internationally can be (and probably will be) different and more resource intensive than domestic trading. So, in itself this can be very time consuming and having the resources to do this and keep the domestic business running smoothly is a key issue. Another area to consider is how dynamic your business is and how flexible it is to change as international trade is another area that can be subject to planned and unplanned (sometimes unexpected) change that can directly or indirectly affect your business. If you are unsure about any of these areas, again, it is not necessarily a reason not to proceed, but it is worth considering and ensuring that your business operation is as prepared as it can be for this type of new trading.
• What are the barriers to trade? This will vary depending on what you are trading and which country or countries you want to trade with. Broadly speaking, there are three major barriers to trade. First, natural barriers: These can be physical or cultural. For example, physical distance between countries, which could cause logistical issues transporting goods or language barriers, creating difficulty in negotiating deals and communication. An example of this could be if you outsource clothing manufacturing to an outsource company abroad, language barriers can cause a barrier in negotiations and time management can influence how often you can fly out to check progress and that in turn can leave you open to quality issues. Second, nontariff barriers: These can include import quotas of certain goods, embargoes, exchange controls, and buy national regulations, where privileges are given to domestic manufacturers and retailers. Third, tariff barriers: A tariff is a tax imposed by a nation on imported goods. It can be a charge per unit, a percentage of the value of goods, or in some cases a combination. No matter how they are assessed; the purpose of tariffs is to make imports more expensive and therefore less competitive with domestic product. All of these issues can be factored into your plans, but it is important to know what they are beforehand. It can be a nasty surprise if you have spent time thinking about trading abroad but have not considered tariffs.
• Have you done your research? As outlined in this chapter, there are many areas to research and consider before deciding whether trading internationally is the right decision for your business. It can bring obvious and enormous benefits for any business, but to maximize those benefits and to minimize the (potentially large) risks, it is important to be as fully informed as possible.
So, while it is important to do your research as far as is possible, there is also a need to expect and to prepare as best as you possibly can for the unexpected in the area of international trade. In a lot of cases, many entrepreneurs may have limited experience of trading with other countries, so a fair amount of learning will be done as you go along.
This is an exciting area and can take your business to a new level, and as with many areas of entrepreneurship, proper planning prevents poor performance.
Foreign trade clearly holds down the costs of the products we buy.
—Tim Bishop