There was probably a time when business people mostly thought about using local resources and workers to produce goods and services for people who lived within the community – or at least within a day’s ride on a horse. While there might still be remote villages where such local trade dominates the minds of business managers, the typical experience of an executive today involves one or more cross-border implications. We don’t have to think about Procter and Gamble to see the growing importance of international transactions. My local dry cleaner might service mostly town-folk who drive at most a few minutes to pick-up their newly pressed garments, but this company is heavily involved with international trade. For one thing, some of his employees are immigrants. For another, some of the dry-cleaning chemicals are imported from around the world – for example, U.S. dry cleaning companies import millions of pounds of tetrachloroethylene each year. While I have not seen any foreign competition for dry-cleaning services in my community, we all know it is possible that a chain of such cleaners from Europe or Asia could set up and operate in any town in the U.S. You can run, but you can’t hide from international business and competition.
Bill Gates gains a lot by specializing and trading. He does the management stuff and hires people to produce the equipment or wash his clothes. He might lose a lot of money if he did all these things himself. In the same way, companies and countries do not do everything for themselves. They try to do what they know best – and outsource the rest of it. They don’t mind paying others to do things for them – because they are using their own talents to produce income. The word “outsource” used to have a “good” connotation. A company got stronger by outsourcing things it thought it didn’t do well. This practice has been going on for hundreds of years – probably for thousands of years. Today outsourcing is at the heart of controversies about international trade. Today outsourcing brings up the notion that a local domestic worker lost a job because of a foreign person.
We should keep in mind that job loss was always part of outsourcing, whether it arose from domestic or foreign sources. An outsourcing action in either case is meant to be a means to strengthen a company – to make it as efficient and competitive as possible so as to increase the probability of its success. We used to call this “operating according to comparative advantage” since it implies that a company focus on things it does best and trades for things that others do best.
We made three points in the above discussion.
First, most of us are involved with many kinds of cross-border transactions, including immigration, goods, services, capital, financial assets, currencies, and more.
Second, domestic and international transactions are for the purpose of strengthening a company.
Third, there are usually parties to these transactions that are injured. We expect government policy to walk the narrow line between redressing the injured parties and making sure that business firms and consumers are free to make choices that promote competitiveness.
How government policy is used to resolve these issues is the focus of this note and is at the heart of business planning.
When a government puts a 100% tariff on imported garments as a means to protect a U.S. garment worker, this policy action affects the playing field for U.S. and foreign countries.
When a European government makes it harder for an immigrant to move and work in Europe so as to protect the jobs of local citizens, this impacts the business outcomes of any firms in Europe – and could lead to companies moving from Europe to other parts of
the world. If an Asian government gives subsidies to foreign manufacturing firms locating facilities in Asia, this subsidy impacts decisions about where companies want to operate. This will also impact where many other firms will be importing or exporting their own goods.
The upshot is that every country has policies that directly or indirectly affect a wide variety of cross-border transactions – and these policies are changing all the time. If many companies are impacted by international trade, then it behooves them to learn as much as they can about these policies.