There are some unique problems in international trade and companies doing business overseas must be aware of them. In particular, these include (a) cultural problems, (b) monetary conversion, and (c) trade barriers.
When companies do business overseas, they come in contact with people from different cultures. These individuals often speak a different language and have their own particular custom and manners. These differences can create problems.
For example, in France, business meetings begin promptly at the designated time and everyone is expected to be there. Foreign business people who are late are often left outside to cool their heels as a means of letting them know the importance of promptness. Unless one is aware of such expected behaviors he may end up insulting the people with whom he hopes to establish trade relations.
A second traditional problem is that of monetary conversion. For example, if a transaction is conducted with Russia, payment may be made in rubles. Of course, this currency is of little value to the American firm. It is, therefore, necessary to convert the foreign currency to American dollars. How much are these Russian rubles worth in terms of dollars This conversion rate is determined by every market, where the currencies of countries are bought and sold. Thus there is an established rate, although it will often fluctuate from day to day. For example, the ruble may be worth $0.75 on Monday and $0.72 on Tuesday because of all announced wheat shortage in Russia. In addition, there is the dilemma associated with converting at $0.72. Some financial institutions may be unwilling to pay this price, feeling that the ruble will sink much lower over the next week. As a result, conversion may finally come at $0.69. These "losses" must be accepted by the company as one of the costs of doing business overseas.
A third unique problem is trade barriers. For one reason or another, all countries impose trade barriers on certain goods crossing their borders. Some trade barriers are directly related to exports. For example, the United States permits strategic military material to be shipped abroad only after government permission has been obtained. Most trade barriers, however, are designed to restrict imports. Two of the most common import barriers are quotas and tariffs.
A quota is a quantitative restriction that is expressed in terms of either physical quantity or value. For example, a quota that states that no more than 50000 Class A widgets may be imported from Europe each year is a restriction stated in terms of physical quantity. Meanwhile, a quota that restricts the importation of a certain type of Japanese glassware to no more than $1 million worth a year is stated in terms of value.
A tariff is a duty or fee levied on goods being imported into the country. These tariffs can be of two types: revenue or protective. A revenue tariff is designed to raise money for the government. These tariffs are usually low, often amounting to less than twenty-five cents per item or pound. A protective tariff is designed to discourage foreign businesses from shipping certain goods into the country. The basic reason for a protective tariff is to keep out goods that will undersell products made in the home country. For this reason, protective tariffs are often very high, thus forcing the foreign business to raise its prices to cover the tariff.
The tariff makes the imported goods more expensive and thus promotes exports. ( )