78-631-03&6: International Business
Dr. Guangrui Guo
Date of submission: August 6th, 2018
Thi Mai Anh Nguyen – 104713488
Sara Zohrehheydariha – 104656989
Dyssah Jane Habulin- 104833289
Xueqi Wang -104856352
University of Windsor
TABLE OF CONTENTS
TOC o “1-3” h z u I.INTRODUCTION PAGEREF _Toc521177589 h 4II.FACTORS AFFECTING INTERNATIONAL BUSINESS IN THE USA PAGEREF _Toc521177590 h 51.EXPORT AND IMPORT PAGEREF _Toc521177591 h 52.FOREIGN EXCHANGE MARKET PAGEREF _Toc521177592 h 73.CULTURAL ENVIRONMENTS FACING BUSINESS PAGEREF _Toc521177594 h 94.POLITICAL AND LEGAL ENVIRONMENT PAGEREF _Toc521177595 h 105.GLOBALIZATION PAGEREF _Toc521177596 h 12III.CONCLUSION PAGEREF _Toc521177597 h 14References PAGEREF _Toc521177598 h 15
INTRODUCTIONThe United States of America (USA), also known as the United States (U.S.), is a federal republic composed of 50 states, a federal district, 5 major self-governing territories, and various possessions (Wikipedia). This country is 3.8 million square miles, geographically spreads over the North American continent, faces two major oceans (North Pacific Ocean and North Atlantic Ocean), and located between Canada and Mexico. With over 325 million people, it is the world’s third-most populous country. Washington D.C. is the capital, and New York City is the biggest city by population.
The United States is one of the leading developed country, with the world’s largest economy by nominal GDP and second-largest economy by PPP, accounting for approximately a quarter of global GDP. This country is a key player in decision making of many international organizations like the United Nations, World Bank, or International Monetary Fund. It has various advantages that arguably help the country gain an upper hand in international trade and business.
In this report, we focus on export-import, foreign exchange market, culture, globalization, government and how important these factors are for the economy and international business of the United States.
FACTORS AFFECTING INTERNATIONAL BUSINESS IN THE USAEXPORT AND IMPORTOverall, the United States is the second largest exporter in the world, after China, and the world’s largest importer. In 2017, total U.S. trade with foreign countries was $5.2 trillion, in which $2.3 trillion in exports and $2.9 trillion in imports of both goods and services. (Amadeo, 2018). Thanks to the favorable location, advanced and innovative technology, as well as political advantages, the country can strongly develop international trade for many years.
Export and import of products
The top exports of the United States are Planes, Helicopters, and/or Spacecraft ($59.2B), Refined Petroleum ($57.3B), Cars ($55.1B), Gas Turbines ($45.8B) and Integrated Circuits ($38.3B), using the 1992 revision of the HS (Harmonized System) classification.
Most of U.S. imports are goods ($2.4 trillion), in which capital goods ($641B) were accounted for 27%, followed by consumer goods ($602B), industrial machinery and equipment ($508B) and the others. Its top imports are Cars ($172B), Crude Petroleum ($99B), Computers ($86.5B), Packaged Medicaments ($68.1B) and Vehicle Parts ($66.9B)
The table below shows top 5 products exports and imports of the USA in 2016, according to the statistical data of World Bank:
Figure 1: Top 5 products exports and imports of the USA in 2016 (Source: World Bank)
In 2016, according to World Bank, top 5 export destinations of the United States are Canada ($266B), Mexico ($229B), China ($115B), Japan ($63B) and United Kingdom ($55B).
The top 5 import partners are China ($481.5B), Mexico ($296.7B), Canada ($282.9B), Japan ($135B) and Germany ($116B).
Over the course of two decades, the US has widened its gap in trade deficit. In other words, the value of imported goods being greater than the value of exported goods increases over 2 decades.
Figure 2: Trade balance of the US from 1995 to 2016 (Unit: USD)
This sustained trade deficit has negative impact on US domestic economy. Due to the decline in spending on domestically produced goods, this hurts domestic companies and stock prices. Over time, investors do not see profitability in domestic market, so they would seek investment elsewhere.
The growth of US-based multinational companies also impacts import/export ratio. Companies decide to outsource elsewhere (China, Vietnam, India…) due to two reasons. First, US labor force is most costly. Also, because of strong labor union in the US demanding wage increase and other benefits for workers. Second, US has strict environmental laws, resulting in higher production cost. Thus, the production of clothes brands, smartphones, computers… is mostly outsourced in China, India or Bangladesh instead of domestically produced.
In addition, 2016 US election resulted in a significant change in trade policies. Trump administration attempted to protect American workforce by discouraging free trade, hoping to reduce imports and bring outsourcing labor jobs back to American labor force. It appears that since Trump takes control of the Presidency in January 2017, despite common belief that America is turning to protectionism, US trade balance shows little to no difference comparing to statistical data collected under Obama administration before 2016. In other words, trade patterns have not been changed significantly under Trump’s presidency.
However, since the implementation of tariffs in May, one may anticipate a significant decrease in imported goods in the remaining months of 2018. For instances: Canadian retaliatory tariffs worth $16.6 billion, cover 299 U.S. goods, including steel, aluminum, and other products; EU retaliatory tariffs on 180 types of products, over 3 billion of U.S. goods will affect various products including steel and aluminum, agricultural goods and so on.
FOREIGN EXCHANGE MARKETForeign exchange market is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines the foreign exchange rate. It includes all aspects of buying, selling and exchanging currencies at current or determined prices. It is the largest market in the world, followed by credit market in terms of trading volume.
Central Bank’s role in the forex market
Central Banks play a key role in the economic health of their respective countries. They have many roles including setting lending rates, overseeing the monetary system, and ensuring global competitiveness. The Central banks play a pivotal role in controlling interest rates, inflation, and the overall supply of their currency. Also, it has many tools at the disposal to ensure their end goals are met, including Open market participation and interventions. The decisions that the Central Banks make has widespread effects, and thus is it paramount that all traders pay close attention to the actions that they take.
U.S Federal Reserve (The Fed)More than 85% of all currency transactions are done with the US dollar. There is no doubt that the US dollar is the most highly traded currency in the world. The Federal Reserve is considered to be the most influential central bank in the world. And interest rate changes made by the U.S. Federal Reserve have a significant impact on other currencies around the world. The Federal Reserve has a division within it, namely the Federal Open Market Committee (FOMC) which is responsible for making interest rate decisions. The FOMC meets eight times per year. Therefore, the decisions made by the FOMC are closely monitored by investors and traders both inside and outside the United States.
Figure 3: United States interest rate from 2000 to 2016 (Source: Focus Economics)
US Inflation of USD from 2015 to 2017
260350122555000The U.S. inflation rate by year is the percent change in prices from one year to the next, or year-over-year. Inflation also responds to monetary policy enacted by the Federal Reserve. The Fed focuses on the core inflation rate because it excludes volatile gas and food prices. The Fed sets a target inflation rate of two percent. If the core rate rises much above that, the Fed will execute contractionary monetary policy. This increases interest rates, shutting down demand and forcing prices lower.
Figure 4: U.S Inflation rate by year from 2015-2017
The US dollar exchange rate fell 4.2% in the first quarter of 2016, after rising consistently since 2014. The NASDAQ reports that many US companies see this as good news: a weaker dollar makes exports more competitive and reduces losses due to currency conversion on the income from overseas sales. Now “all eyes are on the Federal Reserve” in the hope that it can prevent the dollar from rising again.
Exchange rate policy and the forex market
Economic theory tells us that the Fed’s interest rate policy should influence the US dollar exchange rate. When interest rates rise, investors looking for return buy dollars in order to purchase dollar-denominated assets: increased demand for dollars in FX trading puts upwards pressure on the US dollar exchange rate like the “price” of the currency. Conversely, falling interest rates encourage investors to sell dollar-denominated assets, investing their money in foreign assets that give higher returns: as investors sell their dollars for other currencies, the price of the dollar versus those currencies falls.
In FX trading, financial instruments can be used to “lock in” exchange rates: investors may hedge against the impact of interest rate changes. The effect of interest rate adjustments on US dollar exchange rates is therefore uncertain. When the Fed Funds rate was cut to 0.5% after the financial crisis of 2008, the US dollar exchange rate fell sharply: but the interest rate increased in December 2015 had little effect.
Markets respond not only to Fed announcements, but even to remarks by Fed officials. And investors have a view as to what they think the Fed should be doing. The Fed likes to signal its plans in advance which is called “forward guidance.” This is to prevent unforeseen federal policy actions causing market panics, and to “guide” markets along the path set by the Fed. When markets disagree with central bank policy, the response can be market turmoil: foreign currency exchange rates may even move in the opposite direction from that intended.
The Fed could support the dollar by raising interest rates. But as a weaker dollar is helpful to the US economy, it has left well alone. And this raises an important point. Although the Fed’s purpose is to manage the domestic US economy, its actions have external effects. Similarly, the behavior of other major central banks affects the US economy, as do global economic shocks such as oil price changes, and natural disasters elsewhere in the world. The Fed uses federal policies to buffer the US economy from these external effects. But central banks do not operate alone. US federal policies influence the actions of other central banks, and the policies of other central banks influence the Fed. Sometimes, actions by other central banks can mean the Fed needs to do less to meet its mandate. At other times, they can mean it has to do more. And the final judgment of the adequacy of Fed response rests with the markets.
CULTURAL ENVIRONMENTS FACING BUSINESS
Culture is the social behavior and norms found in human societies, which is embodies in shared values, attitudes, and beliefs of group of individuals. The United States is a diverse country. Many customs and traditions constitute this colorful region. Therefore, it is slightly difficult to be specific about American culture because of various states, religious and national differences. Especially in business spheres, understanding the basic business culture of the United States is essential to success. The most significant aspect of US culture is the American dream. It is a widespread belief in individuals that everyone can pursue their own idea of happiness by working hard. Based on this belief, Americans create a very strong work ethic and systematic management, which results in it has become the largest economic entity in all over the world.
There are three obvious values attributes to the success economic development of the United States.
Liberty. All Americans strongly believe in the concept of independence and
individualism. They admire individual freedom, self-expression, and personal independence. Under this doctrine, the government of U.S plays a limited role in social development. Sometimes, the attitude between government and business is not hospitable.
Directness. Most American businessmen prefer to a frank and straight-
forward way to solve any conflicts and disagreements among friends even co-workers. The negotiations among American may seem a little bit rushed, because they believe “time is money”, nobody hopes his/her precious time was wasted on endless arguments. Therefore, in business spheres, they start negotiations with excessive demands thereby avoiding the damage of benefits in later processes.
Equality. Dislike some other countries ‘business culture, there is a strict
hierarchy regulation in workplace, American culture encourages liberal and equal relationship between leaders and subordinates. All people in organization have same important role to play. For example, any employees would be expected to be consulted on business decisions that affect themselves rather than only managers decide and act arbitrarily.
Compared with some other countries, American religion is not as important as them. There is no government supported religions and national church. In general, people keep quite confidential attitude on their religious views, only if they might talk about their religion to their close friends. But this does not mean they do not have religious faith. Because the religion is not political issues, people can hold freedom attitude on it. Most people in the United States is Christians-around 70-88%, which could be divided into two parts-Catholicism and Protestantism. Besides, due to diverse races, some parts of American also believe in other denominations, such as Islamic and Unitarian. However, there is still around 15% of Americans consider themselves atheists.
American believe in the power of information. The most effective way of information exchange is communication. No matter meeting or negotiation, “small talk” is an extremely popular activity among Americans. For example, to eliminating strangeness or create a relax atmosphere before formal meeting, the host might start out conversation by talking about some hot topics, such as weather, sports or simple compliments to each other. However, most of American are dislike to talking about private information, such as personal lives, age and marital status. In addition, most young generations prefer to speak some idioms or directly cite jargons. Thus, this kind of statement would create misunderstanding to listeners who came from other cultural backgrounds. However, most people in the United States still keep a courteous and enthusiastic way to communicate. What’s more, it is worthwhile to be noticed that some non-verbal communication can also convey valuable information. Frequent eye contact represents an agreeable and positive to the speaker, and touching people is not a proper way to convey enthusiasm but makes them feel uncomfortable and nervous.
In conclusion, diversified culture is a challenging subject for US corporations. Company’s ethics, company’s relationship with the environment, and company’s labor conditions are key factors for a successful business. It is important that companies pay close attention to these aspects in order to build and to maintain a stable and powerful reputation for its corporation.
POLITICAL AND LEGAL ENVIRONMENT
The United States is a federal republic of 50 states, a federal district, five territories and several uninhabited island possessions. The states and territories are the principal administrative districts in the country. These are divided into subdivisions of counties and independent cities. The United States government is regulated by a system of checks and balances defined by the U.S. Constitution. In 2016, the U.S. ranked 21st on the Democracy Index and 18th on the Corruption Perceptions Index.
The United States has a special relationship with the United Kingdom and strong ties with Japan, South Korea, and several countries in European Union and British Commonwealth. It is a major contribution to many international organizations, like the United Nations, World Bank and so on. Moreover, Obama presidency from 2008 to 2016 guided the US on a pro-trade path, which stimulated free trade and actively pursue international and inter-regional trade conducts (NAFTA, WTO…).
Taxes in the United States are levied at the federal, state, and local government levels. These include taxes on income, payroll, property, sales, imports, estates and gifts, as well as various fees. The increase in taxes is also an issue facing the business sector in the United States. The government has steadily increased the amount of tax it charges on imports, which has greatly disadvantaged businesses that major in importation. Though it was made with the hope that local industries will flourish, items that can only be accessed through importation have become expensive (Castaño, Méndez, & Galindo, 2015). As a result, the purchasing power has dropped. Therefore, it is a big disadvantage to businesses as they cannot make enough profits and pay the necessary taxes.
Other laws that have been passed and have had a positive impact on the business sector include the Obama Care Act (ACA). The Affordable Care Act was put into place to enable all people to access quality healthcare using insurance at affordable prices. The Act requires people to pay for their cover only for a part of the year, which makes the situation a bit easier (Burns, 2016). The Obama Care law guarantees that all employees can access the right type of insurance affordably, which saves their employers funds that they would lose in cases such as work-related injuries. Therefore, the political and legal issues that face the business world have their benefits and drawbacks. How they affect businesses depends on how the business works around them.
In every nation, there is a political and legal environment that influences business activities. It is upon companies to decide when and how to align their business operations so as not to ruin their chances of making money while conforming to state regulations. According to Weeks (2013), a country’s political system is “the structural dimensions and power dynamics of its government that specify institutions, organizations, and interest groups, and define the norms that govern political activities” (p. 6). Therefore, political systems and the legal environment are created by governments. The USA’s 2016 election presented several uncertainties to businesses because candidates campaigned under many political promises that had the ability to affect industries either positively or negatively. According to Moricz and Sjöholm (2014), elections have the capability to build strong institutions and even enhance a nation’s governance, which can in turn spur its economic growth. During the 2016 election, markets reacted differently to the outcome of the electoral vote. The stock markets, in specific, are very sensitive to political temperatures. The Cable News Network (CNN) reported that Dow futures fell by 3000 points early Wednesday morning after the election (Egan ; Mullen, 2016). The stock markets do not respond well to uncertainties. Notwithstanding, during the campaign season, investors had fears about the unpredictable nature and anti-trade hardline positions held by the current president Donald Trump (Egan ; Mullen, 2016). However, it is important to note that these were short-term effects. In the long-term, businesses learnt to adjust comfortably to campaign promises and party agendas enacted into law through the Congress.
Within the 2015-2017 period, the United States government, through the Federal Reserve, enacted fiscal policies that caused a change in the country’s economic ecosystem. The decisions made by the Federal Reserve impacted both business owners and consumers. For instance, in March 2017, it raised the benchmark rates by 0.25 percent following an improvement in employment in the country (Holmes, 2017). On the other hand, it meant that the cost of borrowing would go up, and business would have to pay more to access credit. Consequently, consumers and commercial entities will have less money to spend at their disposal. In the long-run, the gains made by an improved employment rate will be eroded because business owners will lack sufficient capital for expansion (Brunot, n.d.). Nevertheless, increased government spending on infrastructure and tax reforms will provide a counter measure. Crooks (2017) reported that in the grading of victors and losers from the Republican tax bill getting a thump up, United States corporations are among the biggest winners. The main aim of the fiscal policies was to assist the government in stabilizing the economy while keeping inflation in check.
Although foreign policies are a contentious issue in the United States, the government has used them to influence the levels of business activities in the country. The United States, since time in memorial, owes its economic success to the immigrants; hence, it is true to say that foreign policy transcends political spheres. After the 2016 USA elections, the travel bans on seven Muslim-majority countries dealt a major blow to the aviation industry. It was reported that the net international bookings dipped by 6.5 percent after the ban and its ripple effect weakened the services industry that relied on tourism greatly (Homes, 2017). In addition, many airlines lost their market shares because the destinations they fly to reduced bookings, signaling low profits to the industry. Homes (2017) further reports that between January and February, bookings issued by the affected states fell by 80% compared to the same period in the previous year. Therefore, certain foreign policies had an adverse effect on the level of business activities in the United States.
GLOBALIZATIONGlobalization impact on and American society and economy
In general, globalization is the consequence of economic integration among global countries. Obviously, the globalization not only expands the scope of business trades but also riches interactional methods with other countries. As a result of advanced technology on internet and transportation, the United States can conduct commercial transactions and communication in more effective and efficient way. However, although globalization brings developing opportunities to America, they also have to face severe challenges and risks.
Increasing scope of business trades
The rapid development of economic globalization has promoted formation of American multinational trading system and made international trades grow rapidly, and its growth rates greatly exceeded the growth of gross domestic production. Meanwhile, compared with other developed countries, the United States has become the biggest beneficiary, which embodied into the emerging industries and the export of services trade have been expanding dramatically. As matter of a fact, the new round of negotiations in WTO, the United States seek to continue to the lead the rules of international trade and require conducting the adjustment and restriction on the domestic policies of other countries, such as the investment systems and the competition policies. The United States also tried to add labor and environmental standards to the negotiations, because the developing countries require equal participation so that safeguard their vital interests. Thus, it can be seen that the initiative of the new round multinational negotiations is still in the hand of the United States.
Promoting the introduction of talents
From the society perspective, the economic globalization has created the conditions for the transitional mobility of highly skilled labor force, and human resources have become the most important resources and the focus of competition among countries. Attracting high-qualify talents at the forefront of science and technology in the world has become urgent requirement for developed countries to improve the international competitiveness. The United States with their superior living conditions, advanced universities and research institutions, high-tech enterprises clusters and other advantages, it has attracted a large number of overseas talents and they have made important contribution to the economy of America. The immigration policy of the United States is one of the reasons for its high economic growth, and the role of high-tech talents from foreign countries is particularly prominent in the information and communication sphere. According to statistics, 1/4 of the world scientific and technological personnel are concentrated in the United States.
Increasing financial risks
With the arriving of the globalization of the capital market, the scale of the financial assets flow is large and various in economic activities among the world. The free flow of huge capital created the condition for the periodic fluctuation of the real estate and the stock market from prosperity and recession, which has buried the potential danger for economic stability of the United States. In addition, the strength of global capital market has been strengthened, and its influence has exceeded the ability of central bank. In recent years, the Federal Reserve have found that their decision to raise short-term interest rates has little impact on long-term interest rates, while long-term interest rates will affect the vast majority of lending behavior and ultimately affect economic activities in the United States.
Widening the gap between the rich and poor groups
First, the income gap between the labor and capitalists in America is increasing. The data shows that 54% of national income belongs to the workers, which has created a new low record. According to the report of the US economic institutions, the gap between the rich and poor has been significantly expanded over past 20 years, and the average annual income of richest families has reached 7.28 times than the average annual income of poorest families. Moreover, different industries also differently benefit from globalization and are not evenly distributed. Compared with large multinational enterprises, small and medium-sized companies and traditional industries have been suffered from more stronger impact. For example, the western region of the “sunrise industry “in the United States has developed rapidly, but the eastern region where traditional industries and agricultural concentration are dwarfed.
CONCLUSIONTo sum up, export-import, foreign exchange market, culture, globalization, governmental and legal system are five interdependent factors that play a key role in the economy and international business of the United States. Trade policies, trade agreements, trade organizations which are signed and approved by the government influence heavily on export and import; Central Bank, US Federal Reserve make decisions on foreign exchange rate market, which has influenced on both domestics and international business in US. Last but not least, the trend of globalization has great impact on culture, and its diversification also has only advantages and opportunities for business, but also brings hinders and challenges as well.
Thanks to these factors, United States has been the world’s largest economy for decades, and it has still been developed continuously.
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