In this report the focus will be on international trade, especially addressing the effects on companies' operations and profitability.

University Degree Business and Administrative studies

INTRODUCTION

Trade is one of the oldest economic activities since the discovery of the value of goods. It is argued that domestic trade was the first form of trade that emerged taking place inside the boundaries of a single country. A second form of trade, which appeared as a result of the economic relationships between countries and encouraged by the increasing globalization, is referred to as international trade.

In this report the focus will be on international trade, especially addressing the effects on companies’ operations and profitability. The European Union (EU) and its recent enlargement will be assessed. Furthermore, the impact of the international environment on the opportunities and constraints for businesses will be considered. The relationships between the economic, social, legal and political environments with the management of cultures and policies will also be discussed.

Firstly, an overview of the meaning of international trade will be given. Its concept; principles; importance; benefits as well as drawbacks will be addressed. Moreover, a classification of the different types of international trading agreements will be presented.

Secondly, a brief summary of the EU will be provided. Additionally an introduction of the recent enlargement of EU will be performed in order to evaluate the major changes it brings to international business and trade.

Thirdly, a general forecast of what the future for a small imaginary Polish company (Agripolska) will be carried out considering the opportunities and constraints brought by the accession of Poland into EU. The comparative advantage principle and other significant economic concepts will be addressed in order to evaluate the situation of Agripolska in the international trade environment.

Finally, conclusive remarks will be drawn based on the considerations and main issues discussed. A list of references and bibliography used will be included. Moreover, appendixes will be attached in order to support and provide further explanation of the statements presented in this report.

I. - INTERNATIONAL TRADE

What is International Trade? “International trade is defined as trade between two or more partners from different countries (an exporter and an importer)” (Word IQ, 2004). It exists due to the unevenly distribution of resources throughout the world.

Theory of International Trade: “International trade theory isn't a stand-alone topic. It is a practical application of general trade theory to trading between persons from different countries” (Machaj, 2004) (See Appendix A). Its origins could be found in a book written by Adam Smith ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ (1776) (Atkinson & Miller, 1998). In this book Smith identifies the importance of specialisation. He suggested that countries could:

“concentrate on the production of those goods and services at which they are most efficient, and then exchange these with goods and services which other countries are better at producing” (Atkinson & Miller, 1998, p. 441).

Smith proposed the principle of Absolute Advantage (See Appendix B). Suranovic (2004) extracted from Adam Smith’s book (Book IV, Section ii, 12) the concept of absolute advantage as expressed by Smith himself:

"If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.”

The principle of absolute advantage seems to work only in the case when a country could efficiently produce a good. What would it happen if a country is efficient in producing more than one single good or alternatively multiple commodities? In this case Smith’s principle would be a bit vague.

David Ricardo (See Appendix C) in 1817 developed the principle of Comparative Advantage in order to demonstrate that trade could mutually be beneficial “even when one nation is absolutely more efficient in the production of all goods” (Carbaugh, 2004, p.299) (See Appendix D).

“The theory of comparative advantage explains why it can be beneficial for two countries to trade, even though one of them may be able to produce every kind of item more cheaply than the other. What matters is not the absolute cost of production, but rather the ratio (percentage) between how easily the two countries can produce different kinds of things”. (Free-definitions, 2004)

A country has a comparative advantage when its opportunity cost of production is less than another country. The opportunity cost of a good is the amount of another good that a country should do without producing the good (Atkinson & Miller, 1998).

Benefits and Risks of International Trade

Benefits (Atkinson & Miller, 1998): There are many reasons why companies want to compete in the international arena. Among the most important:

Cheaper sources of materials and labour overseas for organisations. New EU members could provide cheaper labour, which constitute a comparative advantage for these entrants (Financial Times, 2004).

Selling of production in different markets all over the world (export) as well as importing cheaper commodities from other countries.

Great variety of products to consumers and with cheaper prices. It would increase the demand and supply reducing prices.

Rising of wealth and living standards due to the principle of specialization (See Appendixes B & D).

Generation of areas where trading countries have absolute advantage (See Appendix D).

Reduction of the monopoly power of domestic companies encouraging companies to keep low price.

Risks (Word IQ, 2004): Two major categories of risks are distinguished:

Commercial risks

Insolvency of buyer due to bankruptcy or other financial difficulties.

Failure of buyer to pay the amount due within six months after due date (protracted default).

Non-acceptance of merchandise due to defects in manufacturing, quality concerns, among others.

Political risks

Cancellation or non-renewal of export or import licenses due to new political regime on exports or imports.

War. It is likely that Iraq has experienced a reduction in its international trade as well as in foreign direct investment.

Expropriation or confiscation of the importer’s company.

Imposition of an import ban after the shipment of the goods as protectionist mechanisms.

Imposition of exchange controls by the importer’s country or foreign currency shortage (transfer risk).

International trading agreements: Global trade ...

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Non-acceptance of merchandise due to defects in manufacturing, quality concerns, among others.

Political risks

Cancellation or non-renewal of export or import licenses due to new political regime on exports or imports.

War. It is likely that Iraq has experienced a reduction in its international trade as well as in foreign direct investment.

Expropriation or confiscation of the importer’s company.

Imposition of an import ban after the shipment of the goods as protectionist mechanisms.

Imposition of exchange controls by the importer’s country or foreign currency shortage (transfer risk).

International trading agreements: Global trade agreements are created in order to fight against the high barriers to trade around the world, as well as to settle trade disputes and enforce decisions. These are the aims of the General Agreement on Tariff and Trade (GATT) (1947) which was replaced in 1995 by the World Trade Organisation (WTO) (Atkinson & Miller, 1998).

Regional trading blocs have been established since the late part of last century. The most common forms of this kind of trading agreements are:

Free-Trade Area “A free-trade area exists when nations remove trade barriers with each other while retaining individual tariffs against non-members” (Indiana University Glossary, 2004).

Customs Union “is formed when two or more countries agree to remove all barriers to free trade with each other, while establishing a common external tariff against other nations” (Indiana University Glossary, 2004).

Common Market “is a customs union that also has free movement of labour and capital between member states in addition to the free movement of goods and services” (Atkinson & Miller, 1998, p. 421) (See Appendix E).

II. - EUROPEAN UNION (EU)

The Treaty of Rome established the European Economic Community in 1957 (See Appendix F). The Single European Act (1987) set the Single European Market (SEM) to be established by the end of 1992 (Atkinson & Miller, 1998). Therefore, tariff and non-tariff barriers were eliminated between the member states. Such market allows the free movement of labour and capital; goods and services between its constituents. EU instituted a common external tariff (CET) that applies to all imports from countries outside the EU (Atkinson & Miller, 1998). The SEM encourages countries to specialise in these areas where they have an advantage by using their resources efficiently.

“The European Union or EU is an of 25 states, established by the Treaty on European Union (the in 1992). Its current legal base is the which entered into force on , ” (Word IQ, 2004)

EU Enlargements: The EU has experienced five enlargements since it was established. The latest enlargement of EU took place on 01 May 2004 and the number of member states has increased from fifteen to twenty-five (See Appendix G). The accession of ten Central and Eastern European countries (CEECs) to EU represents a great opportunity to enhance the wealth and elevate the living standards of these new members.

Economists agree that small countries and industries do benefit considerably from international trade; as a consequence, they are considered to be the winners. That is without taking into consideration the important contribution that small firms from the new EU states could bring to the whole economy (See Appendix H).

One of the EU’s commitments is to promote

“a favourable environment for small firms acknowledging that small and medium sized firms have an important role to play in helping to realise the benefits of the Single European Market” (Atkinson & Miller, 1998, p. 57).

Major Changes in the Business Environment from the Fifth EU Enlargement: The most important changes that will impact the business environment are the economic ones. However, the existence of social, political and legal factors could not be neglected since these factors will certainly affect the business environment as well.

Economic factors

Free movement of goods and services will allow open exchange of merchandises throughout the EU. This is expected to increase the competition and reduce any monopoly power that any EU firms may have. The mobility of goods would also have an impact on prices due to the increase in the number of suppliers for certain commodities. Removal of customs formalities is likely to bring reduction in prices and cut out frontier delays (See Appendix I & J).

Free movement of labour will increase the migration of the work force to those countries where wages and work conditions in general are higher. This mobility will ease the recruitment of skilled workers. However, the movement of workers could bring unemployment to countries and increase unemployment levels in others. (See Appendix K).

Free movement of capital will open more opportunities for new investments in the enlarged EU. Investors will certainly move to those areas where the overall return on investment is the highest (See Appendix L). Nevertheless, those companies seeking for relocation, new business (alliances, mergers and joint ventures) or cheaper labour will need to make changes and considerations in the organisational marketing approach in order to cope with the cultural and language differences brought by the fifth enlargement (Atkinson & Miller, 1998).

Restriction to new members states to trade with countries outside the EU, they should “buy products from other countries within the agreement” (Atkinson & Miller, 1998, p.421). When trading with third countries, the new member should apply the common external tariff (CET) which is likely to be the essential feature of the European customs union (See Appendix M)

Eventual adoption of Euro will eliminate exchange rate fluctuation and it will ease the trade inside EU, which will encourage the monetary union.

Social Factors

Increase in EU population by twenty per cent, seventy-five million people (Cremshaw, 2004, p. 6). Therefore, the EU human potential will increase.

Boost in cultural diversity all over the EU. That has already brought an increase in the EU official and working languages (Mamadouth, 2002, p. 237).

Improvement of living standards by adopting the European Social Policy (See Appendix N).

Increase demand of students from new EU states for spaces at universities and financial aid in UK (Labi, 2004, p. A-38) and other countries with high quality education levels.

Political Factors

Consolidation of democratic systems and the respect of human rights. This is one of the Copenhagen criteria for applicant countries (Enlargement – The Economic Impact, 2004)

Cooperation in security matters and fight against terrorist, especially after the event on 11 September in New York.

Integration of new members in the area of freedom, security and justice, the three pillars of EU (Bastarreche, 2002).

Institutional reform within the EU. All these institutions are likely to be reformed due to the new members.

Increase in the number of presidents for the European Parliament;

Participation of new members in the Parliament election in June 2004,

Legal Factors

Possible increment in Schengen Acquis membership. From the former EU15 only 13 have adopted the acquis.

Extension of the European law and strengthen of company law and the use of more consistent international accounting standards.

III. – EVALUATION OF POLAND ACCESSION TO EU AND ITS INFLUENCE ON AGRIPOLSKA

Polish Situation

Poland is the biggest country both in surface and population, which has recently accessed the EU (See Appendix O). Its business environment has peculiar characteristics that could encourage or undermine the benefits of international trade.

The industrial composition in Poland is primarily dominated by the industrial sector like other new EU members (See Appendix P). However, it is one of the countries with the highest percentage (15%) of people working in the agriculture sector (See Appendix P).

The percentage of unemployment in Poland is ten times higher than in the former EU15 (See Appendix P). This could be regarded as a threat to other EU members. As there is a free movement of labour, it is likely that some Polish unemployed would migrate either to Western Europe or to other CEECs in order to look for better wages and work opportunities.

Another factor that could lead to a big migratory movement is the fact that Poland has a very low gross earning in industry and services compared with the other acceding countries and the former EU15 (See Appendix P).

All these issues, which have a direct impact on the society, could indeed transform the social composition in Poland following its entrance to EU.

Politically, Poland is regarded to be in a better situation than the rest of the new EU members. Due to its huge population (See Appendix P), the country has a big voting weight in the EU institutions under the Nice Treaty (See Appendix Q). In the European Parliament, Poland will get fifty seats (See Appendix Q.). Consequently, Polish power to turn coalitions into winning ones under the Nice Treaty is the highest together with Spain (See Appendix Q)

The economic allocation of funds, which the new EU members will receive from the Common Agricultural Policy (CAP) (See Appendix R), is less than what the former EU15 receive. Therefore, “direct payment to farmers will initially be lower” (Euroactiv, 2004), and it is expected that Poland, being an agriculture country, will be seriously affected by this situation.

All members of EU are obliged to buy goods and services primarily inside the EU markets. Hence, imports of commodities, which Poland was previously trading from outside EU, will be disrupted due to the compulsory application of the CET as part of the European customs union (See Appendix S).

Forecast for Agripolska (See Appendix T).

Before Poland joined the EU, Agripolska, as many other small Polish firms, has been operating primarily in the domestic domain. Therefore, Agripolska’s trading activities were not too wide and the expansion opportunities limited to Polish territory. However, after 01 May 2004, Agripolska has become a European firm and it could start expanding and gaining new customers in the Single European Market.

Operating in the agricultural sector, it is expected that Agripolka will face certain opportunities as well as difficulties due to the CAP allocation. Nonetheless, as Agripolska is a small firm, it is likely that the company would always gain from international trade.

Agripolska, as well as other new entrants to the EU markets, should adapt and adjust to the export controls set by the CAP and other EU policies in order to get the most from the new trading partners.

Agripolska should use English instead of Polish in all trading and marketing activities since English is one of the working languages in EU. That is part of the cultural challenge that the companies, which want to enter into the new markets, should confront.

Agripolska could face a threat due to the competitive wages in the former EU15 and in some of the new EU members. This could eventually generate a migration of skilled farmers. Moreover, other companies will be targeting and looking for new skilled-cheaper workers from the new EU constituents.

Agripolska will encounter strong opponents from the European arena. However, the fact of having access to cheaper labour and machinery would be crucial for the company to expand its operations and enter into new markets. Therefore, the company is in a position to supply EU with cheaper products than the “current rigged markets” (Blundell, 2003).

In order to be competitive and acquire a bigger market in the EU, Agripolska should evaluate its comparative advantage against the biggest competitors in the agriculture industry both at European level and at global level. The cost of production per unit is another point the company should assess in terms of its comparative advantage. This will give a fair idea of the true cost of a product compared with what the company should give up to get this product done (opportunity cost) (See Appendix U).

As health concerns are growing, Agripolska is very likely to become a target for Foreign Direct Investment (FDI). “The primary motivation of FDI in the candidate countries is access to new markets” (Enlargement – The Economic Impact, 2004).

Agripolska’s trading philosophy is well known in the organic markets throughout Poland. The future challenge will be to enter into the Single European Market and maintain both the quality of the products and the timely delivery. If Agripolska managed to achieve those two targets, it would undoubtedly win part of the EU organic market and increase its profitability.

CONCLUSIONS

Countries should adapt the best production techniques in order to maximise their comparative advantage thought specialisation. Although trade between nations could be commercially and politically risky, it is without any doubt beneficial for small countries/firms to take the risks.

International trade agreements could undermine trade if the governments protect their markets by promoting trading barriers. However, common markets, as trading bloc, could open new economic opportunities for the novel entrants, and at the same time, expands the market for the former members.

European Union has developed and grown since 1957. Its latest enlargement brings a wave of changes in the economic, social, political and legal environments. The business environment, in general, will benefit from the comparative advantages that the enlarged Single European Market offers for businesses worldwide.

The enlarged European Customs Union creates a vast arena for trade. Nevertheless, due to the existence of tariffs and other protectionist mechanisms, the EU places itself in an ‘isolated’ commercial area –restricted to the frontiers of EU characterised by an expensive market. It has been argued by many economists that the creation of trading barriers does frequently generate more losers than winners, and more poverty than welfare.

Poland as a big agricultural country could use its weigh in voting power in the European Parliament to improve the situation created by the CAP’s ‘uncommon’ allocation of funding resources. Thus, the Polish representation in the Parliament could use this power to create powerful alliances, which could eventually lead to either an increase of the CAP allocation for the new EU10 members or to a fairer allocation based on agriculture dependence.

It is expected that the gains and general improvement from international trade created by an enlarged common market will definitely generate a far better competitive situation for EU trading partners. The new EU members could expand their market possibilities for themselves as well as for the whole EU. If small countries and companies manage to exploit and maximise the efficient use of their resources, they will be undoubtedly the winners in this new market situation.

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