Human beings have demonstrated through their own history, as well as the through theircurrent daily activities, that trade is an important part of who we are. Even before the age of industrialization and technology, man has been part of a communal and cultural activity, which is trade. People have traded items such as food, ornaments, cattle, precious rocks, and metals.The physical exchange of good often required long hours spent travelling, and this meant that the distance that people covered in order to trade waslimited. With the age of industrialization,however, trade has grown so much that it can now be done from anypart of the world (Baldwin, 2008). Modern forms of transport, as well as modern ways of communication, allow for international trade to be possible. It is now possible to speak about business and related transactions with someone who is on a different side of the world with no hiccups or miscommunication. This has allowed for trade to grow to such a point that world trade has become just an integral part of global politics and interactions.
To put things into perspective, this essay will look into international trade and the current trends that surround it. More specifically, it will look intotrade between the United States and Europe and will highlight the current issues that are being faced in both countries as a result of trade, as well as because of the involvement of the European Union. For a more effective report, the essay will also use a specific company as the case study and highlight how a company such as the one selected is going to beaffected by the problems between Europe and the United States interms of trade, and the risk of doing business in such an environment.
Trade between countries is referredto as international trade. By definition, international trade is the exchange of goods and services between countries. This is the definition that has been given to trade by the CIA world factbook (Baldwin, 2008).This means that the trade of a country can be equated to the total number of imports and the total number of exportsby that country.The interesting fact about international trade isthat it is not affected bygeographical distances. The entire idea of international trade is one that puts into consideration that trade between countries is easily affected by aspects such as the cost of transport, and possible language barriers. Regardless of these possible hiccups, international trade thrives to this day. In many countries, and especially developing countries, it is because of trade that they have been able to develop to get to where they want to be.
To understand just how far world trade has come, it is necessary to look at the numbers presented by the World Trade Centre. The world trade centre is considered the main body that controls international trade. It is responsible for the regulation and control of tradeamongdifferent countries globally. The World Trade Centre is mostly recognized as a twin tower building that is located in the United States. The World Trade centre is specifically found in theManhattan business district, New York(Baldwin, 2008). As history points out, the world trade centre was completed back in the year 1973. When it was completed, the world trade centre in New York stood at 110 stories high for each building. Each building could accommodate upon 50,000 workers and at least 200,000 visitors daily. This is because of the massive 10 million square feet of spacewithin the building, which is all dedicated to world trade, and ensuring there are no problems between countries that are trading(Amstutz, 2018). Aside from being a hub for international trade, the World Trade Centre is also a tourist attraction and a symbol of a world that can come together and a representation of how far human imagination can go.
According to a report by the World Trade centre, in the year 2016, the total value of transactions between countries globally was$30.98 trillion(WTO, 2017). This value represents a total of $15.64 trillion worth of exports and $15.34trillion worth of imports.Additionally, a quarter of the value of trade globally can be accredited to the exchange of commodities such as electric machinery, nuclear reactors, computers, and scientific instruments. A whopping 9% of all the trade is as a result of the importandexport of automobiles. For commodities such as iron, steel, and oil, they occupy 19% of all the value of goods traded internationally(WTO, 2017). From the 1960’s, world trade has been growing steadily, where it has been seen to grow at an average rate of 10% yearly between the year 1961and 2013.
International organizations, as the word explains, are organizations that are not considered part of only one country. In most cases, these organizations are referred to MultinationalEnterprises (MNEs) or Multinational Corporations (MNCs).MNE’s or MNC’s are companies, which operate on an international level. Theyare often not focused on regional or local trade but in the exchange of goods between itself and other countries, or between itself and other MNCs(Gomułka, 2018).The reason that these companies are so capable of participating in international trade is that of their large buying power, and their dominant brands that span numerous countries globally.Additionally, it is no surprise to find that these companies are so powerful that they can have a considerable influence on local political and global politics. In many cases, Multinational companies are registered in more than one country. This means that as a company, they are legally acknowledged and recognized by other countries where it has its subsidiaries or branches(Gomułka, 2018). Despite the power and influence that is demonstrated by these organizations, it is important to recognize that these companies provide large employment opportunities worldwide, and will often raise the economy of a country if the company chooses to have abranch or subsidiary of itself, in another country.
Having highlighted what it means to be a multinational company and what significance they have on world trade, it is best to highlight one multinational company. Multinational companies are easily identifiable from other organizations. This is because of their large purchasing power, as well as their involvement in more than one country. Additionally, multinational countries are highly invested in international trade where they sell their products to other countries and companies from different parts of the world. They also outsource their labour or other processes involved in the production of their products(Dunn et al., 2002). This means that they can outsource suppliers for the raw material they require, they can outsource the labour that is used to produce the product by the organization or can even outsource the entire company’s production infrastructure to another country as a way to gain better access to cheap labour and raw materials.
Multinational Company (MNC) – Harley Davidson.
The organization to focus on in this essay will be Harley Davidson. Harley Davidson is considered a multinational company because it is involved in international trade for raw materials as well as to sell its products. HarleyDavidsonInc. also called H-D, or simplyHarleyis an American-based manufacturer of motorcycles. The company was started backin the year 1903, which makes it 115 yearsold to this day. The company is said to have had four founders. These were William S. Harley, Arthur Davidson, Walter Davidson, and William A. Davidson(Harley-Davidson, 2018). Harley is based in the United States and has its headquarters in Milwaukee, Wisconsin, where it was also founded 115 years ago.
Harley Davidson is seen as one of the more successful company in the United States today, and this is because of the fact that the company has managed to stay afloat for over a century.Even during the two depressions that hit the United States and the entire globe in general, Harley Davidson was still able to pull through and is still thriving to this day.Looking at the history of Harley Davidson, it becomes apparent that the company has undergone a series of exchanges in ownership arrangement.For example, the company was owned by Aermacchi between the year 1974 and1978 and then owed by Buell, between 1987 and 2009(Harley-Davidson, 2018).These were periods that were characterized by the poor economic health of the United States, as well as intense competition fromthe global market.
Nowadays, Harley Davidson is considered one of the leading manufacturers of motorcycles worldwide. It has become an iconic brand that is recognized globallyand has seen much success in all of its undertakings. These can be accredited tothe fact that Harley has a massive and very loyal following of customers. The company is known to have owners’clubs, international events, as well as museums, which are dedicated to appreciating the brand that is Harley Davidson. What makes this company so unique is because it dedicates its time and effort to creatinghigh-qualitymotorcycles, which in most cases, are considered unconventional, andtherefore unique.
For example, Harley Davidson has traditionally been a producer of motorcycles that have an engine displacement of over 700cm3, that are heavy, air cooled, and that are considered cruiser motorcycles. Harley Davidson also offers many other different designs of motorcyclesall of whichappeal to its different set of customers fromdifferent parts of the world(Harley-Davidson, 2018). Naturally, the company’s biggest consumers are within the United States. The company has numerous locations around the United States and in the world in general. Some of its factories are found in York, Pennsylvania; Kansas City, Missouri; Milwaukee, Wisconsin; Bawal, India; Manaus, Brazil; and in Thailand(Harley-Davidson, 2018). This shows that the company is in more than just one country. Harley’s influence isfelt largely in the United States, as well as in India, and Brazil.
Being a MultinationalEnterprise, Harley Davidson is one of the many companies that participate in international investments. Organizations will ofteninvesttheir capital and resources in other countriesfor profitability as well as for increased productivity. Investments can also be a way for the company to venture into other businesses, as well as to finance other businessin their ventures. In relation to international trade, as well as to Harley Davidsonas an international company, this report willnow discuss forms of internationalinvestment. More specifically, it will focus on ForeignDirectInvestments and Portfolio investments(Heritier & Knill, 2001). It should be understood that for any multinational company to be considered multinational and to experience the kind of financial success that such companiesdemonstrate, it is important for them to make foreign investments.
Foreign Direct Investments
In open economies, Foreign DirectInvestments are a common part of the economy. These investments are often seen in countries where there is a considerable amount of skilled labour, as well as a strong possibility of above-average growth for the investors. By definition, a Foreign Direct Investments is an investment that has been made by an individual, group or organization that is from another country, where the investment is directed to a different country altogether. In other words, a foreign direct investment involves the process of an investor, such as an individual or organization, investing their capital in another country(Dunn et al., 2002). These investments take place when the investors show interest in establishing foreign business operations or acquiring foreign business assets.
What makes foreign direct investments unique is the fact that for the investment to be a Foreign Direct Investment, the investor must be able to establish ownership or control of the object investment. This can mean control of the business’s assets or control of the business itself. It is not necessary for the control of the investor to be full. Instead, the basic requirement is that the investor controls at least 10% of the company or the asset that it has invested in (Baldwin, 2008). Foreign Direct Investments (FDI)has been proven to be very successful in open economies and have been seen to fail when attempted in tightly regulated economies.
For the most part, ForeignDirect Investments often involve capital investments. It also includes the provision of technologyand equipment that prove useful to the recipient company. It is also possible for the company to supply management as well. Whichever the method used for investment, what remains constant is that the investor must, in the end, have some form of control or influence over the business in which it has invested. In most cases, control means that the investor has a part to play in the decision-makingprocess of that company. The United States has some of the most powerful Multinational enterprises globally (Baldwin, 2008). Additionally, the company has a large number of businesses, especially Small-to-Medium Enterprises which make up the economy, and which contribute highly to thecountry’s economic state.
As a result of the presence of so many companies, the United States is seen to one of the country’s that receives a high number of foreign directinvestments and is also a country that has a lot of foreign direct investors to other countries. The Bureau of Economic Analysis (BEA) is an American based company whose main job is to track expenditures by foreign investorsinto the United States and its businesses. It compiles the information collected and uses this o give a depiction of the state of the U.S market and how profitable investments are in the United States. In a report released by the Bureau of EconomicAnalysis back in 2016, it was found that thetotalForeign Direct Investments that had come into US businesses that year totalled to $365.7 billion.
A foreign direct Investment can be made in a variety of ways. The first is whereby a company will open a subsidiaryor an associate company in a foreign country. It can also be done through the investor acquiring a controlling interest in an already existing company in a foreign country or through the use of a merger or a joint venture with another company that is local to the country the investor is investing in. As earlier stated, it is a requirement that an investoracquires a 10% ownership stakein a foreign company in order to haveinfluence in the decision making of the company. This is a number that has been established and specified by the Organization of Economic Co-operation and Development (OECD)(Veiga & Santos, 2018). As expected, there are instances when 10% is not necessary for the investor to have some control over the foreign company.
In terms of types of foreign direct Investment, an FDI can either be horizontal, vertical, or conglomerate. A horizontal investment involves a company establishing a business in a foreign country that is similar to the one that it has in its home country. A good example is an international beverage and bottling company establishing a bottling company in a foreign country to expand its operations. A vertical investment is whereby theinvestor will start a business in a foreign country that is slightlydifferentbut which is related to the business the company has established in its home country.Lastly, a conglomerate foreign direct investment is one where the invert will venue int a new business in which it has no experience, and which has no relation with the business it has already established at home(Veiga & Santos, 2018). For this reason, most conglomerate investments are either jointventures or mergers with another foreign company. Greenfield investment is a type of FDI that can be equated to conglomerate investments. According to the Bureau of Economic Analysis, in the United States alone, Greenfield investments make up for $7.7 billion worth of FDI.
Portfolio investments are described as passive investments ad it is here that the maindifference between portfolioinvestments and foreign direct investments are obvious. Portfolio investments are hands-off investments that are made by an investor while expecting returns. Normally, it is expected that theexpected returns are equal to the risk undertakenby theinvestor. Unlike FDI, portfolio investments to not aim at a sizeable stake in a foreign company. This would need much effort, involvement, and time for theinvestor(Picardo, 2018). Instead, portfolioinvestorsplace their money in other areas where they can expect good returns whilefacing minimal risk.
What portfolio investments are all about is asset investments. It focuses on asset classes such as stocks, corporate bonds, government bonds, real estate investments, treasury bills, mutualfunds, certificates of deposit, and Electronic Funds Transfer (EFT).Portfolio investments can also include physical investments such as land, timber, and real estate, and can be derivatives or options. Derivatives are such as warrants and futures(Renard, 2005). Having such a largearray of objects and areas that an investor can invest in; it goes to saythat the investment criteria used by a foreign investor largely depend on the ability of the investor. In this regard, important considerations for portfolio investments are such as the investor’s ability to tolerate risk, the amount invested, and the investment horizon by the investor. For an investor who has a high net worth, rental property, stocks, and bonds are an appropriate choice for portfolio investment. For an investor with low net worth, Exchange Traded Funds, and mutual funds are appropriate.
The above-mentionedconsiderations have a significant influence on the investments that an investor will focus on. For example, for an investor with limited risk tolerance, they are likely to invest in government bonds and stocks, and for an investor, who is open to considerable risk, will invest in stocks, real estate, or even options and international securities(Krier, 2005).The age of the investor and their investment horizon also playa big part. A young investor is lily to be more open to risk, and long-term returns. Older investments are more likely to avoid investments with considerable risk because of their limited time to save for retirement. In many cases, a portfolio investment is a way for long-term investment, with the intention of saving for retirement. In fact, as has been highlighted by BEA, most of the large investors have significant portions of infrastructure assets such as roads(Krier, 2005). In general, portfolio investments are long-term ad this is because, it is important that in the end, thelevelof returns, and the risk of investment equal out.
Trade betweenthe European Union, the United Kingdom, and the United States
The European Union is both an economic and political union that is based in Europe. These unions’s main goal is to promote political, social, and economic togetherness of all countries within it. Currently, the European Union has a total of 28-membercountries, all which are located within Europe. Being a collective union that brings together 28 countries, the European Union is said to haveapproximately 510 million people, and it covers approximately 4,475,757 square kilometres(Câmpeanu, 2018).The EU was founded in the year 1993 in the town of Maastricht in the Netherlands. Its headquarters is, however, is in the city of Brussels in Belgium. The European is mostly identified and associated with the Euro, which is arguably, the strongest currency in the world today. For the European Union, the main founders were only sixcountries. These are Germany, Luxemburg, Netherlands, Belgium, Italy, and France. For this reason, it is safe to assume that it is this that has the biggest stakes in the EU and the ones who are most likely to be devastated if a foreseen risk were to become an actual problem.
The European Union is essentially a trade organization that helps tostandardize the exchange of goods and services among countries in Europe. It also facilitates trade between European countries and other countries. The main trade partners of Europe are countries such as the United States, Asian countries, and South American Countries. It also trades with African countries andAustralia. Part of the reason the EU exists is so that it may produce policies that help to standardize trade for the internal European market and to regulate exports and imports between Europe and other countries(Heritier & Knill, 2001). These policies already exist and have so far been very effective for Europe.
The United States of America is considered the most powerfuleconomyin the world. This is because of the fact that it is a highlydevelopedcountry, and also because it has a large population that generates considerablerevenue for the government. The United States trades extensively with nearly every region globally. Its main trade partners are Europe, Canada, and South America(Marceddu, 2018). Despite thestrategicpositioning of the United States in the global market, just recently, the US has abused its influence and through its president has made changes to international trade. President Donald Trump recently announced that the United States would be increasing import rates for outside countries looking to bring goods to the United States. This was a move that trump insisted was because of national security.
European countries,however, through their individualgovernment and the European Union rejected this policy by the US claiming that it is a breach of World Trade Organization (WTO) policies.The president of the European commissionJean-clade Juncker even went ahead to call the move by the United States as protectionism, and simply that. For this reason, the EuropeanUnion has decided to retaliate to the U.S bringing newpolicies,and in turn, it has declared that it will increase export tariffs for all steel exports from the United States. This was a threat that was intended to scare the US into reconsidering its current policies. However, Donald Trump then retaliated back saying that if the EU were to impose more tariffs the United State, it would withdraw from the WTO and also levy 25% tax on all cars exported to the United Statesfrom Europe(Metschel, 2018). Trump claims that the move was because he had seen how the bad trade agreements between the US and other countries always leaves the US with a trade deficit of over $800 billion yearly because other countries take advantage of the world strongest economy.
To multinational enterprises in Europe and the United States, the possible trade war between these two regions is both scary and unnecessary. Some of the items that will be targeted for additional tax by the EU from the USA will be such as peanut butter, Harley-Davidsons, steel, whiskey, and Levi’s jeans. These are equal to $3.27 billion yearly. For the EU however, the situation is much worse. The EU exports over $6.4 billion worth of aluminium and steel to the US alone. This, the added to the possible increase of tariffs to 25% by trump will cost the European Union a lot more to export to the US which is its biggest importer.
Assuming that I am the CEO of Harley Davidson, the current situation of retaliation between the United States and Europe points to the need for smart investment on the partofthe company(Boffey, 2018). Possible risks are such as lower returns for investments placed in European countries, higher cost of production due to the highercost of importation of steel and aluminium, possible loss of market for consumers in European countries and possible lower revenue for the company due to higher production cost and lower sales.
For the above-stated reasons, it would be unwise for me as the CEO to direct the company towards committing to more foreign direct investments in European countries. This is because FDI often requires a stable market. High taxes on imports and exports make up for a tightly regulated economy and this is not a favourable economic environment for FDIs. As for Portfolio investments, this remains a viable option(DW, 2018). However, even with a company with a high net worth such as Harley Davidson, the risk of long-term investment remains too high, and so, it would be better to invest in small but secure assets such as government bonds, and options.
The increase in importand export taxes between the EU and the USA has ramifications for businesses that involve the manufacture of automobiles in Europe. It affects them because they rely heavily on exporting their final product to the United States. For a company such as Harley Davidson, which isUS-based, theonly extra cost incurredis when it comes to acquiring aluminium and steel as a raw material. It is also affected when it exports to Europe. As a free investment,therefore, Harley Davidson can commit to a horizontal foreign direct Investment. Setting up a factory in a European country would enable it to produce its predicts at a much cheaper cost due to the availabilityand access to raw materials(DW, 2018). Additionally,since the European Union has lower rates for the sellers within the EU, it would benefit by retaining its customer following, increasing its customer base, and increased returns on investment. This is because when manufacturing within Europe, importand exporttaxesimposed by the EU and the USA do not apply. The downside, however, would be high wages for the skilled labour found in Europe.
International trade involves the exchange of goods between different countries around the world. Through international trade, the world is brought together by a common goal, and with a common need. In regions such as Europe, unions exist to regulate trade and create policies to make the process seamlessand manageable. The European Union is the trade union that operates in Europe and it has for a long time been in a mutual relationship with the US. Recently,however, these two countries have collided where the US wants to impose higher tariffs on imports from Europe, and the EU has in turn, chosen to retaliate with highertariffs as well. This is bound to affect the trade between these two countries, and will also affect Multinational Enterprises such as Harley Davidson.
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