International Business and the European Union

Introduction In this assignment I will be concentrating on International Business and the European Union and how it has an effect on businesses in the U. K. The aim of the assignment to use a U. K based organisation as a scenario. I will be writing the assignment based on a report for the Board of Directors from my chosen company. The company I have chosen is a vehicle manufacturer called Octopus Vehicle’s. They currently have been given the opportunity to supply EU sourced cars and export them to many countries around the world.

They have been offered offices based in Spain and Holland and currently have one in the U. K. TASK 1 International Trade, Economics, and Global Markets In this chapter I will be discussing the effect that international trade and globalisation have on U. K business and in particular how it affects Octopus Vehicle Imports. I will also discuss the challenges and opportunities that Octopus Vehicle’s face if they decide to trade internationally. Trade Blocs are nations that have a mutual trade pact. They agree to give each other reduced tariffs and other accommodations.

Trade blocs will impose trade barriers and restrictions on non-member countries. Today the world is increasingly divided in trade blocs, they play a central role in international trade negotiations. Some examples of trade blocs are: NAFTA – The U. S has linked with Canada and Mexico to form a free trade zone, the North American Free Trade Agreement. It covers environmental and labour issues as well as trade and investment. APEC – It has 21 members which account for 45% of world trade. Some of the members include Australia, Canada, Chile, China, Singapore, New Zealand and the U. S. E.

U – It has 27 members and has become the most powerful trading bloc in the world with GDP nearly as large as the U. S. One of the main challenges for Octopus Vehicles will be the threats imposed by foreign firms. U. K exporting firms are finding it harder to win overseas contracts due to international competition on price and non-price factors increasing. One thing that has triggered this competition is companies using low wage economies in the far east to manufacture. China is certainly one of the countries that has had it’s economy boosted through firms manufacturing goods and paying low wages.

In five years between 1999 and 2004 China’s economy grew by 66%. China’s foreign trade has grown faster than it’s GDP for the past 25 years. It’s economy expanded 10. 3 percent in 2010 the fastest in three years. That is compared with growth of 9. 2 percent in 2009. Trade is increasingly global in scope today, there are several reasons for this but a significant reason is because of technology. Our transport and communication opportunities today are more practical. The U. K had a contraction of 0. 5% in the last three months of 2010. The U.

K is currently the sixth largest national economy in the world measured by GDP and the third largest in Europe after Germany and France, it’s purchasing power however is second after Germany. Consumers and businesses now have access to the very best products from many different countries. Increasingly rapid technology also has increased the competition among countries as to who can produce the newest technology. In the last several decades countries have taken increasing steps to promote global trade through agreements such as the General Treaty on Trade and Tariffs, the World Trade Organisaton (WTO), and of course the E.

U. This has caused specialisation of countries, for example the U. K specialise in services such as finance, legal services and more recently airlines such as EasyJet and Ryanair, China specialise in manufacturing goods and the U. S in software. A result of globalisation is the homogenisation of goods, it is important that Octopus Vehicles keep their cars unique to keep a competitive advantage. Globalisation is important because it spreads best practice and new ideas rapidly. Large companies also have the advantage of putting more money into research, sales and services.

Globalisation has also decreased poverty through overseas trading. In China and India the wages are less than one tenth of U. K wages for unskilled and low-skilled workers. Redundancies have increased in the U. K as firms move to China and India, particularly customer service jobs. Dyson have recently moved production to Malaysia due to the low priced workers. However the wage inflation in these countries is increasing rapidly, in India wage inflation is currently around 20% per year. Hopefully this will mean overseas labour costs will be less of a threat to U. K businesses.

For the U. K globalisation has meant that consumers and businesses have much more choice over high quality goods for lower prices. It has also undermined local producers and local brands. This has caused an effect on culture, MacDonald‘s is an example of this, instead of families eating traditional home made meals there is now the possibility of fast food. The U. K and other countries have also increased there carbon footprint massively due to globalisation, trading all over the world means more transporting of goods, and very often this is to far flung countries.

Some companies may have headquarters in the U. K and send the components thousands of miles away to be manufactured which are then sent back to the U. K once the product is finished. Globalisation has been happening for century’s although the pace of it today is has grown, with new technology allowing it. Globalisation offers many opportunities but also threats for U. K businesses. Below I have listed some of Octopus Vehicles opportunities and threats it faces with globalisation increasing. Opportunities • Not an issue to export goods overseas • Much easier to expand the business.

• High quality products can be bought for low prices • Possibility of manufacturing vehicles overseas for a lower cost • No changes in policies if the company buy’s offices in Holland and Spain • Possibility of U. K workers moving abroad with no paperwork etc Threats • Other foreign businesses may provide cheaper cars • Marketing for a different culture • Language barriers • Carbon footprint from importing and exporting TASK 2 European Policies In this second chapter I will be identifying two European policies and discuss how they impact on U. K businesses and also Octopus Vehicles in particular.

The European Union was set up in 1958 by the Treaty of Rome, it was then known as the European Economic Community (ECC). It had six founder members of what was originally known as the ‘common market’. Before the U. K joined in 1973 our economic growth was significantly slower than these six founder countries. Joining the union gave the U. K the chance to grow along side these countries. There are now 27 EU members which has provided an increasingly large ‘home market’. Being a member of the EU has had many effects on the U. K and its businesses.

Five main areas would be the economy, politics, law and legislation, labour mobility, and common agricultural policy. Joining the EU meant that UK businesses no longer had any import taxes when dealing with other EU countries, this is one of the main benefits for Octopus Vehicle’s. We can import and export cars around Europe without the worry of extensive paperwork and import taxes or controls. It gives us a better chance to compete with other companies on an equal level. This is also better for our consumers, they are given much more choice which in turn causes business to keep their prices down to keep competition.

This benefit has created a single market which means that all countries in the EU trade by the same standard now, e. g. bottles of Coca-Cola sent to Spain may have been different from bottles sent Germany with one packaged in Spanish and the other in German. It makes producing the product a much easier task. We can also take into consideration the increase on inward investment that the U. K has had since being an E. U member, Japan and the U. S have had a significant effect on this. For example, Toyota import cars into Europe so they have offices and manufactures as bases for exporting in the U.

K, this provides more jobs and also expertise for thousands of British citizens. Over the last ten years Britain has had one of the highest growth rates among the developed countries. It is important for our company to remember that if we are to employ the Spanish or Dutch they are not from a low wage economy. We will not be exploiting any persons that we employ and because we are part of the E. U, the legislation for employment will be very similar to our own. The European Parliament has always pushed for strong employment protection and all E.

U members are obliged to adopt the legislation, for example: • The Working Time Directive Regulations, this prevents the possibility of employee’s being forced to work over 48 hours a week. • The Transfer of Undertakings (Protection of Employment), this protects the workers pay if a firm is sold to another business or if the jobs are outsourced. All this is already in effect with our office in the U. K so change wouldn’t be necessary. It would also be possible for our U. K workers to transfer to one of the offices in Spain or Holland.

Being a member of the European Union means that any citizens of the E. U can move freely within these countries. This does however impose a challenge on British citizens, since 2004 when Poland joined the E. U, Britain has seen 250,000 Poles start work in our country. However migrants’ coming to the U. K has also boosted our economy. The EU is particularly powerful when controlling competition between companies. The EU’s control over competition policy gives it the power to rule on merges, takeovers, cartels (price fixing) and the use of state aid.

The commission investigates the abuse of market position by dominant companies. This is important for small companies such as Octopus Vehicles because it out rules the chance of larger companies being significantly cheaper. Competition policy is run by part of the EU commission called Directorate-General and the European Court of Justice. It has taken action on big names like Microsoft by imposing fines of over a billion euro’s over four years for abusing it’s dominance in the market. The EU’s largest fine to date was 1. 06 billion euro’s for Intel in May 2009, this was due to uncompetitive prices.

Although these points benefit Octopus Vehicles there are arguments that the EU are activists when hunting out problems, this then creates costs for tax payers and businesses. The policy conducts court cases, fines and dawn raids. Competition policy is important to Octopus Vehicles and other U. K businesses because it encourages enterprise and efficiency also helps to deliver lower prices and high quality. It causes Octopus Vehicles to be innovative and keep the products unique, this results in greater choice for consumers.

Another EU policy that is influential on Octopus Vehicles is the single market (sometimes called the internal market). It includes the European Customs Union, the single currency, the schengan convention and many other policies and laws designed to unite the economies of Europe. The single market is an area where people are free to trade goods, invest their money and move for work purposes without having any legal or technical barriers. This is a key influence on why it is possible for Octopus Vehicles to build on trade within Europe. The single market enables a faster growth by setting the same rules across the EU.

However, the EU cannot be described as a true single market because it does not have a unified taxation or welfare system, the single currency is only used by 17 members of the EU and some members have opt-out options such as the Schengan Convention, this policy enables European citizens across national boarders without visas or passport checks. The only EU members that are not part of the Schengan Convention are the U. K and Ireland. I see this as a benefit for Octopus Vehicles because it lessens the amount of businesses able to enter our market. The E.

U has the largest the GDP of any economy in the world. Standardising national regulations, the single market makes it easier to business in the E. U and contributes to fast economic growth, European stability and avoiding conflict between countries. The single European market came into being in December 1992. Before this there were many non tariff barriers to trade with. The main barriers that were removed were: Differing public sector project and technical standards Expensive and complex documentation if moving goods from one country to another Distortion of markets through different VAT rates etc

Businesses have had to change products to meet the requirements of legislation, all products now have to carry the CE mark. The single market has created a lot of advantages as discussed such as the increase of competition and access to a larger market, but it also has disadvantages such as European companies may reduce the share of British companies and the fact that firms have to adapt their marketing strategies to suit customers in each country. My conclusion is that being a member of the EU is a greater opportunity for Octopus Vehicles than a challenge. TASK 3 European Monetary Union

In this chapter I will be analysing the implications for the U. K entry into the European Monetary Union. I will also discuss how this would effect Octopus Vehicles and it’s pro’s and cons. The Euro came into circulation in January 2002, it is now used by 17 members of the E. U. The European Central Bank (ECB) has set a single interest rate to the ‘Eurozone’ countries. This means that these member state governments are no longer in control of domestic monetary policy. The Euro was introduced to break barriers between trading countries, it was a step closer to the EU becoming a single market.

One main benefit that member countries have is price transparency. As the U. K is not part of the Monetary Union, Octopus Vehicles will have the issue of converting from Sterling to Euro’s when dealing with Spain and Holland’s trade when importing and exporting cars. Price differentials will not be obvious and therefore cost more for Octopus Vehicles when having to take the time to convert, it will also affect costs on display materials, advertising and packaging. Price transparency would make it much easier for the business that export into Europe and the businesses that trade with the exporting companies.

When the sterling is stronger than the Euro this costs exporting businesses. 60% of all U. K goods are exported to the rest of the European Union and over 3million jobs depend on these exporting jobs. If the U. K did join the Euro there would be no exchange costs and no worry of exchange rates fluctuating. Many other countries across the world such as America and Japan have their headquarters based in the U. K to target the rest of Europe, thus bringing jobs and money into the U. K. There is the possibility of these firms moving to different countries to avoid the difference in currency. The cost of converting to the Euro would be over ?

3. 5 billion. Some small businesses would suffer having to spend money on this conversion. There is also the fact that our Government would no longer be in control of public spending which mean cuts of approximately 10 billion. Arguments have been made that the general cost of living would increase causing unemployment to rise. Although these points are disadvantages to British citizens Octopus Vehicles will benefit through other EU countries being more attracted to trade with the company if it used the Euro. There would be stability on prices when exporting the vehicles and no transaction costs. Pro’s

Britain is already effected by the ECB, if it was to join we would have more of a say in decisions that are made. Since euro has been circulated trade growth in Europe has gone up by 30%. There will be no longer a cost involved in changing currencies, this will benefit tourists and firms who trade within the EURO area. It has been estimated that this benefit will be equal to 1% of GDP so will be quite significant. With a single currency business, confidence should improve leading to greater trade and economic growth. With common currency it will be easier to compare prices in different European countries because all will be in Euros.

This enables firms to source cheaper goods, for example new cars prices in the U. K are higher than elsewhere, a single currency could reduce these price differentials which would give Octopus Vehicles a better competitive advantage. The ECB which sets interest rates for the whole Eurozone area will be committed to keeping inflation low. Euro could emerge as a global trading currency Inward investment may increase from outside the EU, recently the Chairman of Nissan said that the U. K would loose inward investment if it stayed out of the Euro. Cons

Cost of replacing currency’s and adjusting machines (one off cost) Loss over economic policy, ECB setting a common interest rate, countries have lost an important part of monetary policy. Loss over Fiscal Policy, because growth and stability pact, for example no country is allowed to borrow more than 3% of it’s GDP. The ECB is less transparent in their decision making for example they do not produce monthly minutes, this makes interest rates less predictable. The Euro has been unstable against the dollar. Bibliography www. civitas. com www. economicshelp. org. uk www. europa. com Craven College VLE Wikipedia