how international trade agreements might have an impact on businesses

Cambridge A‑Level Business 9609 – Topic 6.1
External Influences on Business

Learning Objective

Analyse how the external environment – political‑legal, economic, social‑demographic, technological, competitors‑suppliers, international and environmental factors – influences business decisions and strategy.

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6.1.1 Political & Legal Influences

• Government ownership & control
  • Privatisation – transfer of state‑owned assets to the private sector (e.g., British Telecom, British Airways).
    Advantages: increased efficiency, access to private capital, greater competition.
    Disadvantages: possible job losses, loss of public service focus, risk of monopoly if not properly regulated.
  • Nationalisation – transfer of private assets into state ownership (e.g., UK railways, former steel industry).
    Advantages: protection of strategic industries, ability to pursue social objectives, price stability.
    Disadvantages: inefficiency, reduced innovation, political interference.
• Regulation of business activity
  • Employment law – minimum wage, working‑time directives, health & safety, anti‑discrimination. Affects labour costs, recruitment, HR policies.
  • Marketing & consumer protection – advertising standards, labelling requirements, data‑privacy rules (e.g., GDPR). Influence product design, pricing and promotional strategies.
  • Competition law – anti‑trust/monopoly legislation (EU competition rules, UK Competition Act). Limits mergers, can require divestments, protects consumers.
  • Location & planning policy – zoning, planning permission, tax incentives, subsidies. Determines where factories, retail outlets or service centres can be sited.
• Political stability & government policy direction
  • Changes in government (e.g., election, referendum) can alter tax regimes, trade policy, or regulatory emphasis.
  • Brexit – withdrawal from the EU introduced new customs procedures, regulatory divergence and uncertainty for UK firms trading with Europe.
• Legal status of trade agreements
  • Binding agreements (e.g., WTO, EU treaties) create enforceable rights and obligations.
  • Non‑binding memoranda provide guidance but limited legal recourse.

Example

The EU General Data Protection Regulation (GDPR) increased compliance costs for UK digital‑service firms exporting to Europe, prompting many to set up EU‑based subsidiaries to avoid penalties and maintain market access.

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6.1.2 Economic Influences

Policy Tool	Macro‑economic Objective	Typical Business Impact
Fiscal policy (taxation & government spending)	Control inflation, stimulate growth, reduce unemployment	Higher corporate tax lowers after‑tax profit; increased public spending can boost demand for suppliers and create contracts.
Monetary policy (interest rates, money supply)	Stabilise price level, manage exchange rates	Lower rates reduce borrowing costs, encouraging investment; exchange‑rate movements affect export competitiveness and import prices.
Supply‑side policies (deregulation, training, tax incentives)	Increase productive capacity, improve efficiency	Reduced regulation can lower operating costs; skills programmes raise labour quality and productivity.
Exchange‑rate policy (fixed, floating, managed)	Influence export/import price competitiveness	Depreciation makes exports cheaper but raises import costs for inputs; appreciation has the opposite effect.

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6.1.3 Social & Demographic Influences

• Demographic trends
  • Ageing population → higher demand for health‑care, assisted‑living, senior‑friendly products.
  • Youth bulge → growth in education, entertainment, technology and fast‑fashion markets.
  • Urbanisation → greater demand for housing, transport, and convenience services.
• Cultural & lifestyle changes
  • Health consciousness → demand for low‑fat foods, fitness equipment, organic products.
  • Environmental awareness → growth in “green” products and ethical consumption.
• Corporate Social Responsibility (CSR)
  • Pressure from NGOs, consumers and investors for ethical sourcing, fair wages, and carbon reduction.
  • CSR can become a competitive advantage (e.g., “fair‑trade” branding).
• Community pressure groups
  • Local opposition to new factories, mines or retail parks can affect site selection and project timelines.

Example

In Japan, >28 % of the population is aged 65+. Toyota has expanded its range to include “senior‑friendly” vehicles, mobility‑assist devices and subscription‑based car‑maintenance services aimed at older customers.

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6.1.4 Technological Influences

• Process innovation – automation, robotics, AI and additive manufacturing lower unit costs, improve quality and reduce lead times.
• Product innovation – digital services, smart‑home devices, wearable technology create entirely new markets.
• Communication technology – e‑commerce platforms, cloud computing and 5G enable rapid international transactions, real‑time supply‑chain visibility and remote working.
• Impact on trade – electronic customs declarations, digital signatures and blockchain reduce paperwork, speed border clearance and increase transparency.

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6.1.5 Competitors & Suppliers (Industry Structure)

• Competitive rivalry – entry of foreign firms (often facilitated by trade agreements) can intensify price competition and force product differentiation.
• Bargaining power of suppliers – reduced tariffs broaden the supplier pool, potentially lowering input costs; however, rules of origin may limit sourcing options.
• Strategic alliances – joint ventures, co‑branding or technology‑sharing agreements help firms access new markets, share risk and acquire complementary capabilities.

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6.1.6 International Influences

6.1.6.1 Why Firms Go International

• Access to larger markets → sales growth and economies of scale.
• Exploitation of comparative advantage → lower‑cost resources, labour or raw materials.
• Diversification of risk across economies → reduces dependence on a single market.
• Access to advanced technology, brand prestige and new talent pools.

6.1.6.2 Forms of Market Entry

Entry Mode	Control	Risk	Typical Use
Exporting (direct/indirect)	Low	Low	Testing new markets; minimal commitment.
Licensing / Franchising	Medium	Medium	Service‑oriented or brand‑driven businesses seeking rapid expansion.
Joint Venture	High (shared)	Medium‑High	Need for local market knowledge, shared investment.
Wholly‑owned subsidiary (greenfield or acquisition)	Very High	High	Strategic control, long‑term commitment, protection of proprietary technology.

6.1.6.3 International Trade Agreements – Core Concepts

• Definition – Formal arrangements between two or more countries that set rules for trade, investment and related matters.
• Legal status – Most are binding under international law; non‑binding declarations exist but have limited enforceability.
• Types
  • Bilateral – two countries (e.g., Australia‑Japan Economic Partnership Agreement).
  • Regional – neighbouring states (e.g., EU Single Market, USMCA).
  • Multilateral – worldwide or large‑scale (e.g., WTO agreements).
• Key Features
  1. Tariff reductions or eliminations.
  2. Removal / harmonisation of non‑tariff barriers (quotas, licences, standards).
  3. Rules of origin – determine eligibility for preferential treatment.
  4. Investment protection (e.g., protection against ex‑propriation, fair‑and‑equitable‑treatment).
  5. Intellectual‑property rights (IPR) provisions.
  6. Dispute‑settlement mechanisms (e.g., WTO dispute panel, ISDS).
  7. Regulatory cooperation and standards alignment.
  8. Environmental and labour clauses (in newer agreements).

6.1.6.4 Impact of Trade Agreements on Business

Impact Area	Positive Effects	Negative Effects / Risks
Market Access	Lower tariffs open new export markets; larger customer base; easier entry for services via mutual recognition.	Domestic firms face increased competition from foreign entrants; market‑share erosion.
Cost Structure	Reduced import duties lower input costs; scope for economies of scale.	Compliance with new technical standards may require capital investment; rules of origin can limit cheapest sourcing.
Supply‑Chain Management	Greater flexibility to source from the most efficient locations; reduced customs paperwork.	Complexity of rules of origin and certification adds administrative burden.
Investment Decisions	Investment‑protection clauses raise confidence for FDI; dispute‑settlement provides legal recourse.	Exposure to investor‑state dispute settlement (ISDS) costs; possible constraints on policy‑making.
Intellectual Property	Stronger IPR protection encourages innovation, technology transfer and foreign licensing.	Higher royalty or licensing fees; stricter enforcement may limit use of existing technologies.
Regulatory Environment	Harmonised standards reduce need for multiple product variants; easier certification.	Domestic firms may need to upgrade processes or equipment to meet higher standards.
Strategic Planning	Predictable rules aid long‑term budgeting, market‑entry timing and risk assessment.	Renegotiations, withdrawals or protective measures (e.g., anti‑dumping duties) create uncertainty.

6.1.6.5 Illustrative Real‑World Examples

• WTO – Most‑Favoured‑Nation (MFN) principle: Guarantees that a member receives the lowest tariff any WTO partner offers, benefiting UK automotive exporters.
• EU Single Market (pre‑Brexit): Allowed UK manufacturers to sell across 27 states without customs duties, but also exposed them to competition from EU producers.
• USMCA (formerly NAFTA): Introduced a 75 % regional‑content rule for cars, prompting North‑American manufacturers to shift parts sourcing to meet the requirement.
• CPTPP: Gives Australian beef and dairy exporters reduced tariffs in Japan and Canada, but requires compliance with stricter sanitary‑phytosanitary standards.
• EU Carbon Border Adjustment Mechanism (proposed): Would levy a carbon charge on imported high‑carbon goods, affecting firms that source steel, cement or aluminium from outside the EU.

6.1.6.6 Steps for Businesses to Respond to Trade Agreements

1. Monitor developments – Follow government releases, trade‑body briefings and industry newsletters for negotiations, ratifications and amendments.
2. Analyse impact – Use cost‑benefit analysis to quantify tariff changes, compliance costs, market‑size shifts and potential regulatory adjustments.
3. Adjust supply chains – Re‑assess sourcing against rules of origin and any new non‑tariff barriers; consider diversification to mitigate risk.
4. Review pricing strategy – Incorporate tariff savings or added compliance costs into price‑setting models.
5. Strengthen compliance – Ensure products meet new technical, safety and IPR standards; obtain required certifications (e.g., CE marking, ISO).
6. Engage with industry associations – Influence future negotiations, share best‑practice resources and lobby for sector‑specific concessions.
7. Plan contingencies – Develop scenarios for possible renegotiations, withdrawals or protective measures such as anti‑dumping duties.

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6.1.7 Environmental Influences

• Regulatory pressures – Environmental audits, carbon taxes, emission caps and mandatory reporting (e.g., EU Emissions Trading System).
• Green clauses in trade deals – Many modern agreements (e.g., EU‑Japan EPA, CPTPP) contain commitments to uphold environmental standards, influencing production methods.
• Consumer demand for “green” products – Drives product redesign, eco‑labeling and greening of supply chains.

Example

The EU’s proposed Carbon Border Adjustment Mechanism would increase the cost of importing high‑carbon steel, prompting UK manufacturers to adopt low‑carbon production methods or source steel from EU suppliers to remain competitive.

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Linking External‑Influence Analysis to Business Strategy (Topic 6.2)

Understanding the external environment feeds directly into the strategic tools required by the syllabus.

Strategic Tool	Use of External Analysis
PEST (Political, Economic, Social, Technological)	Provides a structured macro‑environment overview; identifies opportunities and threats.
PESTLE (adds Legal & Environmental)	Ensures legal‑environmental aspects of trade agreements and sustainability clauses are explicitly considered.
SWOT	External factors (e.g., new trade agreement, regulatory change) populate the Opportunities and Threats quadrants.
Porter’s Five Forces	International influences affect the bargaining power of suppliers/customers and the threat of new entrants (e.g., reduced tariffs increase entry risk).
Ansoff Matrix	Market‑development strategies often rely on favourable trade‑agreement conditions; product‑development may be driven by new standards or IPR rules.

When preparing a strategic plan, students should:

1. Conduct a PESTLE analysis of the external environment.
2. Translate identified opportunities/threats into the SWOT matrix.
3. Apply Porter’s Five Forces to gauge competitive intensity.
4. Select appropriate growth strategies from the Ansoff Matrix based on the analysis.

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Suggested Diagram – Flow of Impact from an International Trade Agreement