Competition in the Global Marketplace: Should we protect ourselves from international trade - Term Paper Example

? Topic:  Competition in the Global Marketplace: Should we protect ourselves from international trade? Globalization can be defined as increase in the degree of economical interaction between countries. This is a process of geographical realignment of networks, production and consumption and sites of power. Therefore, globalization can be said to be the integration of trade, technology investments capital and labor markets worldwide. This involves, opening up of the national economies into a global village, where it is considered as the process of increasing interdependence of individuals, group, companies and countries brought about by technological, economic and political change (Amato & Amato, 2005). This has made many countries engage in international trade, where countries have harnessed many benefits through international trade. This includes increased customer choices; customers obtain goods of high quality at lower prices, promotion of peace and relation between countries. In addition to these, companies that choose to operate globally benefit from increased sales, this result to higher profit, and also acquire a wider distribution channel. Apart from the benefit mentioned above, globalization or internationalization leads to the emergence of global competition. Global competition refers to a situation where organizations cross-subsidies the domestic market share, battles in quest of global brand and gaining control of distribution position in the international markets. Global completion arises where company engages in an effort of acquiring a certain percentage of the global market. Global competition may involve both fair and unfair practices. This results to trade injustice to the aggrieved states, since the unfair practices limit their trading capacity. Global competition has emerged as a persistent problem to many companies both from the developed countries and developing countries, due to the presence of trade Restriction, unfair Practices adopted by some states and high level of leniency, by the World Trade Organization. In an effort to control the global market, many multinational companies and their states have adopted strategies that ensure the achieve they objectives. Such strategies, includes; Transfer pricing. Transfer pricing refers to a situation where multinational companies transfer good from one of their overseas branches or subsidiary. In this case, multinational companies transfer goods from regions or states of high taxation to those or lower taxation. Through such transfers, multinational companies are able to reduce their tax burdens. Reduction in tax liability facing such multinational companies results to increased profitability to the companies . Devaluation Many states result in devaluing their domestic Currency against major world currencies such the sterling pound and the US dollar, which are the currencies used in carrying out transactions in the international markets. Devaluation of a domestic currency result to a situation where a state exports become more expensive and the import made by such states becomes cheaper (Klein & Shambaugh, 2010). This is unfair practices, since when a state devalues its currency, a product fetches more in the global market in terms domestic currency as compared to before. States like china which has joined the big three world economies engages in devaluation so can benefit more from international trading than their trading partners. Therefore, devaluation of their country would enable them to import raw materials cheaper, while at the same time getting a large amount of resources through their exports. Currency convertibility also inhibits free trade among the nations. Low cost of production. Another objective of any multinational company, is to reduce the cost of production. Cost of production mainly composes of cost incurred in production of the final goods both producer and consumer goods. Such cost includes the cost of acquiring raw material, cost involved in turning the raw materials to the final goods such as labor cost. Multination companies will usually establish themselves in countries that will incur the lowest cost of labor. Lower cost of labor would then in turn reduce the cost of production which implies lower prices. From economic theory, individual are assumed rational and thus price sensitive. Therefore, if an individual demands a product, they usually consider the price of the product together with other preference (Amato & Amato, 2005). Lower prices offer a multination company a competitive advantage over other companies. For example, Rynair airline has been branded as the lowest airline through the whole of Europe. This offers Rynair a competitive advantage against other airlines in the European Union. In countries characterized by low labor cost are usually hampered by unconformity of labor laws set by the international labors. Low labors emanates from payment of lower wages than ones that exist in the market, or where workers are over worked. This strategy presents global competition as an economical problem with far much reaching negative effects Counterfeit products Global competition has lead to the emergence of counterfeits good. Counterfeit goods refer to goods that are not genuine products, such goods are of inferior quality as compared to the genuine products. Counterfeits are goods not produced by licensed manufacture and they are usually manufactured with inferior raw materials. Some counterfeit goods are in most cases classified as harmful goods. Harmful goods are not usually fit for human consumption since there are not supposed to be consumed by mankind. In addition to this, the products are lowly priced than the genuine products, thus offering counterfeit good a competitive advantage over the genuine goods (Lim, 2006). Differential in Technological advancement There are differences in the level of technological advancement between various countries. For example, technological advancement in the developing country like the Zimbabwe is not the same as such embraced in the United States. Differences in technological advance deny countries a chance to compete fairly in the global market (Young, 2009). Another element where a firm gains competitive advantage is the composition of its employee in order for a company or country to sustain control in the global market it must employ expatriate who are most not citizen of such countries. Many developing countries are short of highly trained manpower thus lowering them bargaining power in the international markets. Impact to the society Global completion has led to major influence to the society; for example, global completion has enabled the society to obtain good of higher quality at lower as compared. Consumption of high quality goods by the society increases their satisfaction or utility. In addition to their lower price has increased their purchasing powers thus improving their standards of living since they now have increased capability to purchase or state-contingent goods. This leads to improvement of their lives (Graham & Richardson, 2004). Also, completion opens avenues for product differentiation. Product differentiation refers to a situation where a producer produces another product that acts as substitute that is, the second product is a perfect substitute for first product or the original product. The second product has features that can help in differentiating the two products. This helps to increase the consumer choice that is; the consumer now has a wide range of varieties to choose from. Global completion has also had large impacts on sates where labor supply exceeds labor demand, since the authorities of such states will result to attracting foreign investors to establish in their countries so as to solve the problem of unemployment. Therefore, global completion can be said to have positives influence to the betterment of the society (Pitofsky, 2001). Apart from the few benefits discussed, global competition has been found to have negative effects to the society. One, transfer pricing which is a vice usually practiced under global completion reduces the tax burden for multinational companies and deny the sates where such production is carried revenue in terms of tax avoidance. This is a loss to the society since such funds which could be used to improve their live by the national government is transfer to the pockets of a few (the share holders of such companies). As discussed earlier, devaluation of the domestic currency makes the export of a particular company become expensive. This implies that an individual living in a state where the authorities has devalued their domestic currency would receive more resources. While a consumer oversea has to dig deeper in his or her to pocket in order to consumer the good. The net effect of devaluation is a loss to the society, since gains derived devaluation do not end up to the exporters pocket but the government through taxes. This based on the assertion that this is only an increase in the nominal money but not real money due factors such as inflation. Although global completion has led improved career opportunities for a few, in an effort to lower the cost production international firms result to payment of a lower wage rate than the minimum wage established. In addition to this, global completion leads to the creation of docile workforce. In this case all the worker fundamental rights will be violated. In addition, in cases where the objective of the firm is to lower the cost of production employees are the first targets. Therefore, global completion is a phenomenon that requires to be treated with a lot heed (Amato & Amato, 2005). In addition, if a country or a company engages the service of an expatriate, who are mostly foreign thus denying the local society a chance to overseas the running of the country affairs. Global completion has also led to liberalization of the market. Liberalization has led to the collapse of the ill equipped local industries in terms manpower and also machinery. This results to high level of the unemployment rate especially in the developing countries. This makes the society living standards decline due increase in the level of unemployment among the society (Graham & Richardson, 2004). Global completion has embraced major technological advancements, thus advocating for use capital intensive methods in production. To the society in the developing countries, where labor supply is not a problem use capital intensive methods in production on increase the level of unemployment among the society. The society is worst hit by the effects of corruption as resources that were owned by the society goes to the pocket of a few greedy individuals. This also increases the level of injustices even beyond trade injustice (Pitofsky, 2001). Transfer pricing brings inequalities in global competition, that is, public owned companies (state owned) with branches overseas, will always engage in transfer pricing so as to cut down on the prices of the goods thus increasing their competitive advantage over countries (Pitofsky, 2001). Possible solution to remedy unfair practices where countries compete internationally All the companies engaging in international trading should use the flexible exchange rate regime. Countries have been observed to manipulate the appreciation depreciation of the domestic currency and some have operated under the fixed exchange rate regime. A flexible exchange rate regime would ensure that a county does devalue its domestic currency at will. Contrasted to affixed exchange rate regime under the flexible exchange regime the exchange rate is determined by the market forces that is demand and supply as shown in the diagram below (Klein & Shambaugh, 2010). Domestic currency per foreign currency Supply of foreign currency E1 B C E0 A E2 D E Demand of foreign currency Real amount of foreign currency The E0 is the equilibrium exchange rate. If market forces exert to E2 then there will be a shortage of foreign exchange represented by DE, hence a fall of exchange rate from E0 to E2 i.e. appreciation of a shilling and depreciation of the dollar. If market forces of demand and supply force exchange rate to move from E0 to E1 then, there will be surplus of foreign exchange BC because demand is lower than supply. This will lead to increase or a rise in exchange rate from E0 to E1 is referred to as depreciation of shilling and appreciation of the dollar. A flexible exchange rate is often popularly known as “self-correcting", as any differences in supply of foreign currency and demand foreign currency will automatically be corrected by the market. For example, if demand for a currency is low, its value will depreciate, and this would in turn make goods imported by such a country more expensive and result in stimulating consumption of the good produced locally. This will result in generation of more job opportunities, thus resulting into an auto-correction in the market and the market stabilizes (Klein & Shambaugh, 2010). Under the flexible regime, the level of exchange rate is determined by the various factors influencing the foreign exchange market, for example, the level of interest rate, political stability and the country’s economic performance, current account deficit, the level of public debt, inflation and terms of trade. Another remedy directed to global completion is fair remuneration for employees. Employees need to get fair remuneration so as they can be able to consume and so that the capitalist can in turn borrow their savings. From economic theory where the assertion that the wage should be equal to the marginal productivity that is MPL = w where w represents the wage rate and MPL represent the marginal product of labor. If this concept was employed in the determination of the wage rate, there would be no cases where employees are under paid since. Employee wages would be equal to labor productivity and thus resolving cases where the countries underpay the employees in order to gain competitive advantage in the global market as it is the case for china. Also, shadow pricing can also be used in ascertaining the wage rate to be paid as well as the prices that countries should charge for the products. This can be advocated for because of presence of taxes (Graham & Richardson, 2004). All these policy solution can only operate if the world trade organization utilizes it powers to make sure there is fair completion to the global market by ensuring the participants of such markets do operate under the flexible exchange rate regime and legislation are in places that ensure that employees wages should be equal to the marginal productivity of labor. In conclusion, as discussed above global completion have both positive effects to the various stake holders with consumers benefit from an increase in varieties to choose from high quality good at lower prices while they are exposed to vulnerabilities of harmful goods, decay of the moral values. The governments lose revenue due to transfer pricing, employee’s rights are violated and there are paid a lower wage rate which does not represent the value of the service they extend to the companies or countries (Young, 2009). Therefore, there is a need for a country to assess it situation and initiate the best way in order to harness the global completion. For instance, there is a need for the establishment of sub-committee in the monetary authority such as the Fed committees which would indirectly influences the level of exchange in cases where a country has resulted in unfair practices such as devaluing its currency. In addition to these, the question whether to shield ourselves from global competition will also be in depend on the volume of trade that we transact globally and other consideration such as treaty that a country has signed and future effects of the decision adopted. In my opinion if a country after conducting a social cost benefit analysis of engaging global completion and the net social benefit from global completion is negative then a country need to shield itself from global completion. Works Cited Amato, L., & Amato, C. (2005). The Effects of Global Competition on Total Factor. Amsterdam: Kluwer Academic Publishers. Graham, E., & Richardson, D. (2004). Global competition policy. Massachusetts: Peterson Institute. Klein, M., & Shambaugh, J. (2010). Exchange rate regimes in the modern era. Massachusetts: MIT Press. Lim, L. (2006, August 23). Chinese Crackdown Fails to Stem Counterfeit Goods. Retrieved March 7, 2012, from npr: http://www.npr.org/templates/story/story.php?storyId=5693207 Pitofsky, R. (1999, October 15). The Effect of Global Trade on United States Competition Law and Enforcement Policies. Retrieved February 6, 2012, from Federal Trade Commission: http://www.ftc.gov/speeches/pitofsky/fobebf1.shtm Young, J. (2009, october 09). Global Competition—The New Reality. Retrieved February 6, 2012, from Channelingreality: http://www.channelingreality.org/Competitiveness/Global_Competition_New_Reality .pdf Works Cited Amato, L., & Amato, C. (2005). The Effects of Global Competition on Total Factor. Amsterdam: Kluwer Academic Publishers. Graham, E., & Richardson, D. (2004). Global competition policy. Massachusetts: Peterson Institute. Klein, M., & Shambaugh, J. (2010). Exchange rate regimes in the modern era. Massachusetts: MIT Press. Pitofsky, R. (1999, October 15). The Effect of Global Trade on United States Competition Law and Enforcement Policies. Retrieved February 6, 2012, from Federal Trade Commission: http://www.ftc.gov/speeches/pitofsky/fobebf1.shtm Young, J. (2009, october 09). Global Competition—The New Reality. Retrieved February 6, 2012, from Channelingreality: http://www.channelingreality.org/Competitiveness/Global_Competition_New_Reality.pdf Read More