Role and Advantages of International and Home Trade - Coursework Example

INTERNATIONAL TRADE AND COMPETITION International trade is a way to achieve a higher standard of living and improving the per capita income and GDP growth for all trading nations. The post war (WWI and WWII) era has seen a rapid expansion of trade in the trading sections among all the trading nations. One of the important issues is the controlling of rapid growth in trade deficit. Trade involves exchange of goods or services for cash or on credit. There are several other activities, which facilitate trade, and these alongwith trades are known as commercial activities. Commerce includes all those activities, which are connected with trade and auxiliaries to trade such as transport, warehousing, insurance and banking and finance. Interdependency between producers, traders and Consumers Trade involves buying and selling of goods and its purpose is to bridge the gap between persons, i.e. the producers and the consumers can concentrate on their own occupations and at the same time buy goods to satisfy their consumption needs. The farmers can both enjoy each other’s products with the help of traders. For example there are different types of cotton; jute, hides and skins are supplies to the producers of cotton textiles, gunny bags and shoes respectively. At the same time manufactured goods, which have been produced with the raw materials, are supplied to the consumers. Producers buy raw materials, machinery and equipment as well as stores and spare parts for machinery fro trading agencies and consumers buy practically all articles required for their daily use from traders. Goods are produced on a large scale in anticipation of demand. The markets for products are now spread over the length and breadth of the country and even extended to countries across the international borders. Hence direct sale of goods by the producers to the consumers is not possible. Without the help of traders and merchants engaged in trade it would be impossible for the system of large-scale production to continue. The trader involved in the actual operation of purchasing goods from producers and selling them to consumers. Traders and consumers are interdependent. Trade restrictions Let’s take the case of United States and its policies towards foreign trade. At the time of WWI and WWII the country’s economy has slumped to a new low and according the living standards of the people. Unemployment was on high-rise and there was no perfect system to maintain law and order. There was chaos all the time. The post war era was the beginning of expansion in the trade sector. The benefits do not come that easily. Treating those who hurt by trade, equitably a difficult public policy issue. The important issues that were to deal with are controlling the rapid growth of trade deficit, high inflation rate and soaring prices of crude oil. The post war era has seen a rapid expansion in trade and accordingly the economic and political structure has experienced steady and substantial growth. Gaining profits from trade depends on individual economic behaviour. Instead of building own automobiles, manufacturing own goods, producing own food, it is better to manufacture goods in which they have specialisation and trade them for other goods that are required. This thought made the US a leading exporting country in international trade. The most surprising thing is that the total US imports amount to only about 12 percent of the country’s GDP. International trade brings rich dividends and imposing restrictions to such exchanges will hinder the further improvement and in realising the true gains from trade. Protectionism is the factor that’s becoming hindrance to international trade. In the context of trade jobs were created and destroyed as well. Creation and destruction of jobs depends on comparative advantages and disadvantages. Cutting of jobs does not have any net loss on the economy further more it improves the living standard and raises the economy. It is known truth that international trade has positive and negative effects. The wages of an average worker will be hit if there is an increase in imports. But it is also true that worker in export business are benefited by trade. There is a possibility of gaining profits by not following the rules and regulations. If an exporting industry has been given subsidy, though it benefits the domestic consumer it will badly hurt the domestic market. From standpoint of overall economic welfare domestic market should be provided with alternatives and should allow foreign goods into the domestic market and gain in real income. Imposing restrictions on foreign goods to protect domestic market is also considered as a hindrance to international trade. The best example is the softwood lumber trade between the US and Canada. Canada used to export quality softwood lumber to the US market. This process was going on from the last three decades. The quality of softwood lumber from Canada was of high standard and more importantly it was cheaper compared to US lumber. To protect the domestic market the American government imposed some restrictions on the import of Canadian softwood lumber. Not only on this, the American government has taken stern steps on imports to protect their domestic market. It’s a clear case of protectionism. Effects of tariffs and quotas To protect the domestic market the governments of respective nations imply tariffs and quotas. Though this is the clear case of protectionism it is every government’s duty to protect the domestic interests. Tariffs, quotas and other regulations differ in their impact on trade and also in static deadweight losses that they will cause. Under competitive conditions the losses due to the exit of consumers, unable to substitute the domestic product and rent seeking will be same if we keep the imports allowed into the country as a constant. Goods should be classified into categories to administer the quotas. There is no significant diversion in trade if quotas are auctioned, moreover its look like non-discriminatory tariff system in its welfare effects. If quotas are given as first come first served basis there will be an increase in deadweight losses due to the quota race. If the quotas are given as fixed shares to individual exporting nations there again lies a danger of giving quotas to less efficient suppliers. In sum, quotas are of no good when we look from a welfare standpoint than a non-discriminatory tariff. It is seen that quota system is always inferior to non-discriminatory tariff. The reasons for this are due to the quota races, diversion in trade and disability of trade negotiators to reach an accord on concessions. Corruption Corruption is nothing but bribing a person to make him to do a particular task. Corruption is prevalent in all nations. Corruption is considered as a cancer to the society. Importance of trade and its advantages Importance of trade Trade is of great significance for production as well as consumption of goods. It is through trade that goods produced at particular places are equitably distributed among users. With the help of trade goods are made available to consumers at the time of their need. It removes the hindrance of persons by bringing together producers and consumers who are widely scattered. Advantages of trade Advantages of trade are outlined below: It enables the producers to concentrate on their production activities; otherwise they would have to go in search of consumers for goods they produce. Trade makes goods available to consumers who can concentrate on their own occupations It results in specialization and large-scale production as the markets are now spread over wide territories. Sale of goods from one country and purchase of goods form other countries. It provides avenues of employment to various persons. It increases the standard of living of people as they can avail of goods of various kinds produces by different producers. Distinction between Home trade and foreign trade a. Home trade is concerned with trade between people of the same country while foreign trade is concerned with trade between people of two different countries. b. In home trade the buyer has to pay for the goods in home currency while in foreign trade buyer ha to make payment in foreign currency. c. Payment in home trade is simpler and less time consuming while in foreign trade, payment is not a simple process and hence is more time consuming. d. Home trade is not subject to restrictions, which exist in case of foreign trade such as tariffs, quotas, etc. e. Transport costs are relatively much less in home trade than in foreign trade. Auxiliaries to trade In addition to trade, there are several other activities, which facilitate trade in activities; these are known as auxiliaries or aids to trade. Goods are produced at different locations and required by consumers at different places. Production and consumption may not take place at the same place. It is true that in a village, producers are able to sell their products locally through traders but in case of manufactured goods, or goods which have concentrated production and for which consumers are scattered in far off places, the necessity arises of carrying goods from the place of production to the markets where they may be sold. Similarly goods are produced in anticipation of demand at one time and are consumed at another point of time. It is therefore, necessary to remove the hindrances, which arise due to the production and consumption-taking place in different parts of the country or at different times. Trade knows the various activities removing these hindrances as aids. These include transport and communication, warehousing, banking and finance and insurance. It is through these auxiliaries to trade that exchange of goods and services is made possible between producers and consumers who are widely scattered. Insurance The term Insurance refers to a contract between two parties, one known as insured and the other insurer, whereby the insurer agrees to protect the insured against risks of loss or damage or liability on payment of a certain amount by the insured known as premium. This contract is put in writing and is known as Insurance policy. The person whose risk is insured is called insured or assured or under writer. The consideration in return for which the insurer agrees to make well the loss is known as premium. This premium may be paid by the insured monthly, quarterly, half-yearly or annually. Reference Craig Elwell. (2001) RL30226: Trade, Trade Barriers, and Trade Deficits: Implications for U.S. Economic Welfare. [online]. Available from: < http://www.cnie.org/nle/crsreports/economics/econ-129.cfm -->> [Accessed 9 April 2006]. Roger W. Ferguson, Jr. (2004) Trade and the Future of American Workers. [online]. Available from: . [Accessed 9 April 2006]. Alan O. Sykes. (n.d.) "Efficient Protection" Through WTO Rulemaking. [online]. Available from: [Accessed 9 April 2006]. WTO. (n.d.) TRADE AND ENVIRONMENT. [online]. Available from: >. [Accessed 9 April 2006]. WTO. (n.d.) COHERECE. [online]. Available from: . [Accessed 9 April 2006]. Howard, J.L. (2000) US timber production, trade, consumption, and price statistics. [online]. Available from: . [Accessed 14 April 2006]. Michael Weinstein, A. (2005) Economic Brief: U.S.-Canada Softwood Lumber Dispute. [online]. Available from: . [Accessed 14 April 2006]. Carroll, A. B. and Buchholtz, A. (2006) Business & Society: Ethics and Stockholder Management, 6th ed., Ohio: Thompson. US Department of State. (n.d.) TRADE RESTRICTIONS. [online]. Available from: [Accessed 14 April 2006]. Sheldon Richman. (2003) Trade Restrictions Show Hypocrisy. [online]. Available from: [Accessed 14 April 2006]. Read More