International Trade and Trade Barriers - Term Paper Example

International Trade and Trade Barriers Introduction International trade or foreign trade – economic activity between nations characterised mainly by export and import – is no longer new to mankind. It has been a long time practice between societies that has led to the discoveries of the whole world and has furthered cultural exchanges, but unfortunately, has also transferred undesirable things such as diseases, crimes and negative influences. Evidence to early trading between peoples from different world parts is the Silk Route – the 4,000-mile long trade route from China’s ancient commercial centres that had enabled people to trade goods – mostly luxury goods and medicinal herbs (Wood 2002: 9) between Asia and Europe from 105 or 115 BC to the 15th century (Franck 1986: 1). With a sophisticated modern technology, international trading today has greatly changed – becomes faster, easier, broader, and more voluminous causing unmatched economic growth. Nations trade with each other due to the benefits and opportunities they can gain and enjoy as export-import naturally transfers resources between trading partners for comparative advantage creating a win-win situation by both gaining in ‘consumption, production and exchange’ (Barrera 2004: 22). As many different goods are made available in the market, consumers have wider cheaper choices; as employment are made available through outsourcing and working overseas, personal income and government revenues are increased; as knowledge and technology are shared, less developed countries learn the trade – all these stimulate the market, which in return improves the economy of trading nations. With this productive activity also come the risks and tensions causing trading nations to impose trade barriers thru government regulations: tariffs, quotas, voluntary export restraints (VERs) and non-tariff barriers. The most common is the tariff or customs duty – used to tax imports, sometimes even exports, not to earn additional revenue for the nation – although it follows – but primarily to protect the local market against stronger foreign competition (ANON 2007: 47101). However, VERs are more acceptable to major exporting countries because of their more favourable effect – rents from VERs go to exporting nations, while rents from quotas to importing countries (Chao, Hwang & Yu 1993: 675). Trade barriers create protectionism – a controversial issue in this era of globalisation. As trade barriers may seemingly be legitimate and safeguarding national interest, its long-term effect may become worse than better. Example, with the US balance of trade at deficit blamed largely on globalisation, US economists still see trade barriers as mere palliative measures which later on might instead become more harmful to the US economy and American workers (Burtless, et al.1998: 7). So, when does protectionism really protect national interest and when does it not? When is international trading more beneficial and when is it harmful? These are the essential points of debates regarding international trade that this paper discusses. Starting on the premise that international trade stimulates economic growth not only of the participating nations but the world economy as a whole, the paper discusses first the advantages of international trade. From here, evidences of trade’s negative effects causing nations to impose trade barriers are analysed finding out the cost and benefit of protectionism. Then, the paper concludes with the writer’s analysis and personal stand point on the matter. To Trade or Not To Trade: Understanding the Costs and Benefits of International Trade and Trade Barriers Countries wealth varies and so are their capacities and needs, yet not all their needs can be provided by them because resources are unequally distributed around the globe. For example, rich countries have the technology but poor countries have the raw materials. Rich countries need the raw materials of the poor countries and the poor countries need the technology of the rich countries to manufacture their raw materials. Although this may sound so simple, this lays the basic premise for international trade – the spirit of sharing what each country has to give everyone the opportunity to enjoy the bests of the world. This also spells the comparative advantage one nation has making it possible to equalise the uneven playing field, which today is the centre of contention. Here the Heckscher – Ohlin Trade Theory provided useful insight – nations may specialise in their comparative advantage to bargain better. China for example knows its comparative advantage is human resource – though unskilled counts in millions. To maximise this advantage, it specialises in mass-producing labour-intensive trade goods like microchips, garments, house wares, electronics, etc. resulting to cheaper commodities that can supply the whole world. China was able to penetrate and dominate the global market by providing consumers a cheaper choice. Today, China’s balance of trade shows that a major contributor to its economic growth is the dramatic increased in its export, which unexpectedly exceeded the US imports, leaving the US at trade deficit (Morrison 2009: 1-7; Cowen 2006: 1). Although, US trade deficit may not necessarily be caused by China’s larger export, but by the trade policy of the US. Still operating on our basic premise of sharing the world’s best, international trade not only becomes a productive economic activity but a satisfying one, too, because the essential benefit that one gets from trading is not in gaining profit from export, but in being able to buy goods one needs or wants, as satisfaction comes from achieving ones desire (import) and that is achieved in exchange of export (Elwell 2005: 2). On this premise, the criticism that nation’s unequal capacity makes competition in international trade unhealthy becomes meaningless because trade is not a “zero-sum game” (Krugman 1994: 34). Moreover, international trade in this context lessen conflicts between nations creating a better chance for more cooperation between them, building a better road towards a truly globalised economy – an economy that treats the world wealth as the wealth of all, not only of the powerful. Summarily, international trade generally boosts economic growth. “The most notable examples of such export-led growth are Japan, South Korea, Taiwan, and Singapore” (Agmon and Hekman 1989: 3). As it boosts economic growth, it further opens new doors for more progress and widens countries’ understanding of the world for better trading. With a growing economy, nations are now in the position to improve their social welfare, which in turn would lessen poverty reducing the gap between the rich and the poor. Ideally, as economy progresses, so must the people’s income level and as social welfare improves, so must the social condition of the people, so poverty is reduced. This makes international trade necessary to a nation’s progress and survival and to the world. In effect, international trade brings national economies together towards growth. But why do we have losers when it must be a win-win situation? Why is the gap between the rich and poor countries and peoples widened more, instead of closing in? These lead to the most controversial issue – unfair trade. This exactly was the case in the food market where industrialised countries – EU, US, and Japan – intending to protect their own farmers, firmly deny poor countries to use their comparative advantage in agriculture (Barrera 2004: 22+). If international trade is done in a different basis, just like the globalisation being promoted by the WTO – where the interest of the capital is most important than that of the larger society – the mutual benefits from international trade may instead harm poor countries. Yet evidences show that even developed countries could be harmed by unsound trade policy. For example, the outsourcing of U.S jobs abroad has displaced many American workers but has better the lives of the technologically competent young professionals in India, who now belongs to the middle class (Barrera 2004: 22). Relatively, liberalising farm products like cows milk and beef has threatened similar products and hurt dairy farmers in Europe, forcing Europe to ban US beef justifying it with health safety – the steroids used by US to hurry growth in their cows have suddenly become dangerous to health (Harbison 1993: 26+). Once trade is politically motivated, its unifying effect may instead sour trade relations and worst may create tensions between nations jeopardising its productive effect. As economic crisis worsens, threatening nations, these uncertainties become real. Nations’ immediate reactions are to protect their economic interest, to lessen the impact of the crisis, making nations become cautious to trade. Effectively, protectionism re-emerges with trade barriers being erected anew for domestic market protection, public interest, and retaliation against a competitor justified commonly with health safety and environmental threat – issues, which the civil society could easily sympathise. For example, US-made aluminium baseball bats were not allowed to leave the docks of Japan not until they were declared safe; agricultural countries which comparative advantage rests on farm products reject bioengineered crops because of health hazard, but voluntarily compromise this with free new seeds (Harbison 1993: 26+). Once trade barriers emerge, its cost against benefit is considered. Is putting barriers against import good to the economy? Study shows, although imposing trade barriers intends to safeguard local economies, the costs that may result from ‘inefficient resource allocation, intractable implementation, and foreign retaliation’ may outweigh its benefits (Elwell 2005: 2), much more the opportunity local economies may miss. Many industries today depend largely on imported materials – especially with the restructured global economy where capital-good production is taken by developed countries, while manufacturing and agricultural production are imposed on less-developed countries and poor countries. With imports essentially paying for exports, barriers to imports would also mean barrier to exports (Sweeney 1979:283). In short what you are barring in the market is not only foreign products but even your own products, because instead of raising the purchasing power of your trading partners, with the barriers in trade, you weaken their potential to keep the market going, which is vital to economic growth. “But the global economy is itself a vast protectionist scheme used by T.N.C.s and banks to expand their own power, unfettered by the inconvenient checks of democracy” (Hines & Lang 1996: 29+). Clearly, protectionism harms more than improves economy given the negative effects of globalisation – critics say it creates lower-wage economies. How is this so? In restructuring the global production, instead of helping poor economies to stand on their own by determining their own comparative advantage, industrialised countries instead dictated it by assigning the low-skilled production to developing countries capitalising on their cheap and docile labour, which costs per hour: 50 cents in China, $1.8 in Hungary, and $4.9 in South Korea (Ibid). So, it is no wonder why industries in developing countries are composed primarily of manufacturing industries – this is the part of production that is labour-intensive but low-value added. On the part of developed countries, instead of doing the labour-intensive productions in their own countries which by legal standard require much higher labour costs per hour: $24.9 in West Germany, $16.9 in Japan, $16.4 in the US, and $12.4 in Britain (Ibid) –aside from their benefits, chose to outsource this part of production to developing countries to cut cost and profit more. Recent data show 9 million jobs shifted from developed countries to poor and developing countries. The result of this was not only apparent in the US but also in other developed countries. For example, France rising unemployment is linked directly to jobs outsourced to Third World countries (Ibid). What then is the basic flaw of this design? The basic flaw lies in the motive, which is to preserve and protect the interest of the industrialised countries instead of pursuing genuine growth of the world economy. If this had been the case, this wouldn’t be the design. Also, with international trade motivated with genuine sharing, I don’t think protectionism or trade barriers will still be an issue of concern. Conclusion International trade is naturally a productive and satisfying activity – it promotes cooperation, creativeness and dynamism in the market improving the economic well being of trading nations and the world as a whole. However, motivated politically, international trade becomes damaging to the whole process creating unfriendliness between nations, preventing market growth, resultantly, discouraging world progress. This awakens protectionism causing the re-erection of trade barriers in various forms. Although, these aim to protect and save local market, it may most likely turn out to be more harmful to economic progress. Thus, international trade in the context of globalisation contradicts the progressive basis of trading, because if not, trade barriers should have not been an issue of concern. 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Well, not so fast, The New York Times, 7 September, viewed 12 July 2009 http://www.nytimes.com/2006/09/07/business/worldbusiness/07scene.html?_r=1 Elwell, Craig K., 2005, Trade, Trade Barriers, and Trade Deficits: Implications for U. S. Economic Welfare, Congressional Research Service Report for Congress: Received through the CRS Web, Order Code RL32059 27 January viewed 12 July 2009 http://fpc.state.gov/documents/organization/45941.pdf Franck, Irene and Brownstone, David, 1986, The Silk Road: A History 1st Edition, New York, England. Harbison, Earle H. Jr., 1993, Protection or Protectionism, Issues in Science and Technology, vol. 9, issue 4, 26+ Hines, Colin, and Lang, Tim, 1996, The New Protectionism: Global Trade Rules Protect Corporations. Let Nations Protect Their People, The Nation, vol. 263, issue 3, 29+ Krugman, P., 1994, Competitiveness: a dangerous obsession, Foreign Affairs, Vol. 73, No. 2, 28-44. 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