Analysis of Back to Basics: Why Countries Trade, Finance and Development by McDonald B - Article Example

Analysis of Back to Basics: Why Countries Trade, Finance and Development by McDonald. B The article ‘Back to Basics: Why Countries Trade’ begins by addressing the hypothesis that trade between countries makes the world better off. Apparently it implies that reasons behind trade are the first most crucial aspects of international business. The purpose here is to highlight the basic debate centering on the benefits of international trade and whether the governments should adopt it. The research question again arises from the very basics of international trade and whether it is beneficial to all kinds of businesses and whether trade friendly policies are favorable to all. Despite several measures taken (by the international bodies like WTO and conferences like the Doha Conference of 2001) towards reduction in tariffs and facilitating free trade, one needs to consider the right policies which would help in bringing a balance between the advantageous and the less advantageous business groups. The article begins by addressing the very basic concepts of economics and international trade, that is, the comparative advantage theory of Ricardo and its importance to the business world. The methods applied are qualitative in nature and based upon the basic theoretical concepts considering their practicality. The author also talks about exchange of technology and the consideration of product varieties as one of the pro-competitive forces. A country trades internationally only if it gains from trade, that is, it has production and consumption gains. The article hence considers that while some measures encouraging trade might be good for some groups it might adversely affect others. It takes up an example of tariffs imposed of products imported from Bangladesh and those from European Union in United States. The burden of trade is skewed towards the developing nation. The article thus considers the basic economic concepts in the light of practical events and issues and also picks up the Doha conference and the WTO where the issues of facilitating trade in the light of benefiting the cause of international trade and addressing the problems of the less advantageous business groups were addressed. According to Ricardo, trade between countries is driven by comparative advantage and not absolute advantage. This means that a country exports the commodities in which it has a relatively greater advantage (comparative advantage) and imports commodities where it has comparatively lesser advantage. Factor endowments play a major role in international trade and according to Heckscher and Ohlin countries have a tendency to export goods in which the relatively abundant factor of production (labor or capital) is used intensively. This implies that countries abundant in capital like plants, factories or machines will produce capital-intensive commodities and similarly labor abundant countries will produce labor-intensive commodities. However, is not always true that trade makes the world better off since. Although the importers or buyers benefit from purchasing the good at a cheaper cost, the domestic producers becomes worse off due to the higher cost of production (higher price). Generally, the gains are greater than the losses and hence, the country benefits as a whole except for instances where the foreign costs involve social costs such as pollution and other negative externalities. The article therefore rightly identifies that free trade across countries adversely affects the domestic producers who lose out to the foreign imported products. This leads to the contraction or shut down of these less efficient domestic firms. As a result, these firms voice against free trade and seek trade barriers such as tariff or quota to safeguard themselves. They even try to put a ceiling on the export of raw materials to artificially lower the price of the inputs used by them. With opening up of free trade, the factors of production are relocated in the export industries depressing the growth of these firms further. The trade barriers imposed by the national governments have considerably reduced in the Post-World War II period. The barriers are more prevalent on primary products like textile and agriculture mostly in the developing economies. These trade barriers are beneficial for the industries in the country that imposes them but they are unfavorable to the exporting countries, especially the developing or less-developed countries that export low- skilled, labor-intensive primary products mainly, agro-based goods. Their exports are restricted by the developed countries through different protective trade policies. For instance, it is reported that the United States imposes a tariff of 15 percent of the total value of imports from Bangladesh whereas it charges lower tariff revenue from the contemporary developed countries of Europe. Economists have estimated that less developed countries exporting goods to the industrialized countries counter tariff barriers that are almost fifty percent higher than those faced by the other industrialized and developed countries in the world. From the above discussion it is clear that the main strength of the article lies in the fact that it has successfully done justice to the title and addressed the basic foundation of international trade and its importance and direction. Again it has rightly picked on the problem areas and the groups which might face the blow in the current situation. The article has done justice to reconsider the old debate around international trade and has also considered aspects (technology transfer and increase in product varieties) which economic models find difficult to incorporate. However the main weakness of this article is that it has not considered the recommendations on which direction should trade policies take and which sectors should be protected against the free trade concept. It talks of making the less advantageous weaker groups better off but how? What kind of negotiations could ensure this? The limitation of the article is that it could have taken up the measures adopted now by the developing countries towards promotion of Foreign Direct Investments (FDI) which in turn can benefit their economies instead of having to import and export products and services. From the basic discussion presented in the article one may extend his thoughts further. While these multinational companies provide better employment opportunities to the existing labor force, they do damage to the domestic production houses. Again the developed nations’ people thrive for some employment while the large corporate houses look towards lowering their costs. Again transfer of technology and production processes are the boons accruing to the developing nations from such outsourcing and the MNCs. But these nations have not really crossed the industrial development stages and are already in the post industrialization period where service sector gains importance and hence the question of stability of these economies might be raised. In conclusion therefore we may say that the article does a great job in addressing the main research question and answers it by saying that weaker groups and their needs should be identified in order to frame an unbiased set of trade policies. Finally, this article does justice to the basic economic theories of international trade and successfully raising the very old question of gains from trade in this modern context. Read More