The Global Economy - Assignment Example

The Global Economy Introduction The global economy indicates the economy of the world which comprises of different types of economies existing in various countries and the activities taking place among the economies of such countries (Gandolfo and Trionfetti, 2013). The core idea of global economy is derived from the concept of globalization that facilitates international trade and economic activities in such a way that economic occurrence of one country is bound to influence the condition of world economics (Dunning and Lundan, 2008). In this paper, two questions arising out of Global Economy such as economic reasons behind implementing various forms non- tariff trade protection and the structural pattern of Chinese outward Foreign Direct Investment (FDI) will be answered. Discussion Question 1: Various forms of Non- tariff Trade Protection and Reasons behind such Protection Trade barriers are the measures appointed by governments and other public authorities for the purpose of making the imported goods and services less competitive as compared to locally produced goods. Tariff is a form of trade barrier that is imposed to restrict international trade import and export activities lead to increase in the price level for consumers. In contrast, Non tariff barriers are imposed in order to control imports. The main hypothetical reason behind shifting from tariff to non-tariff protection measures is to protect the concern of developing countries, aid them to acquire funds for the purpose of running such economies and to support their weak industries to flourish (Kerr and Gaisford, 2007). Mainly six types of non tariff protections processes can be experienced in a global economy. Most important among these is specific limitation on trade such as import licensing requirement, fees, embargos, fixed proportionate restriction on foreign domestic goods and minimum import price limits. Customs and administrative entry procedures also outline non tariff trade protection methods through the ways of anti-dumping practices, tariff classifications and strict documentation and valuation systems. Intergovernmental acceptance instruments for testing methods, standards, packaging, labelling and marking, government participation in international trade by the means of procurement policies, export subsidies, countervailing duties and domestic assistance programs are the other form of non tariff trade protections. Apart from all these, government imposes specific charges on imports prior to the importation takes place and other fees such as special supplementary duties, import credit discrimination, variable levies and border taxes represents various forms of non tariff trade protection (Krugman, 2008). Figure 1: Welfare Gain through Non- Tariff Trade Liberalization (OECD, 2005b) The main reasons behind such actions taken by Governments can be broadly attributed to a large number of economic and socio political reasons. The most traditional reason behind appointing such protection measures is to protecting the infant industries of a particular nation, especially in developing economies (OECD, 2009c). In such economies, a number of sunrise industries exist which have great potential to evolve as an important part of international business over the period of time. However, after their foundation and entry into the industry, as the firms have to cover their establishment cost, initially no firm realize any cost advantages as well as economies of scale in production and distribution. Such industries require time for expanding their market share, advancing the skills of the labours and to understand which production process will be most cost efficient for their businesses (Kenney and Florida, 2004). Hence, in order to protect and promote the interest of such infant industries protection should be given from those low cost foreign investors so that local producers can increase their price level to a ceiling level and enjoy some positive profit. Protecting employment interest of the local citizen is another agenda for a Government to impose non tariff safeguard. For instance, in 2002, President Bush had imposed a controversial 8-30% steel tariff in United States to counter the rising pressure from the industry leaders (Letiche, 2014). Such decision helped to subsist the structural employment of the country for the specified time period. Country specific revenue generation leads to employ protection measures in order to earn sufficient revenue from income and corporate taxation, required for smooth running of the administrations, especially for a developing country. In emerging nations, as the level of unemployment is naturally high and the number of large firms is considerably less, the government has to introduce non tariff protections on foreign goods in order to derive the expected level of revenue. In Sub Saharan economies, though the countries have to implement liberalization in their economies to survive strict Structural Adjustment Policies (SAP), in many sectors such as agriculture and production of minerals such as gold, diamond and copper, the countries experience substantial comparative advantages due to enforcement of protection measures in these segments. National security is another reason for taking protection measurements to ensure survival of the countries that do not gain comparative advantage on production overtime. In general, foreign goods attract consumers to a great extent irrespective of the quality and safety associated with the goods. Hence, government has to step forward to ensure the safety level of the importing goods. Some of the essential import goods such as medicine, chemicals, food products, cars, and dairy products must be inspected in order to evaluate whether the quality and safety standard meets the country’s standard (Reinert, 2011). Example of such protection can be sighted by the ban of US beef and dairy products on the ground that the cattle have been injected hormones fluids to enhance its milk production capacity. Non tariff trade restrictions are also appointed to protect the country from unethical trade practices and dumping. For instance, EU’s strategy of selling its huge surplus of their butter and milk at a lower price in domestic countries and at a much higher price in foreign countries largely harms the interest of foreign consumers, especially from developing countries. Hence, governmental protection is required. As more expensive foreign goods lead to fall its demand in relation to export quantity, IMF’s (International Monetary Fund) initiative to narrow the BOP (Balance of Payment) deficit, particularly in current account, enables countries to put trade restrictions to fix their BOP problems (Markusen, 2004). However, in recent times, rise in non-tariff protectionism leads to amid global uncertainty, mainly in emerging economies themselves. According to the World Bank reports of 2012, creeping effect of such protectionism is prominent in countries like Argentina, Brazil and Indonesia where the countries are interested in appointing other indirect policies to control free commerce between countries. India, Brazil, China, Russia, Indonesia and Argentina constitutes for more than half of the non tariff measures imposed worldwide (Collins, 2013). These governments are restricting imports through upgrading product standards (Indonesia), tightening technological requirements (Argentina) and acquiring production licence of some critical manufacturing goods in domestic countries (Brazil) while staying within WTO (World Trade Organization) guidelines (M. Marinov and S. Marinova, 2012). While WTO enforces the right to the governments to implement non-tariff protection measures for the sake of consumers, such measures are creating tremendous pressure on traders as they are not been able to increase the volume of cost and such gap between consumers and traders’ interest is in turn creating great economic distortions (Levy, 2003). Consequently, non-tariff protections are proving to be detrimental for poor consumers. In Nigeria, as a result of strict banning on imported consumer products, domestic price level increased in such a way that pushed 3 million Nigerians below poverty line (Ray, 2008). Such incidents are prominent in other countries under as well. Therefore, it is evident that though non-tariff protection is imposed for securing the interest of developing nations, if not employed in a corrective manner, it will lead to distort the global economy (World Bank, 2012). Question 2: Structural and Geographical Pattern of Chinese Outward Foreign Direct Investment Foreign Direct Investment may be defined as investment made by business entity on one country which will be outlaid to aid a different country. Foreign Direct Investments involves certain degree of influence and control over the country or company on which investment is made. In an open economy that possesses skilled workers and other resources readily available, largely attracts huge amount of FDIs for exploiting the un-tapped potential and opportunities lying in the economy. China is the major example of such countries (Berning and Holtbrügge, 2012). China started experiencing FDI inflow since late 1970s which the country designated for the development of four special economic zones in Southern China. By the last decade, the country managed to acquire one third of the total FDI flows into the emerging markets which constitutes for more than 60% of the capital flow in Asian market (Chen, 2011). However, the outward shift of foreign direct investment in China is a recent phenomenon. According to economists, the recent surge of outbound FDI in China can be attributed to the intensive government policy for promoting foreign investment (Nolan, 2001). In 2000, Chinese government has become keen to acknowledge huge gains from overseas investments (Jakobson and Knox, 2010). The strategic rationale behind such outward Chinese investment shows that much of Chinese OFDI is undertaken by state owned enterprises rather than privately owned entity, which in turn proves the centralized and controlled economy of China, at macro level (Prasad and Wei, 2005). While, inbound FDI was encouraged as a critical pillar of Chinese economic reform, outbound FDI was capacitated based on the attractive property market in prime locations (The Economist, 2013). For the purpose of achieving a sustainable outward FDI, macroeconomic adjustments were experienced through appreciation of Yuan and healthy competition among corporate (Li, 2010). Such competition enhances the requirement of innovative technologies and more advanced resources to bring superiority in production process and invite more and more capital investments. Such effort facilitated China $1 to $2 trillion in direct investments abroad by 2020 (Poncet, 2006). Figure 2: Pattern of Outward Foreign Direct Investment in China (OECD, 2000a) Other major concers related to massive increase in China’s OFDI may be sighted as the old FDI model exercised in Chinese economy. The initial FDI model of China was concentraed in the investment on expeort industries. Such investments has generated sufficient surplus in Chinese trade balances which has enabled the country to rebalance its economy to obtain a more sustainable economic position (Worm, 2008). However, competitive pressure arising out of the rebalancing process necessitates considerable amount of internationalization of the Chinese firms. Coming to the statistics of Chinese OFDI, it is difficult to confirm the accuracy of data as most statistics are related with the acquisition of forign firms that requires confirmation from the host government. In 2013, World Bank estimated the Chinese OFDI that accounts for 3.3% of all International FDIs. In this context, it should be mentioned that where Chinese OFDI is increasing at an uniform pace, the FDI by UK, Japan and Germany is successively decreasing (OECD, 2012d). However, there question as to whether the Chinese owtward foreign direct investment challenges the traditional internationalization theory will remain a controversial matter. However, only 10% of the economists affirms the allignment of traditional internationalization theories with Chinese OFDI. Majority are on the opinion that the strong role of Chinese government is reflected in the factors that determines nature of Chinese OFDI (Huang, 2005). Hence, the decision made by Chinese government regarding institutionalization largely influences the internationalization of individual firms. Moreover, the government’s initiative for going global also increasingly supports the importance of OFDI. However, unfavourable institutions that are lacking legal protection for property rights, efficient intermediaries and enforcement of legislations may drag the firm behind for going global (Hanemann and Rosen, 2012). Another consideration in this framework is that the Chinese government is engaged in the FDI matter in the form of State Ownership Enterprises (SOE). Hence, the key management positions of the firms engaged in international activities are largely influenced by the though process of Communist Party of China (Zebregs and Tseng, 2002). When such firms are encouraged to compete domestically as well as internationally, the policy makers experienced inward linkages and institutional support. Thses are the incidents that indicates clear contradiction of Chinese owtward foreign direct investment with traditional internationalization theory (Song, Garnaut and Fang, 2014). Conclusion After analyzing the non tariff trade protection and its various forms for restricting the degree of economic liberalization, it can be inferred that initially, the motivation behind formulation of non-tariff trade protection was to protect and promote the interests of developing countries. Many countries, specifically developing economies such as Indonesia, Brazil, India, China, Russia and Argentina experienced initial benefits arising out of non-trade tariffs. However, in turn these nations are experiencing long term contradictions out of such protections. Considering, the structural pattern of Chinese Outward Foreign Direct Investment, the positive outcome of such investment facilitated the country to achieve and maintain a uniform growth rate of the economy and making the economy more competitive and mature over a period of time. If China can manage and control the trivial issues out of such outward FDI, the country will definitely continue to maintain its position in global economy in future as well. Reference List Berning, S. C. and Holtbrügge, D., 2012. Chinese outward foreign direct investment—a challenge for traditional internationalization theories? [PDF] Retrieved from: [Accessed 15 January 2015]. Chen, C., 2011. Foreign Direct Investment in China: Location Determinants, Investor Behaviour and Economic Impact. Cheltenham: Edward Elgar Publishing. Collins, D., 2013. The BRIC States and Outward Foreign Direct Investment. Oxford: Oxford University Press. Dunning, J. H. and Lundan, S. M., 2008. Multinational Enterprises and the Global Economy. Cheltenham: Edward Elgar Publishing. Gandolfo, G. and Trionfetti, F., 2013. International Trade Theory and Policy. Berlin: Springer Science & Business Media. Hanemann, T. and Rosen, D. H., 2012. China Invests in Europe: Patterns, Impacts and Policy Implications. [PDf] Retrieved from: [Accessed 15 January 2015]. Huang, Y., 2005. Selling China: Foreign Direct Investment during the Reform Era. Cambridge: Cambridge University Press. Jakobson, L. and Knox, D., 2010. New Foreign Policy Actors in China. Stockholm: Stockholm International Peace Research Institute. Kenney, M. and Florida, R. L., 2004. Locating Global Advantage: Industry Dynamics in the International Economy. California: Stanford University Press. Kerr, W. A. and Gaisford, J. D., 2007. Handbook on International Trade Policy. Cheltenham: Edward Elgar Publishing. Krugman, P. R., 2008. International Economics: Theory and Policy. New Delhi: Pearson Education India. Letiche, J. M., 2014. International Economics Policies and Their Theoretical Foundations: A Source Book. Waltham: Academic Press. Levy, P. I., 2003. Non-Tariff Barriers as A Test Of Political Economy Theories. [PDf] Retrieved from: < http://www.econ.yale.edu/growth_pdf/cdp852.pdf> [Accessed 15 January 2015]. Li, X., 2010. Chinas Outward Foreign Investment: A Political Perspective. Lanham: University Press of America. Marinov, M and Marinova, S., 2012. Impacts of Emerging Economies and Firms on International Business. Basingstoke: Palgrave Macmillan. Markusen, J. R., 2004. Multinational Firms and the Theory of International Trade. Cambridge: MIT Press. Nolan, P., 2001. China and the Global Economy: National Champions, Industrial Policy and the Big Business Revolution. Basingstoke: Palgrave Macmillan. OECD, 2000a. Main Determinants And Impacts Of Foreign Direct Investment On China’s Economy. [PDf] Retrieved from: [Accessed 15 January 2015]. OECD, 2005b. OECD Trade Policy Studies Looking Beyond Tariffs The Role of Non-Tariff Barriers in World Trade: The Role of Non-Tariff Barriers in World Trade. Paris: OECD Publishing. OECD, 2009c. Protectionism? Tariffs and Other Barriers to Trade. [PDf] Retrieved from: < [Accessed 15 January 2015]. OECD, 2012d. China in the Global Economy Foreign Direct Investment in China Challenges and Prospects for Regional Development: Challenges and Prospects for Regional Development. Paris: OECD Publishing. Poncet, S., 2006. Inward and Outward FDI in China. [PDf] Retrieved from: [Accessed 15 January 2015]. Prasad, E. and Wei, S. J., 2005. The Chinese Approach to Capital Inflows: Patterns and Possible Explanations. [PDf] Retrieved from: < https://www.imf.org/external/pubs/ft/wp/2005/wp0579.pdf> [Accessed 15 January 2015]. Ray, E. J., 2008. Changing Patterns of Protectionism: The Fall in Tariffs and the Rise in Non-Tariff Barriers Symposium: The Political Economy of International Trade Law and Policy. Northwestern Journal of International Law & Business, 8(2), pp. 286-316. Reinert, K. A., 2011. An Introduction to International Economics: New Perspectives on the World Economy. Cambridge: Cambridge University Press. Song, L., Garnaut, R. and Fang, C., 2014. Deepening Reform for China’s Long-term Growth and Development. Acton: Australian National University. The Economist, 2013. China’s outward investment: The second wave. [Online] Retrieved from: [Accessed 15 January 2015]. World Bank, 2012. Rise of non-tariff protectionism amid global uncertainty. [Online] Retrieved from: [Accessed 15 January 2015]. Worm, V., 2008. China: Business Opportunities in a Globalizing Economy. Copenhagen: Copenhagen Business School Press. Zebregs, H. and Tseng, W., 2002. Foreign Direct Investment in China: Some Lessons for Other Countries. Washington DC: International Monetary Fund. Read More