International Trade and Globalization - Essay Example

INTERNATIONAL TRADE AND GLOBALISATION Introduction International trade is the exchange of services and goods between nations of the world. This definition recognises that world trade involves services such as engineering, financial and architectural services. On the other hand, there are various goods in international trade ranging from food stuff, automobiles, steel and much more (Reinert 2011, p. 3). International trade operates in form of trade agreements. International trade agreements is a collection of rules that define the behaviour of trade policy, and the required compliance in form of implementation mechanisms. This paper will discuss international trade in terms of its history and reflect on the reasons for and types of its development. In addition, this paper will deliberate on the function of international institutions, multinational corporations and trading blocks. This essay will look into the major patterns in regard to the international trade and examine the positive and negative effects of globalisation. In addition, the discussion will assess the influence on different groups such as consumers of trade as well as limitations between blocks and countries. Moreover, the paper will touch on international production and its aspects of foreign direct investment. Finally, the paper will analyse the globalisation of international business, for instance, in regard to market entry techniques and the importance of multi-national global brands and corporations, from different perspectives. Module overview International trade Comparative advantage determines international trade. Theory of comparative advantage argues that the common rate of profit and the standard of wages are not at equilibrium internationally as they are in a domestic market. The assumption of comparative advantage theory is that capital cannot be moved from less profitable to more profitable sectors of production. If this is the case, it would lead to an equalisation of the profits rates like in domestic market. Consequently, the wage rates are not equalised in international market due to lack of labour movement. A nation is said to be at comparative advantage in production of commodities, if the opportunity cost of generating the product is lower compared to other countries (Schumacher 2012, p.51). The comparative advantage theory is concerned with trade of homogeneous products. On the other hand, new trade theory focuses in intra-industry and inter-industry trade. Intra-industry trade is the exchange of similar products within a common industry for example goods at various levels of production. Inter-industry trade is the exchange of goods from various industries for instance, trading agricultural products for equipment and machinery (Handjiski 2010, p.15). Factors of production consist of heterogeneous objects such as labour, land and capital. Trading blocs are created to reduce the variations in the mobility of factors of production between and within nations (McDonald & Burton 2002, p.36). Trade policy is a tool through which income is circulated in the economy. The main challenge of a trade policy is that it cannot address multiple targets because it is one tool (Hoekman, Mattoo & English 2002, p. 520). Trade policy focus on the economic influences of indirect and direct government activities that interferes with international transactions environment (Kerr & Gaisford 2007, p.1). Preferential trade agreements include custom unions and free trade area negotiations. Free trade area eliminates obstacles and duties to trade for members while the custom union impose a common commercial system against non-members (Bagwell & Mavroidis 2011, p. 235). International production International production involves ‘production sharing’, intra-product specialisation’, ‘outsourcing’, and ‘vertical specialisation’ by companies in different countries. Foreign market entry is a strategy by a particular organisation to enter a new overseas market (Benjamin Levi 2006, p. 34). Global production networks are decentralised events and concentrated industrial clusters of various arrangements in the global production complex. Global production network focuses on a global scale to look for a favourable production location. On the other hand, the industrial cluster is created to ‘localize’ and ‘bring down’ the highly globalised production operations (Kuroiwa & Toh 2008, p.88). Global expansion of material market acts as a way of ongoing production and capital reserve. For example, the world production and expansion of oil market in post-war era is magnificent. The new period of expansion engaged new faces into the market that challenges the market position of established companies. As more oil joined the international market, it generated market intervention by governments of consumer and producer as they fought to get a greater share of economic profits and rents. World oil production expanded in 1949 from 9,750 thousand b/d to 62,195 thousand b/d in the year 1988, representing a growth of 537.9% (Linde 2013, p. ch.3). Foreign direct investment is the exchange of intangible and tangible assets from one nation to another with an aim of utilising them to produce wealth. In such a case, the owner of the assets is in partial of full control of the business operations (Sornarajah 2010, p.8). Foreign direct investment occurs through indirect or direct investor inform of investment enterprise. Exporting is a form of expansion mode utilised in terms of international outsourcing and direct foreign investment. In most cases, government set up trade assistance agencies in overseas countries to assist in export efforts by companies. Various researches prove that exporting is utilised by companies in their early stages of internationalisation. This mode is common in manufacturers in mining and agriculture sectors (Welch, Benito & Petersen 2007, p.239). History of international trade The economic resources of a nation are connected through financial capital flows, trade and foreign investments. The nature of international trade has transformed over time due to changes in institution, economic, politics and technology. For instance, the occurrence of global crises in 2008 resulted in a reduction of the quantity of the world trade beyond one-quarter that affected countries with stable financial systems negatively. From a historical perspective, the long distance trade played a significant role in the development of world’s economy. The Roman Empire succeeded in ancient trade whereby it linked three continents together. The three continents include Northern Africa, Europe and western Asia. The mode of transport used was land and sea. The commodities of trade were subsidised by the Empire that constituted of grain and oil (Helpman 2011, p.2). The expansion of long-distance trade was connected to economic growth in such a way that they both influenced each other. Trade was a contributing element to industrial revolution in Europe in the mid-eighteenth century. The availability of high wages and cheap labour promoted the growth of technologies that replaced machines for labour, which increased the economic development in Europe (Helpman 2011, p. 7). After the World War II, a group of industrial counties established GATT (General Agreement on Tariffs and Trade). The aim of the agreement was to facilitate trade among the nations to improve the living standards, enlarge production and exchange of goods, and ensure full employment and full utilisation of resources. The international trade was attained through subsidised tariffs, removing discriminatory treatment and trade barriers (Rodrik 2011, ch. 1). Trading blocks The multilateral trading system during the post-war period under GATT, resulted in the rise of regional trading blocs. The European Union was established for the purpose of rebuilding the war-torn Europe. The move to create a trading bloc was motivated by political issues to enhance the level of economic incorporation to reduce the military conflicts in the twentieth century. The economic incorporation started with the European steel and coal society that was created in 1952 to focus on incorporation and rationalisation of European steel industry. The aim of the trading blocs was to eliminate the border limitations on trade in particular quotas and tariffs among member states (Trebilcock & Howse 2012, p. 26). There are two forms of trade blocs namely; custom union and free area trade. A free area trade is a setting where trade limitations between member states are eliminates but each country maintain their distinct national restrictions on trade with other nations. On the other hand, custom union permits trade amongst members’ states that is not restricted. However, there are common external obstructions against the rest of the world (Bill 2011, p. 4). The trade blocks discriminates against lower-cost producers who are not members resulting to unfair distribution of resources, therefore, minimising global welfare. In such a case, it is against the objectives of (WTO) World Trade Organisations to promote and reinforce sustainable growth, raise the standards of living, reduce poverty level, and to enhance stability and peace. Krugman Model suggests that different countries come together to form a trading bloc and employ their monopoly authority to impose ‘optimal’ tariff against the rest of the globe (Marrewijk 2012, p. 278). Fig.1 Equation of total welfare (Marrewijk 2012, p.279). Krugman framework states that total welfare reduces as the number of trading bloc reduces over a wide range of an area. An exception is in the case where the number of trading blocs is small. This scenario is vivid in figure 2, which indicates that three to six number of trading blocs has an improved welfare. Fig. 2 Trade agreements and total welfare (Marrewijk 2012, p.279). Note: the broken lines show the minimum level attained. Figure 2 shows that total welfare is maximum where there is only one trading bloc. In addition, maximum welfare is attained where the number of trading blocs is big because of the elimination of relative price distortion. Where the tariff rate t charged on imports of commodities from outside a trading bloc results in a reduced welfare standard. In addition, it leads to an increase in the quantity of trading blocs. This is illustrated in figure 2 (a). Consequently, an increase in the elasticity of substitution ԑ results to an increase of the trading blocs and minimisation in the welfare level (Marrewijk 2012, p. 280). The role of multinational corporations and international institutions Today’s world is made up of global markets for capital, merchandise and global players for example, independent countries and transnational corporations. Therefore, International Institutions are required to control global market collapse where the independent national governments are unable to execute the laws in global market effectively. To minimise the cost of resolving the conflict, the International Institutes have been created to establish global rules (Chen 2003, p. 1). International institutions have four functions; facilitative, constraint, diffusion of influence and promotion of interaction. The facilitative role entails facilitation of discussion and conclusion of commercial contracts as per their normative and institutional position. The constraint function implements compliance and policies of restraint by members with a developing code of trade ethics. From the perspective of diffusion of influence role, the international institutions gives small members a first-rate chance to impact. The promotion of interaction function enhances trade evolution because the growth of trade flow is paramount to all countries in a trade bloc. At the same time, it eliminates the deep-rooted systematic risks through creation of a system to solve and prevent trade conflict (Delimatsis 2007, p. 41). Multinational corporations play a crucial role in international trade between companies and industries in various countries that push forward the procedure of globalisation (Krugman, Obstfeld & Melitz 2014, ch.8). Unlike the sovereign nations, the multinational corporations exist in a society that has no borders, therefore, they possess the potential to implement change. Major trends in international trade The advancement of globalisation begins with a major drift in policy actions adopted or implemented by concerned government to accommodate economic changes and expose the economy. Globalisation has therefore contributed significantly to drifts in the composition of trade. From the perspective of commodities, the major shift has been advancement from primary to manufactured goods. From geographical point of view, a critical shift has been the swelling of the share of world trade witnessed by the developing nations (Dicken2011, p. 13). In addition, geographically, the advanced industrialised countries have accounted for a reduction in the share of world trade. A major development in the industrialised nations, is the surfacing of Japan as a key trading country. On the other hand, a large increase in export share originates from newly industrialising economies of East and South Asia. These trends are clear where the focus is on trade in manufactured commodities (Grimwade 2000, p. 27). Positive impact of globalisation Globalisation consists of development of interconnections between countries. As a result it assists in reduction of obstacles such as cultural, political, physical and economic that divide various parts of the globe. Therefore, it encourages liberalisation that promote movement of resources. From this perspectives, businesses gain from lower prices, new markets, and a broad choice of suppliers for services and goods. Moreover, enterprises gain from cheap labour and cheaper locality for investment (Hamilton 2015, p.5-6). In addition, globalisation results in immense development of FDI (foreign direct investment) that is much more compared to world trade development. The FDI plays a fundamental function in the transfer of technology, creation of global businesses, and industrial restructuring (Salvatore 2012, p.226). In addition, globalisation influences technological innovation. Globalisation and the rise of competition has provoked advancement in technology and increased its absorption into countries via foreign direct investment (Sloman & Garratt 2013, ch. 13). Furthermore, there is an increase in development of trade in services that consist of information, financial, managerial and legal services (Gangopadhyay 2005, p. 70). Globalisation has also pushed for a rapid expansion of global competition. Competition results in division and specialisation of labour which is a benefit of a market approach. Division and specialisation of labour promotes an increase in production on a global perspective (Baylis, Smith & Owens 2011, ch.33). Other beneficial impacts of globalisation comprise of economies of scale and opportunities that can lead to reduction in costs and prices. In addition, it identifies horizons that are favourable for progressing economic evolution (Gangopadhyay 2005, p.71). Negative impact of globalisation Nevertheless, globalisation can also pose dangers to businesses from the perspective of reliance of foreign market and suppliers. This makes the businesses susceptible to occurrences in overseas economies and markets that they cannot manage (Hamilton 2015, p.5-6). Likewise, globalisation can result in different forms of conflict at international, regional or national level. There is a possibility of equity challenges in the allocation of benefits from globalisation among regions, individuals, nations and organisations. As a matter of fact, many benefits end up in the hands of wealthy people or nations that generate more inequalities that bring about conflicts at international and national levels. Moreover, globalisation results in global or regional instabilities because of interdependence of economies on a global platform. Globalisation also results in a shift in the control of national economies from sovereign governments to other bodies. This results to a norm among national leaders that they have no control of global pressures that may develop an attitude of dissatisfaction among the population. This can result in extreme xenophobia and nationalism (Gangopadhyay 2005, p.71-72). Impact of trade and trade restrictions between blocks and countries The quantity of international trade has increased at a fast rate in the recent years. This is motivated by looking at the comparative advantage instead of absolute advantage that has been the source of benefits from trade. The difference in the relative production costs of commodities enables trading partners to earn from trade. The trading partners are able to generate a bigger output and enlarge their consumption chances through trade and specialisation. In addition, imports increase the supply in domestic market that results in cutback on consumer prices. On the other hand, exports minimises the domestic supply that forces the prices to go up. The resulting effect of trade and trade restrictions is that it results in increase in total output and more income volume for trading members (Gwartney 2013, p. 375). Import restrictions from another perspective, minimises the supply of foreign commodities to domestic markets. These import restrictions include quotas and tariffs that result in increased prices. This is in contrary to the purpose of restriction, which is to act as a subsidy to workers and producers of members of a trading bloc. The influence of trade restrictions on an entire economy is destructive, but it produces welfare to interest groups that can be used by politicians in campaigning. All in all, open economies have developed at a fast rate and attained greater per capita income compared to closed international trade economies (Gwartney 2013, p. 375). Main hindrance in trading blocs is that big nations do not have huge incentives to become parties to such agreements and neither does the large trade contracts possess substantial inducement to include such countries in their trade agreement. Another obstacle to free trade agreement is the reliance of government on revenues generated from import tariffs (Bigman 2007, p. 271). Globalisation of international business International business deal with business operations that consist of movement of knowledge, information, resources and skills across national boundaries. The resources involved in international business include services, capital, people, goods and raw materials. Services include insurance, management, healthcare, and tourism, banking and legal counsel. Goods may be in form of finished or semi-finished products and assemblies. Expertise and knowledge comprise of innovation and technology, intellectual property rights such as brand names, copyrights and trademarks. Parties involved in international business are international institutions, alliances, companies and individuals. The business is a key economic agent that gains and facilitates globalisation. Business exchanges and operations that cross national boundaries are referred to as international transactions. International transactions are demonstrated in international investment and trade (Shenkar, Luo & Chi 2014, p.10). Market entry methods for international business Market entry mode is a channel used by a company to expand their operations in foreign markets. International business penetrates foreign markets through four types of entry modes. The four entry modes include wholly owned subsidiaries, licensing/franchising, exporting and joint ventures. Wholly owned subsidiaries Wholly owned subsidiaries are also known as ‘Greenfield investment’. It achieves this through obtaining a domestic company or by constructing it (Neelankavil & Rai 2014, p. 167). Wholly owned subsidiaries presume that an international business is prepared to exploit the foreign market and achieve a full potential that is provided by the market. Moreover, wholly owned subsidiaries gives a company full management of entire operations for instance marketing. The advantages of receiving a local company include short period to establish such an activity compared to beginning from the bottom. In addition, it makes it easier to transfer resources into a foreign country where the local situation is different from home nation. In addition, the entry mode employs an approach of ‘appropriability theory’ because it denies competitors access to resources. Large companies adopting this mode of market entry have the potential to safeguard their technologies (Hill & Jones 2012, p.165). The main disadvantage of using wholly owned subsidiaries is that it requires a lot of investment and involves much risk that makes it difficult for small companies to use. In addition, the companies setting up the subsidiaries, lack knowledge about the host country conditions that make it complicated to establish supplier networks. Moreover, new companies face host-country regulations and cultural differences that in most events favour local businesses hence making full ownership complicated (Neelankavil & Rai 2014, p.168). Joint ventures Joint ventures are a type of market entry that involves direct investment on two or more businesses that share ownership. A joint venture contract can be created between foreign company and host government where the foreign business ownership between 1 and 99 percent. The party that owns majority in a partnership assumes the controlling power in the joint venture. This form of market entry is common in developing nations because it gives maximum benefits. The benefits include capital, technology and aid in the growth of local entrepreneurial expertise. In addition, joint ventures create employment, create quality services and goods, and assist to develop local managerial skills. There are critical factors to consider before establishing a joint venture. These factors include; common business goals, control issues, mutual trust, right partner, shared benefits and active partnership (Rivera-Batiz & Oliva 2003, p.167). One advantage of joint ventures is that the two partners share risks and investments. In addition, a foreign company takes full advantage of the market by engaging in marketing and operations. A foreign business also takes advantage of the local regulations in the developing countries. In joint ventures, companies have complimentary expertise that makes them to acquire a strong competitive power. Moreover, the foreign companies gain political preference from the host country because it is a favoured mode of market entry (Grath 2012, p. 167). However, the main disadvantage of joint ventures is lack of control over the entire business activities. Control of business operations is a major concern of international companies because it limits their execution of strategies due to interference by a local partner. In addition, foreign businesses lose control of their technology through piracy by local partners. Additionally, the joint ventures are difficult to manage because of variations in existing goals, cultures, business practices and philosophies (Dransfield 2013, p.284). Exporting Exporting is a process used by international business to enlarge its operations into foreign markets. Exporting is less risky and provides a simple and cheap way to stop business operations in overseas companies. This mode of market entry is divided into two; direct and indirect exporting. Indirect export is facilitated by third parties who perform the role of export that involves documentation and distribution. Direct exporting is more proactive and involves a business selling and distributing its own products in a foreign market (Ireland, Hoskisson & Hitt 2008, p.157). The advantage of indirect exporting is that the foreign business does not require international knowledge or experience because the procedure is managed by third parties. Exporting creates a long-term commitment to a specific market because it can accommodate development. In addition, export creates a close contact with the consumers and establishment of an efficient after-sales service. Disadvantages of exporting include minimal control over the export procedure for the manufacturer and produces little or no comprehension about domestic market. In some cases, caution needs to be taken on freedom of agents to sell products of foreign companies that may result in conflict of interest (Ireland, Hoskisson & Hitt 2008, p.157). Licensing/franchising Licencing is the process of granting licence or permission by the owner of a product to a licensee to harness the licensor’s intellectual property in a specific region over a specified period. The intellectual properties include trademarks, patents and copyrights. In franchising, the franchisee purchases the right to utilise the franchiser’s trademark and name. Advantages of licencing and franchising include gaining knowledge of the local market in regard to dealing with national and local authorities and public officials. In addition, franchisee gain from the franchiser’s reputation, promotion, advertising and goodwill. A disadvantage of franchising is that it may limit the company’s potential to get profits from one business to underpin competitive attacks in another (Hill, Jones & Schilling 2014, p. 270). Conclusion All in all, the development of international trade is influenced by globalisation. Due to the urge to expand business activities, many companies are forced to acquire foreign supply chain partners and facilities. Market entry modes are used to enable international businesses to access foreign markets. 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