Theory of Integration and Trade Diversion - Essay Example

When a technology company located in America receives a loan from a Bank in Germany it is termed as a credit trade transaction. When a German resident purchases stock from a broker located in the U.S., is it termed a credit transaction? On the contrary, when a U.S. resident receives dividend payments from stocks of a company located abroad is a debt trade transaction. When an American tourist is on a shopping extravaganza in Hong Kong, this is also a debt trade transaction.

Globalization is known as the process of integration across economies and societies. The Key drivers of globalization include trade and market, investment and capital flows, and information and innovation on poverty (Hill 11). The types of trade flows encompass the flow of services, finance, information, and products. The frequency and intensity of these flows are related to the increase and decrease forming a trend in globalization. The changing demographics in the global marketplace occur due to one main reason, competition. Competition in a global marketplace with the dominance of countries like the U.S. in the world economy and the world trade picture. There was also a change in demographics with the dominance of world foreign direct investment. Trade flows can be a fundamental factor in determining an emerging market. As an emerging market, a country is seen to embark on an economic reform that will be good for the country.

Given the current state of the global economy, for a nation that is emerging and wants to build on its competitive trade position through factor conditions, related and supporting industries, the county’s structure, strategy, rivalry, and, demand conditions should be highly considered. This means that the government should act as a catalyst of competition but not get directly involved in the competition. The new trade theory and the international trade theory can help support this claim. As the output of a country expands with specialization its ability to realize economies of scale will increase as unit cost decrease. Countries that have early entrance into a certain type of market have the advantage of first movers and limited barriers to entry (Hill 23). International trade theory encompasses the difference between countries. Since factors like trade differ from one country to another, cheap labor can be used as a competitive advantage. This is about Ricardian trade theory which purports differences in labor patterns. Michael Porter’s article on the “Competitive Advantage of Nations” offers a clear insight into how an emerging country should take advantage of its trade position by implementing the first theory of competitiveness. This is based on the causes of productivity in which companies will tend to compete. A country’s natural resources and pool of labor are deemed as a source of prosperity. Porter's concept of “ clusters” advocates for the interconnection of firms, companies related industries as a new way of improving economies by setting public policies.

Harmonized code is an international standardized coordination of names and numbers that are used to classify traded products that are developed by the WCO World Customs Organization.

Product                                                                                                 HS CODE

Women’s Silk Dresses                                                                         500720

Brown rice                                                                                            100620

Herrings, excluding livers and roe                                                       030310 
Men’s Cotton Raincoats                                                                      620332    
Leather Brief Case                                                                                410791

Concerning the theory of integration, trade diversion is an economic argument. This means that third countries stand a chance of lower opportunity costs as opposed to member countries that are excluded by import tariffs. Unrestricted trade flows will enable counties to specialize in the production of goods for those who can produce them most effectively (Hill 56). It is a result of economic integration within a specific geographical region. On the other hand, the political case of integration uses the concept of connecting neighboring countries' economies and making them increasingly dependent on each other. This will help in creating incentives and political collaboration by reducing the potential violence between them. In addition to this, these countries can enhance their political weight in the world. The benefits of political and economic integration do not out way the difficulties. Even though economic integration benefits the majority, it comes with a cost. A set-on nation may benefit from regional free trade but some may lose.   Consumer surplus is likely to decrease as a result of integration. This is evident from the European integration and NAFTA. The national sovereignty of a country is not respected and this may lead to border disputes.