International Trade Theory - Essay Example

? International trade theory Table of Contents Answer to Question 3 Answer to Question 2 3 Answer to Question 3 4 Answer to Question 4 4 Answer to Question 5 5 Answer to Question 6 6 Answer to Question 7 6 Answer to Question 8 7 References 7 Answer to Question 1 According to mercantilist views, the amount of assets or wealth that the world is endowed with is constant and that the only way that a nation can attract it within its perimeters is to follow a protectionist trade policy. However, this school of thought is almost futile in describing present day economics of nations almost all of whom participate in international trade. Mercantilist view of economics depicted international trade to be a zero-sum game where profit enjoyed by one group will be mirrored as a financial loss of another. Economists beginning from the age of Adam Smith nevertheless, have vehemently refuted this theory and established the concept of comparative advantage which could arise only when the scope of international trade is open. Comparative advantage theory which is widely followed today states that factors of production are not available uniformly around the world. It is wise for a nation not to invest in producing all its needs; rather it could specialise in the production of the good which could be produced most efficiently and at the cheapest rates (Peng, 2008, p. 127). This is the innate strategy being followed by most successful nations in the world today. Hence, it could be claimed that mercantilism is a bankrupt theory that has no place in the modern world. Answer to Question 2 Free trade is an economic phenomenon which supports an unbarred flow of goods and services across international boundaries. Since there is no government intervention in this case, the actual demand and supply positions of the commodity in question is reflected through its market price. Since there are no mark ups to prices, such a policy is advantageous for the producers as well as consumers of the concerned commodity. However, government intervention could be regarded as necessary in case of certain exhaustible resources whose supply needs to be rationed to guarantee future consumption as well. Such a restriction cannot be imposed in situations where free trade exists. A good example is that of oil prices which had been at pretty low rates prior to 1971, when these values were guided by market mechanism. However, concerns about the precious resources being replenished compelled the World Trade Organisation to sanction its restrictive use. Answer to Question 3 There has been an increasing tendency among developed nations to assume a protectionist position in many aspects of international trade. Many of them who had previously sought the services of less developed or emerging nations to cater to the needs of their residents, have turned dead against such a strategy, posing a view that such a mindset could hamper employment opportunities in the recipient nation. They have termed it as “unfair” import competition due to the potential loss of jobs that such practice is leading to. Such a standpoint however has differentiated impacts upon various sections of the recipient nation. (a) It might be of high interest for the union houses who often adopt practices to apparently pacify the workers and show them the former’s alignment to them. (b) The people who are represented by the unions might be benefitted if the national government adopts such policies, since in the short run, they would be rewarded with higher employment opportunities. (c) The nation however, is likely to land up in a worse situation since they have to subsidise the companies which adhered to such practices. Even if they decide not to fund their needs, they would be in an inferior position given that the companies no longer reap as wide a profit margin as before which reduces the national income statistics. Answer to Question 4 A free-trade regime had been supported by Ricardian economic theory after David Ricardo pointed out the scope of comparative advantage that partner nations can enjoy through indulging in international trade. According to him, a restrictive trade regime leads to an artificial hike in the price of commodities which could discourage their consumption. However, there are potential costs of allowing free trade as well. From an economic ground, such a regime is least likely to curb the problem of social and income inequality since the producers will be eager to produce their goods at cheaper rates to stay at an advantageous position compared to its peers, in the international market. From this ground, they will try to compromise as little as possible in terms of paying labour wages thus worsening the already inferior standard of living of the workers. From an environmental ground as well, such a stance might prove to be harmful as free trade often discourages rationing of commodities even if they are exhaustible in nature, such as crude petroleum (Hill & Jain, 2009, p. 218). The national government could impose protectionist policies for certain industries which are still at their juvenile state and have to reduce labour costs in order to gain a competitive edge. In addition, supplies of certain exhaustible commodities should be restricted as well for long run gains. Hence, a complete free trade regime must not be adhered to by an economy. Answer to Question 5 (a) China had complied with neo-mercantilist views of trade policy till late 1990s when it had vehemently advocated rising exports and discouraged imports. Such a stance was expected to enhance the stock of foreign reserves in the nation since that would expand the current account surplus of the economy. Such pattern of behaviour has actually accumulated a large amount of foreign reserve stocks in the nation’s treasury. However, the Chinese government still maintains a low rate of currency exchange in order to keep its foreign demand surging. On the other hand, the Chinese government has imposed restrictions in the form of taxes and tariffs so as to constrict the inflow of foreign goods within its premises (Roy, 1998, p. 87). (b) Many developed nations like United States are in strict opposition of such a regime since that not only has curbed the international demand for goods produced by them, but has also restricted their entry into the Chinese market which is counted as the largest consumption market in the world. Furthermore, the developed nations are fast losing their domestic reserves which are locked in with the Chinese government. In order to discourage such activities, the developed nations should ideally create restrictions for the entry of Chinese goods within their domains as well. Answer to Question 6 (a) The beneficiaries of white-collar jobs getting outsourced in developing nations are the companies which outsource these jobs as they can get them accomplished at far cheaper rates than what it is in developed nations. In addition, the developing nations also benefit out of such an outsourcing system since such avenues create employment opportunities for their nationals. (b) Developed nations like United States is likely to suffer the brunt of such outsourcing of white-collar jobs given a downfall in their employment channels. In addition, there also arise possibilities of a fall in national income levels. (c) The possible difference between outsourcing of white-collar and blue-collar jobs is that while in the former case there will be a fall in the equilibrium level of wages by a significant amount, it will not be so in the latter case. Such a movement in wage prices might be detrimental for the nationals of a developed nation and hence, the government must impose restriction to a certain extent upon outsourcing, to save some employment opportunities Hill & Jain, 2009, p. 229). Answer to Question 7 Biotechnology is a field characterised by regular research and requires upgraded resources for the same. According to new trade theory and Porter’s theory of national competitive advantage, the national government must invest in the domains of research and development as well as education, proper infrastructure, which would build national competitive advantage in biotechnology. One suitable policy which the national government should adopt in this regard is to provide the domestic firms with a level playing field, free from any government intervention. Such a measure will enable them to gain a competitive advantage needed to sustain in the international market. However, such a step also goes against the principles of free trade policy since here the national government has to adopt a protectionist image (Hill & Jain, 2009, p. 250). Answer to Question 8 Free trade might not be completely advantageous for the poorer nations from all aspects. However, they can always indulge themselves in the production of commodities in which they are specialised. Usually, there are some commodities which even poorer nations can produce efficiently from cost grounds and hence attract global demand towards. Actually, the concept of free trade is rooted in that of comparative advantage theory which suggests every nation to produce that which it can produce most efficiently. In fact, a prolonged involvement in free trade could actually prove beneficial for these developing nations as well, since that will help them to accumulate a large stock of foreign reserves and hence lead to development eventually. References Hill, C. W. L. & Jain, A. K. (2009). International Business (6th ed.). New Delhi, India: Tata McGraw-Hill. Peng, M. W. (2008). Global Business. USA: Cengage Learning. Roy, D. (1998). China's foreign relations. Maryland, USA: Rowman & Littlefield. Read More