International Trade - Essay Example

? International Trade Question: 1a.Identification and discussion of factors that may have contributed to the growth in world exports between 2000 and2007. In many countries, exports play a very important role in determination of their performance. Exports are the major sources of the much needed foreign exchange. This rapid growth in the world trade is one of the major developments which have taken place in the last few years. Over the period between 2000 and 2007, there was a rapid growth of the world’s trade. In fact, world trade growth is one of the major developments which have taken place in the world over the recent past. Statistics shows that the world output rose from 16% to 22% between 1980 and 2007 (Zymek 2010: p. 2). During this period, the word’s GDP increased significantly. There are various reasons for the growth in the world’s trade during this period. Many people have argued that the removal of the trade barriers is one of the major factors which have contributed to the growth of international trade. Trade barriers are the impediments to free trade. Impositions of trade barriers discourage international trade. One of the main international trade barriers are tariffs. Over this period, the average tariff rates among the most powerful economies reduced significantly. Zymek (2010) argues that the recent growth in international trade resulted from the fact that many open economies had become less homogenous with time. The classical trade theory proposes that the differences in the relative factor endowments encourage specialization in the international goods market. This realization has significantly led to an increase in the level of interdependence among different economies. Consequently, this has led to an increase in the level of interdependence among these countries. The more the countries become specialized, the higher the level of goods they produce. This contributes to the growth of the international trade. Zymek (2010) found out that specialization due to increase in factor proportion has contributed to more than 50% of the growth in the world trade from 1980 to 2007. This clearly reveals that specialization has a significant role in promoting the international trade. Question: 1b. Distinguish between tariff and quota and discuss why tariff are preferable to quotas (i.e. quantitative restrictions) as a method of controlling imports Differences between tariffs and quota In various economies, there are many ways through which the government can protect the domestic competing industries. That is, through a quota or a tariff. One of the main areas where these policies differ is on the magnitude of protection of each. Quotas provide more protection to the domestic industries due to the fact that they limit the quantities of particular product which is allowed to enter into the country (Suranovic, not dated: par 3). On the other hand, tariffs protect the domestic industries by just raising the level of prices. Importance of tariffs over quotas (quantitative restrictions) In most cases, tariffs are preferred to quotas. There are several reasons why many governments prefer tariff to quotas. To start with, a tariff generates revenue to the government (Suranovic, not dated: par3). This is more so when the tariff is unprohibitive in nature. Once imposed, tariff will automatically generate revenue for the government. On the other hand, quotas may not generate revenue to the government. However, this will depend on the manner in which the quota is administered. Quotas administered on the first come served basis will rarely generate revenue for the government. On the other hand, a quota administered by selling of tickets will generate some income for the government (Suranovic, not dated: par 4). The administrative costs between these two forms of trade control differ significantly. Some of the processes involved in tariff collection involves the identification of the product which is then followed by collection and processing of the fees. On the other hand, the trade control through quotas involves identification of the product which is followed by a process of tracking and keeping a close inspection of all the products entering the country through various ports in the country. Quota system also involves distribution and auctioneering of the quota tickets. In other words, administrative costs of the quotas are relatively higher. It involves more processes than the tariff administration. Another reason for tariffs is that they are associated with more market flexibility (Suranovic, not dated: par 3). This is unlike the quota system which does not favour market flexibility. While using tariffs to control trade, it is easy to know the extent to which these policies offer protection. For instance, tariff percentage can be used to measure the extent to which this measure protects. Contrary to this, it is difficult to come up with a measure of the extent to which a quota protects. That is, it is difficult to exactly estimate how far or near a quota lie below the free trade. Question: 2. In reference to the graph on components of the U.K. balance of payments, carefully analyse the international trade in goods and services as reported on the United Kingdom’s balance of payments between 2004 and the first half of 2009. The graph on U.K.’s balance of payments give a summary of the international trade as reported in the international trade in goods and services for the U.K. Generally, the graph shows that the trade in goods was falling from the first half of 2004 up to the 2008. However, the trend changed in the mid 2008. In between this period, the rate at which the value of traded goods and services decreased varied. From the first half of 2004, the value of trade in goods and services was decreasing at a relatively low rate. However, the rate increased between mid 2006 and mid 2007 from where the rate was slightly lower. This downward trend changed from the first half of 2008. In other words, the value of the goods sold was increasing at a high rate by June 2008. In average, the value of the trade in services was rising from 2004 up to the mid 2008 where the value of traded services started to fall. However, there were some fluctuations to this upward trend in between 2004 and 2008. For instance, the value of trade in services was increasing at a high rate up to the first half of 2004 when the value started to decrease. This lasted for a period of one year. The value was increasing from the beginning of the second half of 2005. This continued up to the second half of 2008 when the value of traded goods and services started to decrease once more. One of the most dominant observations in this graph is the fact that the trends of the value of the traded goods and the value of traded services was in opposite directions between 2004 and 2009. The value of traded goods was decreasing from 2004 while the value of traded goods and services was increasing. From the beginning of the second half of 2008, the value of traded goods and services was decreasing while the value of traded goods was decreasing from the same time. This implies that there was a diversion of factors of production in the U.K. between the production of goods and services. More resources were diverted from the production of services to production of goods and services. This is one of the potential reasons which could have led to these changes in the value of traded goods and services between 2004 and 2009 in the U.K. Measures of Rectifying the Imbalances in the Current Account In the balance of payment, the current account represents the trade in goods and services, current transfers and investment incomes (Anonymous 2009: par 2). According to Fan (2011), current account is one of the most popular methods which are used by majority of the economies in the world in identification of the financial as well as the trade flows (p 6). There are several ways through which the U.K. and other governments can use to solve the problem of current account imbalances. One of the ways which the U.K. government has employed to solve the current account imbalances is by slowing down consumer spending (Pettinger 2008: par 9). The government does this by discouraging spending hence increasing the incentive to save. By increasing the taxes, the government will discourage consumer spending hence lowering the level of imports. Recent statistics shows that U.K.’s propensity to import is as high as 40% (Pettinger 2008: par 9). This raises the need to discourage imports. An economy can restore its current account balance by reducing restrictions on the exports. In most cases, we have several restrictions to discourage exports. For instance, the U.S. government through the ministry of commerce ranked ten groups of regulated export products. Such restrictions help in reducing the imbalances in the current account. Various governments has minimised such interactions in order to avoid current account imbalances. Another way through which a country can rectify its balance of payments is by subsidising young companies in the economy. This will improve the level of domestic production. Increase in the level of domestic production increases the level of exports. Increase in the level of exports improves the balance of payments. Finally, the U.K. government is also trying to boost its productivity in order to restore its balance of payment. By so doing, the government will be able to improve the competitiveness of the U.K. goods and services in the international trade hence making them more attractive while reducing the attractiveness of the imports. This helps in reducing the trade deficits. Question 3 Describing the term of shipment and sale of this shipment under the Saudi Arabia-tanker and an assessment of the distribution of responsibilities and risks associated with Direct Duty Paid (DDP). BBC, Ex Works (EXWKS), Free on Board (FOB), and Cost Insurance and Freight (CIF). In some cases, goods in transit and under contract may get damaged, lost or stolen while in neither the seller’s hands nor the buyer’s hands. In such a case, the loss could not be blamed on either of them. However, the loss has to be absorbed by one of them. In such contracts, both the seller and the buyer can agree on who should absorb the losses or even decide to share it in case it arises. Currently, the situation has worsened due to high prevalence of piracy. This has increased the cases of loss of goods under transit. One of the common contract rules in export and import transactions is the Direct Duty Paid (DDP). Under the direct duty paid system, the seller must clear the goods for import and pay the duty (Anonymous 2006: par 17). Under the DDP, the seller responsible for the shipment costs and the risks posed on the goods under transit. However, these terms may be adjusted to have the buyer to pay for the VAT. In this case, the Sirious Star was hijacked before the goods had reached the destination. Under the DDP system, the seller should be responsible for the losses. Free on Board (FOB) system is used when the sea is used as the medium of transport (Anonymous 2006: par 25). Under FOB, the seller must be able to support the loading of the cargo on their own. They can also use agents to perform these duties but under their responsibility. Then, the process has to be monitored by both of them. Under this INCOTERM, the risk of the goods under contract changes from seller to the buyer the moment the ship carrying the cargo passes the ship’s rail at the origin port. For the transportation costs, the seller remains responsible until the goods reach the destination where the buyer is located. For instance, the buyer would have been the one to absorb the costs of the oil losses in the case of the ship hijacked by Somali pirates. Under the Ex Works, (EXWKS), the buyer is more involved in the processes of transporting goods from their origin to destination than the seller. That is, from the places of ‘works’. Under this system, the buyer is responsible for the risks once the cargo is made available at the place of works (Fabio 2010: 182). Reference List Anonymous 2006. Buyer & Seller Frequently Used Abbreviations. [Online] Available at: [Accessed 23rd March 2011] Anonymous 2009. Current and Financial Account Balance. [Online] Available at: < http://www.economicshelp.org/blog/economics/current-and-financial-account-balance/> [Accessed 23rd March 2011] Fabio , M., 2010. Customs Law of the European Union. Netherlands, Kluwer Law International Fan, H., 2011. Rebalancing: China’s Perspective. [Online] Available at: [Accessed 23rd March 2011] Pettinger, T., 2008. Solving the UK Current Account Deficit. [Online] Available at: [Accessed 23rd March 2011] Suranovic, S., n.d. International Trade: Theory and Policy. [Online] Available at: [Accessed 23rd March 2011] Zymek, R., 2010. Factor Proportions and the Growth of World Trade. [Online] Available at: [Accessed 23rd March 2011] Read More