Free Trade, International Business, and Globalization - Essay Example

?Free trade, international business and globalization continue to increase inexorably; if they are so beneficial to our world and promoted as such; why do nations fight over issues such as the trade in bananas Introduction With a sound perception of the most desirable economic specialization in the light of the evolving international demand, the countries can be benefited from trade, globalization and international business. Even with minimal infrastructure, availability of an appropriate range of human resources and enough efficient producer services may reduce many obstacles to economic efficiency (like transaction cost). In the context of low developed countries, international trade or business becomes crucial to i) reduce economic vulnerability and protect the environment and ii) to mobilize financial resources (UNCTAD, 2010). From the point of view of international business, globalization is not a mere sale in the overseas, but an operation in the overseas. Producing companies or the runners of business decide to produce in foreign countries for making this operation successfully. By producing in the foreign countries, the companies obtain access to the preferred inputs and to markets. The cheap inputs may be labor or raw materials like minerals or agricultural products. The relevant implications of the international business or globalization of business is free trade and competition. The overall interest of most of the global companies lies in free access to market. Similarly, the companies support the reduction of investment barriers in the individual countries. The competition is brought by the companies into the markets where there exists a limited number of local producers. The competition may be with local producers or among these companies them selves (Stewadson, 1999). Positive Roles of International trade and business in the era of Globalization Free trade in the context of globalization attribute to i) the demand expansion and increasing returns to scale, ii) technological dynamism and investment, iii) specialization of production, technological advances and spill over, and above all to the iv) employment generation in a country, where the multi national countries produce or run the business. The goods and services which are produced locally have access to a larger market and the demand expansion effect of trade make the economy capable of overcoming the constraints of its local and domestic market size. The increasing returns to scale as a result of access to international markets can further reinforce the benefit of operating at a higher output level. The manufactured goods propose better prospects for export earnings by allowing for a more rapid productivity growth and production expansion and also offer the promise of greater price stability as volumes expand, thereby avoiding the declining terms of trade which hinders the long run economic performance of many developing countries (UNCTAD 2002) Trade leads to acquisition of newly affordable goods that are necessary for technological dynamisms, poverty reduction and increasing economic development. Those goods would not available unless export or import occurs properly and even if they are available, those may not be for the scarce domestic resources. If the foreign earnings from exports are appropriately re-invested, competitiveness would be enhanced and this leads to expansion of exports and greater investment. Trade with sufficient strategic support, incentives and guidance of the government can lead the economy to industrial diversification and other crucial economic development. The experience of South Korea is very relevant in this context. Export earnings have been used to import the selective capital goods and technologies which led to the inception of new and outstanding industries (in which the country had any initial comparative advantage) which are internationally competitive (for eg., Steel and Ship Building). The trade theories indicate that a nation exports the commodities which are produced out of its relatively abundant and cheap factors or resources and imports the commodities which are produced out of relatively scarce factors or resources. In another words, relatively labor abundant country exports relatively labor intensive commodity and imports the relatively capital-intensive commodity. Country 1 exports commodity X because X is the Labor (L) intensive commodity and L is relatively cheap and abundant factor in country 1. Country 2 exports commodity Y because Y is the Capital (K) intensive commodity and K is relatively cheap and abundant factor in country 2. Technological dynamism is said to be the most powerful factor in enhancing the economic growth.. And mostly industrial production typically occur in large, stable and concentrated firms unlike in agricultural production. The industrial sectors are said to be the ideal places for knowledge and capital (human) accumulation and provide a tax base for government revenue which can be diverted to enhance education and health care systems , other public provisioning and to support research and development including agriculture. Hence the positive spillovers from industrial innovations are crucial for the growth of agricultural sector and in turn, agricultural growth is decisive for the growth of industrial sector in the early stages of development of any economy. 5. International Trade and Employment International trade creates greater international demand for the domestic goods and services which will increase the capacity utilization of the country and growing export requirements may lead to the employment of previously idle and surplus land and labor resources. The inception of export-oriented and labor intensive industries will create large volume of jobs, by benefiting thousands of previously disadvantaged workers and unemployed people Critical Appraisal of international Trade and business in the context of globalization As per the theories on international trade, trade and foreign direct investment give large efficiency benefits by envisaging the international division of labor and by disseminating the benefits from the technological dynamism. This results in economic development and which in turn lead to poverty reduction and human development. Empirical studies have also proved the decisive benefits that the developing countries reaped from integration into world economy. But this trade-development link is not automatic. Market access alone does not bring economic development. Though trade can promote economic development through different mechanisms and channels, such contributions are not automatic and uniform. Whether trade affects economic development is a question which depends on the domestic policy environment, composition of exports and interaction of trade with other components of the economy. Through trade, it is expected booster in economic development and that in turn, boosts in poverty reduction and human development efforts. But export growth and promotion of trade happen without yielding these positive results and hence the empirical studies do not prove correlation between trade, economic growth and human development. Trade imbalances and the case of Banana War Although trade is universally considered to be the principal engine of economic development, capturing of new trading opportunities is a challenge to many developing countries. Seizing the newly emerged opportunities is a task among the countries with unequal economic capacities. Because of the structural handicaps, the developing and low developed countries are disadvantaged in their efforts to increase the contribution of trad. Again, considering the multilaterization of the policies of international trade, the participation of under developed countries in the multilateral trade systems is very critical. It is very difficult for many LDCs to participate in these multilateral trade systems by deriving the benefits of new trading opportunities and avoiding the situation of irreversible marginalization. It has been widely recognized that many LDCs have no any effective participation in negotiations with the World Trade Organization and this is because of the absence of the intensified capacity building efforts. Though free trade and liberalization is highly encouraged and insisted by the U.S, it shows that it is capable of reverting to protectionism. The relevant case here is the stand taken by the U.S government by the interference in the export of Chiquita bananas. Chiquita (a U.S multinational company), by using the political pressure, influenced to combat the European Union’s (E U) favourable terms of trade for their rival Caribbean firms. They insisted the U.S. government to slap cent percent duties on the export of the items like sheep’s cheese from the E.U. to the U S. By posing threats and challenges in this trade war, the U S and E U are playing higher games than represented by bananas (Wiley, 2008). As Prof. Andrew Hughes Hallett, Strathclyde University remarked, “it is not about bananas at all and it isn’t about protecting poor farmers either in St. Lucia or Honduras. It’s about political pressure in Washington and Brussels. ..this dispute is tied up with the power of the agricultural lobby”. This example of banana war shows the large influence of multinational companies in the U S political system. This example, like many other earlier instances, point out to developed nations’ occasional reverts to the protectionism when they feel that it suits their interests. Hence in these cases, free trade, though they advocate, is not the primary goal and strategy of the U S and but the primary goal is profitability. Hence, a combination of free trade and protectionism is embarrassed by the nations (World Socialist Movement, 2006). Concluding Remarks From the above discussion, it can be inferred that international trade especially in the context of liberalization has not benefited all regions of the world or all sections of the society equally. There is increasing and upsetting split between a group of middle income developing countries which are the active participants in global trade, and a large number of developing and transferring economies are virtually excluded from the list of active participants. The reason for this split are many: but most of them lies in the domestic policies of the countries themselves. Successful domestic policies will address a comprehensive range of institutional and structural needs of the society such as good governance, social inclusion, efficient civil services, free information flows, environmental policies and like. Sound and efficient domestic policies will create stability and security which in turn create the atmosphere for investment and regional integration helps to development of large markets and working of economies of scale. Hence, the domestic policies are critical for developing countries to tap the benefits of globalization and to alleviate the negative effects. References Dixit, A. and Norman, V. 1980. Theory of International Trade. Cambridge: Cambridge University Press Jones, R. 2002. Heckscher-Ohlin trade models for the new century, in Bertil Ohlin: A Centennial Celebration, MIT Press Jones, R. 2006. ‘Protection and Real Wages : The history of an idea’. Japanese Economic Review. 57, 457-66. Leamer, Edward E. 1995. The Heckscher –Ohlin Model- in Theory and Practice. Prinston Studies in International Finance, 77. February Samuelson, P.1992. Factor-Price Equalization by Trade in Joint and Non-Joint Production. Review of International Economics, Vol.1., 1-9. Stewardson, Robin (1999). Globalization and International Business. www.apec.org.au/docs/citer7.htm Uekawa, Y. 1971. Generalization of the Stolper-Samuelson Theorem. Econometrica 39. 197-213. UNCTAD. 2002 and 2010. extracted from http://r0.unctad.org/ldcs/issues/page3.html Wiley, James (2008). The Banana; Empires, Trade Wars and Globalization. Universtiy of Nebraksha Press. World Socialist Movement (2006). The Move Towards Free Trade. http://www.worldsocialism.org/articles/globalisation_part_2_the.php Read More