World Trade in Merchandise - Essay Example

World Trade in Merchandise 1. As reported by the World Trade Organization in 2010 table 1 above, world trade in merchandise grew at an average of 7 percent per year between 2002 and 2010. But dropped by about 23% between 2008 and 2009. Identify and critically discuss four factors that may have contributed to this over this period. The upward trend in the prices of the commodities reached the peak in 2008 but was followed by a downturn. The combination of short and long run factors have contributed to create a widened rise in the prices of the commodities. The commodity price index of the United Nations Trade and Development indicates that the prices of the commodities have been decreasing since 2008. Between the months of June and September, the price index lost 11.5 percent in terms of dollar. (United Nations, 2009, p.45). The reason that can be identified for contraction in trade is financial crisis. There was slow growth in output by almost 2 percent and the probability to fall further was high as well. The impact of decline in total world production was magnified in trade. Since the month of September, 2008, the imports and exports of the major developed and the developing countries declined. (World Trade Organization, 2009). The share of developing countries in the total global trade started to rise. It was assumed that a ‘decoupling effect’ would emerge into the picture and the developing countries will be less exposed to economic downturn. As all regions of the World are slowing at once, the decline in demand conditions are more widespread than that of the past. The second reason that can be accounted to is the presence of increasing global supply chains in total trade. In the production process the goods are supposed to cross many boundaries and the components in the final product are considered each and every time they cross a boundary. The only way to avoid such kind of effect is to measure the transactions in trade on the basis of the added value at each stage of the process of production. Shortage of trade finance can be regarded as the third reason for the situation. Shortage of trade has lead to shortage of trade. This problem is receiving attentions from government and other international institutions. The role of the WTO has been like an honest broker. It brings the top players to work together that will ensure the availability and also the affordability of trade finance. Protection is yet another factor that contributed to contraction in trade. Rises in the level of protection is threatening to the prospects of recovery and delay the downturn. In the long run, the aggravated protectionism policy is a source of concern. 2. “Free trade, one of the greatest blessings which a government can confer on a people, is in almost every country unpopular” Lord Macaulay (1800-1859). It is true then and arguably very true today. (a) Critically discuss THREE forms of non-tariff barriers used by governments to limit the free flow of trade and assess their possible effects on consumers in any market of your choice. Non tariff barriers The three forms of non tariff barriers are import quota, import licensing requirements and import deposits. American firms have registered few grievances against Dutch firms. The Dutch came up as the neutral traders of Europe as they opted for a level playing field for trade matters. Soft drinks, beer and petroleum products are the items where excise tax is levied. The excise tax is borne by the importers in addition to customs duty. The European Union aims to create a single international market and harmonize the excise taxes. Non tariff barriers are a measure used by the government to favor goods that are produced domestically over goods produced in foreign countries. The non tariff barriers are used to reduce the volume of imports so as to help the domestic producers. A quota may be defined as the maximum limitation either in physical units or in other terms imposed on imports of a product for a certain period of time. A quota may be imposed on imports of a specific country or all foreign countries (Beghin, 2006, p.2). A quota is imposed through licenses that are issued either to the exporters or through the importers. The country of United States imposes a quota on imports of dried milk. The country grants licenses to some traders and are allowed to import a maximum amount of the product based on their early imports. The U.S. sugar imports are limited by quota that demonstrates the shares of particular countries (Coughlin and Wood, 1989, p. 33). Licenses are the most common instrument to regulate the imports. The non tariff methods are applied by almost all industrialized countries. In this system the state issues permits for transactions of imports and exports only for the commodities that are included in the list of merchandises to be licensed. General license is one such type that permits unrestricted import and export of goods over a certain period of time. One time license indicates the quantity of imports and the country of its origin. The number of international level standards plays a part in the system. Licenses and quotas border the independence of enterprises which intend to enter the foreign markets. It limits the number of goods for imports and exports along with the number of participating countries involved in trade. Import deposits are another type of measure used to regulate the foreign trade. Import deposits can be taken as a form of deposits. The importer needs to pay to the bank a non interest bearing deposit for a definite period of time which is equal to the amount of the cost of the imported goods or a part of the cost of the imported good. The trade barriers limits the flow of imports or acts as an incentive in raising the price of the imported product as the importer has to bear the extra cost of importing the goods (Khan, 2005, p. 7). Therefore when the trade barriers limit the flow of goods into the country, consumers are worse off as they will have a narrow basket of goods to choose from. Therefore, they will be denied of varieties which will create a situation that will not be welcomed by the consumers. Again, import cost raises the price of the imported goods. Therefore, consumers have to pay higher prices in order to buy the imported goods. This is again a worse off situation from the consumers point of view of a particular country as consumers in other countries may get the similar product at much lesser price (Sumner, n.d. p. 3). (b) Comment on the Current Account position of Pakistan’s trade position with the rest of the world. Discus three strategies that could be used to correct the position. The sum of net factor income, balance of trade and net transfer payments gives current account. The following graphs show the current account position of different countries. (trading economics, n.d.). (trading economics, n.d.) (trading economics, n.d.) (trading economics, n.d.) . (trading economics, n.d.) The above graphs show the position of current account of Pakistan is not at all great. So there is need to rectify the situation. Pakistan needs to have a clear policy in international economic relations. A stable regional integration will provide economic benefits for the country. Such initiatives have the potential to improve the prospects of political corporation. The second best way is to follow the policy of free trade. This would eliminate the bias in anti-exports from which the country has been suffering. The country needs to reestablish the credentials in front of the foreign investors. A stable and sustained improvement in current account will free the country from the dependence of short term capital inflows. A stable inflow of capital will minimize the risk of financial crisis in the country (Williamson, 1999). 3. Describe the following terms of shipment and sale: Free on Board, Cost Insurance and Freight, and Direct Duty Paid. Assess the significance of these trade terms in international trade. Significance of Free on Board in International Trade Free on board is referred to an international trade term of sale. The term is used in domestic and in contracts of export. The manufacturer often quotes a price on FOB terms. The manufacture quotes the price in domestic contracts to the exporter. Exports are usually valued free on board. United States do not follow this policy as exports are valued at free alongside shipping there. The free alongside shipping is lower than the free on board by the cost of loading the goods on board. Buying Free on Board provides two major benefits over the cost insurance freight. The free on board provides the freight rates to be more competitive and enhanced control over shipping. Companies are careful while shipping CIF as overseas suppliers tend to mark up the cost of freight in order to cover up the cost of shipping arrangements. However there are major reasons other than costs for buying FOB. Importers work with the logistics providers of their choice. They can obtain accurate information on shipment by taking the title to the goods. They are assured that their freight partners are working according to their needs and not for the suppliers. The importers are needed to pay the freight charge and other charges only after the goods arrive at the destination. Significance of cost insurance and freight It is an internationally used trade term in which the seller passes the good for export. At the port of shipment the seller is held responsible for transporting the goods past the rail of the ships. It is the duty of the seller to pay the associated costs of transport to the destination port (Asian Logistics Umbrella, n.d.). Significance of Delivered Duty paid Delivered duty paid is regarded as the transaction where the seller is responsible for the payment of all costs that is related to transporting the goods. The seller is also responsible until the goods have been transferred to the buyer. The costs include shipping costs, the duties as well as the other costs involved in shipping or transferring the goods. Delivered duty paid can also be regarded as the type of agreement that places all types of risks and costs till the time of delivery. The seller is held responsible if the goods are lost in transit. Reference Coughlin, C. and Wood, G. 1989. An Introduction to Non-Tariff Barriers to Trade. [pdf]. Available at: http://research.stlouisfed.org/publications/review/89/01/Trade_Jan_Feb1989.pdf. [Accessed:10th April, 2012]. World Trade Organization, 2009. WTO sees 9% global trade decline in 2009 as recession strikes. [online]. Available at: http://www.wto.org/english/news_e/pres09_e/pr554_e.htm. [Accessed: 10th April, 2012]. Trading economics, n.d. Pakistan Current Account. [online].Available at: http://www.tradingeconomics.com/pakistan/current-account. [Accessed:10th April, 2012]. Williamson, J., 1999. Paper presented at the annual conference of the Pakistan Society of Development Economists. [online]. Available at: http://www.iie.com/publications/papers/paper.cfm?ResearchID=333. [Accessed:10th April, 2012]. Asian Logistics Umbrella, n.d. Cost Insurance and Freight. [pdf]. Available at: http://www.alu-group.com/download/ALU_CIF.pdf. [Accessed:10th April, 2012]. Beghin, J., 2006. Nontariff Barriers. [pdf]. Available at: http://www2.econ.iastate.edu/research/webpapers/paper_12703.pdf. [Accessed:10th April, 2012]. Khan, A., 2005. Sanitary and Phytosanitary Measures (SPS) and Technical barriers to Trade (TBT). [pdf]. Available at: http://www.teriin.org/events/srilanka/ntb.pdf?phpMyAdmin=ac2c888ba0bcc4bab16ef08607132639. [Accessed:10th April, 2012]. Sumner, D., n.d. Tariff and Non-Tariff Barriers to Trade. [pdf]. Available at: http://www.farmfoundation.org/news/articlefiles/816-sumner.pdf. [Accessed:10th April, 2012]. Read More