Impact of the International Trade on Economic Growth - Essay Example

? Impact of the International Trade on Economic Growth International trade affects on the economic growth positively by enhancing capital accumulation, institutional advancement, industrial structure and technological progress. Increased intermediate products and imports of capital result to the rise of productivity of manufacturing. This is confounded by the fact that the products may not be available in the domestic market. Participation in the international market has led to intense competition and overall improvement in terms of production. External environment is known to generate the benefits for international trade. International trade is promoted through appropriate strategies and strict observation of the trade patterns. This essay seeks to discuss the impact of international trade on the economic growth. According to a study by the OECD in 2003, the elasticity of international trade was found to be significant. Results from 73 low and middle-income countries in developing economies indicated that there is a strong correlation between international trade and economic growth (Peacock 2013). Inward developing economies tend to grow at a slower rate compared to outward-oriented developing economies. Average growth rate is significantly higher after the liberalization of trade than the period before the liberalization. International trade involving imports of immediate goods leads to diffusion of technology in an economy (Berdell 2002). Most of the studies tend to support the positive effects of international trade on economic growth. The static impacts of the international trade refer to the improvement in the social welfare with a fixed resource supply. Opening up the global market offers the chance of trading at international prices (Peacock 2013). Domestic consumers can buy cheaper imported goods. At the same time, producers have the chance to export goods to other markets at higher foreign markets. The comparative advantage in the international trade leads to specialization and improved quality delivery. This has caused an increment in the social welfare and output. Another impact of international trade on economy is the dynamic gain. This is the change in the structure of production that can be attributed to adoption of new technologies (Peacock 2013). This has also led to increased scales of production. Expansion of production through international trade leads to economics of scale and are mostly based on the comparative advantage. There has been expansion in production which is a response to the demands in the global market (Berg & Lewer 2007). This expansion has led to a decrease in the cost of production and accumulation of capital (Berdell 2002). This has had an overall effect of increasing employment levels. International trade has been known for its support in the technological spillovers among the economies involved. This has favored productivity. International trade transmits knowledge into international market. A world renowned economist, Paul Krugman, through an article in The New York Times suggested that competitive devaluation in the 1930s was different from the modern of currency wars and international trade policies. Several countries were dependent on the gold standard at the time. In the modern fiscal policies, mutual interventions are hard to accomplish. In the past, gold was worth more than the domestic currencies. The conventional liberal-market interventions are seen to have no effect. Currency interventions are perceived to be accomplishing very little. This has caused major economies to get tempted to devalue their economies by printing more money. International trade affects economic growth. According to Paul Krugman, international fiscal policies affect the incentives offered by the central banks which in turn affect economic growth. According to economist Milton Friedman, the most acceptable measure of the fiscal policy is their economic effect and not interest rates. Milton believed that unwarranted government intervention was unwelcome in economic affairs. The economist suggested that low interest rates were not to be compared to easy monetary policies. In effect, weakening the currency is known to increase domestic demand. The move is known to have negative impacts of foreign trading partners. However, the central banks can develop measures to counter the effects of depreciated currencies. This increases the absorption capacity of the countries involved in the trade (Berg & Lewer 2007). The capacity is enhanced through technology. International trade has led to increased productivity through innovation and practice (Peacock 2013). Therefore, international trade is known to lead to increased institutional vibrancy and robust changes in the developing economies. The liberal or international trade facilitates market mechanism ideas, trading of goods and ideas (Berg & Lewer 2007). Developing countries are increasingly applying market power with minimum intervention from the government. International trade plays crucial role in propelling the fueling economic growth (Berdell 2002). International trade can become the engine of economic growth in a country. Main controversies Currency wars Currency wars lead to uncertainty in national policies. The wars are also associated with supply chain disruption and currency volatility. Any efforts to change the international monetary system must recognize the resilience of the system. The rules of international trade bind countries from manipulation of exchange rates (Berdell 2002). Capital controls like macroeconomic policies and macro-prudential policies have spillover effects if there is no adequate and coordinated international effort to address monetary policies. Trade disputes between countries are expected to arise because of the currency wars (Peacock 2013). This might disrupt the supply chain in the international market. Research indicates that countries with floating currencies are expected to experience more favorable economic conditions than those with pegged currencies (Berg & Lewer 2007). The United States has been critical of Chinese government. The printing of more dollars has increased the supply of the US dollars leading to weakening of its value (Peacock 2013). The Chinese government has been accusing the united states of encouraging policies that weaken the dollar. The debt crisis in Europe has led to the weakening of the main reserve currencies (Peacock 2013). The Chinese polices have been accused of undervaluing its currency (Yuan) in order to gain competitive advantage in the international market. Countries are barred from boosting exports through illicit manipulation of currencies. Currency manipulation can determine which industries are likely to flourish. Under the IMF rules, international trade partners are not allowed to manipulate exchange rates. This prevents come countries to unfair competitive advantage over others (Berg & Lewer 2007). There is evidence that confirms the existence effects of currency wars within a country. Indeed, is one of the main controversies of the international trade is the currency wars (Berdell 2002). Countries have been abandoning gold standard. Some have also depreciated their currency and embarked on expanding domestic supplies. The exchange rates have an impact of the competitiveness in international market (Peacock 2013). Case studies indicate that the countries that left the gold standard and depreciated their currencies were able to expand. The countries that remained on gold did not do well. The controversies on currency emerged as expansion of exports happened at the expense of the countries that made poor decisions with regard to the currency (Berdell 2002). The capital outflows from countries depreciating their currencies helped relax the conditions credit market. This moderated the expected deflation in other countries. In the case where many countries suffer from deflationary shocks, the monitory expansion and depreciation of the currency becomes inevitable (Berg & Lewer 2007). Some participants believed that an international coordinated response can solve the currency wars. The counter-accusations between the United States and China can be solved through policy agreement and intergovernmental deliberations (Berdell 2002). Over the decades, countries have arrived at a set of policy agreements on currency wars (Berg & Lewer 2007). When goods from two countries are not substitutes, the effectiveness of the policy makers from foreign markets tend to be more beneficial to their home-country policies. This is because the expenditure-switching results tend to outweigh the expenditure-changing effects. This is intended to capture unconventional monetary policies’ cross border effects in the international market environment. Weak international trade governance The international trade needs strong and effective global solutions in order to have the desired effects on the economy. Controversies on international policies and monetary institutions have been enhanced by poor policy framework governing the international market. There is need for effective global solutions in multilateral trade engagements. In the year 2009, the world merchandise trade had contracted by 12 percent. This was said to be the largest contraction in 70 years. The service trade was also seen to be decline by 13 percent. The new realities of the global challenges are causing the international policy makers to undergo transformation. This demands commitment and ingenuity (Berg & Lewer 2007). There is a conflict of multilateral cooperation against the interests of the major global players in the international trade (Berdell 2002). A telling example is the question of unfair competition alleged by the developing countries. This has caused many regions to form trading blocs that favor their terms of engagement (Berdell 2002). The situation has been complicated by the need to help the poorest nations. The developing countries are skeptical of the international trading policies that are said to be controlled by a few powerful economies. The WTO has been working to ensure that trade keeps flowing among international trading partners. This happens through mobilization of efforts by into the trade finance. The trade organization has been has been helping its members fight protectionist pressures. This happens through ensuring transparency when responding to crisis. The WTO feels duty bound to mobilize international support developing countries. This is aimed at boosting their trade capacity and productivity through increased help for trade. International policies have increasingly become contentions because they are intertwined with exchange rates and currency wars. However, they are also affected by the government to government policies. For example, in the event of sanctions or war, the international trade becomes affected. This has a ripple effect in multiple countries leading to a slow economic growth. Rising unemployment levels are contributing to increased protectionist pressures. Macroeconomic stability This entails ensuring low levels of inflation and enhancing stability and competitive exchange rates. Weak international trade institutions have led to volatility in exchange rates. This has resulted to risky international business environment which makes future profits uncertain. Successful exchange rate requires sound international monetary and trade policies. The sequencing of capital account and trade reforms also has an effect to international trade and economic growth. Successful liberalization promotes export growth leading to enhanced economic growth. Exporters must be given incentives to make international trade attractive and competitive (Berdell 2002). Trade reforms are affected by political economy. International trading partners must function under productive political and social support reforms. Practical examples According to The economist, the United States accuses Chinese government of unwillingness to appreciate the Yuan. This move is said to have created competitive non-appreciation in the emerging economies. The Chinese government states that the ultra-loose global policies are to blame for the trade imbalance between the United States and China (The Economist 2010). The rising economies are skeptical of the international trade policies by the super powers. Rapid fiscal contraction is opposed by many emerging economies. According to IMF, China is expected to give over $3 trillion on reserves. According to The economist, global imbalances on trade are likely to have a negative impact on international trade. Trade wars and capital controls are likely to continue affecting the global economy. The emerging economies are likely to rejects currency appreciation forced on them (The Economist 2010). The world economy requires rebalancing are revealed by the currency wars. This shall entail having productive exchange rates. The economist observes that managing tensions in the international trade shall require harmony from all the trading partners. There is a need to address spillovers from policy choices that affect the emerging economies and the developed economies. According to the The Telegraph, the Chinese central banks is prepared to take into account quantitative policies that implemented by other foreign banks. The currency wars can be avoided through consensus by the policy makers. There has been intense competition among the major economies to devalue their currency and lower exchange rates (Peacock 2013). This has characterized the currency wars and leading to price cuts on exports while making the imports more expensive. The move is said to boost job by raising demands from both foreign and domestic markets. There have been escalation tensions over the currency policies with Japan announcing that it is determined to devalue yen in order to boost exports. The effectiveness on international trade depends on the goodwill from other trading partners. Most of the economies are afraid of the negative impact of fluctuating exchange rates (Peacock 2013). Poor fiscal policies can derail economic growth. A number of leading economies have committed not to engage in currency wars. This is an attempt to prevent the negative impact of devaluations. My opinions Large industries which practice economics of scale can dominate markets leading to negative economic growth in small economies. Small countries that open up trade with larger foreign companies can be incapable to compete without the necessary scale effects. As economies seek to offset weak currencies, the policy makers can implement initiatives that affect international trade. A good example is the pegging of the franc to euro. The move devalued the Swiss franc by 6 percent. Policy uncertainty leads to currency uncertainty. This has a profound effect on the international trade and economic growth. Openness of trade is helpful to the economic growth. The performance of the international relative prices is attached to the scarcity of the inputs in the market. There is need to focus on the dynamic relationship between the economic growth and international trade. Although the relationship is said to be positive, there is need to look into the impact of exchange rates and fiscal policies on economic performance. As econometrics continues to develop, more focus should be placed on the relationship between economic growth and international trade practices. Liberalization of trade has had positive effects of the economic growth but needs to be supported through proper and progressive policies. References Berdell, J. 2002. International Trade and Economic Growth in Open Economies: The Classical Dynamics of Hume, Smith, Ricardo and Malthus 1st ed. Edward Elgar Publishing. Berg, H. V., & Lewer, J. J. 2007. International Trade and Economic Growth, 1st ed. M.E. Sharpe. Peacock, L. 2013. China 'fully prepared' for currency war. The Telegraph, 1,1, A5. The Economist 2010. Fumbling towards a truce. The Economist, 16, A1. Read More