Examples of winners and losers from international trade - Research Paper Example

? WINNERS AND LOOSERS FROM INTERNATIONAL TRADE Trade refers to the exchange of goods and services. International trade therefore is the exchange of goods and services between countries. This is done through imports and exports of both goods and services. This form of trade therefore calls for synchronization and standardization of the different currencies of the world. International trade heavily relies on currency exchange that takes place through the foreign exchange market. Another key ingredient for the success of international trade pertains to government policies of the countries involved. Most of these government policies seek to further their country’s interests and agenda and therefore tend to encourage an influx of exports while at the same time restricting volume of goods imported (Helpman, 2011). Therefore a balance has to be reached between exports and imports for mutual benefits to the countries concerned. Hence trade agreement, regional and international trading blocks are tasked with the important task of creating a fairer playing ground. International trade as mentioned is the trade beyond the borders of various countries. For example, international trade may involve countries in different continents. Most countries that trade together include China, the United States of America, the United Kingdom, South Africa, Brazil, Japan, Egypt and Mexico just to mention but a few of the trading nations. International trade involves importation and exportation of goods among several countries. Winners in international trade are the consumers present in the country that is buying goods from another country. In international trade between the USA and China, winners and losers in the type of trade are very evident. Exports from China include auto parts and accessories, building material, environmental protection equipment, food and beverage, electronics and electrical appliance, eye wear and accessories and furniture and furnishing to mention a few. When China exports these mentioned products to other nations involved in international trade such as US, the winners in the trade are the consumers or the buyers of the products in the USA. This is because the bought products are a big benefit to them. The other example of winners in the trade will be the producers of the exported products in China. Also known as the sellers. The main aim of trade is to get profits and this is greatly received by the producers of the Chinese products that are exported to other countries such as USA. International trade also exists between countries such as Brazil and Japan. Japan is a renowned producer of motor vehicles, non-electrical machinery, tools and mechanical apparatus, iron and steel products just to name a few. Brazil on the other hand is a renowned exporter of soybean, orange juice, iron ore, oil, coffee and raw sugar. Trade between these two countries has winners and losers just like the previously mentioned between USA and China. The winners in the trade are the consumers in the country buying the products. For example in this case, when Brazil exports its products to Japan, the winners are the consumers or the people buying the products in Japan. Other winners are the producers of the products in Brazil who sell the produce or export the produce to Japan. The losers involved in this example of trade are the producers of the similar type of imported products in Japan. The producers of the similar type of products imported are losers because they will not have market for their products in Japan. The consumers of the exported products in Brazil are also losers in the trade. This is because most products produced are exported hence there will not be available products for the consumers to use. International trade involves several laws. One of them being the law of comparative advantage. The law of comparative advantage is a fundamental economic principle that explains the disparities experienced in trade between rich and poor nations. It states that every country production activity that provides a lower opportunity cost than that of another country. It explains how and why there is an inclination by technologically superior countries to purchase goods from technologically inferior countries. This in essence means that both the trading nations can benefit mutually by each country producing goods with lower levels of opportunity costs. This is aimed at balancing the economies of scale as far as international trade is concerned. This can be further divided into two related concepts: Absolute Advantage: This refers to the ability of a country to produce more goods using fewer resources. This in most cases is facilitated by superior technology as employed in the processes of production, manufacturing and transportation therefore developed nations have an absolute advantage over the developing nations which are yet to utilize technology in its entirety. Hence the developing nations are mainly net importers while most developed nations are net exporters. Comparative Advantage This is the ability of a country to produce one type of food at a much lower opportunity cost than other goods, as compared to production in other countries. It is worth noting that a country with both absolute advantage and superior technology does not necessarily amount to it having comparative advantage. Neither does a country need these two factors in order to have a comparative advantage. On the contrary since these technologically inferior countries lack the efficiency and capacity to produce some goods, it incurs very little opportunity cost when it forgoes the production of the particular commodity in favor of another. This is opposite to a nation with superior technology with the ability and efficiency to produce a certain commodity whereby it incurs a high opportunity cost and gives up a lot more on production (Gaston, 2010). This law therefore is able to work since each country has a good that it can produce and export at lower opportunity costs than that another nation would otherwise incur. This law then forms the fundamentals of international trade whereby nations can benefit from producing importing goods it cannot produce domestically. This creates a win-win scenario for the concerned party. In international trade, opportunity cost is very important. By definition, the opportunity cost of producing each good in each country is the number of units of labor required to produce a unit of the good, divided by the number of units of labor required to produce a unit of the other goods (Bremen, 2012). One country normally has a comparative advantage in producing a certain good compared to the other. It is also important to note that a country cannot have a comparative advantage in the production of both goods. Tastes are also irrelevant in determining comparative advantage under constant costs because the slopes of the PPFs are normally constant. However, tastes affect the particular point at which a country will choose to produce. This means that the comparison of opportunity costs in the two countries is the same regardless of tastes. This theory of comparative advantage normally states that it will be beneficial for a country to specialize in the production of the good in which it (the country) has a comparative advantage, and to trade for the good in which it has a comparative disadvantage. Such specialization and trade make both countries potentially better off by expanding their consumption opportunity sets (Gaston, 2010). Therefore, specialization and trade enable a country’s consumption opportunity sets to increase beyond its production opportunity set. Once countries have specialized production according to comparative advantage and trade has been opened, at which relative price ratio will trade occur? The equilibrium price ration at which trade occurs is known as terms of trade. Ceteris paribus, a country would not voluntarily trade in international terms of trade that were less favorable than the autarky price ratio. In other words this means that it is not rational to import goods and services at prices higher than those prevailing domestically for the same goods (Helpman, 2011). Another important point to note is that residents of a country gain from trade because trade enables them to move to a higher consumer indifference curve and therefore higher levels of welfare are attained with trade. Economists normally divide the total gains from trade or rather exchange into two main parts: The consumer gain from exchange and production gain from specialization. The consumer gain from trade refer to the fact that the exposure to new relative prices (cheaper imports), even without changes in production, enhances the welfare of residents of the country. When discussing these two gains, there are three assumptions that are normally made: Costless factor mobility Full employment of factors of production The community difference curve map can show welfare change Another important aspect to look into is that of trade barriers. Free trade between the respective trading countries. These barriers are normally set up by the government so as to regulate the trade. Mainly, they are used to the advantage of the country imposing the barriers. There are a number of alternative theories that talk about trade. They have been put forward by economists to explain the observations realized during the trade. In international trade, there are always winners and losers. The international prices of goods and services are normally determined by the market forces of demand and supply. This brings about the foreign exchange market where the currencies of different countries are exchanged. There are various stakeholders involved in the regulation of the foreign exchange market prices (Gaston, 2010). Countries also use their Central banks to fix the exchange rate at a point that will favor the trading activities of the particular country. In Trade there are several theories that have been put forward to explain the difference observations made in international trade. Paul Samuelson came up with a theory known a Factor Equalization theory. When trade begins, a country increases its output of the good in which it possesses a comparative advantage and according to H-O, this will be the good whose production involve the use of the abundant factor. Thus the abundant factor increases due to the derived demand resulting from trade. In the same way, trade lowers the scarce factor because imports reduce demand or domestic goods produced using the scarce factor. This theory states that trade raises the price of a factor in the country in which it is abundant, and lowers the price of a country where the factor is scarce. Other alternative theories of trade include: the limitation lag, the product cycle, and the Linder theories. All have been put forward to explain more about trade patterns. In summary, there must be both winners and losers from international trade. There are those who will benefit and others who will incur losses in the same (Gaston, 2010). International trade also exists in North American countries. These include Canada, Mexico and the United States. To enhance trade in this continent, the countries signed an agreement on January 1, 1994. This agreement was known as the North American Free Trade Agreement (NAFTA). This agreement improved the trading relations among the three North American Countries [Lederman, Maloney and Servan 2005].NAFTA had goals during its formation in 1994. One of the goals of its formation was to play part in removing barriers and challenges that existed in trade and also in investments between the US, Canada and Mexico. Fortunately, after its implementation, the trade tariffs that existed in the borders of the North American countries were abolished and this allowed for the countries to trade freely. NAFTA also helped to in the protection of the intellectual property rights of the products that were involved in the trade between the North American Countries. NAFTA has also enhanced equality in trade between the North American countries. Since NAFTA was implemented in North America, it is evident that trade has taken another turn. The amount of money got from exports and imports in the 3 countries has greatly increased. Also another evident impact of NAFTA is that investments in the three countries have been on the rise. Industrialization is also another evident impact of the implementation of NAFTA. Due to free exportation and importation of goods catered for by NAFTA, industries have been constructed. Despite the advantages caused by NAFTA, there were disadvantages. This includes pollution as a result of free trade and this was a great threat to the North American environment. The trade triangle between the US, Canada and Mexico represent the largest flow of income, goods and services in the world as compared to other trading partners worldwide. In this trade triangle, USA is the leading trade partner of Canada in North America. In the recent years, majorly in 2002, several exports from Canada were sold to the US and several US exports were sold to Canada. This enhanced great trade relations between the two countries. Other trade partners in North America are Canada and Mexico. The trade triangle in the three countries has enhanced their cooperation enabling good relationship between the countries. The trade triangle also involves exportation and importation of a lot of goods thus this has increased the flow of goods and services in these countries drastically. To recap it all, as discussed above, the losers in international trade are mainly the producers who live in the nations that import or buy goods from other nations yet they are produced locally within the country. This is evident in the international trade involving Brazil and Japan. Brazil imports goods from Japan yet similar goods of same quality are produced locally in Brazil. Thus the producers of such goods tend to be big losers. Other losers are the consumers in the exporting nation. For example, when Brazil exports it goods to Japan, the consumers in Brazil will be at a great disadvantage since their produce is exported instead of being consumed locally by them. Winners in international trade are mainly the consumers in the importing nation. This is because they get the chance of consuming products that are not locally available in within their country. For example, when Japan imports coffee from Brazil, Japan tends to be the winner. References Bremmer, I. (2012). Every nation for itself: winners and losers in a G-zero world. New York Portfolio/Penguin. Frieden, J. A. (2006). Global capitalism: its fall and rise in the twentieth century. New York: W.W. Norton. Gaston, N. (2010). Globalization and economic integration: winners and losers in the Asia-Pacific. Cheltenham: Edward Elgar. Helpman, E. (2011). Understanding global trade. Cambridge, Mass.: Belknap Press of Harvard University Press Trade of OECD Member Countries by Partner Country. Monthly Statistics of International Trade, 2007(9), 87-89 Lederman, D; Maloney, W; Serven, L (2005), Lessons from NAFTA for Latin America and the Caribbean, Palo Alto, CA, USA: Stanford University Press Read More