Economics in an International Context - Assignment Example

Economics in an International Context Introduction Complexities in international trade in the recent years have increased complexities in businesses due to globalization drive pursued by the countries. The market structure in various economic systems has undergone significant change due to the impact of convergence of technology. Krugman (2000, p. 2) stated, ‘Countries may trade because there are inherent advantages to specialization.’ Restrictive trade practices adopted by companies are not good for growth in international trade. International trade has impact on a country’s economy in terms of stability in exchange rate of its currency and its balance of payments position. Similarly, the policies of the central government and the central bank are aimed at improving international trade and they have impact on country’s economy and its international trade. Corporate social responsibility calls for balancing positive and negative externalities in businesses for sustainable growth and development in the long run. 1. International trade International trade is an important component in GDP of several nations. ‘The World Trade Organization (WTO) deals with the global rules of trade between nations.’ (World Trade Organization, 2013) Trade between nations has the potential to benefit all participating countries due to several reasons like import of technologically advanced machineries, materials for manufacturing products for exports and export of surplus agricultural produce. Reuvid & Sherlock (2011, p. 23) stated, ‘Between 2001 and 2008, world merchandise trade exports increased steadily from $4.7 trillion to $12.1 trillion, while trade in commercial services rose from 1.5 trillion to 3.8 trillion.’ Market structure and economic systems: According to Rivera-Batiz & Oliva (2003, p. 392) ‘Differences in market structure create different incentives affecting production decisions and trade behavior.’ Monopoly in various countries has given way to monopolistic structure or oligopoly with smaller number of firms controlling the markets indirectly, circumventing the regulations on restrictive trade practices. The structure of markets in any country is influenced by the economic system adopted in the countries like capitalist, socialist or communist. Traditionally, imposition of tariffs and quota system in closed economies increased the prices that affected imports negatively. Under the free trade regime the complexities have considerably increased. However, new trade models are not in a position to dispense with the subsidies and tariff, since various countries have various economic agenda that may not be consistent with free trade policy. Restrictive trade practices: In the international trade, import controls are the important tools adopted by governments to regulate the countries’ foreign trade. ‘The main objectives of import controls have been to protect domestic industry, raise revenue, and improve the balance of payments.’ (Thomas, V. & Nash, J. 1991, p.5) Though the objectives are reasonable, under globalization drive pursued by the countries in the recent years their economies cannot be kept insulated from the developments in international economy. Krishna (1985, p. 1) stated ‘Voluntary export restraints (VER's) have been increasingly used to restrict imports recently’ and the malady still persists. Such problems mainly arise due to worsening balance of payments position in developing and underdeveloped countries. The impact of regional trade agreements on international trade cannot be underestimated. Kurihara (2011, p.846) argues ‘RTAs are not an efficient way to promote international trade.’ Restrictive trade practices in the international trade will be detrimental to the development of global competitiveness in the industries. Collusion among the producers could lead to formation of cartels and differential pricing. This practice can restrict output and increase prices in the markets. Importance of international trade and its impact on economy: According to Federal Reserve Bank of Dallas (n.d., p. 7) ‘To benefit from international trade, countries must specialize…’ Countries have advantages on several factors such as geographical location, availability of raw materials, manpower and technological developments; like India and China in manpower, Middle East countries in oil and America in technology. The comparative advantage aids specialization based on their strengths that ensure growth and development of specific industries. Continued deficits in balance of payments weakens the currencies that makes imports very costlier. Since most of the countries import oil for their need, weakness in their currency leads to inflation in domestic economy that affects demand for the products. The multiplier effect caused in this process would lead to recession unless the country focuses on exports. 2. Externalities and economic decisions ‘Externality theory is used to claim that markets fail. It is claimed that because of the existence of externalities, the market will provide too much or too little of a particular good, and that the government must step in and use taxes, subsidies, restrictions on the provision of the good, or take over the production of the good in order to remedy the situation’ (Simpson, 2007). There are positive as well as negative externalities. The chances of failures exist in both the cases since market prices do not reflect the underlying costs and benefits. Most of the products we see in the market produce negative externalities and few create positive externalities. Positive externalities are associated mostly with the goods that are not paid for by the society. John, C. (n.d.) states. ‘Positive externalities occur when the actions of a person or entity have a positive impact on an unrelated party.’  For example, planting trees by farm owners creates positive externalities since plants absorb carbon dioxide and emit oxygen in photosynthesis that benefits the society. Pricing of the products do not take into account the social cost involved in their manufacturing. Companies do not compensate society for polluting its environment. The people in the society bear the brunt of pollution, an externality caused due to consumption of oil by industries or transport vehicles. Therefore, externalities are often cited as products of economic decisions, for example, a decision to manufacture may be associated with pollution. If these negative externalities are factored appropriately in pricing of such goods, the prices of goods will go up and the profitability will be affected. Positive and negative externalities are the obstacles in maximizing social utility of the transactions. Because, a portion of the cost associated with manufacturing or consumption is transferred to the people other than the manufacturers or consumers. If we take construction industry as an example to study the positive and negative externalities, congestion near the site due to movement of vehicles and materials used causes inconvenience to the people who are using the roads. Greenhouse gas emissions by the vehicles cause air pollution in the area. The dust resulting from the use of construction materials such as cement and sand causes dust allergy to the people who reside in the area. These are negative externalities created in the business process. However, rain water harvesting system introduced by the builder increases ground water level in the area. Clearing of weeds and debris will be useful in keeping the area clean. Use of greenhouse building materials, for example glass in construction enhances natural lighting in residential units. This will reduce energy consumption which is beneficial to the society that will lead to conservation of natural resources like coal and prevent pollution. The incentives associated with positive or negative externalities either to the buyer and seller in commercial transactions will tend to bring about equilibrium in the long run through under production or over production. In an advanced society we can find attempts at various levels to turn externalities into opportunities as it provides scope for mutual benefits. For instance, if people in an area join together by forming an association to maintain roads in residential area under some agreement, the entire neighborhood will be benefited. In some cases, where the transaction costs involved are very high, the government steps in to deal with the negative externalities through subsidies and tax rebates. Conclusion Consistency and uniformity in international legal landscape is essential for growth in international trade. Gupta (2008, p. 260) ‘The trade developments in international law over the past half century have left us with the current multilateral status being extremely weak.’ Convergence of technology has made countries to adopt globalization policy. It is also important to note that the restrictive practices in the international trade will eventually affect the economic growth of the nation as it loses competitive edge in this process. In the aftermath of Kyoto Protocol, environmental protection needs to be viewed in international context due to its impact on international trade. Economic decisions which have significant impact on negative externalities have to be neutralized with the best CSR practices. References Federal Reserve Bank of Dallas, n.d. International Trade and the Economy. Available at: [Accessed 4 December 2013]. Gupta, S., 2008. Changing Faces of International Trade: Multilateralism to Regionalism. Journal of International Commercial Law and Technology Vol. 3, Issue 4 (2008) John, C. (n.d.). Examples of Externalities in a Market. Hearst Communications. Available at: [Accessed 4 December 2013]. Kala, K., 1985. Trade Restrictions and Facilitating Practices. National Bureau of Economic Reserach, Cambridge. Working Paper 1546. January 1985. Krugman, P. , 2000. Rethinking International Trade. Massachusetts: The MIT Press. Kurihara , Y., 2011. The Impact of Regional Trade Agreements on International Trade. Modern Economy, 2011, Volume 2, Issue 5. Pp.846-849 doi:10.4236/me.2011.25094. Scientific Research Publishing. Reuvid, J. & Sherlock, J., 2011. International Trade: An Essential Guide to the Principles and Practice of Export. London: Kogan Page Rivera-Batiz, L. & Oliva, M., 2003. International Trade: Theory, Strategies, and Evidence. New York: Oxford University Press. Simpson, B. P., 2007. An economic, political, and philosophical analysis of externalities. The Free Library 22 September 2007. Available at: [Accessed 4 December 2013]. Thomas, V. & Nash, J. 1991. Best Practices in Trade Policy Reform. Oxford: Oxford University Press. World Trade Organization, 2013. Home page of World Trade Organization. Available at: http://www.wto.org/english/res_e/statis_e/statis_e.htm> [Accessed 4 December 2013]. Read More