Governmental Barriers on International Trade - Essay Example

Contents Introduction International trade is one of the oldest economic concepts as almost all of the greatest economists of the world put their efforts in formulating the theoretical framework for the international trade. Developed simultaneously along with the modern economic theory, international trade is based on the mutual trade or exchange of goods and services between two countries beyond their traditional physical borders. Based on the assumption of comparative advantage, international trade is based on the relative efficiencies o f the countries in producing goods and services at cheaper costs. Besides offering cost reduction advantages, there are also other benefits of the international trade including the opening up of the economy to evolve technologically. However, despite these perceived benefits, many governments do not allow the free access to the international trade and impose various trade related barriers to curb the international trade. There are various reasons and ways through which governments put bars on the international trade. This essay will look into the reasons behind why the governments do this and how they do this however before discussing this, I will be discussing about what international trade is and what benefits it provides to the countries that engage into the international trade with each other. International trade International trade is a field of economics that applies microeconomic models to help understand the international economy. (Suranovic, 2004). The tools included for analysis in this field of economics include demand and supply analysis, consumer behavior, market structures as well as the impacts of market distortions. The basic assumption behind the international trade is comparative advantage. Comparative advantage exists when a country has superiority over another country in terms of producing goods or services. Comparative advantage is achieved when the opportunity cost of producing that good or service is low. Historical account of international trade would suggest that the theory of comparative advantage in the international trade was developed by David Ricardo more than two hundred years ago. This basic theory of David Ricardo however further modified and refined by Heckscher, Ohlin and Samuelsson. All these economists argued that all the countries different factor endowments of labor, land and capital inputs. Countries will specialize in and export those products which use intensively the factors of production which they are most endowed. Based on the comparative advantage of the international trade, we also need to take into account the opportunity cost of producing the goods and services. However in order to achieve at a mutual understanding, countries need to be strike a rate of exchange for the goods and services to be imported and exported by each country. However, it must also be noted that the comparative advantage itself is a dynamic concept and keeps on changing therefore one country enjoying comparative advantage in one form of product or service may loose it next year if the other country being able to achieve more better efficiency through labor and technological breakthroughs. Therefore in order to assess the comparative advantage and arrive at the lowest opportunity cost to provided goods and services, a country also needs to take into consideration following factors: 1) The quantity and quality of the factors of production because if an economy is being able to improve its labor force and capital formation process therefore it can achieve the enhanced productive potential to gain further comparative advantage. 2) Research and Development is another very critical factor which determines the level of efficiency in gaining the comparative advantage by the countries. The greater the investment into this domain the higher will be the efficiency and greater will be the comparative advantage enjoyed by the country. 3) Import controls are also used to create artificial comparative advantage by the countries. Benefits provided by the International Trade The major reason why countries allow the international trade is the fact that it broadens the economic choices of the country and in doing so increase the general welfare of the economy. International trade provides many benefits to the countries. Most of them come under the umbrella of the efficiencies. The traditional theories of international trade are based on the cost theory of value suggesting the superiority in labor productivity. (Ellsworth, 1940). Thus the international trade greatly increases the local competitiveness of the firms besides providing county the opportunity to gain market share. Apart from that International trade also provides countries the freedom to rely less on the existing markets by providing the diversification. However the most important benefit which international trade provide to the countries is that it provide them an opportunity to sell the excess capacity of the firm. The empirical studies suggest that the international trade has helped countries to increase their national income many folds and is considered as one of the main ingredient of the prosperity of a nation. However despite these perceived benefits provided by the international trade, most of the governments tend to discourage the international trade through the imposition of various trade related measures effectively targeted at reducing the influence of international trade on their economy. The subsequent section of this essay will discuss the reasons as to why the governments tend to impose trade barriers on the international trade despite these perceived benefits. Why International trade is discouraged International trade is probably one of the most suspicious economic concepts with general public as well as the politicians viewing it with keen eye. The alternative approaches to the international trade suggest that the unrestricted movement of the goods and services across the border substantially reduce the power of the local governments to exercise influence over their own policies. (Rushing, 1987). This so called dilution of the authority is probably one of the most critical reasons behind the discouragement of the international trade especially by the less developed countries. The increasing globalization of resources provides a somewhat upper hand to the companies or governments working in other nations. Examples include the role of Shell in the affairs of Nigeria and ENRON’s involvement in gaining the contracts in Africa through political as well as diplomatic pressures from White House. Additional harms of international trade include the loss of domestic jobs and the reduction in the real income of the local labor force. Further to that, the increasing specialization of one country in any particular industry may diminish the specialization of the same in any other country with which the country is trading therefore countries in order to maintain their industrial viability at least in the short run do not allow the free and unrestricted access to the international trade. The imposition of trade barriers is achieved through various ways and means. The most effective way is the imposition of high tariff rates. By raising the tariffs on the various goods and services, the local government restricts the access to the particular industries. The higher tariffs essentially increase the cost of doing the business in that particular industry or product and service. (Krugman.1983). the second most important reason for imposing the higher tariff rates is to provide protection to the local industry against the foreign players. Since it is assumed the foreign players must have achieved the economies of scale therefore they will be enjoying the cost advantage therefore governments in order to protect the local industry and giving them unrestricted access to the untapped local market try to broaden their production capabilities and capacities to be utilized in the future so that dependence on the external help can be minimized in the long run. Embargo is the most serious kind of trade restriction as it means a complete ban on the trade transactions between the two countries. This is however mostly done due to political reasons. Examples include the embargo on the Iraqi Oil after the Gulf War which virtually brought Iraq to its knees as no one was willing to buy their cheapest and highly exportable commodity of oil. Further examples include the embargo on the purchase of military equipments due to the perceived threats from those nations to the overall peace of the world. The pre-supposed notion that the loss of jobs due to free trade may decrease the national income of the country however with the introduction of more cheaper technologies and goods and services, the real income of other citizens of the country increases hence loss on one side is compensated on the other side. Conclusion On the conclusion remarks, it can be argued that the advantages and disadvantages of the international trade or relative. On the overall footings, losses incurred in one area due to the international trade may be compensated through improvements in other good or service. However despite its benefits and advantages, international trade is still being viewed with more of skeptical attitude rather than being viewed as a phenomenon which help achieve efficiencies and increase in the national income of the country. References 1. Survanovic, Steven M. (2004). International Trade Theory and Policy. Available: http://www.internationalecon.com/Trade/Tch5/T5-3.php. Last accessed 1 April 2008. 2. P. T. Ellsworth. (1940). A Comparison of International Trade Theories. The American Economic Review. 30 (1), p285-289. 3. Rushing, Francis. (1987). In Defense of Realistic International Economics: Free Trade. The Journal of Economic Education. 18 (2), p185-190 4. Krugman, Paul. (1983). New Theories of Trade Among Industrial Countries. The American Economic Review. 73 (2), p343-347. Read More