Potential Benefits of International Trade - Coursework Example

Content Outline I. Introduction (a) Definition (b) Background II. The Reason Why Countries Take Part in International Trade (a) Major Commodities in Today’s International Trade and Economic Gains Arising From it (b) Reasons Compelling Countries to Place Restrictions in International Trade III. Conclusion I. Introduction (a) Definition The expression international trade refers to an exchange of commodities across boundaries of nations. Two major terms are used to describe international trade (that’s imports and exports). Imports are services and goods bought from other countries while exports are the services and goods sold to nations or individuals of foreign countries. (b) Background It’s estimated that the international business sees commodities worth US $7trillion per year over the entire globe. Entrepreneurs can nowadays indulge in exporting and importing of goods and services since the international market arena has transferred to a more independent one. Conditions set for international trade have also changed in various nations. Today, interdependent is evident due to various global distributions. Examples are; transportation systems, internet as well as satellite communication systems. The establishment of WTO (World Trade Organisation) promoting equity in nations’ status, the international monetary Fund (IMF) besides the World Bank, has made stronger the anchorage of international trade. These organisations aid in reducing the trade barriers across boundaries. Nelson (2000). This is a study set out to make a comprehensive and vivid answer to the question, “Which are the benefits of international trade and why are trade restrictions imposed by countries?” II. The Reason Why Countries Take Part in International Trade The countries ‘comparative advantage’ drives them to participate in international trade. Costs of factors of production and also the relative distribution are the ones that guide the specification of nations. Under oligopolistic business patterns, productions and involvement in trade are the major determinants of the competitiveness of specific firms involved as well as governments. The patterns of exports depend upon the particular governments’ policies and also those of the multinationals corporations. Recently, modern world’s competition is paradoxical since various firms have constructed the capability to go beyond that of their home nations. Some governments have also strives to ensure that terms of trade in the competitive world favour the corporations with domestic headquarters. Yoffie (1993) (a) Major Commodities in Today’s International Trade and Economic Gains Arising From it The modern world, that’s commercially oriented, benefits a great deal from international trade. In fact international trade forms the backbone of the current world. The major reasons leading to international trade is the surplus or deficits of natural factors of production, specialisation on the part of industries, lower costs of production of some region compared to other and consumer tastes and preferences. Developing economies are experiencing lower costs of production of various commodities. Korea, China, Indonesia and India, for example produce services and goods at very low costs compared to EU and USA’s. This has led to the developed regions placing high levels of restrictions to the Asian countries. A major product component that’s very common in the current world’s international trade is oil and petroleum products. For instance in 2005 alone, USA utilised about 26 barrels of oil per single day. American usually imports natural gas liquids, refined commodities and crude oil. Very big amounts are brought into the world market by a group of nations under the umbrella of OPEC- Organisation of Petroleum Exporting Countries. The nations are bringing their products in high amounts and the countries which are consumers are also demanding them in big amounts. There are also other resources (natural) which contribute to the modern world’s international trade. The examples may include African Diamonds for jewelry making and industrial use, wheat and also other products of agriculture from USA, steel and coal from Russia and Canada. Moneyinstructor (2009) Based on a recent study by the WTO, 20% of the global GDP is accounted for by international trade. Of vital importance to the development of this global trade is liberalisation of commodities’ trading and also the rise in foreign direct investments among nations. According to the general point of view of economists, international trade has profited in terms of efficiency and economic welfare courtesy of the escalating trade levels as well as investments between countries. For instance; according to David Ricardo’s concept, in which he explained the theory of comparative advantage, a nation can take advantage of producing commodities which marginal production cost is relatively lower. This results into a better allocative efficiency and also economic welfare. Examples may include the economy of Canada which realises low costs in land provision and thus exploits this by maximasing on its agricultural production. Asian countries like China have also intensified in making exports of manufactured commodities which are not expensive to produce. These manufactured goods especially depend on lower unit labour outlays. The first world nations’ comparative advantage is tending towards exporting and producing of high-technology and high-value manufactured commodities as well as services calling for high knowledge. To this, the UK’s comparative advantage is fundamentally on medical and aerospace technology, oil, pharmaceuticals and chemicals, financial services, insurance, software and computer services and also other entertainment and business services. Riley (2004) The economic gains arising from international trade are more than the losses going tandem. The global trade brings about efficiency in doing things to various countries involved. However, individual nations often place restrictions particularly to imports. For example, the invention of automobiles by the advanced first world led to large amounts of losses upon the industry of horse- and – buggy. The extensiveness of supermarkets’ chains is so vast that they kicked out of business the small- scale grocery stores. Thus, importation of things where other countries hold a comparative advantage triggers losses in jobs and revenues as well in domestic industries involved. (b) Reasons Compelling Countries to Place Restrictions in International Trade Politically, governments seek to protect local industries from competition emanating from foreign firms via placing restrictions against the importations. Renowned Economists like Adam Smith, however, argued that these restrictions are brought about by false beliefs. Nevertheless they remain in place up to date. Some persons may argue that well-to –do countries cannot engage poor countries in a competition and especially whose wages are lower. These poor countries may have the notion that the restrictions are aimed at guarding their infant industries against uneven-grounded competition with established industrial countries. They say that they want to give the upcoming industries a chance to gain experience and skills to ensure competition is on even terms. Developing countries also argue that other nations are not fair in terms of their statutes regarding exports and imports. The most common of complaints is that these foreign countries ‘dump’ their products on the global market at very low prices aiming at the long-term capturing of the markets for exploitation. Some of the misconceptions of the restricting nations regarding imports are high-wages. It’s usually put across, that goods from first world countries like USA cannot fairly compete with commodities from poor countries and which are produced by workers who are paid low wages. Sowell (2007) Despite the fact that many people are for a freer international trade, countries both developed and underdeveloped often place trade barriers. They argue that this is in pursuit of domestic market protection. Some of the techniques used by the nations to palace barriers on trade are; tariffs, embargoes, quotas and exchange controls. Tariffs are export and import taxes. Embargoes on the other hand, refer to the total prohibitions placed on imports usually due to political reasons. Quotas are imposed on specific products and this works by limiting the amounts of the products imports and exports. Lastly, exchange controls are targeted at the world’s ‘hard’ currencies. Nations placing the restrictions on trade cite various reasons for the essence of the whole idea. They may range from the raising of revenues by the governments, protection of the nation’s industrial base, infant-industry protection and also combating the predicaments of negative balance of payments. Also trade barriers may come in other forms like the formation of trade blocs. One of the popular trade bloc is the EU (European Union) and the Association of South East Asian Nations (ASEAN). The trade blocs encourage relations in terms of trading between member countries. To protect these relations they put across barriers of trade to non-member nations. Grant and Vidler (2003) One of the most recent actions by nations with respect to trade barriers is one presented by Washington Post Russian which is the biggest market of automobiles in Europe raised the level of taxes on foreign cars’ Importation. It hit the 35% mark in December 2008. This is due to the recent global economic crises and struggling economies. Global trade leaders had vowed to uphold free trade principles and rid of themselves the trade protectionism at a summit held in Washington. However, due to the credit crisis hitting the whole world countries are breaking the agreed upon promise. The main factor leading to the phenomenon is the negatively affected local manufacturers by the imports from foreign countries. Another example of the barriers in international trade is the Indonesian putting restrictions on about 500 foreign products calling for new fees and special types of licenses. Russia is also doing the same on pork and poultry. France is on a mission to come up with away to protect their companies from takeovers by foreign companies among others. Faiola and Kessler (2008) IV. Conclusion While concluding, thus, and in the answering of the question, “which are the benefits of international trade and why are trade restrictions imposed by countries?” various points have been put across. It’s universally a benefit for various countries to indulge in this mostly common trade in today’s world. What nations need to put into account is basically their comparative advantage so as to fit the balance of trade in their favour. Further, generally it has been noted that countries place trade barriers for self protection and more so to the developing countries’ infant industries against the already establishes ones. Reference list: Faiola, A and Kessler, G. (2008). Trade Barriers Toughen With Global Slump. Retrieved 12th March 2009 http://www.washingtonpost.com/wp- dyn/content/article/2008/12/21/AR2008122102171_pf.html Grant, S and Vidler, C. (2003). Heinemann Economics for OCR. Edition: illustrated. Heinemann. Moneyinstructor, (2009). Importance of International Trade. Retrieved 12th March 2009 http://www.moneyinstructor.com/doc/internationaltrade.asp Nelson, C.A. (2000). Import/export: how to get started in international trade. Edition: 3, illustrated. McGraw-Hill Professional. Riley, G. (2004). Edexcel A2 Economics 2005: Unit 6 Toolkit: UK in the Global Economy 2005. Tutor2u Limited. Sowell, T. (2007). Basic Economics: A Common Sense Guide to the Economy. Edition: 3. Basic Books. Yoffie, D.B. (1993). Beyond Free Trade: Firms, Governments, and Global Competition. Edition: illustrated. Harvard Business Press. Read More