International Trade as the Exchange of Goods and Services Across International Borders - Assignment Example

Introduction International trade is the exchange of goods and services across international borders. In most countries, it accounts for a significant share of GDP. While international trade has been present throughout much of history, economic, social, and political importance have been on the rise in recent centuries, mainly because of industrialization, advanced transportation, globalization, Multinational corporations, and outsourcing . In fact, it is probably the increasing predominance of international trade that is usually meant by the term "globalization". International trade is also a branch of economics, which together with International finance, forms the larger branch of International economics. International trade is in principle not different from domestic trade as the motivation and the behavior of parties involved in a trade do not change fundamentally regardless of whether trade is across a border or not. The main difference is that international trade is typically more costly than domestic trade. (Cited from Wikipedia) The reason is that a border typically imposes additional costs such as tariffs, time costs due to border delays and costs associated with country differences such as language, the legal system or culture. Another difference between domestic and international trade is that factors of production such as capital and labor are typically more mobile within a country than across countries. Thus international trade is mostly restricted to trade in goods and services, and only to a lesser extent to trade in capital, labor or other factors of production. (Cited from Wikipedia)Then trade in goods and services can serve as a substitute for trade in factors of production. Question 1 The table obtained from the World Trade Organization in 2010, showed International Trade Statistics-Growth in the volume of world merchandise exports and production 2000-2007. The percentage for world merchandise exports during 2005-2007 was fluctuative, with the highest growth recorded in 2006. Agricultural products started off steadily but suffered a decline in 2007. Fuels and Mining Products were consistent in its growth over that same period. Manufacturers showed its highest growth in 2006, whilst world merchandise production was consistent but showed a marginal increase in 2007. Agriculture was fluctuating similarly to Mining which suffered a nil growth in 2007. Manufacturing was consistent until its marginal increase in 2007. Lastly, the World GDP got a marginal increase over the last two years. Four factors which may have contributed in the growth in world exports include; Industrialization, advanced transportation, globalization and multinational corporations . Industrialization may be defined as the process in which a society or a country transforms itself from a primarily agricultural society into one based on the manufacturing of goods and services. Individual manual labor is replaced by mechanized mass production and craftsmen are replaced by assembly lines. (Industrialization, Anon, 2011) Characteristics of industrialization include the use of technological innovation to maximize production efficiency in order to increase economic growth. The growth of the amount of freight being traded as well as a great variety of origins and destinations promotes the importance of international transportation as a fundamental element supporting the global economy. Economic development in Pacific Asia and in China in particular, has been the dominant factor behind the growth of international transportation in recent years. Since the trading distances involved are often considerable, this has resulted in increasing demands on the maritime shipping industry and on port activities. International transportation systems have been under increasing pressures to support additional demands in freights volume and the distance at which this freight is being carried. This could not have occurred without considerable technical improvements permitting to transport larger quantities of passengers and freight, and this more quickly and more efficiently. (Cited from ‘the geography of transport systems, Dr. John-Paul Rodrigue) Few other technical improvements than containerization have contributed to this environment of growing mobility of freight. Since containers and their intermodal transport systems improve the efficiency of global distribution, a growing share of general cargo moving globally is containerized. Globalization is a process of interaction and integration among the people, companies, and governments of different nations, a process driven by international trade and investment and aided by information technology. (The Levin Institute, State University of New York)This process has effects on the environment, on culture, on political systems, on economic development and prosperity, and on human physical well-being in societies around the world. A multinational corporation (MNC) or enterprise (MNE) is a corporation or an enterprise that manages production or delivers services in more than one country. It can also be referred to as an international corporation. Some multinational corporations are very big, with budgets that exceed some nations' GDPs. Multinational corporations can have a powerful influence in local economies, and even the world economy, and play an important role in international relations and globalization. (Cited from Wikipedia) Tariffs and quotas are trade restrictions imposed on imports and exports, they are imposed on goods in order to protect domestic industry, earn government revenue or restrict the quantity of imports. A tariff is a form of tax that is revised on imports or exports, when a tariff is imposed on a good the price of that product increases. A quota on the other hand is a quantitative restriction on goods. A quota involves stating the maximum amount of a good that can be imported from a certain country. (Cited by Charles Kelly from Hardwick, 2002) The difference between a quota and a tariff is that the government will earn revenue while a quota does not.   A tariff is preferred given that it earns government revenue whereas quota does not yield any revenue. (Cited by Charles Kelly from Hardwick, 2002) Comparing a quota, tariff and free trade a country should consider free trade, a tariff is preferred over a quota but through free trade a country can gain more through trade, according to Adam smith and David Ricardo a country will gain from trade due to absolute and comparative advantage, therefore a country should not restrict trade by imposing tariffs and quotas. (Cited by Charles Kelly from Hardwick, 2002) Question 2 With reference to the table entitled “Components of the UK Balance of Payments”, Trade in goods, Current Account and Transfers showed a trade deficit, whilst investment income and Trade in services showed a trade surplus. With reference to a web article (Malcolm Tatum, Wisegeek.com) a trade deficit occurs when a country imports more than it exports. The article stated that it is not uncommon for nations with a stable economy to experience a small amount of trade deficit from time to time. However, prolonged periods with a significant imbalance between exports and imports can create significant economic issues within the country. In addition, it may cause the country’s currency to weaken on the Forex Market. On the other hand a trade surplus as reported by investopedia may be defined as an economic measure of a positive balance of trade, where a country’s exports exceed its imports. A trade surplus represents a net inflow of domestic currency from foreign markets, and is the opposite of a trade deficit which would represent a net outflow. When a country has a trade surplus, it has control of majority of its own currency. This causes a reduction in the risk for another nation selling its currency, which causes a drop in its value. When the currency loses its value, it makes it more expensive to purchase imports, causing an even greater imbalance. Judging from the graph ‘trade in goods’ reached its highest trade deficit in 2008 at around 98 billion dollars, the ‘current account’ reached its highest trade deficit in 2006 at an estimated 49 billion dollars. Lastly, ‘transfers’ was somewhat consistent with its trade deficit which was a little less than 25 billion dollars. Looking on the brighter side, ‘trade in services’ reached its highest trade surplus in the first quarter of 2009, after a dramatic increase in 2005 to stop at 50 billion dollars. Investment income followed a fluctuating trend with its highest point of trade surplus being in 2008, with a little over 25 billion dollars. Judging from the said graph the UK imported than it exported and that is one of the reasons for the imbalance of the Balance of Payment. When all the components of the BOP are included it should sum to zero with no overall surplus or deficit. Therefore, since the UK import more than they export, its trade balance will be deficit; but the shortfall should be counterbalanced in other ways-such as funds earned from its foreign investments, running down reserves or by receiving loans from other countries. Four mechanisms which may be used to rectify the imbalance in the Balance of Payment include; rebalancing by changing the exchange rates, rebalancing by adjusting internal prices and demand and rules based rebalancing mechanism. (Cited from Wiki Pedia) Rebalancing by changing the exchange rate causes an upward shift in the value of a nation’s currency relative to others will make a nation’s export less competitive and imports cheaper and so will tend to correct a current account surplus. It also tends to make investment flows into the capital account which will help with a surplus there too. Exchange rates can be adjusted by the government in a rules based or managed currency regime and when left to float freely in the market they also tend to change in the direction that will restore balance. When a country is selling more than it imports, the demand for its currency will tend to increase as other countries ultimately need the selling country's currency to make payments for the exports. The extra demand tends to cause a rise of the currency's price relative to others. When a country is importing more than it exports, the supply of its own currency on the international market tends to increase as it tries to exchange it for foreign currency to pay for its imports, and this extra supply tends to cause the price to fall. Just in case that one may be complicated, the next option is to try rebalancing by adjusting internal prices and demand. When exchange rates are fixed by a rigid gold standard, the standard approach to correct imbalances is by making changes to the domestic economy. To a large degree, the change is optional for the surplus country, but compulsory for the deficit country. In the case of a gold standard, the mechanism is largely automatic. When a country has a favourable trade balance, as a consequence of selling more than it buys it will experience a net inflow of gold. The natural effect of this will be to increase the money supply, which leads to inflation and an increase in prices, which then tends to make its goods less competitive and so will decrease its trade surplus. (Cited from Wiki Pedia) The next option is known as rules based rebalancing mechanism. Nations can agree to fix their exchange rates against each other, and then correct any imbalances that arise by rules based and negotiated exchange rate changes and other methods. The Bretton Woods system of fixed but adjustable exchange rates was an example of a rules based system, though it still relied primarily on the two traditional mechanisms. (Cited from Wiki Pedia) Question 3 There are times when contract goods for sale may become lost or damaged and neither the buyer nor the seller is at fault. Unfortunately, however, someone has to bear the expenses or the losses. Commonly the buyer and the seller enter into a sale of goods contract. This contract details who will shoulder the responsibility of risks of loss or how the risk losses will be divided. Drawing reference to the case, Saudi Arabia and China agreed to a DDP (Direct Duty Paid) contract. Under the DDP contract, the supplier is responsible for most of the expenses, which includes cargo insurance, import customs clearance, and payment of customs duties and taxes at the buyer’s end, and the delivery of goods to the final point of destination, which is often the project site or buyer’s premises. The supplier may opt not to insure the goods at his/her own risk. (Cited from Export 911) As such Saudi Arabia’ responsibilities under the DDP include; producing the goods (oil) and commercial documents as required by the sales contract for example, the request for quotation, quotation, pro forma invoice, commercial invoice etc. secondly, the Exporter must arrange for export clearance and all other clearance formalities. Thirdly, they are to arrange and pay for all the costs for the transportation of goods, including final delivery, up to the named place of destination. Furthermore, Saudi Arabia as the seller should assess all risks of the goods (loss or damaged) up to the point they have been made available to the buyer at the named place of destination. It is also the Exporter’s responsibility to advise the buyer that the goods have been delivered to the carrier and provide the appropriate arrival information, with the date of delivery being one of the most important. In concluding, the seller must make all arrangement for import customs formalities and payment of customs duty. In other words, Saudi Arabia is responsible for most of the expenses and should have ensured that the oil reaches the depot in China safely. Unfortunately, since the Sirius Star was hijacked and the goods are considered to be lost in transit, Saudi Arabia will have to absorb all costs. On the contrary they buyer’s responsibilities as per the sales contract include providing the seller with all licenses and authorizations required for import clearances and formalities and to assume all risks of the goods after the goods have been delivered to the named place of destination as per the contract with China and Saudi Arabia. Alternative sales agreements that could have been utilized by both countries include; Ex-works (EXWKS), Free on Board (FOB) or even Cost Insurance and Freight (CIF). With the EXWKS agreement, export 911 reported that the buyer is responsible for loading the goods on a truck or container at the seller’s premises, and have to assume all risks and costs. Under this said agreement, the supplier has the least amount of responsibilities/obligation to the buyer. The only thing the supplier has to do is make the goods available at his premises (warehouse, factory) and it’s the buyer’s responsibility to take it from there. CIF is another trade term of sale in which for the quoted price; the exporter clears the goods past the ship’s rail at the port of shipment-not destination. The seller is also responsible for paying costs associated with transportation of the goods to the named port of destination and also for procuring and paying for marine insurance in the buyer’s name for the shipment. However, once the goods pass the ship’s rail, the buyer assumes the responsibility for risk of loss or damage as well as any other transportation costs. (Cited from Inter-fret Consolidators) In comparison to the CIF the FOB agreement entitles the exporter to be responsible for the costs and risks of delivering the goods past the ship’s rail at the named port of shipment. Considering the above mentioned terms of sale agreements; the responsibilities between buyer and supplier and the pros and cons associated with each- China and Saudi Arabia probably agreed on the DDP based on the type of the product being exported. The terms associated with the DDP make it more convenient and acts as an advantage to the buyer but at the same time it can be very expensive for the seller especially when the goods become lost in transit or damaged. (Cited from Speedy Air Cargo) Works Cited Export 911.com (n.d.) international commercial terms, viewed Mar 13, 2011 at http://www.export911.com/e911/export/comTerm.htm#xDDP Charles, K 2010, Tariffs and Quotas, viewed on Mar 13, 2011, at http://www.articlesbase.com/trademarks-articles/tariffs-and-quotas-2188143.html Inter-fret.com, (2007) frequently used abbreviations, viewed Mar 13, 2011 at http://inter-fret.com/html%20pages/terminologies.htm John, P R 2011, the geography of transport systems, viewed on March 13, 2011, at http://people.hofstra.edu/geotrans/eng/ch5en/conc5en/ch5c2en.html The Levin Institute (n.d) what is globalization? Viewed Mar 13, 2011 at http://www.globalization101.org/What_is_Globalization.html Michael T 2011, what is a trade deficit, wisegeek.com, viewed Mar 13, 2011 at http://www.wisegeek.com/what-is-a-trade-deficit.htm Reem H (2011) Understanding the Current Account in the BOP, investopedia.com, viewed on Mar 13, 2011 at http://www.investopedia.com/articles/03/061803.asp Spenak.com, 2008 DDP-Delivered Duty Paid, viewed Mar 13, 2011 at http://www.spenak.com/lexicon.DDP-%20Delivered%20Duty%20Paid.1153.html Speedy Air Cargo (n.d.) CIF vs. FOB, viewed Mar 13, 2011 at http://www.speedycargo.com/resource-center/cif-vs-fob Read More