Exchange Rate Policy and International Trade Linkages and Impacts - Example

International Trade No. Lecturer International trade Countries in most instances get involved in trading activities with other countries with a view of increasing the profit volume resulting from indulgences into these activities. International trade can either be bilateral or multilateral. Bilateral trade involves trading activities between two main countries, in most cases, this trade targets improving relationship between the two countries. On the other side, multilateral trade involves participation of a number of countries in trading activities. Countries within a certain geographical location can get involved in this type of trade. International trade can assume a number of forms depending on the position of the countries involved or the status of the targeted sectors. Among the famous form of international trade is direct investment in foreign countries. It involves establishment of operating business premises in foreign countries with a view of realizing market share in these countries. However, the establishment of these business operations will entail consideration of a number of aspects that include both economic, political and socio – cultural facets (Agnihotri, 1995). Proper and extensive analysis of these aspects will allow for efficiency and effectiveness in international. Another form of international trade involves the use of exports and imports. Countries will undertake exchange of commodities owing to different in endowment in these resources among the involved countries. Export and import activities among countries will directly affect the purchasing power experienced hence contributing to diverse effects in the economy of the country. The paper will strive to explicate key effects that international trade participation will have to an individual country. Developed countries are often attracted to global operations in attempt to economically compete in the world market. Availability of skilled expertise also contributes to the massive indulgence of countries in international operation since there are ready advisory services. In addition, due to existence of various international regulations that controls the activities of various nations, countries at times are compelled to participate in the international more so to encourage ties among nations. The period after the first world witnessed countries engage in a number of economic ties in order to prevent any occurrence of any unnecessary tension among countries. A close reflection will be made with reference to employment and the influence that international business operation causes to the existing wage rates (Bidlingmaier, 2009). Firstly, the effect of exports and imports will be analyzed in terms of balance of payments and capital flows. Capital outflow and inflows associated with export and import activities directly affect employment patterns in countries. Analysis of both positive and negative impacts of indulgence in international trade will therefore be extensively taken into consideration. Common aspects in global business operation such as inflationary tendencies and currency fluctuations will also with be examined reference to their effects on employment patterns (Bhagwati, Panagariya & Srinivasan, 2001). Labor mobility In most occasions, activities in international trade have been closely influenced by the forces of demand and supply within the involved market. Owing to this influence, high levels of competition has often characterized the dynamics of international trade. Globalization has also contributed greatly to the manifested levels of competition. As a result of these high levels of competition, global industries have valued outsourcing of personnel from various sectors and countries. The aspect has resulted into creation of employment opportunities to various individuals due to the need to acquire persons with the desired expertise. The practice of outsourcing of personnel is mostly experienced in international trade that involves an s specific trading bloc (Kerr & Gaisford, 2007). Trading blocs are groupings of countries or sectors within a given location that uses common regulations to guide the trading activities. In a number of instances, these trading blocs allow free easy movement of commodities across the borders of member countries. Developing countries have highly benefited from globalization in trade as citizens in these countries are absorbed to sectors in the developed countries. In addition, owing to the need to increase the general output in most of the global operations, these industries have considered increasing the workers base that directly improves the output levels. China has in the past greatly contributed in the placement of its nationals in various employment positions across the world. Personnel from China have been highly valued by most sectors owing to the high levels of technological expertise. Liberalization in open economies A number of developed countries often have certain restrictions that help in regulating a number of key operations like trade locally and with other global partners. However, the current globalized markets has witnessed governments compromise these restrictions in order to allow for free trade participation more in the transfer of personnel. International business operation has largely attracted skilled man power since the high level expertise contributes to competitiveness and increased output. When countries expand in offshore operations, liberalization policies help countries to transfer personnel from its borders without restrictions (Feenstra, 2000). The policy of liberalization has greatly aided Mexico in offering direct support to its nationals. It is reported that 90 per cent of the country’s export and import are as a result of liberalization policies. This explains that most of the income from the Mexico’s international operations is diverted back to the country’s economy. Apart from Mexico, Canada and China have highly benefited from liberalization that has seen the countries provide direct employment opportunities to their nationals despite the global operations (Lopes, 2007). The graph below shows the percentage of Import and export over the years among countries, Kenya, South Africa, Vietnam and Bangladesh as a result of liberalization policies among the countries. In line with the data presented, liberalization helps in improving a country’s participation in export and import activities that will eventually influence the resulting employment patterns within the nations (Gandolfo & Gandolfo, 1998). In the event of new venture in a foreign country, a number of employment opportunities will be realized by the host country resulting into increase in the percentage of the employed. The effect of these ventures is made evident in most of the rural locations in most developing countries that have witnessed increase in employment opportunities that is directly attributed to international trade (Grath, 2012). Securing of these opportunities has contributed to improved purchasing power of the individuals hence improving the living standards in these host or the involved countries. The economic potentiality that has constantly increased in most of the developing countries is closely attributed to increased business ventures as a result of international business operations. In attempt to control the volume of imports and exports, countries will consider certain operations that in the long run will affect the employment patterns in the country. Firstly, governments will strive to promote the operations of local industries through limitation of import activities and encouraging increased exportation. Excessive importation of commodities will tend to discourage operation of local industries participating in similar production lines. Imposition of high taxations and quotas on the imports will assist in limiting the volume of imports. On the other hand, improvement of export activities will be exercised through reduction of taxes and introduction of operating subsidies to these exporting industries (Grath, 2012). In the event that there is increased in exports, this will translate to active operation of local industries making it possible for the nationals to be offered employment opportunities in these sectors. In terms of the realized income, increase in export activities will translate to increase inflow to the local industries hence resulting into improved wages for the employees in these sectors (Krugman, 1996). The effect international trade to the employment and wage rate of employees can also be elucidated in terms of capital outflow and inflows. Positive impacts will be realized with increase in the volume exports (Krugman, 1996). Increase in the volume of exports will mean increase in capital inflows to the respective countries. This will allow for resources to be used in initiation of various ventures. Increased capital inflows will allow for operational improvement in the existing sectors besides making it possible for the development of new ventures within the country. The new ventures will serve as a source of continuous employment. The impacts of international trade on employment aspects can also be explained in terms of the existing pay rates within different sectors. Open economies are in most cases attributed to high pay rates unlike sectors that are closed. In most cases, pay rates in various instances is highly affected by import levels. The illustrated graph chart below shows the increase in pay rates in various sectors in Chile. A three times increase in pay rates can be manifested from the chart below. Improved working conditions in various sectors International trade can also result into improved working conditions in most sectors. Owing to the ever increasing competition levels in various sectors, industries often strive to provide working environments that meet the desired standards of the industry. Technological aspect has been continuously improved by various sectors in order to meet the existing standards of the industry. The adoption of the use of computing devices has been manifested in most international operations with a view of improving the working conditions and the overall performance of the involved sectors (Bhagwati, Panagariya & Srinivasan, 2001). Trade operations in Japan resulted into drastic reduction in the working hours that were attributed to the improved working conditions, specifically the use of improved technologies in most operations. International trade and wage rates The existing wage rates in a country are often affected by changes in the volumes of exports and imports. A favorable balance of payments that is as a result of increased exports and reduced imports will influence desired wage rates in a country. However, in attempt to influence the volume of the balance of payments, there are certain actions that a country can assume that will also affect the wage rates (Maskus & Wilson, 2001). Devaluation of currency is a common policy action that most governments undertakes with a view of improving the overall volume of exports in order to realize positive balance of payments. The practice involves reduction of the value of the local currency in order to portray the country’s commodities relatively cheap in the international market. Locally, devaluation of currency results into reduction in the purchasing power of the currency. The move will compromise the resulting wage rates since the purchasing power of unit currency is reduced. In order to curb the effect of currency devaluation and the restoration of the purchasing power, affected industries often considers increasing the wage rates so as to reinstate employees to the earlier economic potential. The North American Free Trade Agreement (Nafta) that allows member countries within the region to freely exchange commodities has allowed for improvement of wage rates in the countries’ sectors. Currency appreciation and employment patterns The local currency can at times appreciate due to government reduction in expenditures that will increase the demand of the local currency in the international market. Monetary policies like increased borrowing rates from the local commercial banks will also help in increasing the value of the local currency through creation of increased demand (Maskus & Wilson, 2001). In the event that there is evaluation in the local currency, a deflationary effect will be made manifest in the local economy as there will be high demand for the currency. The improved value of the unit currency will improve the existing wage offered. Individuals will become more attracted to existing employment opportunities hence more individuals will consider employment. Negative effects of international trade on employment and wage rates Despite the various positive implications resulting from indulgence of a country in international trade, there are certain demerits regarding employment dynamics and wage rates that result from international trade. In most instances, these negative implications result from wrong policy adoptions. It reported that in the trading period ending 1992, Germany experienced 700, 000 cases of job loss while countries like Japan and U.S experienced a lot of job creation. Unfavorable balance of payments and unemployment Every trading nation often desires and strives to realize favorable balance of payments. A number of policies will be enacted by these trading nations in order to realize these desired balances of payments. However, in some extreme cases, unfavorable balance of payments is sometimes witnessed that consequently results into unemployment cases and low wage rates Lopes, 2007). Initially, large volumes – importation will contribute to collapse of tender local industries. In most instances, imported commodities are often lowly priced relative to the local commodities (Feenstra, 2000). Due to the price differences, locals will tend to prefer the imported commodities hence compromising the demand and supply for the locally produced commodities. The situation if not corrected often jeopardizes the general operations of these local industries hence causing de-employment of individuals. The imposition of high taxation by governments on imports has been mainly in order to encourage the operation of local industries with the view creating employment opportunities (Al-Shammari, 2007). Secondly, unfavorable balance of payments will also result into the reduction of the purchasing power of the currency. In terms capital flows, unfavorable balance of payments will be realized when the valued of capital outflows exceed capital inflows. The scenario is further elucidated when a country incurs large volumes of cash in the purchase of commodities that results in the depletion of the local accounts. As a result of this, the country will be insufficient of funds to be used in the establishment of new ventures besides lacking funds to be used in the expansion activities (Lopes, 2007). The resulting effect will be numerous cases of unemployment as sectors are inactive. In international trade this form of structural unemployment is commonly experienced by developing countries that imports technological commodities that are highly priced while exports cheap agricultural produce. The large disparity in the commodity-prices therefore contribute to the capital outflow. Impact of Trading Agreements on employment Trade agreements are commonly enacted in the course of international trade in order to ensure certain levels of controls by countries in the trade. Among the aspects of interests in these trading agreements are the prices to be placed for various commodities of trade. In a number of cases, trade agreements will curb countries from setting high prices for commodities without extensive consultation with the involved trading countries. At times the move to set high commodity – prices will be regulated despite improvement in commodity quality. The World Trade Organization has often regulated countries from adopting measures that are not in accordance with the trade agreements (Reeve, 2002). This greatly affects the magnitude of support that governments offer to the various domestic industries. Lack of support will be witnessed through high taxation that the governments will imposed on the operations of the local industries (Bidlingmaier, 2009). Additionally, due the cheap international commodities allowed by availability of the trade agreements there will be a lot of preference for these cheap commodities. Domestic industries will as a result be in constant financial distress hence compromising the existing wage rates. Low and fluctuating rates will be experienced that will make the domestic sectors highly unattractive. Fluctuations in the currencies International trade involves consideration of both the values of both the local and foreign currencies. This is mainly regarded since global trading operations involve the use of a number of currencies. The use of hedging techniques like swaps, futures and options are often considered by countries in bid to control the possible adverse effects that often results from currency fluctuations. In the event that the value of the local currency reduces, unfavorable balance of payments will be realized since the low purchasing power of the local currency will attract more exports however of low prices. Among the locals, the low purchasing power of the currency will result into low demand for the local currency as individuals will prefer foreign currencies that are of relatively high value. In attempt to rectify the condition, the government will act by increasing the supply of the local currency (Reeve, 2002). Inflationary effect will be realized due to the low purchasing power of the currency. The effects of inflation will be greatly experienced in the employment patterns and the existing wage rates. The use of Philips curve aids in the explanation of the relationship of inflation and unemployment. Due to the wage rates that are unattractive, individuals will willingly avoid employment with future expectation of better wage rates. The situation if not corrected can result into negative employment, a situation where almost the whole country is unemployed. Conclusion In line with the above discussion, it becomes evident that international trade greatly affects a number of operations in various countries. Owing to the ever increasing globalization aspect in most sectors, it is evident that countries should assume international operations in is to achieve effectiveness in business operations which can be either bilateral ore multilateral. Among the impacts of international trade that becomes manifest from the discussion are, improvement of the existing relationship among countries and improvement of the general development of the country. In the consideration of these indulgences, there is need for countries to take into consideration the existing resources within the countries (Feenstra, 2000). The analysis of these resources will make it possible for countries to undertake trade in commodities in which they experience comparative advantage. Through comparative advantage analysis, respective countries will realize competitive advantage in the international trade participation. The aspect of comparative advantage will make it possible for the countries to export only commodities that are cheaply produced locally and import those commodities that cannot be locally produced by the country. Additionally, owing to the diverse effects that international trade has on various macroeconomic aspects like employment and wage rates, there is need for involved governments to adopt measures that would result into favorable conditions. Controls such as the use of currency devaluation, quotas, subsidies and taxation are tools that the involved countries should skillfully adopt in order to influence the resulting balance of payments. Considerably, a large percentage of employment in a country can be influenced by international business operations. Global operation will require the entity to expand its activities in order to meet the existing global standards. The existence of trading agreements among most countries has also improved the process of transferring personnel from various locations. However, the governments and the involved sectors should also be keen to identify possible challenges that could jeopardize global operations (Maskus & Wilson, 2001). Conditions such as unfavorable fluctuation in the value of currencies should be pre-determined and necessary course of action adopted. The strategies that the government can assume in this case include both impositions of effective monetary and fiscal policies. References Agnihotri, V. K. 1995. Public policy analysis and design. New Delhi, Concept Pub. Co. Al-Shammari, N. N. 2007. Exchange rate policy and international trade linkages and impacts. Thesis (Ph.D.)--Syracuse University, 2007. Bhagwati, J. N., Panagariya, A., & Srinivasan, T. N. 2001. Lectures on international trade. Cambridge, Mass. [u.a.], MIT Press. Bidlingmaier, T. 2009. The influence of international trade on economic growth and distribution in developing countries with a special focus on Thailand. Berlin, Logos-Verl. Breau, S. M. 2006. Impacts of international trade in Los Angeles. Thesis (Ph. D.)--UCLA, 2006. Feenstra, R. C. 2000. The impact of international trade on wages. 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