Changes in the Composition in Trade - Essay Example

Student Name: Student Number: Unit: Unit Coordinator: Assignment: Topic: Changes in the Composition in Trade since 1960s Date Due: Word Count: 3002 Globalization of world economy has, since World War II, continued to develop at a rapid pace. It is undisputed that the international trade has increased too. Economies have now become increasingly interactive and more open. This is said to be made possible by the tremendous increase in the economic activities in the foreign direct investment (FDI) and international trade. In 1960, for instance, the year where the uproar of the postwar years would be finally laid to rest and finally leading to the world commencing its journey on exponential growth, Gross domestic product (GDP), that is, the ratio of foreign trade to GDP was at 25 percent. The figure went up, excluding the duration of global recession, it soared to 53 percent by 1999. It is also important to note that in 1998 the ratio of GDP to FDI had bounced to 35 percent in contrast to 1980 where the ratio was recorded at 11 percent. This is confirmed by statistics for investment and international trade (Panangariya, 2000). Of importance to note, are the various reasons that have continued to allow the rise of trade between countries. With the decreased average tariffs by the industrialized countries, from about 42 percent in 1960s to 7 percent in the late 1990s, it boosted the world exports. For instance, the United States imports and exports equaled less than 9 percent of the Gross National Product in the 1960s but in 1990s total trade was at 25% (Schiff & Winters, 2003). This was significant as it marked an excellent kick off of trade among countries especially those that partnered with the United States (Panangariya, 2000). Establishment of global organization led to increase of trade between countries. During the Bretton Woods Conference, the World Bank, International Monetary Fund and General Agreement on Tariffs and Trade were established. They were part of the complex framework of managing the global economy after the postwar (Bagwell, 2002). The creation of OECD, one of the trends towards regionalism, in 1961 has also led to the rise in trade among the members states. The organization is said to be committed to liberalize all international transactions which include capital flows and trade. This has been one of the agents of globalization. In addition, the creation of European Economic Community led to development of trade in Western Europe (Yamazawa & Ippei, 2001). The trading body within different regions led to the removal of most trade barriers for instance imports and tariffs which led to free trade among members states (Schiff & Winters, 2003). Other favorable conditions that create an environment excellent for trade between countries were improved in most countries. Technological development in communication and transport was improved and their costs also lowered. Therefore, movement was enhanced leading to increase in export and imports among different countries. These included development of containerization in shipping and the jet engine. Other notable development includes the positive change in the production methods which has resulted to new products for trade and increased manufacturing efficiency. Privatization and deregulation of national industries was quickened and led to improvement of trade among countries. As most countries were politically stable, trading activities were carried out especially in the Western countries, United States and the Asian countries. Most of the African countries were still at war. Therefore, trading activities were not rampant as seen in other countries (Yamazawa & Ippei, 2001). The General Agreement on Tariffs and Trade was formed by Bretton Woods, after the World War II. The main objective was to eliminate discrimination, reduce the tariffs barriers, trade restrictions and to form several agreements to improve international trade. GATT has remained as an agreement though its functions have been taken by the World Trade Organisation. Other key objectives of GATT was to create full employment, improve the standards of living, promote the production and encourage the exchange of goods and services(GATT,1948).WTO is a trade organization that has rules that govern the international trade and its members. The aim of WTO is to resolve dispute and to negotiate on matters of trade to the member of states. Free trade is not an objective of GATT, but it is for WTO. For instance under WTO agreement all members are treated equally, no discrimination or any special favors between the trading partners (Michalopoulos, 2000). When GATT was formed in 1947 most developing countries were not recognized or given any special rights. All rights and obligations were uniformly applied to all members. For example two states can have different per capital income yet they all have the same provisions (Langley, 2002). Currently two third of WTO members are developing countries. According to the world economy, there has been an open multilateral trading system which has led to a balance of rights and obligations as a result of different phenomenon within the trading partners. The following are the roles of GATT and WTO. Governments are important purchasers of goods and key drivers in the international trade sector. This means that the local and foreign goods and services will have to be treated equally, especially when the foreign goods entered into the market. Negotiation is required in order to lower the barriers that are attached to the custom duty, import bans and quotas (Sally, 2000). Free market is another way of describing WTO because of allowing tariffs to a certain limit though it is not fully confirmed. It rules promotes fair and open competition among its members. Due to the stability of WTO and GATT, people from different states are encourage to invest, jobs are created, prices lowered as a result of competition and consumer are able to enjoy the full benefits of goods and the business environment (Bagwell, 2002). WTO purpose is to encourage development through the set rules to all the member states. Flexibility is a key especially to the developing countries as they continue to implement the systems that are significant in agriculture sector and export subsidies. They highly depend on trade and have large share of the international economy. Therefore the protection of the well system and good trading rules is important to the developing countries (Sally, 2000). GATT and WTO encourage this principle of reciprocity between different governments negotiating about trade policy. The negotiation can lead to tariffs adjustment in exchange of equal volumes of imports and exports of goods and services. This principle includes the compensation terms to be followed when one partner withdraw from the business (Bagwell, 2002). The principle of reciprocity and non discrimination can also promote good trade agreement through neutralizing the terms of trade policies. These include the analysis of labor and the environment standards that guides against the regulatory body (Barton, 2010). WTO procurement rules are fair to the upcoming developing countries because they provide rights to access market and rights of protection against the developed world.WTO negotiations can provide the developing countries with a golden opportunity of strengthening their relationship to the universal trading system. Multilateral rules are also very significant in matters of domestic, economic and politics. It provides commitment and protection especially when the growth is very low or there is a recession. International treaties are very vital between the governments who share common interests. These bindings protect the governments against influential producers and domestic exporters who are capable of lobbying their governments. According to Australia study, global protection of agriculture and manufacturing will boost world economy annually by 400$ billion (WTO, 2000).Other countries that are under WTO agreements are provided with more time, more favorable treatment when meeting their obligations. The role of ideology has also played a fundamental role in the changing of trade composition among countries since World War II. Neo-liberalism, political-economic attitude that de-emphasize intervention of domestic economy by the government, does focus on free-market, less restrictions on property rights and business operations. Thus, in foreign policy, it favors opening of numerous foreign markets by diplomacy, political means and economic pressure. Opening of foreign markets generally refers to division of labor at international level and free trade. One of the benefits of neo-liberalism in today’s trade activity is that it does favor privatization and measure success in the economic gain. It has also minimized unemployment and strives to mitigate all the labor policies that affect the employees for example, minimum wage. Application of neo-liberalism is evident in Britain where Margaret Thatcher continued with the neo-liberal revolution. Before her era, most people were living below poverty level. This may be said to be a result of public sector maintaining and running most basic companies. Of great concern is that the public sector could not obey the law of competing for the market shares or profits (Menon, 2006). Privatization was therefore, created in Britain and spread later in the world. This encouraged competition in the business world leading to major profits and increase in trade between countries. This also improved service rendered to the customers to be good and at a competitive cost. Margaret did use privatization to smash the powers entitled by the trade unions. She used the public sector to weaken the trade unions. As a result employment in the public sector drastically dropped. This led to more investment by foreign companies in Britain leading to the increase of trade between countries. At international level is to be noted that neo-liberal has led to the increase in free trade in services and goods, relative freedom of investment and circulation of capital. Most international organization such as IMF has continued to establish neo-liberals rules that have increased free trade in the world. In the 1990s, the then president of the United States, Bill Clinton backed Free Trade in North America as one way of embracing neo-liberalism. Free trade was observed as a basic economic program for his government. This promoted intellectual rights property as one way that the America would manage persistent balance of the trade deficit and reduce trading barriers. Basically, neo-liberalism has changed the fundamental nature of trade since 1960s. Competition was observed between the non-communist and communist blocks. This was seen immediately after the Cold war that followed World War II. This led to increase in communication and transport technology. Specifics programs were undertaken by the different blocks to ensure that they ideologies were the best. In addition, the need to influence other countries that were not member of any block, led to the members of the different blocks to trade with others in order to influence them. Thus trade activities increased among different countries. Multinational corporations also rose at this era to create excellent trading environment (Scollay, 2001). Between the end of World War 2 and 1960s, most good-governed nations, tried to maintain a constant balance in their imports and exports. They sought for a situation where their imports were less than their exports. The nations wanted to accumulate more Treasury reserves of gold which could be redeemed by Central Bank that could exchange with dollars. However, United States was exceptional. The US was not concerned with maintaining this balance. According to the Bretton Woods, US paid her export deficits by sending dollars, which of course it printed to the creditors. Therefore, it had a clear advantage over the other nations. However, this practice resulted to regular loss of American gold. At the end of World War II, US gold reserves dropped from 20,000 tons and this reduction was observed yearly it could have been as a result of some unrest with France, for example. Later, President Nixon declared that US would no longer redeem the dollar at any price. This resulted to devalue of the dollar as well as other currencies. This is because most currencies were bound to gold through dollar (World Bank, 2004). Using the gold standardization standards, most countries held to the fact that it was possible to export to a country that sold goods and services in turn. In other words, trade was balanced. For instance, Germany would import coffee from Mexico as it would export machinery to Mexico. There was balance as each transaction was always denominated in gold. At that time there was little trade between China and US as China did not have the buying power to get products from US (Scollay & Gilbert, 2001). However, as result of the closure of gold window, things changed. Most industries in the US closed. Some of them were built in other countries where labor was cheap and ready market was available. For instance, Japan became one of the beneficiaries as US started to buy goods from Japan (Kihwan, 2002). It was able to have huge reserves of the dollar. This led to the United States to be de-industrialized. The greatest effects are the increase power in trade of China. China at the moment sells vast of products to the world whereas most nations do not export the same quantities. This has been possible by the fact that the trade deficits are not paid in gold but Euros, pound sterling, yen or dollars, which of course will never be scarce as they are all created by will by the European Central Bank, the Bank of England, the Bank of Japan and the USA respectively (ADB, 2002). Global financial crisis and industrial crisis have been felt throughout the world especially in the transition and developing countries and has replaced the credit expansion. China and Asian countries have continued to buy gold reserves as they realized that dollar can be erased at any time. However, these accumulations have made China to accumulate huge reserves of gold which cannot be exchange with tangible products. Therefore, manufacturing void has been created as a result of drastic rise of the developing economies especially in the Asian regions (Menon, 2006). This is especially so in Japan and China which continued to export their products from their massive industries. The services sector has showed drastic growth in the past 20 years. It has accounted for a higher GDP in the business world. As a result the services sector has continued to fill the void created in the industries economic. This has been evident in the developed countries for example, United Kingdom, the United States, France and Germany (Bijit & Gilbert, 2001). Great importance has been accorded the role played by the regional trade and bilateral agreements in the world. Of great concern is magnitude that these trade agreements have played in the Asian Pacific region. Reasons for emergence of regionalism included: same geographical region, political needs of the members, opportunities to address their common issues which would not be done so by World Trade Organization or GATT leading to trade liberalization, positive response to formation of regional trade agreements in other regions, they may have formed these organizations to expel the fear of being excluded from the major markets. Other factors included; the developed countries seeking to engage other countries in order to pursue their objectives and also strengthening their political integration. As a result of this regional trade, trade barriers have drastically declined (Bergsten, 2000). The trade regime in the Asia-Pacific region has continually been moderately open and the average tariffs declining below what is registered in the world. This also resulted to increase in the extra-and intra-regional value in trade for the last few decades. In addition, an increase in the shares of intra-regional trade subject to total trade recorded an increase. The Asian –Pacific region has also been able to have a great command in the business world. As a result, other countries have showed interest in trading with these countries. For example, New Zealand and Chile have started negotiations that may result to partnership with the Asian countries. This was initially aimed at expansion of liberalization of trade between the involved countries which would result in increased in investment and services. Security and peace was also experienced in the Asian region as a result of Cold War (Feridhanusetyawan & Pangestu, 2003). ASEAN was said to be established during that time. However, after the Cold War, the organization was maintained and was used as a tool to cooperate with China as a result of its increase in growth in the region. The bilateral and regional agreements have promoted economic and trade integration due to the flexibility and speed associated with the approach. Agreements were readily reached as only a smaller number of nations were involved. The agreements were of course tailored to the specification of the members (IDE, 2002). The trades agreements have been incentives for other nation to join as export prospective of non-members were at a risk of being damaged. Basically, trade has increased for the last decades and their share in their world trade has also been significant. This led to more countries to acquire trading activities with Asian-Pacific region (Frankel & Jeffrey, 1997). In conclusion, there has been a tremendous and major change in trade after the World War II. Various reasons are given for these changes. Formation of regionalized trade organizations played a significant role in these changes. Others international bodies which include GATT and WTO brought in great change in the world of business. Of most importance are the contributions that these two organizations have played in the trade activities (Schiff & Winters, 2003). Neo-liberalism has been observed in the recent years. Most countries that have absorbed the revolution have acquired significant growth trade wise. It has led to privatization which has created room for competition in the business world. Britain is an excellent example where neo-liberal has liberalized trade. Major changes have also been observed in the fall of gold standardization. As a result the United State has continued to de-industrialize leading to the growth of other trade powers, China and Japan. These countries have continued to command trade activities as a result of huge export activities. Changes have also taken place in the service sector. Trade and bilateral agreements have played a role in the changes seen in trade. These agreements have had a major positive effect in the Asian-Pacific region. Trading activities have made easier due to reduction of trade barriers and tariffs, for example. REFERENCES Asian Development Bank (ADB), (2002). Asian Development Outlook 2002, Manilla: Asian Development Bank Bagwell, K. (2002). Multilateral trade negotiations: bilateral opportunism and the rules of GATT/WTO. Department of Economics . Barton, J. (2010). The evolution of the trade regime : politics, law, and economics of the GATT and the WTO. Princeton University Press: Princeton. Bergsten, F. (2000). “Towards a Tripartite World,” The Economist (July 15) Bijit, B. Gilbert, J. (2001). “Assessing Regional Trade Arrangements in the Asia-Pacific,” Policy Issues in International Trade and Commodities Study, Geneva: United Nations Conference on Trade and Development. Goldstein & Barton, J. (2010). The evolution of the trade regime: politics, law, and economics of the GATT and the WTO. 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