International Trade and Global Economic Issues - Essay Example

International Trade and Global Economic Issues

International trade is important for countries as globalisation grows for the following two reasons each of which shows the gains made from trade between nations. Firstly, just like individuals, countries are different from each other and can all benefit from their differences by agreeing to each do the things they do best. Secondly, economies of scale can be achieved by these countries by focusing their energy on producing one good each on a large scale and more efficiently than trying to produce all the goods at once. The benefits achieved from international trade form the basis of David Ricardo’s model on free trade. The model discusses how comparative advantage can be beneficial for two countries from each country specialising in the goods that offer a better comparative advantage over the other country. Despite the arguments against globalisation and free trade, both countries can benefit if each nation exports products that it produces, thereby gaining a comparative advantage.

To determine the role played by comparative advantage in regulating how international trade plays out, we imagine an economy with a single factor of production, labor. There are also only two products, wine, and cheese, produced in this economy (Krugman, Obstfeld, & Melits 2015). The labor hour per unit required for the manufacture of a gallon of wine or a pound of cheese is used to show the economy’s productivity per industry. However, there are limits to production capability due to the limited resources of the economy leading to trade-offs. For the economy to decide what to produce the relative price of each commodity is accessed but since the only factor of production available is labor, the supply of both goods will be determined by how labor move to the better paying industry (Krugman, Obstfeld, & Melits 2015).

When it comes to trade between two countries, both countries have a single factor of production too. For example, two countries A and B produce both wine and cheese. Nation A produces more cheese than B, which produces more wine. Labor in country A is thus more efficient in producing cheese than wine and Country A has a comparative advantage in the production of cheese and vice versa. Without trade, prices of both commodities are decided by the requirements of labor per unit of production. With international trade, however, domestic factors will not be the primary price determinant (Krugman, Obstfeld, & Melits 2015). When prices of cheese are high in nation B, then they will import cheaper cheese from A while nation A imports wine from B. The situation cannot continue indefinitely as country B will export enough wine and An enough cheese to equalise the relative price. Each of the nations will specialise in what they are efficient at producing leading to a rise in production of both goods than before the trade began. A comparative advantage of a country is achieved if it can produce one product at a lower opportunity cost than its trading partner. Opportunity cost in the case of country A can be defined as the amount of wine production it gives up to produce an extra unit of cheese. Gains achieved from trade include indirect production where the country specialises in the production of a good it is good at and trading it for the other good it is not very good at producing thereby indirectly producing the goods it imports through trade. Another benefit is increased production capability, which in turn leads to greater consumption of the product and improving living standards of the nation’s residents (Krugman, Obstfeld, & Melits 2015).

The Ricardian Model on comparative advantage is based on the following assumptions. Two countries are involved in the model producing only two goods, and labor that is the only factor of production. Across the two nations, products are homogenous, but labor is heterogeneous across the countries and homogenous within the country. Labor can be transported at no cost across and within the nation but not does move across the countries while goods can be relocated costlessly across the nations. There exist differences in production technology across the countries and the industries which are reflected in labor and productivity. Perfect competition exists in the labor and goods markets in both countries, and both workers and firms aim to maximise utility and profit respectively.

Question B

Even though international trade and globalisation have numerous benefits for the nations involved, there are myths or controversies surrounding globalisation particularly the trade part. Anti-globalisation supporters have the tendency to blame almost all social agenda shortfalls on globalisation. Arguments against free trade are thus from a social and an economic perspective. Social issues include poverty, inequality and child labor while economicmatters include sunk costs, unemployment, environmental pollution, social dumping, and stronger countries benefiting more. The first argument against Ricardo’s model is that influential countries benefit more from free trade as than stand up to foreign competition (Krugman, Obstfeld, & Melits 2015). For instance, a critic of the theory poses the question of what happens if the country has nothing to produce efficiently and cheaply compared to other nations except by lowering the cost of labor steadily. Such an argument shows the critic’s lack of understanding of the model. In free trade according to Ricardo, gains are dependent on comparative advantage and not absolute advantage. If country A produced more wine and cheese than country B but produce more cheese than wine while B produced more wine than cheese efficiently, then country A would focus wine as it is what it produces best while B would focus on cheese as it is the product it is least worse at producing to gain comparative advantage.

A second argument that falls in the social and economic categories is the pauper labor argument (Krugman, Obstfeld, & Melits 2015). Labor unions particularly love this argument when trying to seek protection of domestic workers against foreign competition. It is their belief that domestic industries do not have to deal with foreign competition from countries that pay fewer wages than the local industries. In the US for instance, manufacturing workers earned $35.53 each in 2012 compared to $6.48 in Mexico, $2.01 in the Philippines, $1.36 in China, and $1.17 in India. Consequently, over 42,000 factories closed down the US leading to a loss of over 6 million manufacturing jobs between 2000 and 2009 (Paul, 2015, 9). While some of the jobs lost were because of the recession, themajority of the jobs move overseas. Between 2001 and 2010, close to 2.7 million were lost in the US because of Chinese imports. The example of country A and B once again shows the fallacy of the argument. Nation A is superior in production for both cheese and wine compared to nation B. the low cost of wine produced by B is due its low wages, but the pay rate is irrelevant when it comes to trade gains. All that matters for nation A is that it is cheaper to trade off its wine production to specialise in cheese than produce wine itself.

The same argument is used on the social side to claim that poor wages in these countries promote poverty in these developing nations (Bhagwati 2007). Such an argument is a conclusion mostly made by those opposing free trade in wealthy countries. The argument on poverty is irrational as employment opportunities have been created in these nations lifting the previously from extreme poverty. Once countries like India and China changed their policies from autarkic to free trade with other nations in the 80’s there has been significant poverty reduction as many have been absorbed into gainful employment (Bhagwati 2007). Another social argument used in this case is the exploitation of women and children to work in places of a poor standards (Bhagwati 2007). According to ILO, an estimated 168 million children aged 4-17 are under employment with close to 85 million of them in hasardous jobs in Latin America, Asia, Middle East and Africa (Paul 2015). It is, however, an illogical argument as with the globalisation and international trade, countries gradually establish labor laws to protect workers due to pressure from the international community. Also, parents of such children are absorbed into meaningful employment expanding their sources of income. Parents thus no longer force their children to work to contribute to family income but instead send them to school to better their futures. Globalisation has also helped the fight for women right and equality despite claims from anti-globalists that it has worsened them (Bhagwati 2007).

The environmental cost of globalisation is currently being felt in the form of global warming and irregular weather patterns. Increased consumption due to globalisation and free trade has also increased the transportation of commodities leading to depletion of resources and an increase in carbon emissions (Taylor & Thomas 2005). It has resulted to economists coining the term ‘external social costs’ to refer to the problem of producer passing on the environmental cost on the consumers (Paul 2015). If a company is required by the government to clean up a polluted area or institute technologies to reduce pollution, the costs are eventually passed on to the consumer. Consumers, therefore, have the choice to buy a cheaper substitute, pay the high price or reduce their consumption. Governments, therefore, force companies to comply with environmental values but inadvertently force the companies to pass on the costs to consumers by increasing costs (Taylor & Thomas 2005). Local industries consequently have to compete with foreign companies that do not have to face similar regulations. For example, Chinese steelmakers do not have to face the same regulations that US steel manufacturers do making Chinese imports cheaper, which creates unfair competition as US companies slowly run out of business due to their expensive products (Paul 2015). Such a consequence was not an intention of the Ricardian model and has become a huge burden currently. It is a valid argument affecting the current market and creating unfair competition.

Conclusion

Conclusively, the Ricardian model of comparative advantage shows how two countries can each benefit from trading with each other if the specialise in the production of a good they are best as and importing the other good from the other nation. Gains from such as trade off include increased production, consumption, and ability to produce the product they specialise on efficiently and at a lower cost. Despite the gains earned from globalisation and free trade, there are various arguments against by anti-globalists, economists, and environmental conservationists. Such arguments include poverty, inequality and child labor while economic issues include unemployment, environmental pollution, and stronger countries benefiting more.