World Merchandise Trade Growth - Coursework Example

World Merchandise Trade Growth        Unprecedented level of globalization has affected and revolutionized the world’s economic structure. Although the Less Developed Countries (LDCs) did not gain as much as what was hypothesized by the Free Trade Arguments, noticeable changes were observed especially in case of the United States as consequences of the globalization movements. The Organization for Economic Co-operation and Development (OECD) countries, in all these years experienced a good amount of rise in their trade volume, share mounting from 12.5 percent to 18.6 percent between the years 1960-90. China’s trade growth virtually exploded during the recent years. (Brainard, 1990, 327 & 328)   There are different factors propelling world’s merchandise trade to this level over the years. Four most significant factors may be mentioned here. Firstly, the recent Information Technology Industry boom has really worked as a major push towards achieving this kind of extraordinary trade growth. Throughout the 1990s, the office and the telecommunication equipments were considered under the most dynamic product category traded. Although the industry was not successful in exceeding its previous export level in 2000, a rise of 10 percent was realized amounting to nearly 770 billion US$. (WTO NEWS: PRESS RELEASES, 2000; WTO NEWS: PRESS RELEASES, 2004). The tremendous rate was accentuated by the sales of mobile phones and semi-conductors. The second factor that aided prospective trade growth rate is Reduction in Tariff. In October 2002, Chairman of the NAM Board of Directors Trade and Technology Policy, Harold Wiens stated that over 70 percent of the merchandise trade consisted of manufactured goods. Multilateral trade negotiations have been significantly effective in bringing about reductions in tariff in most of the industrial nations, but the policies of many of the LDCs regarding the tariff and non-tariff trade barriers are yet to be revised. Since 1950, the import tariffs in U.S. dropped from 6 percent to 1.5 percent, with the average rate slumping from 8.6 percent to 3.2 percent from1960 to 1995 worldwide. Thirdly, transportation cost, as a result of the tariff reductions, forms a substantial part of the total trade costs. “In 2000, aggregate transportation expenditures for major Latin America countries were two to four times higher than for the United States. (source: author’s calculations based on US Imports of Merchandise; ECLAC BTI data)” (Hummels, n.d., 7). The ad-valorem duties are based on the distance of the goods to be shipped, quality and the weight/value ratio of the goods. These transport factors significantly alter the pattern of trade and the relative prices. Rapid technological change has affected dramatically in reduction of the real prices. During 1957-72, with the widespread usage of the jet engines, air-transport reduced the real prices at the rate of 12.8 percent to 16.6percent each year. Over the period, 1972-83, the quality-adjusted aircraft prices were dropping per year by 2.2 percent to 3.8percent (Hummels, n.d., 8). Another most important factor, which affects the merchandise trade, is the rising Income Cost. The impact of globalization has led to new and effective rise in the technical progress, which aids in reduction of labour-demand and thereby the distribution of skills and wages becomes more and more skewed. Here comes the fourth factor. A rise in the cost of living, can be noticed. The competitive market prices for the merchandise goods have led to the rise in their demand. The job insecurity and low paying structure in service industry, as a result of globalization and outsourcing, especially in the developed economies of USA, is fueling the demand for consumer goods with a reasonable price structure. In turn it is working as a greater incentive towards trade. An instance may be taken from the rising popularity of cheaper and utility oriented Japanese car in the US market. Free Trade — Greatest Blessing?         The theory of ‘Absolute Advantage’ explained how the nations are going to get benefited with the adoption of free trade. In 1817, the British political economist David Ricardo adeptly took forward the idea into a revised form of “Comparative Advantage”. The two most important areas affected the globalization can be discussed in this regard: Environmental effects: Environmental effects incorporate increase in income with expansion in the scale of economic activities, technological advancements, easy exchange of environmental knowledge, rise in global awareness through environmental networks and societal movements, increase and homogenization of consumption patterns, national regulations becoming more or less ineffective and rapid depletion of national resources to meet the global demand. Balance of Trade: The Balance of Trade (BOT) indicates the Trade Surplus (Export-Import). Globalization promotes free trade, which creates the opportunity to add the Balance of Payments (BOP) level, helping a nation to gain Foreign Exchange Reserves. Here the exchange rate plays a vital role, as it is a key factor in regulating the volumes of exports and imports. Free trade helps the developed nations to increase their market base and increase in the revenue earnings of middle-class high-wage yielding jobs while benefiting the Third World nations through bulk purchases of the goods and services. Effects of Three Forms of Non-Tariff Barriers        Globalization, with its advent, has resulted in many controversial theories, which turn against the phenomenon. Some anti-theorists are still critically scrutinizing the steps taken forward by most of the enthusiastic industrial nations, especially America, for the purpose of spreading economic benefits to all and upgradation of global socio-economic structure. The industrial expansion and full-fledged promotion of Free Trade is still not well accepted by many of the Less Developed Countries (LDCs). The presence of some protectionist government in many of the Third World nations find their economic goals clashing weakly or firmly with the capitalist viewpoint. The conservative government policies can be of various forms restricting international trade partially or fully among multiple countries importing or exporting any sort of trade items. The general policy of any such government is to raise the cost of the traded products by the imposition of some sort of trade duties. The Theory of Comparative Advantage as postulated by David Ricardo by taking forward the Theory of Absolute Advantage (by Adam Smith in his work, The Wealth of Nations), explicates the loss of overall efficiency if there are any kind of restriction imposed on the Free Trade policies - “A new tax too may destroy the comparative advantage which a country before possessed in the manufacture of particular commodity” (Ricardo, 1821, 307). However these nations advocating the policy making of Free Trade, themselves opt for heavy subsidization in the areas of agriculture. We will now discuss on some of the non-tariff barriers enacted by the conservative and neo-conservative government of some the Third World countries.       Firstly one may talk about Import Licensing. It is a document issued by the national government regarding the import of certain goods in the concerned country. It is a way of discriminating against goods of another country. This is a kind of non-tariff barrier against the free trade movements in order to guard the domestic industries or manufacturers from the international competitions. In the past, LDCs maintained rigid exchange controls relatively to avoid perennial Balance of Payment (BOP) problems. This scheme was used offset the inefficiencies which were produced from the foreign exchange controls. This kind of Industrial policy tool was adopted by several nations to regulate import flows and channel them to the sectors, which were considered to be important for successful economic growth in future. In this regard, “Infant Industry Argument” is one of the most common topics of discussion. The import licensing is adopted to protect the newly formed domestic industries that can meet up the domestic demands, but will definitely succumb if left open to the foreign price competition - “Evidence from business reports suggests that the procedural aspects of licensing continue to act as an impediment to trade” (OECD, 2005, 105). Secondly, we may talk of Quota shares, which have rendered similar effects in hindering the free trading activities. Quota refers to a specified percentage or amount of the total allotted importable that is prescribed to each of the individual manufacturers. For example, if the government of U.S. imposes a quota on import of cars from Japan, the Japanese government may impose a quota share program, which determines the number of cars to be manufactured by each of the manufacturers to be exported to U.S. Even a single unit extra produced by one of them will require negotiations with another one, since the total number of exportable cannot be exceeded. The import quota imposed by a nation is a kind of protectionist trade policy, which aims at limiting the amount of foreign goods to be imported within a specific time period. Lastly we will talk about the Technical Specifications, which is one of the major Non-Tariff Barriers affecting transnational and regional trade movements. This kind of imposition is subjected to various requirements those need to be satisfied for successful trade. These include Technical Regulations which incorporate the content of standard, code of practice, or technical specifications, Product Characteristics Requirements including technical specifications to be fulfilled by the product and Marking Requirements depicting information regarding transport, customs and proper labeling (country of origin, weight, product type etc.). Packaging Requirements include Testing, Inspection & Quarantine Requirements advised by the authorities in charge regarding pre-shipment checks and prior to release from the customs department and Special Customs Formalities incorporate measures taken in response to incapability of submitting relevant or necessary documents related to product information when required. (The Association of Southeast Asian Nations, 2007) Terms of Shipment and Sale International trade relationship depends essentially upon decisions on how to structure the transaction terms between the buyers and the sellers. In case of imports, the American or Canadian companies take some critical decisions regarding the deal. They can either handover the responsibility to their overseas suppliers or can take up the responsibility on themselves carrying out the shipping and the insurance of goods. Cost, Insurance and Freight (CIF): This term can be explained as the seller quotes a certain price for the goods including the insurance charges, transportation and other miscellaneous charges, till the point the vessel is unloaded. After the delivery, the entire responsibility shifts on to the buyer regarding any risk of loss or damage and the buyer is even liable for extra transport charges. This term is typically applied for inland waterway transport or ocean shipments. For any other mode of consignment, Carriage and Insurance Paid (CIP) is applicable. The importers, especially who are rookie international traders or importers dealing with fewer amounts of freight volumes prefer this mode of transaction. They do not need to attend any trouble regarding the delivery as the suppliers assume the entire responsibility. The convenience is given priority by these types of importers, and they are reluctant about gaining the shipment control or saving freight charges. The associated problems arise out of proper shipment information, delivery concerns, and demurrage. (“Cost, Insurance and Freight (CIF) vs. Free on Board”, n.d) Free On Board (FOB): This term has been named after a particular port of export (overseas) where the seller quotes a price covering every cost till the delivery at a port, to the buyer. This term has got two major advantages over the CIF as it provides with a more competitive freight charges and an improved shipment control. A much more competitive freight rate can be availed through FOB, which is obviously cost effective. (“Glossary of Trade & Shipping Terms”, 2005) Delivered/Duty Paid (DDP): While the “Ex Works” (EXW) denotes seller’s minimum obligation, DDP works at the maximum point. Irrespective of the delivery means, a part of the cost payable must be excluded upon delivery (like VAT etc.), if the parties agree to that. Otherwise, the exporter must assume duty at the time of disposal of the consignment. (“Glossary of Trade & Shipping Terms”, 2005) References 1. Brainard W. C., 1990, Brookings papers on economic activity, Brookings Institution Press. 2. “Cost, Insurance and Freight (CIF) vs. Free On Board”, n.d., Speedy Air Cargo, Inc. available at: http://www.speedycargo.com/resource-center/cif-vs-fob (accessed on March 29, 2009) 3. “Glossary of Trade & Shipping Terms”, 2005, Trade Port, available at: http://www.tradeport.org/library/d.html (accessed on March 29, 2009) 4. Hummels D. n.d., Transportation Costs and International Trade Over Time, accessed on 27th Mar 2009, available at: http://www.mgmt.purdue.edu/faculty/hummelsd/research/hummelspercent20jeppercent20rewritepercent20finalpercent20withpercent20tables.pdf (accessed on March 29, 2009) 5. Organization for Economic Co-operation and Development (OECD), 2005, Looking beyond tariffs: the role of non-tariff barriers in world trade, OECD Publishing. 6. Ricardo D., 1821, On the Principles of Political Economy and Taxation, John Murray. 7. The Association of South-East Asian Nations, 2007, Non-Tariff Barriers, , available at: http://www.aseansec.org/10114.htm (accessed on 27th March 2009) 8. WTO NEWS: PRESS RELEASES, 2000, WTO, available at: http://www.wto.org/english/news_e/pres00_e/pr200_e.htm (accessed on March 29, 2009) 9. WTO NEWS: PRESS RELEASES, 2004, WTO, available at: http://www.wto.org/english/news_e/pres04_e/pr386_e.htm (accessed on March 29, 2009) Read More