International Trade and Comparative Advantage - Essay Example

Comparative Advantage Tobacco is fast gaining importance as a controlled substance and the limitations as well as the restrictions placed on the use of tobacco have ensured that demand for the drug as well as the supply of it in America is being strangled. However, there are quite a few lucrative markets for tobacco products internationally which means that the overall demand for the crop remains relatively stable. As American farmers move out of growing tobacco, the cigarette companies need other sources of the crop, since the crop itself can only be grown in specialized circumstances land owners who can grow tobacco are given many incentives by the cigarette companies to induce tobacco farming.

In the short run, farmers may be able to gain profits from planting tobacco but it must be kept in mind that the buyers of their crop are a very specialized group of companies. In the long run, their product can not be sold to everyone since even a smoker would have little use for raw tobacco unless it has been refined, packaged and sold as a finished product. This means that with time, the tobacco companies will be able to dictate the price at which they will buy tobacco or not. Additionally, if the farmer has taken a loan from the tobacco company then the dependency of the farmer on the company is doubled.

The company will be able to push the price downwards or ask the farmer to bring more area under the cultivation of tobacco. In domestic terms, since the farmer will not be producing as much food crop, the prices of other food items would be expected to rise due to their relative scarcity. This comes across as a negative practice but for the tobacco companies, this is smart business which is not blocked by the American government (U.S. Department of Commerce, 2006).Acme Motors makes engines in the Nuevo Laredo facility simply because the assembly and manufacture of engine parts is much cheaper in the region.

Engine assembly is an extremely labor intensive process and since labor is not that expensive in the region the overall cost of the engine is lowered. The other parts which are bolted on to the engine to complete the car are handled with automated robots to a large extent therefore the engines can be shipped back across the border to finalize the production of the car in America. This is a part of the international trade that is supposed to bring a better understanding for people around the globe and improve the human condition (UNCITRAL, 2006).

Acme motors gains two significant advantages with this situation. First, the cost of labor is reduced and engines are produced at a lower cost. Second, the same engine can then be used in several different cars of various models. Third, the final assembly and the manufacture of the car takes place in America which means that Acme is able to get the benefits in terms of tax and production as an American producer. In the international market, the cars made by Acme are sold as American made cars even if the engine or other parts of the car are assembled elsewhere in the world.

Without this connection of international trade, the economies of the world would present very different pictures in terms of their values and output (WTO, 2005).The gain for consumers is improved quality, reduced costs and the satisfaction of driving a car made in America. However, these gains can quickly turn into losses if Acme does not make sure that the savings in labor are passed on to the consumer in terms of lowered costs and quality control is maintained across its production facilities.

International business is nearly always about seeking competitive advantages and Acme is doing its best to maximize the competitive advantage it gains from making engines for its cars in their newly established Nuevo Laredo facility. Works CitedU.S. Department of Commerce. (2006).Ensuring Fair Trade. Retrieved July 1, 2006, from trade.gov website: http://trade.gov/fairtrade/index.asp UNCITRAL. (2006). Origin, Mandate and Composition of UNCITRAL. Retrieved July 1, 2006, from UNCITRAL.org website: http://www.uncitral.org/uncitral/en/about/origin.html WTO. (2005).

International Trade Statistics. Retrieved July 1, 2006, from WTO.org website: http://www.wto.org/english/res_e/statis_e/its2005_e/its05_toc_e.htm