A Significant Representative of Gross Domestic Product - Term Paper Example

Definition of International Trade International trade is very important to the economy of all countries around the globe. It has given rise to economic prosperity of most countries in the world. Under this type of trade, demand, supply and prices of products or commodities are affected by events that occur globally for example changes in the political environment in countries where the trade is been done. Changes in the global events result into changes in prices of commodities which in turn affects the demand and supply of the very product in the market. By definition, international trade is the process whereby goods and services are exchanged across both national and international borders. International trade is a significant representative of Gross Domestic Product in many countries. International trade has social, economic and political benefits and these have been realized in most industrialized countries in the recent times. Other factors that have contributed enormously to the development of the international trade are globalization, advanced transport systems around the world, emergence of multinational corporations and practice of outsourcing by many countries. In general, international trade is globalization and it is a branch of economics. When economics is incorporated into international trade, a larger branch called international economics is formed. Foreign Direct Investment has contributed greatly to international trade. This type of trade occurs when an investor acquires an asset from a country other than their own with intentions of managing the property. FDI has been categorized into three classes namely: Equity capital - this refers to the value which a multinational corporation has invested in shares of an enterprise in a foreign country. It includes both mergers and acquisitions and Greenfield investments made by the multinational company in a foreign country. Reinvested earnings- This represents the value of shares that Multinational corporations have invested in affiliate earnings as dividends. The retained profits by the affiliates are assumed by the multinational company to be reinvestment in the affiliate. This can represent up to 60 per cent of outward FDI in the United Kingdom. Other capital- refers to short or long-term borrowing and lending of funds between the MNC and the affiliate. It is imperative for countries around the world to engage in bilateral FDI arrangements due to enormous growth in institutional, economic and legal interlinkages between countries. FDI has boosted economy all over the world. There is increment in the annual global flow of around $250 billion as experienced between 1985 and 1995. United Kingdom is one of the countries that has benefited from international trade for a long time. International trade has boosted the UK economy to a greater level. UK is economically strong and has progressed in the competitive global world. UK economy has been influenced so much by international trade in terms of costs and benefits. Through international trade, firms within the country have been able to compete effectively in both the domestic and foreign markets. The country has exploited the technology that is available outside the country. International trade has reduced the too much dependency on the existing markets. Venturing into outside markets has enabled the country to increase the volume of sales hence more money flowing into the country. This in turn leads to improved living standards among its citizens. UK has benefited from the international business operation through expansion of business. Due to new market ventures, businesses have expanded hence utilizing the capital capacity. International trade is very important to the UK economy since it has also stabilized the seasonal market fluctuations. In general, international trade and FDI have played a key role to the development of the UK economy especially during the colonial times and the post war period. There is economic certainty. Trade Barriers Exchanging goods and services with other countries is sometimes a very challenging process. There are trade barriers that a country or individuals have to encounter in undertaking international operations. Proper marketing and selling strategies are very essential to any business operation. A trader in UK should be able to compete with local, national and multinational companies. Cost of production is very high in the UK hence their competitors might take advantage. One is obliged to demonstrate the value of the products that he or she offers. Culture is another key factor that has a great influence on international trade. An exporter has the duty of ensuring that promotional and advertisement activities match the culture of the country in which they are operating. Some countries prohibit goods or even containers that exhibit religious or obscene connotations. Exporting goods to another country should be approved by the relevant authorities within and outside the country. This process of approval and documentation can be difficult. Taxes and other legal considerations imposed in order to participate in international trade forms barriers to many potential businessmen. It is imperative for an exporter based in UK to adhere to legal regulations such as licensing. It is mandatory that an exporter has to declare all exports to Customs Department. Language has been another trade barrier that has greatly influenced international business operations. There are diverse languages that are used around the world. English is not the major language as most citizens of UK have adopted. For example, in African countries, English is not commonly used. This creates a lot of problems in undertaking business operations in African countries. Without proper communication it is not easy for one to get business opportunities which are viable. The issue of differences in currencies used has also posed a lot of challenges to international trade. Role of WTO and GATT in liberalizing Trade WTO came into existence in early 1995 and it is a mere continuation of GATT. With the two there are legal documents that govern trade between the member states. It assists in monitoring implementation of diverse agreements between these member countries. WTO members voluntarily liberalises their trade regimes as governed by the principles of the organization. This in effect leads to a free trade between the member states. The two trade agreements ensure that developing countries are free to open up small market sectors. It ensures that developing countries are in position to impose certain conditions on developed countries such as accessing superior technology and joint ventures for investments such as shares of domestic and foreign capital. The two trade agreements have a role in ensuring that trade between the member countries is liberalized through better management of global events, fairer distributions of global benefits and international economic governances. European Union (EU). It is a geo-political organization which covers a large portion of Europe. Its origins date back to the post World War II era. The entity was established as a result of numerous treaties. It has undergone a lot of expansions. European Coal and Steel Community foundation contributes to the foundation of EU and the Treaty of Rome in 1957. The union has grown in size through incorporation of more countries. Policies regarding the operations of EU have changed substantially. European integration was seen as the only way the European community could evade the form of nationalism which was rooted in the continent. In an attempt to escape the devastating nationalism, Belgium, Italy, Luxemburg West Germany and Netherlands formed European Coal and Steel Community as a step towards the federation of Europe. This was formed to control national coal and steel centrally. European Economic Community and European Atomic Energy Community were also formed in 1957 .The two communities were formed with the aim of establishing custom unions and to enhance cooperation in nuclear energy development. European Community was formed in 1967 and it comprised the first three sets of unions. EC enlarged when Denmark, Ireland and United Kingdom joined in 1973. Greece joined in 1981 while Portugal and Spain were incorporated in 1986. With the increase in the number of communities, Maastricht Treaty came into force in November 1993 which led to formation of EU. Current Historic Members of EU The union is composed of 27 sovereign states: Czech Republic, Austria, Belgium, Ireland, Italy, Hungary, Latvia, Finland, Greece, France, Cyprus, Bulgaria, Denmark, Romania, Poland, Spain, Sweden, Slovenia, Luxemburg, Germany, Portugal, Netherlands, Slovakia, Malta, Lithuania, Estonia and United Kingdom. Newest Members: Some of the newest members of EU is Slovakia which joined early this year, Romania and Bulgaria which joined the eurozone in January 2004. Effects of EU Regulations on UK business Members of EU have dominated the world Economy and some of their policies affect business the world over. European Union is investing billions of money on telecommunication. This investment is of vital important to the whole world since it enhances job creation and more people will benefit from this. The EU policymakers are introducing many rules and regulations and they are taking advantage of monopoly to control and regulate the high-tech underpinning European countries internet. These rules will lead to incurring of heavy costs to access internet hence businessmen are not in a position to get relevant information around the world. This undercut enormous economic advantages. EU has affected business operations in the UK because of the rules imposed on the member countries some of which are vital to business operations. All EU members are covered by treaties such as Procurement Directives. These enable all public contracts between the member states to operate freely without any interruptions. All public sector contracts are transacted freely and there is free movement of goods and services from one country to another so long as they are members of EU. Privacy standards for consumers proposed by EU have a lot of effects on business operations. Former U.S. president G.W. Bush warned the EU over the weakened proposed privacy standards for consumers. This is because U.S. community could not conduct their business in the country very easily. This would in turn affect the level of business in the UK. U.S. policy is quite liberal as compared to that of European Union. Countries across the world would prefer to conduct business in U.S. than in U.K. UK National Currency- Exchange Rates Systems Definition of Exchange Rate System It is the rate at which currency from one country can be exchanged for another currency of another country. It represents the value of currency from one country compared with that of another. Difference between Fixed and Floating Rate System This is where the rate at which currency is exchanged is determined by the government. Here, the government through the Central Bank sets and maintains a certain rate as the official one. In fixing the rate, a rate is determined against the major world currencies such as the U.S. dollar, euro, yen, or a basket of currencies. Under the fixed rate exchange system, the Central Bank has a duty of buying and selling of its own currency in the foreign exchange market. The bank has the duty of ensuring that currency is stable. Central bank has to maintain the rate at which currency is exchanged hence the level of reserves should be high at any time. On the other hand floating exchange rate is determined by market forces i.e. supply and demand. It is termed as self correcting as the differences that occur in the supply and demand forces will automatically be corrected in the market. Simple model - if the demand of a currency in a country is low, the value of that currency will automatically decrease hence the price of the imported goods become more expensive. The rise in price of imports increases demand for the goods and services that are produced locally. This will then have effect on the economy since more jobs will be created leading to more income hence an autocorrection will occur in the market. Floating exchange rate systems keep on changing with changes in demand and supply. UK uses both regimes because there is no currency which is fixed or floating. Euro is used by the EU members and it is a single currency that came into theoretical operation from 1999. Britain entry to sole currency has been subjected to a lot of debate. It was suppose to join in 2003 but due to economic and political reasons it did not which was denied by Gordon Brown who suggested that Britain would joint the system only on economic reasons. Arguments for Britain Adopting the Euro Currency Britain will derive various benefits from joining the Euro currency system. In the absence of the floating exchange rate system, the cost of labor in the country can adjust itself following changes in the wage rate. By adopting a single currency method, the country is likely to reduce the uncertainties in the exchange rate system. This has a positive impact on the British businesses since uncertainties reduce cost of exchange transactions. Certainty in exchange rate system will attract more tourists into the country hence economic welfare of the country will improves. European community has benefited from the single currency system since absence of exchange rates eradicates the risks of unforeseen exchange rates devaluation. The single system will be advantageous to the country as the large Euro Zone will integrate the national financial markets between the member countries. There will trade between Britain and the large European countries. The country will benefit greatly from trade flows and high capital investment that result due to adoption of single currency. Due to intra-European trade flows, a country devaluing the currency of another country in the pretext of competition will be eliminated. Arguments Against Currency union has never been successful in the past; hence Britain joining euro currency might fail leading to economic stagnation in Britain. This would also have the effect of increased unemployment when the European Central Bank undertakes deflationary monetary policies contrary to the needs of Britain. The currency union will not be sustainable as countries may pull out upon experiencing difficulties. Countries may opt to establish an independent currency which they feel would serve the interests of their country’s economy. Exchange rates are an effective mechanism of eradicating imbalances between countries. Absence of this mechanism means that there will be economic imbalance between countries which is very dangerous when considering distribution of resources. If Britain joins the single currency system, then it means that it has to transfer domestic monetary autonomy to European Central Bank permanently. This in turn affects the domestic monetary policy which might no longer respond to external economic pressure such as inflation. By joining the single currency system, the country has to devalue the domestic currency. The country does this to restore the international competition. Devaluation of domestic currency carries a lot of costs and risks. If the country loses international competitiveness, then it gets dislocated socially and financially hence becoming economically unequal with the rest of the European countries. Work Cited Brett, D. European Unions and International Trade Economics: European Perspective, Nelson Thornes Publishers, (2006), pp. 200-378. Read More