Advantages and Disadvantages of Specialisation and International Trade - Coursework Example

Discuss the two primary ways in which international business occurs and critically examine the advantages and disadvantages of specialisation and international trade. What arguments would you put forward in favour of the concept of free trade? Introduction: Historically economic exchanges between nations have been a common phenomenon. This is indicative of the fact that nations today, are a part of an increasingly wider marketplace, and their interdependence on one another plays a key role in the development of their regional as well as international economy. These cross-national economic activities are defined and explained in the form of international trade / international business. The terms international business and international trade are often used interchangeably; where international business is mostly used to denote international trade. The concept of international business is comparatively larger and broader in scope as compared to international trade. For instance, the concept of international trade is restricted to imports and exports between various countries while international business on the other hand includes – international trade, as well as production and manufacturing of goods or any such similarly activity by an enterprise, involving exchange of capital, people, industrial processes and / or skills; taking place across international boundaries (Ball, McCullouch, 1993). Definitions: International business: According to Ball & McCullouch (1993): “International business is a business whose activities are carried out across national borders. This definition includes not only international trade and foreign manufacturing but also the growing service industry in areas such as transportation, tourism, advertising, construction, retailing, wholesaling, and mass communications" (Pp.9). International trade: International trade1 refers to trade between countries involving import and export of goods. International trade can be bilateral or multilateral. The cross-national trade patterns of various nations can better be explained with the help of international trade theories. According to the classical trade theory the extent and scope of a nations trade i.e. exports as well as imports depends upon its trading patterns with other nations, i.e. any country would be able to maximize its profits by maximizing the production of those goods which would help them increase their economic advantage (Ricardo, 1817; Smith, 1776). The factor proportion theory on the other hand states that countries usually aim at producing and exporting those goods which require production factors in which it specializes or possesses in abundance. Similarly they tend to import those goods which require production factors which are relatively scarce in their country (Hecksher & Ohlin, 1933). According to the product life cycle theory, when a given product is produced by a country and subsequently by its foreign subsidiaries and exported to the world, a trade cycle is formed. The import and export decisions by countries are taken in accordance with such trade cycles i.e. the place where the costs are at its lowest possible produces and exports the product (Vernon, 1971; Wells, 1969). The two primary ways in which international business occurs include: Geographical / international specialization and Division of labour The term specialization refers to the utilization of a countrys scarce resources in specialized areas of production in which country has absolute or comparative cost advantage in comparison to the rest of the world. Division of labour: international trade leads to division of labour since all the countries are engaged in producing only those goods which offer them maximum comparative advantage. Thus the countries involved in international trade, will only trade for those goods which ensures them maximum profitability and import goods from others at lower prices. Advantages and disadvantages of international trade and specialization: Advantages of international trade: 1. Optimum utilization of natural resources: International trade entails the optimum use of natural resources and enables them to be exploited to their full potential. The nations which have natural resources in abundance trade it with those who have acute shortages of such resources through exports and imports. 2. Availability of goods at cheaper rates: International trade enables the availability of goods and services at a cheaper rate since all the nations are involved in producing only those goods - the production of which requires the minimum of comparative cost. 3. Ability to deal with natural calamities: The increased international ties between countries in the form of trade relations enable them to help each other in the event of natural disasters. Thus all the nations are empowered to deal with such unforeseen incidents in the most effective manner. 4. Availability of wide variety of goods: On account of international trade, the consumers enjoy the benefit of consuming a wide variety of goods / products. This leads to an increase in the aggregate consumption of goods in all the countries and thus ultimately leading to an increased standard of living. 5. Excess production: International trade provides an opportunity for every nation to dispose of its excess production. For instance, many countries may produce more than what is required by them. In such a case, the excess production can be sold to other countries which need those goods and thus avoid a sharp decline in prices of such goods in their own countries. In the process it can also earn foreign exchange ultimately leading to its overall economic prosperity. 6. Wider markets: International trade broadens the scope of countries in terms of trade. All nations try to maximize the production of goods and services in order to attain economies of scale. It leads to a reduction in cost of production and hence higher profits, thus benefiting the nations in the process. 7. Increased competition: International trade leads to an increase in competition among nations who compete to provide better quality products at reasonable rates. Such increased competition leads to a fall in the cost of production and hence higher profits. 8. Eliminates monopolistic tendencies: Due to the presence of a wider market, the opportunities for exporting goods are higher. Nations try to produce more to cater to a widened marketplace - i.e. various countries, hence there is no scope for monopoly to exist. New entrepreneurs continuously enter the industry thus eliminating all possibilities for the monopolistic firms to dominate the market place. 9. Availability of raw materials: International trade makes it possible for countries with little or limited natural resources to import the same from other countries and attain industrial advancement through technical knowhow. Any nation can benefit through international trade by trading goods which it has in abundance with those that they lack. 10. Specialization: International trade has increased the scope for specialization of certain goods by certain countries, which can then be exported to other countries for a profit. Those countries specializing in certain type of goods can produce them in larger quantities - thus reducing its cost of production, and export it to countries across the globe, and improve their profitability in the process. 11. Increased economic development: international trade leads to an improvement in economic development of the nations. It On one hand, it enables the developed countries to import raw materials and other natural resources from developing countries and on the other hand, it enables the developing countries to import technical knowhow, advanced machinery and other similar resources from developed countries thus paving way for their economic development. Such an exchange between various countries help them in increasing their output and hence their exports thereby leading to a simultaneous rise in their foreign exchange earnings which ultimately leads to increased profitability and hence economic development. Disadvantages of international trade: 1. Exhaustion of natural resources: International trade implies the optimum use of natural resources by countries. This may lead to over use of such resources, which are used by developing countries for export purposes in exchange of highly priced manufactured goods from developed countries. 2. Political slavery: International trade tends to encourage political slavery in the sense that it encourages the developing and under-developed countries rich in natural resources to import technically advanced goods or technical knowhow at high prices from developed countries. Also, it encourages the developing nations to borrow loans from developed countries, which leads to an increase in foreign debt on the part of such nations, which leads to an increased interference of developed countries into the affairs and political administration of the developing countries. This ultimately leads to political dominance where the developing countries are left to oblige to the needs and demands the developed / rich countries. 3. Price rise: Certain goods are manufactured and sold in higher quantities by nations with a view to maximize their profitability and maximise their foreign exchange earnings. This leads to a shortage of such goods in their own home country thus leading to an increase in price of the said product. Moreover it also adversely affects the standard of living of people. 4. Increased dependence: international trade affords countries the luxury to import products in bulk at lower prices. Such benefits offered by international trade often leads to an increased dependence on foreign goods which are available at lower prices. Such dependence may act as a setback in case of outbreak of wars or political animosity between countries involved in exchange of such products. 5. Over-production: In order to increase their profitability, countries may produce higher quantities of goods, for export. However, in the event of a sudden fall in demand for the said product in the foreign countries, it leads to massive financial losses and also depression in the domestic economy. The workers / labourers may also face setbacks and the entire economy may suffer. 6. Restricted industrial growth: International trade requires countries to specialize in certain products for the purpose of export. However such a requirement leads to a lop-sided development of a country, since it produces only those goods which earn them maximum foreign exchange. This leads to development of only certain type of industries which is harmful for the domestic economy in the long run. 7. Exploitation of under-developed economies: International trade often leads to exploitation of the poorer nations who are made to rely on expensive products or technical knowhow, imported from developed nations at higher rates. Also, the under-developed nations are also involved in borrowing loans from the developed nations, giving them the power to control their economies. This acts as a major setback for the under-developed nations (Kaur, et al., 1992). Advantages of specialization: Specialization offers benefits to both the management as well as the workers 1. Saves time: specialization helps saving time since the workers are exclusively dedicated to one single task as opposed to switching between various other tasks. This saves a considerable amount of time and more work can be done thereby leading to increased productivity of workers. 2. It helps the management in training the workers more effectively 3. Simplifies the task of the management in hiring workers since no specific education is required 4. Maximized output can be achieved due to the repetitive nature of work. 5. Minimized errors: the number of errors and the resulting wastage can be easily avoided since the labourers are mostly engaged in repetitive work, and hence the chances of any serious errors are easily avoided. This in turn helps in increasing productivity and ultimately translates into higher profits. 6. It is easier for the management to control and supervise the work flow Disadvantages of Specialization: 1. Deterioration in quality: The quality of product may deteriorate due to boredom faced by the workers engaged in repetitive jobs. 2. Worker dissatisfaction: the workers may become highly dissatisfied due to the repetitive nature of their jobs, leading to increased absenteeism among them, tardiness, and neglect towards their work ultimately affecting the quality of the end product in the process. 3. Absence of opportunities for progress: the workers may become highly dissatisfied due to lack of adequate opportunities for progress in their jobs. Since most of their work is repetitive in nature, it may lead to fatigue, stress, and frustration among them. Also the management may find it difficult to overcome such setbacks and the production may suffer. 4. Increased reliance on foreign goods: due to specialization, the domestic economy may suffer, since it may have to rely heavily on foreign / imported products, thus leading to an imbalance in their economy. It may also ultimately lead to increased foreign debts and higher cost of living. Arguments in favour of concept of free trade: Free trade refers to the absence of any artificial barriers to trade between countries i.e. tariffs or other similar trade barriers and implies exchange of any type of goods and / or services freely between nations. It is often argued by many economists that free trade encourages higher standard of living. Such a claim is supported by the theory of comparative advantage as well as the economies of scale. The arguments in favour of free trade are listed below: 1. Maximization of output: The theory of comparative advantage states that any nation would aim to specialize in that good or product in which it has a comparative cost advantage i.e. it will engage in production of only those goods which offer them a higher comparative advantage. Such an approach results in higher productivity of the said goods or services. 2. Optimum utilization of resources: since free trade entails the production of goods by countries at a comparative cost advantage, it ensures the optimum utilization of resources and helps in avoiding wastage as each country produces goods with the minimum inputs required. 3. Promotion of economic welfare: Free trade encourages countries to freely indulge in exchange (import and export) of goods and services required by them without any sort of restrictions. This helps in economic welfare of countries as they can import or export only those goods which ensure them maximum profits. 4. Improved efficiency in production: Free trade encourages the countries to maximize production of goods in which they specialize at lowest possible costs. This helps firms in the industry to improve their production and only those firms with good quality products manage to sustain themselves in the market thus ensuring effective production of good quality products. 5. Wider market place: since free trade allows all the countries to freely participate in international trade, it automatically helps in broadening the market place whereby various countries can import and export the required goods and services from a wide variety of firms from diverse nations. References Ball, D. A., McCullouch, W. H., (1993). International Business, McGraw-Hill Publication, Pp. 9 – 11 Hecksher, E. and Ohlin, B. (1933), Interregional and International Trade, Harvard University Press, Cambridge, MA Kaur, S. J., Gupta, A., Jain, T. R., (1992). International trade and public finance, F. K. Publications, Pp. 97 - 100 Ricardo, D. (1817), “Principles of political economy” in Saffra, P. (Ed.) (1951), The Works and Correspondence of David Ricardo, Vol. 1, Cambridge University Press, London Smith, A. (1776), An Inquiry into the Nature and Causes of the Wealth of Nations, edited by E. Cannan (1961) and reprinted by Methuen, London Vernon, R. (1971), Sovereignty at Bay, Basic Books, New York, NY Wells, L.T. (1969), “Test of a product cycle model of international trade”, Quarterly Journal of Economics, February, Pp. 152-62 Read More