International Trade: Advantages and Limitations
International trade is “the exchange of goods and services between two countries” (www.unc.edu/depts/europe/euroeconomics/glossary.php). International trade can account for a significant portion of gross domestic product for many countries and is contributing greatly to the movement toward globalization. This type of trading can be more costly because of tariffs, language barriers, time costs, and different legal systems between countries. International trade has been beneficial to many countries simply because it allows goods and services to be traded by a country whose land may not produce those particular goods and services. However, some countries cannot take advantage because of lack of technology, communication, and transportation, and also costs. Globalization is our process of integrating regional economies, societies, and cultures through communication and trade. For some small, impoverished countries globalization is too large a feat. International trade has successfully integrated many larger countries and helped boost our struggling economy.
We have seen many advantages to international trade, but with these advantages come a few limitations. One advantage for us, The United States of America, is that we are economically integrated with all nations in the world. In our attempt to globalize our economy we have then established trade with everyone in the market; this not only allows us to gain more control, but also allows us to control tariffs on our imports and exports. According to the U.S. Census Bureau and the Department of Commerce exports totaled $142.7 billion and imports totaled $180 billion as of January 2010. Understanding that we are the world’s largest trading nation and importer we could lower the deficit significantly if we were to apply higher tariffs to our imports and exports. A benefit that applies with our control in the international trading market is that the US dollar is in circulation all over the world making it a standard unit of currency in the market. With this advantage comes the possible limitation of increased prices and higher revenues because of increased competition. Simply because we have an advantage in our ability to export goods and services faster we may not be the most efficient producer. Once the globalization process has advanced, other countries who are the main producers of the goods we export may be able to set lower tariffs and essentially take away that advantage. The international trade market is run like any other competitive market; lower pricing is considered a large competitive advantage.
The first key point mentioned in the reading that was emphasized in the simulation is increasing demand by conducting multiple free trade agreement negotiations with more than one country. Negotiations are typically lengthy and tedious so by negotiating a free trade agreement with more than one country can increase demand, which increases products being exported. Another point is to know which products to import. It is very important to understand the countries needs and wants so that the country can import those commodities. This can also conserve money by avoiding the imports the country has no use for. The third point is identifying which countries specialize in which commodities. This is vital to success in the international trade market; a country must know what products they want, where to acquire them, and how to go about receiving them. Many countries may export the same good, but only one of those countries specializes in that good. In order to ensure you are receiving the best product and receiving the amount you paid for, you need to know where to import from. The last main point is the understanding that trade barriers outside the Federal Trade Association are very high.
When attempting to solve the puzzle of who can produce a product at a lower cost the producers must understand absolute and comparative advantage. Absolute advantage is used when comparing the productivity of one person, firm, or nations to that of another. When a company, individual, country, or regions can produce a service or good at a lower cost than another entity they will have the absolute advantage. If a company is figuring how much time it takes to produce a product, they would figure the absolute advantage they would compare how much time it took to produce the product with another company and whom ever took the less amount of time for production would have the absolute advantage. When an entity has absolute advantage, they will be able to reduce costs and enhance profits. Comparative advantage describes the opportunity cost of two producers. When an entity can produce a good at a lower opportunity cost than another entity, they will have the comparative advantage. If two companies handle customer service calls for AT&T and Ford and AT&T is located in which the call volume is high because they service the west coast and AT&T’s coverage is better there, and Ford is on the east coast and Sprint has better coverage in that area. Because AT&T has the comparative advantage (both are equal in the Ford calls) they may consider turning exclusively to an AT&T call center, and let company B just handle Ford calls.
Several factors that can influence the foreign exchange rate such as: purchasing power parity, relative interest rates, trade imbalances, political stability, government intervention, and most important speculators. Speculators have the biggest influence over the foreign exchange rate because they tend to have huge amounts of capital that they use to sell or buy currency that causes the value of currency to significantly fluctuate. The foreign currency market is erratic and ever-changing in both categories: currency for holiday, or those exchanging to make a profit.
There are several issues with international trade. The most common were loss of jobs due to offshoring and outsourcing and the loss of business for US food and agriculture industries. Most of team A believes that these have a seriously negative effect on the economy. There was one maybe two members that didn’t agree. They believe that this would create an opportunity to follow the company overseas. In some cases researched, it was true and an opportunity for an overseas career was available. The most common affect led to more jobs being lost than opportunities were created. The US food and agriculture industry lost a lot of business as well due to international trade. For example, sugar. Some of the US sugar comes from Florida but that’s very little. The majority of sugar used in the US comes from outside of the US. Its not that the US can’t produce enough sugar, it’s just cheaper and easier to secure from other sources. This is bad for US citizens and the US economy. This occurs with many other products and not just sugar. The US economy, farmers, businesses, and citizens are suffering more then benefiting from international trade.
The assessment of international trade cannot be complete without assessing the role of government policies in its development. The apparent positive effect can be seen increasing the competition, lowering prices, and providing wider selections. Due to such reasons the governments of most countries actively support international trade. In that regard, international trade can be seen as one of the aspects of economic activity which is influenced by government policies. The way economic behavior in particular and economy in general are influenced by government policies can be seen through the areas of regulation, control and assistance.
The influence of governmental regulation and control cannot be overestimated. Government policies regulate economic behavior in many ways, which are tailored to suite specific purposes. Such purposes include achieving social goals, strengthening market forces, protecting employees, etc (U.S. Department of State, 2000). Generally, such regulations fall into two categories, preventing monopolies, and controlling prices (U.S. Department of State, 2000). One area falling within the regulation field can be seen through the encouragement of entrepreneurship. The changes in taxes, for example, can have a significant effect on entrepreneurial entry, which in turn might influence the economic activity for a selected region (Minniti, 2008). In terms of international trade, regulatory policies aimed toward internationalization have a significant impact, as stated in the previous paragraph. Nevertheless, it cannot be stated that such influence is always positive.
On the one hand, policies favorable for the internationalization of ventures can have a positive impact in raising competitiveness, reducing prices, reducing local monopolies, and bring technological development. On the other hand, such policies might lead to either unfair competition between foreign investment and local industries, or to cases where countries restrict or regulate the movement of international business might lead to lowering the quality of the local product or its monopoly in the market. Such aspects might have a negative impact on the economy of the country in general.
Taking the opposite position, deregulatory government policies might have more favorable influence on economic activity. One areas of such influence is the increase of small businesses in deregulated industries. Following the latter it can be stated that the development of small business is one of the drivers of the economy, which creates jobs and increases employment (Longley, n.d.). It is no wonder that small business in the United States was largely emphasized, where such emphasis largely transforms into lobbying in the Congress and state legislature (Longley, n.d.).
One of the ways the government policies help small businesses can be seen as an area of influence on economic behavior, which is assistance. The government provides several interventions and support mechanisms for entrepreneurs and small businesses. The latter can be seen through training programs, funding research areas, chambers of commerce, and others. With such influence of small businesses on the economy, it can be seen that the government is largely interested in supporting and assisting entrepreneurship.
It can be stated that government policies have a significant impact on the economic behavior of the country. In that regard, regulation, control, and assistance can be seen as examples of such influence. In terms of international trade, it can be stated that the role of the government is twofold, where policies encouraging foreign investments might have a positive impact, which nevertheless, if not counteracted with proper support to the local economy, might harm local industries.
Longley, R. Small Business Drives U.S. Economy. Web.
Minniti, M. (2008). The role of government policy on entrepreneurial activity: productive, unproductive, or destructive? Entrepreneurship: Theory and Practice, 32(5), 779(712).
U.S. Census Bureau, Foreign Trade. “U.S. International Trade Data”. Web.
U.S. Department of State. (2000). Regulation and Control in the U.S. Economy. Web.