International trade has of recent increased rampantly due to free flow of information across the borders majorly enhanced by good communication. With the rapid development of technology, many businesses have been endowed with the power to interact with overseas producers and consumers of different type of goods and services.
Benefits of international trade
International trade has a number of benefits. First, many countries get the chance to acquire what they do not produce and sell what they have in surplus. Some countries also get the opportunity to buy products at cheap prices as compared to the cost of manufacturing the goods domestically (Bhagwati, 2004). This trade has majorly been supported by relaxations of some tight policies imposed by most countries.
The late inclination in the strength of communication through tools such as email address among others ensures business partners get in touch with each other in time. Delays caused by letters as for the ancient period is a history and no longer hold any logic.
International trade also gains some benefits through its extension to the financial market (Fingerand & Schuknecht, 1999). Financial market involves buying and selling of foreign currencies due to several reasons such as anticipation of the future rise in the value of the currency. The market also comprises investment in foreign market securities such as bonds and shares.
A deep insight in the international trade reveals that some members have benefitted while others get hurt. Often, research reveals that developing nations have able to gain in terms of technology. The discrepancy that exists between developing nations and developed nations is quite wide and only international trade that can act as solution.
Most of the technologies applied in the industrial sector by developing nations are acquired from developed nations (Bhagwati, 2004). These technologies are fundamental in production efficiency.
This efficiency is what leads to high quality products. Technology has also helped to solve the time issue during production processes. With the launching of computers in developing nations, supervision and management of many businesses have been made easier.
On the other hand, developed nations are able to outsource cheap labor from developing nations. They additionally get the chance to dispose their surplus products. This has further enhanced their production capacity in their countries. Foreigners are also availed with the chance to invest in other countries economy. This has seen several multinational companies increase their level of profits.
Disadvantages of international trade
Recent confirmations have pointed out a number of setbacks concerning the international trade. Both developed and developing nations accused bodies that control international trade including World Bank, International Monetary Fund and World Trade Organizations for the exploitation by some countries. This has led to several debates of whether a nation gains or losses after participating in the international trade.
Some countries such as the U.S.A. perceive international trade as weighing more on the negative than on the positive side. As much as it was able to sell its industrial goods to most countries, recently, many countries especially from Europe began to import cheap products from Asian countries such as Japan and China. With the help of cheap labor and latest technology, these Asian countries are able to produce cheaply.
As a result, they give stiff competition to their U.S.A. counterparts. This consequently leads to the reduction of the U.S.A. exports to other nations. Noticeably, this automatically reduces the U.S.A gross national income.
On the contrary, the imports from other nations seem to be rapidly increasing. The strength of the U.S.A. dollar favors importation of goods and services especially from developing countries; but on the other hand, importation seems to be superseding exportation levels. Logically, the country would be making less money from exportation to enable easy of exports purchasing.
Many will term it as “many goods chasing few dollars”. In short, there is no balance on the ongoing economical activities. Commonly, this is referred to as imbalance of trade. Such country might fail to meet its national budget outlay or forced to borrow loans from the international bodies such as World Bank and International Monetary Fund. This means the country will be operating in deficits.
Restriction rules by the GATT and WTO
What happens when the world is in the face of financial crisis? Will a nation gain or lose if it restricts itself to the rules outlined in the World Trade Organization? This has been a major challenge for about 153 partners of the multilateral trade system across the world. Free trade advocates free trade across the member countries.
The member countries should operate within the limits of import duty taxes and tariffs levels laid down by the international bodies. However, do they keep to these promises? Anyway, most countries seem to deviate from these regulations.
They resolve to protect their economy and this include their markets and industries thereon. In the case of financial crisis that took place in 30s, 70s and early 80s a country resolving to protection measures was not an issue to be addressed at international level unlike today. This was because international trade was not as free as it is today. Today, other members are keen to watch other countries actions during such economical hard times.
International trade and economic crisis
International trade has been the greatest contributing factor to the economic crisis that we recently experienced in the beginning of the year 2007. In the approach of this crisis, several companies that had some foreign subsidiaries went under. Enron and WorldCom had open business units in other countries such as the Power Plant in India.
Indeed, operations of these subsidiaries are always dependent on politics that sometimes turns out to favor foreign companies (Fingerand & Schuknecht, 1999). The fall of these huge companies, have impacts on other nations considering that their subsidiaries will fail to operate. This means losses of jobs and shares.
For instance, the collapse of Lehman Brothers Incorporation had subsequent effect to whole the U.S.A. economy and the world in general. Other companies that had investment with Lehman were due to go under. It was only in the support of government in which congress passed a bailout package of 750 billion dollars that saw the economy stabilize to some extent.
Otherwise, ripples of the economic crisis could have been stronger. Nevertheless, this was the strongest crisis ever since. The international trade volume contracted across all nations as most firms failed to operate.
The consequence of economic crisis is severe to individual countries. This is the time when economy is operating below the normal economic growth level. A country is faced with low GDP. This means the nation is under-producing given the economical resources available (Sachs & Warner, 1995). A number of factors lead to this: first, the inflation rates are high and so the prices of commodities are somewhat high.
Therefore, industries are not able to produce many products to the consumers. Given that production costs are high and consumers’ income is constant, consumers will tend to buy less especially the so-called luxurious goods. As matter of fact, consumers are unable to save due to high cost of living.
This forces financial institutions to lend at high interest rates and as a consequent, this pulls down the level of investments in the economy leading to the dragging of economical performance. In the midst of such problem, governments always seek new measures to intervene in the economy for its recovery.
This may force the government to raise taxes for imports into the country with an aim of protecting domestic industries from the stiff competition of foreign companies. Raising taxes would make imports more expensive as compared to domestic products and therefore consumers will shy away from the foreign products.
A country may sometimes put anti-dumping policies which will discourage import of cheap products from other economies. For instance, India had banned Chinese toys into its country for some period. Subsidies on the other hand, help industries to manufacture products at a lower operation cost than in the absent of subsidies such as loans.
More so, the government will aim to apply labor-related measures to protect employment. The U.S.A. government was forced to reduce the stimulus taxes for the companies that had moved overseas with a view of maintaining jobs for its citizen. Some States will prefer to devalue their currency to encourage their export to other countries.
Korean did it by allowing a depreciation of its currency by 19% against the USD. The Government might also come up with other measures such as quotas majorly on tariffs and export taxes among others. All these measures focus on protecting the economy from the harsh economic crisis.
Protectionism measures and international trade agreements
These measures of individuals’ economic protection are always against the agreement made at the international trade meetings (Sachs &Warner, 1995). The G20 for instance had agreed on import taxes levels permissible for all the members.
However, some member countries went against it in the year 2009 due to some negative implications resulting from such policies. As far as a country want to gain from the international trade, it also needs to protect its economy from the negative side of the international trade.
Comparison of benefits and setbacks realized from participating in international trade
The above discussions specifically points out advantages as well as disadvantages realized from participating in the international trade. This brings us to the topic of this piece of whether international trade is a zero sum game. Indeed, it is! This is because a country benefits on one side and loses on the other. A country gains in form of specialization. Any country would specialize in producing goods and services it can well.
This ensures it produces on large scale and therefore gains from the economies of scale such as low production costs. The nation is also assured of the market for its surplus. Nevertheless, this country is able to buy products it does not produce domestically from foreign countries at lower price than it would if locally manufactured. This advantage is mostly tagged as comparative advantage.
Additionally, a nation is able to acquire imports from other countries at a low cost due to low taxes imposed by the foreign countries on the member states. It also avails a country with the variety of goods and services offered across the world (Bhagwati, 2004). Most importantly, developing nations are able to acquire technology from the industrialized countries.
Conversely, international trade also suffers from a number of drawbacks. It is perceived to be unproductive especially during economic crisis. The free trade might harm ones economy. For instance, consider a country facing high production costs and at the same time, it is being dumped with cheap imports.
Most probably its’ domestic industries would collapse because of the failure to keep up with tough competition emanating from foreign competitors. This would mean loss of jobs and the general contraction of the economic growth. Other disadvantages include loss of one’s culture through interaction of these nations during the trade.
Generally, international trade has both advantages and disadvantages that end up cancelling each other leading to almost zero benefit realization. Therefore, protectionism measures would not help, as other nations would take retaliatory measures. This might include high taxes on its exports among others. Moreover, having closed economy would be dangerous as country cannot be self sufficient in providing resources to its citizen.
Bhagwati, J. (2004). In Defense of globalization. New York, NY: Oxford University Press
Fingerand, K. & Schuknecht, L. (1999).Trade, finance and financial crisis, special studies 3. Geneva: World trade Organization Publisher.
Sachs, J. & Warner, A. (1995). Economic reforms and the process of global integration. Brooking Paper on Economic Activity, 2, 1-118.