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Countries benefit from trade due to comparative advantage. Baumol et al. (2009) defines comparative advantaged in trade as a country’s capability of producing one good than another. According to the law of comparative advantage, two countries, goods firms or individuals can all benefit from trade if in the lack of trade they boast dissimilar relative costs for manufacture of similar.
Baumol et al. (2009) explains that even in instances of absolute advantage (where a nation is more proficient in the manufacture of all produce), trading with a less competent nation can be beneficial, as long as the relative efficiencies are dissimilar. For instance, if a worker in one nation can produce five trousers and five shirts in an hour and a worker in another nation can produce three trousers and four shirts in an hour, each nation will be in a position to benefit from trade because their home trade-offs are dissimilar.
Trade between China and India.
India considers China as its principal trade partner. India and China became partners in trade in the year 1950. However, in the year 1954, the two countries experienced border disputes and regional instability. Later on, a bilateral trade agreement was signed by the two countries in the year 1984.
Since then, there has been a stable increase in growth of bilateral trade between the two nations. Rogoff (2006) explains that the bilateral trade was US$338 million in 1992, US$7.6 billion in 2003 and by 2004 the bilateral trade was US$ 13.6 billion. In the year 2004, India was ranked as the 12th country among the top trading China partner. This had gone up from the 20th position in 2003. Currently, China is the second largest trading partner of India, the first being USA (Rogoff, 2006).
According to Gopalan (2001) labor productivity estimates in manufacturing indicate that apart from non- electrical machinery and products of petroleum, the efficiency of Chinese workers is usually higher as compared to that of Indian workers by 30 to 180 percent, subject to the product.
However, these estimates should be handled cautiously due to several factors like the heterogeneity of goods in wide manufacturing sectors and production, the fact that productivity is only restrained to labor and possible prejudice in the exchange rates used in the conversion of the output.
Cost comparisons for Chinese and Indian manufactured products designate that China has lower overheads in several products than India, though this is subject to the exchange rates applied as they may be imprecise (Gopalan, 2001). Thus China has benefited, and India has lost market shares in tertiary markets. According to Rogoff (2006) if India does not catch up by being more competitive, this tendency is most likely to go on in future.
India lags less behind in export of commercial services than China, since it is the 19th largest exporter, with a 1.5% share index. Even though China’s growth of service and products exports outdo the average growth of world exports, its products exports grew much faster than service exports, resulting to a decline in the ratio of service exports in the total exports.
Conversely, India’s service exports are almost double the rate of product exports. Gopalan (2001) notes that if the present tendency continues the share of service exports will increase by 50%.
Currently, iron ore makes up 53% of India’s entire exports to China. Other exports to China include: rubber, dairy products, oil seeds and mar products, plastic, salt and medical facilities. Most of India’s exports to China are devastatingly dominated by primary products that are of low value, with the main reliance being on iron ore. By the year 2005, 56 % of India’s exports comprised of ash, ore and slag, with an annual growth of 28% (Baumol et al., 2009).
On the other hand, electrical appliances and machineries are the China’s major exports to India. According to Rogoff (2009) these accounted for 43.9 % of sum Indian imports from China in the year 2005.
China’s low cost investment, productive labor force, connectivity to global markets and the presence of large numbers of transnational customers on Chinese shoreline have lured a small but unyielding flow of Indian investors in different sectors including pharmaceuticals, wind farm, IT, tyre manufacturing, equipment, banking and auto components.
China offers rapid growing opportunities to Indian exports (Rogoff, 2009). This is evident from the growth of the bilateral trade, which has doubled in the past two years. Thus India has largely benefited from the bilateral trade in this way.
In absence of certain markets of bilateral quotas, several rising nations would have to compete with more efficient producers. The existence of bilateral trade between India and China has addressed this issue.
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The major reason as to why some countries participating in free trade may benefit while others lose in the short run is that trade liberalization alters the comparative profitability of economic activities (Gopalan, 2001).In developing countries, trade liberalization directly impacts the prices of tradable goods as there is direct interaction with international prices. Price alteration in tradable goods in turn alters prices of non- tradable goods. These two changes stimulate changes in the hourly labor wages.
Reduced tariffs brought about by trade liberalization affects tax revenues thus impacting change in supply of services and commodities by the government. Thus in the long run countries participating in trade liberalization benefit.
The imbalances of trade between developed and developing countries are usually as a result of weak safety nets in developing countries. According to Stiglitz (2002), risk management involves enhancing the capacity of the susceptible within the nation to take up risks. Nearly all developing nations own weak safety nets. For instance, they lack unemployment insurance plan. Some developed nations also have weak and inadequate safety nets. Thus there is need for international help in boosting the safety nets.
In conclusion, firms or individuals can all benefit from trade if in the lack of trade they boast dissimilar relative costs for manufacture of similar products. Even in instances of absolute advantage trading with a less competent nation can be beneficial, as long as the relative efficiencies are dissimilar.
The efficiency of Chinese workers is usually higher as compared to that of Indian workers by 30 to 180 percent, subject to the product. However, these estimates also depend on factors like the heterogeneity of goods in wide manufacturing sectors and production, the fact that productivity is only restrained to labor, and possible prejudice in the exchange rates used in the conversion of the output.
Cost comparisons for Chinese and Indian manufactured products designate that China has lower overheads in several products than India. Thus China has benefited, and India has lost market shares in tertiary markets. However, this is subject to the exchange rates used as they may be imprecise.
Baumol, W., Binder, S., & Steve, W. (2009). Economics: principles and policy. London: Sage Publishers.
Gopalan, R. (2001). China in the global economy: China competitiveness. Calcutta: Statistical Publishing Company.
Rogoff, K.S. (2006). Financial globalization: the case of India versus China. New York: Oxford University Press.
Stiglitz, J.E. (2002). Globalization and its discontents. London: Penguin Books.