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Who wins and who loses in International trade (Essay Sample)
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WHO WINS AND WHO LOSES IN INTERNATIONAL TRADE
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International trade has gained momentum in the past century and many countries have opened their borders for export and import of goods. The modern world has better communication and transport networks which necessitate trade between different nations (Kerr & Gaisford 2007). Therefore, the trade involves one country exporting and another importing. In many cases, international trade agreements are managed by the government because they have the duty to protect the interest of their citizens. Trade policies done by the government is inclined towards promotion of exports and restrictions of imports. The idea of unbalanced trade among various countries is debatable and economists have expressed different views on the topic. Some have argued that foreign trade brings more benefits to a country while others are skeptical and they suggest that it favors developed countries. Although foreign trade is beneficial to a country, it also has its own disadvantages hence creating losers and winners (Negishi 2001).
International trade revolves around the concept of comparative advantage which has benefits to all parties involved in the trade. According to Negishi (2001), comparative advantage can be used to explain why a country with better technology tend to import or buy goods from a country with poor technology. The rule that governs comparative advantage indicates that every nation has one commodity that it can produce at less opportunity cost. As a result, it is advantageous if the country specializes in that good and exports it to another country.
The concept of absolute advantage is closely related to comparative advantage and it explains why a country uses fewer resources in production of a particular good. Absolute advantage can be attained if a country has efficient technology compared to another country. The idea of comparative advantage enables a country to concentrate with goods with less opportunity cost and import the goods which it cannot produce efficiently. The combined cost of producing both goods of high and low opportunity cost is reduced if every country specializes in one commodity that it can cheaply produce. However, economists argue that the situation comes with negative implications (Negishi 2001).
When a country concentrates in one commodity, the price of that good tends to increase in the domestic market because attention goes to international market. Price increases because the supply cannot meet the demand of both local and foreign markets. The benefits of international trade are also affected by exchange rates. Every country has its own exchange rate and international trade is done based on terms of trade which determines the exchange rate foreign trade. A country whose local exchange rate is far from that of international trade tends to benefit more from the trade (Kerr & Gaisford 2007)
Specialization geared towards comparative advantage has negative implications for future growth in an economy. A country that chooses to focus in the production of one good may ignore other sectors of the economy. Note mentioning, infant industries may lack the capacity of comparative advantage during the early stages but as they expand they benefit from the advantages of economies of scale. Therefore, a country should protect these industries by imposing barriers on imports. In addition, comparative advantage is affected by technology and it can be lost if there is technological advancement in another country hence the loser here is the country that specializes only in one commodity. It is important to point out that prices fluctuate which may negatively impact on comparative advantage.
Foreign trade encourages expansion because more goods can be produced to meet the demands of the local and international market (Kavoussi 1984). Mass production enables an industry to benefit from economies of scale because the cost of inputs decreases. Economies of scale enable countries with similar resources to gain from trade and specialization. It also allows differentiation of goods which necessitate exchange between firms within the same industry.
Foreign trade results to competition between local and international companies (Negishi 2001). Consumers are the winners because competition leads to price reduction. Monopolistic firms are forced to reduce prices and strategies shift to factors that reduce cost of production. On other words, international trade promotes the conditions necessary for a perfect competitive market where the price is determined through the interaction of demand and supply. Priced derived from these conditions reflects the true value of a commodity.
Competition improves efficiency because companies are obliged to innovate and adopt new strategies to attain competitive advantage. Efficient strategies such as improved technology enable industries to reduce cost and maximize production. Consumers also benefits from improved efficiency because quality of goods improves as technology advances. As a result, the winners in this situation are the industries and consumers. However, foreign trade has less impact in agriculture sector because the nature of the industry attracts more people to the industry and produce identical products. Nevertheless, agriculture sector gains from the industrial efficient by sourcing inputs like farm machinery from the industries. Agricultural products provide raw materials for industrial processing (Battese, 1992).
As Kerr and Gaisford (2007) indicate, foreign trade enables consumers to enjoy diversified products. Products from different countries are available in the local market which gives them large variety of goods to choose from. The study of consumer behavior indicates consumers have different taste and preferences. Consequently, more products to choose from enhance consumer utility. Capital goods that are not produced locally can be accessed through international trade and as result a country improves production efficiency.
Negishi (2001) suggests that international trade acts as stabilizer of prices in an economy. The factors of demand and supply can vary at some point and it results to price increase. For example, prices of basic goods like food may rise due to low supply which may arise from adverse climatic changes. Through international trade food can be imported and price is stabilized. However, it is vital to indicate that foreign trade can also result to price increase. Prices fluctuate in international market and countries that specialize in one product are greatly affected and efforts to correct the problem are also limited because the product comes from external sources.
The main winners in foreign trade are the owners of factors of production who produce goods and services for export. International trade expands market for exports hence producers are motivated to increase output for the large market. Marginal cost of labor also decreases with increased production hence firms are forced to hire more labor to produce more goods (Davidson & Matusz 2004). Exporting industries also benefit from government incentives that promote exports. For example, the government may reduce taxes on products used to manufacture export goods. This encourages investment in the industry and lowers the cost of production. On the contrary, owners of factors of production who produce goods that compete with imports tend to lose. Competition from foreign companies reduces profits because monopoly is eliminated.
The conditions under which international trade operate favors developed countries. In most cases, the developed countries have better technology used for production which increases efficiency (Saggi 2000). Therefore, production cost ...
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