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International Trade

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Introduction

When business activities for delivering products and services occur in exchange of either currency or other products and services between two countries then International Trade is said to take place (Nelson, 2000). The basic strategy of trade is supply meeting its demand. International trading enables one Country to fulfill its requirements through imports from the other and also a Country earns by exporting the requirements of the other Countries. Thus, the Countries become interdependent on each other. Usually, foreign trading is done when a demand is not fulfilled locally or if fulfilled then it is expensive and/or substandard. For instance, Chinese products exporting to different parts of the world give tough competition to the local industry of the importing Country. Therefore, Countries regulate the products to be imported to safeguard its domestic industry.  Further we will discuss the necessity and impact of regulations on international trade by different international/ local authorities. It is important for a Country to regulate its international trade to prevent the trade deficit which is the imports exceeding the exports in terms of their respective values. Both imports and exports are essential for a Country, but they need to be regulated in the best interest of the Country. For example, trading in (importing) oil and other basic products of necessity is essential. Several issues such as mobility of labor and currency are involved in trading internationally which are taken care of by the international trading regulations; their details and implications will be explained later.  Literature Review

 The economies of the trading Countries have become interdependent on each other. Thus, economists have formulated different regulations to solve the various issues involved in international trade such as the difference in the currency and in the value of the goods, importance of self sufficiency for a State, trade deficit, and many more. Countries form trade unions (like the European Union) by having a single unit of currency or a trade policy to support trade among the Countries in the union. International Trade strengthens the economy as it brings Foreign Direct Investment (FDI). FDIs causes increase in Gross Domestic Product (GDP), income opportunities, efficiency, foreign exchange reserves, and so on.  Moreover, the Country providing the FDIs also progresses as its Companies expand their businesses beyond the borders and thereby, make more profits. People as consumers are beneficiaries of the foreign trade since they get a range of products at affordable prices due to the competition. On the other hand, the domestic industry encounters difficulties in competing with the quality and price of the imports. If the domestics industry suffers losses or shuts down due to the imports then unemployment is increased in the Country. The individual nations as political units make policy decision in their national (as distinct from “world”) interest, so many trade problems have eventually had to be looked at from a national viewpoint as well (Bhagwati, Panagariya & Sirinivasan, 1998).

International Trading Strategies

Free Trading and Fair Trading (Protectionism) are the two distinct strategies of international trading. Free trading means no restrictions are applied on the international trade and the Government only protects against frauds whereas the fair trade refers to the imposition of the economic policies by means of  trade barriers such as tariffs, subsidies, import quotas, etc. in order to protect the local industries.  There are fears attached with trade liberalization that large industrialized nations will erode infant industrial sectors, hindering the process of economic development (Chomo, 2002).

Research Question

What is the role of Free Trade Agreements in the development of the countries and thereby, their effects on the globalization process? This Research Question leads to the following queries: How are the Free Trade Agreements responsible for the rise or fall of the International Trade of a Country? Do the Free Trade Agreements really ensure the progress of a Country through Free Trade?

Methodology

The study is focused on the world’s economy and ethnography. Books, Scholarly Analysis, Researches, and International Trade Regulatory Policies were reviewed in detail for writing this paper.  Also, the Economic Statistics by the World Bank Group, WTO and other International Monetary Authorities were studied.  Moreover, the data or figures were obtained from JETRO International Database (cited in World Bank Group, 2010). The study analyzed the Free Trade Agreements and their implications around the world. 

Globalization

Globalization is the interdependency and integration of different economies of the world by virtue of mobility of services, technology, goods, labor and capital from one Country to another. Globalization occurs in culture, environment, politics, technology and financial services. So, international trading and globalization are interdependent on each other. The International Monetary Fund (IMF, 2008) has released in its article, the following indicators to illustrate the level of globalization of products, capital and even people.

  • The value of the international trades, which includes exchange of goods and services, expressed as percentage of the world’s Gross Domestic Product (GDP) has raised from 42.1 percent in 1980 to 62.1 percent in 2007.
  • Foreign Direct Investments have raised from 6.5 percent of the world’s Gross Domestic Product (GDP) in 1980 to 31.8 percent in 2006.
  • The stock of international claims, mostly comprising of bank loans, as percentage of the world’s Gross Domestic Product, have raised from about 10 percent in 1980 to 48 percent in 2006 (BIS Quarterly Review, 2006 cited in IMF, 2008)
  • The time in minutes spent on International Telephone Calls on the basis of per capita income have raised from 7.3 minutes in 1991 to 28.8 in 2006 (IMF and International Telecommunications Union data cited in IMF, 2008)   
  • The number of foreign workers has risen from 78 million persons in 1965, which was 2.4 percent of the world’s population at that time, to 191 million persons in 2005 which was 3.0 percent of the world’s population at 2005. (cited in IMF, 2008)

 As a fact observed by World Bank, globalization has almost been doubled since 1950; this has been estimated in terms of the ratio of International Trade of a Country to its Gross Domestic Product (GDP) or Gross National Product (GNP). Figure 1 is the bar chart, released by the Development Education Program (DEP, 200) of the World Bank Institute (WBI), showing the significant increase in the GNP and exports in the last 3 decades (World Bank Group, 2010)   

Free Trade Agreement

A Free Trade Agreement (FTA) is the legal arrangement between the participating Countries to lift the trade barriers such as tariffs and import quotas to maximize the trading activities amongst its members. FTAs exist in the following forms.

  1. Free Trade Agreements, which lift trade barriers amongst its group members
  2. Custom Unions, which impose common tariffs for Countries outside the Group
  3. Common Markets, for removing the constraints on the mobility of the production factors within the region
  4. Economic Unions, which adopt macroeconomic policies

(Asia Pacific Review, 2002)

Influence of the Mobility of the Production Factors on the Free Trade

Robert and Schumer explained that if the factors of production are able to move to the place where they are most useful giving better profits then Comparative Advantage does not benefit its holder Country anymore as it can be acquired by the Country to which the factors of production are being moved. So the Comparative Advantage of a product moves with the factors of production for that product. Thus, the basic concept of mutual benefits for the trading partners gained through the imposition of free trade is diminished (Robert and Schumer, 2004). This way only a few Countries are able to progress through International Trading leaving the rest far behind.

Influence of the Mobility of Capital Goods on the Free Trade   

The relocation of capital goods such as factories, research institutes, machines, etc. will result in the reduction in the rate of wages of the workers.  “If much of the capital that has made American workers so productive (and, hence, so highly paid) moves to countries with a more abundant labor supply, then the American workers’ comparative advantages might shift from the industries, featuring specialized and highly productive capital equipment to the industries, characterized by production methods that are more labor-intensive. With much of the capital that they once worked with drained away into India, Malaysia, Mexico, and other low-wage countries, American workers’ wages will fall as their productivity falls and as more and more of them compete to work alongside the ever-diminishing stock of capital located in America” (Boudreaux, 2004).

Therefore, the opportunity of international relocation of the factors of production should not be provided to the workers who belong to a Country which holds the comparative advantage in high capital based products or industries so that they may not lose their comparative advantage. If such a movement takes place then the comparative advantage of that Country shifts to products or industries which require labor intensive work. Such a situation occurs, when free trade in products or/and services takes place. This movement of capital goods may cause heavy losses to the local industry which previously enjoyed the comparative advantage, resulting in the bankruptcy of the industry or even complete closure of the industry and thus, the workers are forced to search jobs in other industries which may even offer low wages with more labor intensive work. If fair trade policy is to be adopted to overcome this issue then the situation even gets more complicated since the people are withheld from buying the cheap products of better quality which of-course, is not the right measure towards the progress of the Country and its people.

 The reason behind the relocation of the capital actually determines the fate of the workers and thereby, the development of the Country. The imposition of regulations, high taxes and other such anti-trading policies results in the reduction of the capital stock which impoverishes the people. The stricter such policies are the more will be the capital that migrates from the Country. But such flow of capital when takes place due to better reasons then better investment opportunities are created by the other Countries. If the capital is migrated due to the healthy reasons as described previously, then the capital stock is not badly affected since the migrated capital is probably to be succeeded by the new capital, provided that the free trading policies are followed by the Country. 

It is important to keep in mind that the size of the capital stock varies with respect to the market policies, property rights and the law and order situation of the place. The increase in the size of the capital stock is subject to the following conditions.

  1. The barriers imposed by the government on trade are minimum and flexible
  2. The property rights are protected
  3. Rule of Law
  4. Freedom of Contract

(Boudreaux, 2004).

The mobility of the capital goods does not itself change the trade policy, law, system and culture due to which the previous opportunity for investment was created. If the Country, from which the capital has been moved, changes its policies to support international trade then the investors and the entrepreneurs will definitely introduce new capital to the market. This is done through the investments made in to the industries in which the Country has developed the Comparative Advantage. The new earning opportunities created by the new investments will provide the workers with the rates of wages which would be even higher than to the situation in which previous capital would have been withheld by imposing the trade barriers. Also, the workers will be more productive by the new investments in comparison to the scenario of conserving the capital by means of protectionism in international trade  

Influence of the Mobility of Foreign Direct Investment (FDI) on Free Trade       

As explained above that the Free Trade encourages International Trade, creates better employment opportunities, protects the capital stock, develops competition in the market and thus, provides a place that is most likely to attract local and foreign investments. So, the Free Trade Agreements implies the flow of Foreign Direct Investments from the non members of the FTA to the members. The production of the items grow with these FDIs which cause: the prices to reduce further, the employment and the wages to increase, the exports to rise and thus, the Free Trade Agreements develop the Countries and globalize the world economy.

Free Trade between Developing and Industrialized Countries    

The preposition that an increase in trade impediments stimulates factor movements and thereby, also stimulates trade has implications as an argument for protection (Bhagwati, 2001, p.30). Its has been observed that the industrialized Countries perform more interregional trade, supported by the Free Trade Agreements, than the international trade in comparison to the developing Countries. The larger Countries, therefore, generate higher incomes than the Countries having the small local markets. In developing Countries, the production of resources, goods and services is also limited by the corruption, non-transparent government policies and inadequate incentives besides the regular constraining factors such as electricity, number and efficiency of workers, cost, time and availability of other resources, etc.  

Developing Countries have the scope of improving their productivity efficiency and progress with the help of the Free Trade Agreement. Without the Free Trade Agreements, the local market of the developing countries suffer from the consequences of the trade restrictions such as inefficiency, high price, low quality, etc. The advantages of free trading implies enhanced efficiency in the productivity sectors which were earlier constrained by the trade interventions and also, refined transparent policy to carry on business activities. The inefficiency and incompetency of the export sectors are caused by the shielded local manufacturers and the government controlled operations, irrelative to the progress acquired by means of free trading policies. Economic growth is dependent on the export policy introduced by the State but trade policy is not the only factor responsible for the economic growth. The other sectors must also progress apart from the progress being made to the export sectors only, so that the economy is able to grow smoothly. The natural resources of the trading Countries should be kept in mind while analyzing the trade flows and free trading between the countries.  

Conclusion      

The research carried out in the paper was aimed to define the role of Free Trade Agreements in the development of the countries and thereby, their effects on the globalization process. It has been found that the implementation of the Free Trade Agreements give rise to the International Trade of its participating members. This increase in the foreign trade brings Foreign Direct Investment as well as the local investment to the Country. The capital stock is conserved with the investments made to the industry which then creates earning opportunities. Also, the workers are benefited with the increase in their rates of wages. Production is done efficiently providing the local and the foreign buyers with the improved quality of products at highly competitive prices. The mobility of the production factors, the capital goods and the Foreign Direct Investments is well balanced out with the Free Trade Agreements. The domestic industries, if capable enough as in case of industrialized Countries, face and fight the challenge of the competition put forward by the international industries. On the other hand, the newly created local industries of the developing Countries may be completely destroyed by the availability of the high quality and low priced imported products as they are amateur. For this reason, some short term limitations may be applied to safeguard the domestic manufacturers and once they get stable, experienced and qualified then should be exposed to the fierce challenge of the foreign products through imposing free trading system. It is highly recommended that the fair trade policy must be lifted after some years so that the better economic growth is made and the consumer gets the improved and cheap variety of products to choose from; otherwise, the domestic industry due to its monopoly in the local market will keep on providing the low quality items to the consumer at high rates. Also, the inefficient productivity slows down the economic growth. Thus, it is concluded that the Free Trade Agreements give rise to the development process of a Country and thereby, also raises the Globalizations activities. Free Trade increases the International trading amongst regional trading partner who are bound together by the FTAs. Free Trade Agreements has brought its member Countries closer. The increased foreign trade amongst its partners has also increased their interdependency over each other. The economy of a Country grows well with the rise in global trade which is achieved via liberalization. Therefore, free trading policy, implemented via Free Trade Agreements, ultimately results in the economic progress, social prosperity and technological development of a Country and its people.

Economic transformation leading to sustainable growth needs to be modeled taking in to account geographical attractiveness for investment, infrastructure, and trade linkages, trade regimes and of course the entrepreneurial evolutionary process that drives the engine of productivity  improvement (Weeks, 2006).

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