Why International Trade!!!

If you walk into a Shopping mall and are able to buy Australian Apples, Cuban cigars, Sri-lankan tea and an Iraqi Carpet, you are experiencing the effects of international trade.

International trade allows us to expand our markets for goods as well as services beyond our country’s political boundaries. It is the reason why we can pick between a Japanese, German, Indian or an American car. As a result of international trade, the market contains greater competition and therefore more competitive prices, which brings a cheaper product home to the consumer.

What Is International Trade?

International trade or foreign trade as we call it, is the exchange of goods and services between countries. This type of trade gives rise to a world economy, in which prices, or supply and demand, affect and are affected by global events. Political change in india or china, for example, could result in an increase in the cost of labor, thereby increasing the manufacturing costs for an American phone company based in asia say Apple, which would then result in an increase in the price that you have to pay to buy the phone at a mall in your neighbourhood. A decrease in the cost of labor, on the other hand, would result in you having to pay less for your new phone.

International Trade gives consumers in various countries the opportunity to be exposed to goods and services not available in their own countries. Almost every kind of product can be found on the international market: food, beverages, clothes, spare parts, oil, consumer durables, jewellery, sport shoes, stocks, currencies, agro commodities and even water. Services are also traded: BPO, healthcare, tourism, banking, consulting and transportation.

A product that is sent to the global market outside your country is an export, and a product that is bought from the global market inside your country is an import.

Advantages of Free International Trade

Free International Trade involves the following changes

  • Greater movement of labour from one country to another.
  • Increased capital flows between several economies.
  • Growth of Multi-national companies that operates in several countries.
  • Increased integration of global trade cycle.
  • Increased communication and improved transport

Advantages of Free Trade

  1. Free trade is a way for countries to exchange goods and resources. This means countries can specialise in producing goods where they have a comparative advantage (this means they can produce goods at a lower opportunity cost). When countries specialise there will be several gains from trade like

– Lower prices for end users

– Greater choice of goods to the customers

– Bigger export markets for local manufacturers

  1. Free movement of labour

Increased labour migration gives advantages to both workers and countries where they go to. If a country experiences high unemployment, there are increased opportunities to look for work elsewhere. This process of labour migration also helps reduce geographical inequality. This has been quite effective in the EU, with many Eastern European workers migrating towards the more prosperous west.

Also, it helps countries with labour shortages fill important posts.

However, this issue is also quite controversial. Some are concerned that free movement of labour can cause excess pressure on housing and social services in some countries. Countries like the US have responded to this process by actively trying to prevent migrants from other countries. It acted as a driving force for Britain to exit EU recently since the former realised a need to check this migration for which it needed to break-away from the latter.

  1. Increased economies of scale

Production is increasingly becoming specialised. Globalisation enables goods to be produced in different parts of the world. This greater specialisation enables lower average costs and hence lower prices for consumers due to economies of scale.

 

  1. Greater competition

Domestic monopolies used to be protected by lack of competition. However, globalisation means that firms face greater competition from foreign firms and hence become more effective and efficient in their attempt to survive.

  1. Increased investment

Globalisation has also enabled increased levels of investment. It has made it easier for countries to attract short term and long term investment. Investment by multinational companies can play a big role in improving the economies of developing countries.

 

Disadvantage of free trade

  1. Free trade can harm developing economies.

Developing countries often struggle to compete with developed countries, therefore it is argued that free trade benefits developed countries more. There is an infant industry argument which says industries in developing countries need protection from free trade to be able to develop.

  1. Environmental costs

Free Trade has increased the use of non-renewable resources. It has also contributed to increased pollution and global warming. Firms can also outsource production to where environmental standards are less strict like africe/asia.

  1. Labour drain

Free Trade enables workers to move more freely. Therefore, some countries find it difficult to hold onto their best skilled workers, who move to other countries attracted by higher wages there.

  1. Less cultural diversity

Globalisation has led to increased economic and cultural hegemony. With globalisation there is arguably less cultural diversity.

  1. Tax competition and tax avoidance.

Multinational companies can set up offices in countries like Mauritius, Bermuda and Luxembourg with very low rates of corporation tax and then funnel their profits through these subsidiaries. This means they pay very little tax in the countries where they do most of their business.

 

By – Umair Ansari, Global Trade Consultant, MBA from IIFT (2012-14) can be reached at umairansari20@gmail.com

 

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