Importance of Foreign Trade In Global Economy Assignment Help

Overview of the purpose and importance of foreign trade in global economy

Why foreign trade is necessary

Current issues surrounding foreign trade and its impact to global markets.

Foreign Trade

The advantages and disadvantages of foreign trade.

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 Introduction

International trade or foreign trade is an important aspect of increasing the overall living standard of people in many nations, proving people with more and more employment and at the same time, it allowsconsumers in various nations to have more choices in their consumption. Here it must not be forgotten that foreign trade alsoallows the price paid by the consumers to be lower and provides a basis for growth of specialization of labor and specialization of the skills and raw materials. In recent decades the trend of foreign trade has really caught attention of global consumers and business leaders and as a result of which more and more countries have opened up their economies for free trade among different nations. While the share of foreign trade was only 10-12% of World GDP, the same has increased impressively to reach 30% by 2015(Ortiz-Ospina, Beltekian, & Roser, 2018). This has also allowed nations to earn foreign currencies which helps them stabilize exchange rates. however foreign tradecan have some very negative effect on many economies as well and they must also be addressed by leaders for keeping the countrys political sovereignity intact.

Overview of the purpose and importance of foreign trade in global economy

Foreign trade has many benefits for the world economy principal among which are the maximized resources of materials and other resources and labor force.

1. Make use of abundant raw materials

Some countries have abundant resources but if they are not reading with others they cant make the best use of the same. For exampl, the development of oil resources was primary reason behind the economic progress of Middle east and Gulf countries. If trade is not undertaken these vast resources can't be of any value to the local economy. Similarly developed nations also benefitted form trade as they supplied surplus manufacturing of goods to others in exchange of raw materials. Growth of these nations would stagnate ifmaterialsnot traded(Collinson, 2006).

2. Comparative advantage

If a country has a relatively lower opportunity cost in the production of one good or service unit then the country must specialize in the production of the same. This also provides that if two different countries have lower absolute costs, they must not specialize in all. Instead, they must concentrate on the goods in which they have greater cost advantage. Thus having comparativeadvantage in productionof goods and services would allow the nation to specialize in thesame and gain from trading. Trade also increases the overall productivity of a nation as they generally get more from the scarce resources(Rugman & Collinson, 2010).

3. Specialization and economies of scale can bring greater efficiency

Countries are pushed into adopting specialization and as a consequence of which the country would have to benefit from economies of scale. Once the economy specializes in one area, the same brings in improved efficiency and allows the economy to have higher productivity. In the example of Apple Inc, the products were designed in US but the production is outsourced to China and Japan, India, etc. because they specialize in these kinds of production. This not only benefits the specialized economy but also benefits the producer as it reduces its overall cost as well(Salvatore, 2012).

 Why Foreign Trade is Necessary?

International trade or foreign trade has allowed the expansion our markets both domestically and internationally. Because of foreign trade, goods produced inJapan, China, India can be found in US and vice versa. Trade allows and coerces the participants to take part in trade parlance and try to be innovative and competitive. This reduces the prices and make sure products of better quality are made available to consumers worldwide at lesser costs.

Trading not only allows goods to be exported but also allows services like tourism, banking, and insurance et to be exported. For exampl, the call centers in India allows the US companies to provide services to consumers all over the world at a fraction of what it might costs if the same service is provided in US(Griffin, 2010).

Trading on the global stage providesthe consumers and countries involved the opportunity to be exposed to goods and services not available in their own countries. Trading on the global stage can bring benefits in tow different ways:

a) For example, the country can engage in production of a certain commodity and take advantage ofcomparative advantage it enjoys and export the same. More exports means more employment and better productivity.

b) The nations which can't produce a commodity efficiently or say it does not have comparative advantage then it would like to engage in trade to exchange goods which are not available in their country with others. Overall GDP can be increased through realization of the economy's specialization and developing comparative advantage through efficient use of resources and specialization rather than factor endowment.

c) EconimicEfficnecy can be reached through tradnign in the internaiotnal stage and a nation which gets enegaged into some kind of spcialisaiotn to promore exports would create more emploeyemtn in the some sector of the economy. Not only it would create emp,oyement but alosit would helpinriansing the profile of the sector and standard of living.

Current issues surrounding foreign trade and its impact to global markets.

Current issues which are affecting trade on the international stage can be defined as:

a) The Magnifier Effect

The magnifier effect refers to the effect of the trade on the environment of the particular nation. The environmental degradation occurs to the econom, not as a direct result of trade but imbalances are created because there is alack of awareness of the need for environmental laws. For example, billions of units electronic goods are produced in China each year. If the government does not bring an effective disposal policy, then the same would one delayed to a disastrous effect on the environment as electronic wastes can be catastrophic for the environment(Levi, 2010).

b) Market Distortion Effect

Sometimes the government of nations have tried to shield the industries which were inefficient by levying tariffs on exports. This allows trade imbalances to develop. These measures hampers the producers in low endowed countries the opportunism to offer their goods to a larger market and their development stalls as a result. Various other measures like import tariffs, import quotas are also levied to protect domestic industries which are not competitive and reduced flow of trade and denies a faster sustainable development. Despite the WTO trying to bring inorders, there still exists large no of issues involved in foreign trade which calls for greater discussion and amicable solutions for free trade(Peng, 2014).

c) Innovaiton and Grwoth

On the positive side the interenaitonal trade volume has posiitvelyaffected the innovaitons all over the world aimed at international trade. Exposrts leads to innovative emasures aimed at creating higher value, quality and reducing costs. More than 60% of traders in Asia and UK believes that overseas trade has heloed them bring in more innovation on a consistent basis. innovation has heleoed businesses grow moreroalidly, create more employment and heloed GDP growth as well on a consistent basis.

 Foreign trade:

i. Meaning

Foreign trade is defined as the exchange of goods and services in between two or more nations. In recent decades the share of foreign trade has risen sharply and has made living standards better a for a greater percentage of people in these nations. Foreign trade in egeral includes Exports , imports and re-export. Re-export means the importing of goods and services from one nation for primarily selling them to another naitons and still be bale to ebenfit form the same. China, US and Genrmanyetc are top trading naitons of the world. While China is the top exporter of merchandised goods the UK is the largest exporter and importers of commercial services.

ii. Types

Trade can be of differenttypes in the international arena. Trade can take the form of either bilateral trade or it can be multilateral trade.

Bilateral trade:

Bilateral trade is an agreement to trade between two countries and this might involve both the exchange of goods as well as services between two nations.

Multilateral trade:

Under the multilateral trade agreements, more than two nations participate in trading activities within the participants and this might also involve creation of trading blocs such as ASEAN or NAFTA, etc.

iii. Barriers

Free trade is not alwayspossible and from time to time several barriers are created to stem the form of free trade and protect inefficient domestic producers. These barriers can be in the form of:

Embargo

A trade barrier can come in the form of an embargo. This is like a blockade of trade form a particular country. However these types of barriers now a days are very few and are often difficult to implement.

Tariffs:

Import tariffs are one of the most common form of barriers in foreign trade. If the domestic producers are inefficient, the government would take a decision to impose a tariff on imports to raise the prices of foreign goods and help the domestic producers. As a result of which the domestic consumers end paying higher prices.

Subsidy:

Another form of creating a barrier is paying a subsidy to the domestic producers to protect them against cheaper foreign goods. This reduces their overall costs and helps them fight foreign producers. Contrary to the tariff being imposed this, however, helps in lowering of the domestic prices and consumers benefit more. It helps in reduction in imports(Peng, 2014).

All these barriers or protection measure, however, has proved to be not beneficial to the nations which imposes them as the production system is made more inefficient and consumers don't get the benefit of quality and advanced products from specialized producers from all over the world.

The advantages and disadvantages of Foreign Trade

Advantages

a) One of the primary benefits of foreign trade is that it helps in the maximization of the scarce resources available in each country through efficient exchange.

b) Foreign trade makes sure various goods which are not produced within the country is madeavailable fromall over the world.

c) Specialization is one of the most long term benefits as economies are made aware of their strength and work towards gaining competitiveadvantage in the production ofa fewgoods and services

d) Engagement in foreign trade helps in the production of large scale leading to economies of scale and lower costs which makes them morecompetitive in the foreign markets.

e) Price stabilization is one ofthe key benefits of international trade as thereis a continuous supply and availability of goods andservices(Rugman & Collinson, 2010).

Disadvantages

a) International trade can be detrimental to the industries which are new in a nation as costs can be higher leading to failures.

b) As many underdeveloped nations are heavily dependent upon industrialized nations for equipment and technology, there can be severe economic exploitation of these nations in the form of high prices for techand equipment, etc.

c) Too much dependence upon imports would lead to not so fast devlepement of particular sectors of the economy and they would remain stagnant. This would restrict their developement as investments wont be made in these industries. Too much reliance on imports might lead to political subordination to laregr trading partners(Surugiua & Surugiub, 2015).

Summary

Countries trade with each other when they fail toproduce alltheyneedon their own and don'tpossess all the resources to produce all they need. As resources are scare the same means countries would needto concentration producing commodities in whichthey have comparative advantage and as a result of which they can produce them at a cheaper cost. Thus they can trade these goods to others for importing the goods which theydon't have. So for making sure they are trade surplus countries need to develop efficiencies and specialization and earn valuable foreign exchange in the process as well(Salvatore, 2012).

 Conclusion

Foreign trade or trading between nations is very much a necessity as no nation produces all the goods they need. Some economies are more efficient in the production of some goods and others in other goods and services. This cost advantage on a comparative basis would allow more efficient use of exchange of goods of services. This can also increase the pace of growth for many economies which has bene demonstrated in the impressive growth achieved by smaller nations such as UK, Japa, and South Korea, etc. China continues to prosper because of comparative cost advantages it enjoys over many industrialized and developed nations. Therefore foreign trade in a necessity for growing economic needs and growth of Economies concerned all over the world.

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