International Trade Questions - Assignment Example

International Trade Table of Contents Question 3 Question 2 (a) 5 Question 2 (b) 8 Question 3 10 References 12 Question International trade is said to take place when one nation conducts business with another nation. Trade between different nations is a significant aspect of international economy. The major understanding of every global economy is that there are certain achievements from trade when nations sell products or services to each other. International trade is almost always conducted for the mutual benefits within participating nations (Krugman & Obsfeld, 2008). Over the years several factors have contributed to the international trade that have resulted in growth and slowdown of merchandise. The four most significant factors which impact on the volume of international trade are tariff, exchange rate, housing market and production. Tariffs Tariffs have negative impact on international trade. Tariff is a kind of tax which is imposed on the products as they cross the national boundaries. It is used either to increase the revenue or to defend national industries. However, tariff, planned mainly to upsurge revenue, may employ a strong defensive effect on an economy. Due to tariff, international trade can be affected because it makes the foreign products more costly, i.e. customers will require paying more on purchasing overseas products. Tariff also results in incompetent organisations in a protected economy to accomplish a free drive (Hill, 2000). Tariff being a tax on international products are intended for restricting or slowing down the imports of certain products. Thus, it decreases international trade merchandise. The huge growth of international merchandise was the result of reduction of tariff restrictions between countries. The bilateral trade between nations are the impact of increased world trade growth. For example, the US tariff reductions had increased the export of numerous products (Debaere & Mostashari, n.d.). Exchange Rate The other significant factor which impacts on the international trade is exchange rate. Exchange rate is the rate at which the currencies of different nations can be traded. Exchange rate can determine the inexpensiveness for purchasing currency of different nations. For instance, if one Pound is able to purchase 128 Yen, a country can be able to import more products with 100 Pounds, than if a Pound could able to purchase only 100 Yen. Thus, in this way exchange rate can impact on international trade. Hence, when the worth of currency of one nation becomes low regarding the currencies of other nations, it can naturally import fewer products and export more products (Beamish & et. al., 2003). Housing Market Housing market is considered as one of the major factors, which has contributed to the international trade. The housing crisis has resulted in economic recession which had impacted negatively on the international merchandise. Due to the economic recession, the total exports and imports had reduced significantly during the period of 2008 and 2009. The housing crisis has weakened the financial markets of developed countries such as the United States and the United Kingdom, which has resulted in collapse of baking organisations. Thus, the production had also been impacted negatively leading to decline in export (Nistor & et. al., 2010). Production Advantage Production is the other major aspect having an impact on international trade. Wealthy economies such as the USA frequently import products from other nations which can produce them inexpensively because of low labour expenses. However, the standards applied for manufacturing products can differ from nation to nation. The theory of competitive advantage can determine the level of international trade. According to competitive advantage theory, a nation which can generate a specific product at lower opportunity expenses can gain profit in international business. The theory of competitive advantage can occur if a country has specific advantage such as low cost of labour, high quality or a specific production standard which can make the opportunity cost of production low. For example, the US can levy severe standards on producing certain products and it can result in competitive advantage for nations who follow those standards. If every nation concentrates on manufacturing those products in which they have competitive advantage then the total production and international trade can increase considerably (Nistor & et. al., 2010). Question 2 (a) Non-tariff barriers are used by a nation in order to regulate the trade level with other countries. Non-tariff barriers can be used for egotistical or philanthropic intentions. Non-tariff barriers comprise all measures which restrict the imports and significantly misrepresent a business. The three common forms of non-tariff barriers which are used by governments of different nations are quota, licences and voluntary export restraints. Quota Quota is considered as a trade limitation which is used in import and export of particular products for specific time period. The significant feature of quota is that it is a constraint on product quantity rather than cost. Quota is a direct managerial form of non-tariff barrier used by government in order to limit the free trade flow. Quota restricts the liberty of organisations with respect to entering in the overseas market. Use of quota can control the ranges of products which are allowable for import and export, hence constricting the arrays of international trade for certain goods. Quota shifts the demand curve in support of comparatively more wealthy customers and thus it forces them to search for substitutes. This substitute can appear in the form of domestic products or other imported products which are relatively priced in relation to the quota limitations on imports. Thus, the possible impact of using quota on consumer is limitation in selection of products (Cadogan, 2010). Licences Licenses are considered as the most common form of non-tariff barriers used by governments to limit the imports and exports. Licence necessitates organisations to gain certifications for conducting international trade of approved merchandises. Licence is a direct method of regulating market access for international organisations (Markusen & et. al., 2005). The reduction of number of foreign organisations in the domestic economy can decrease the benefits of customers. Licence can increase the fixed cost of products because in this system, organisations are required to attain authorisation for each delivery they carry into a country. Thus, licence can reduce the total volume of imports. The major objective of license is to control the imports. The use of licence as an instrument is based on numerous global agreements which comprise certain provisions in international trade (Jorgensen & Schräoder, 2003). Voluntary Export Restraint Voluntary export restraint is the other barrier used by government to limit international trade. In voluntary export restraint, exporting nations decide to restrict deliveries of certain goods under risk of certain preventive or arduous activities. Voluntary export restraint is the consequence of appeals made by trade in a nation to deliver appropriate products. Voluntary export restraint is the formation of progressive methods when trade obstructions of importing nations are presented at the boundary of the exporting nation. It can impact on the business of fabrics, shoes, dairy products, consumer electronics products, vehicles and machineries (Markusen & et. al., 2005). The voluntary export restraint can raise the national cost of production and production quantity in the importing nation. It can transform the trade outline by encouraging trade diversion and relocate leases from importing to exporting nations. Voluntary export restraint changes the resource distribution and employment by generating monopoly and presents the prerequisite for export certificate distribution instrument. Customers desire for high quality or superior price for products and services and voluntary export restraint can result in substitution of customers’ desires thus it can bring about welfare loss (Hamilton, 1986). Voluntary export restraint increases the cost of import thus making customers to be varying with regard to making purchases and switch products. For instance, throughout the period of 1986-1990, the Japanese automobile organisations had imposed voluntary export restraint in order to limit the exports of vehicles in the USA. It reduced the sale of Japanese cars in the market of the USA and increased the car sales of American automobile organisations thereby swelling their profits. Although voluntary export restraint was beneficial for the US automobile organisations but it was harmful for consumers as they have to purchase expensive vehicles and it resulted in customer benefit losses in the US economy (Benjamin, 1999). Question 2 (b) In international trade, current account is considered as one of the significant parts of capital. Current account is the total of “balance of trade” (i.e. balance amount of export after deducting from imports), net factor revenue (i.e. interest and surpluses), and net transfer expenditures (i.e. overseas assistances). Current account is one of the crucial drivers of international economy. In the year 2011, the current account deficit of Pakistan was almost US$815 million (Trading Economics, 2012). Although the international economy has become stabilised after the financial crisis, the economy of Pakistan has not recovered completely due to increased concern of authority, energy, safety and slowdown of international economy. The deficit of current account in Pakistan was spurred by high cost of fuel and low cost of exported fibres (Central Intelligence Agency, 2012). Pakistan’s current account was positive during July 2010 to June 2011 due to increase in exports representing almost US$11.2 billion in 2010. However, the major reasons for bad economic performance of Pakistan were due to collapse in foreign investment, power shortage, inner-city violence, chaos and weak physical infrastructure. In comparison with the rest of the world especially with several other Asian countries, the extent of economic growth of Pakistan is poor. The domestic aspects are more pivotal and crucial for poor economic performance compared to international aspects. The weak governmental control, restricted financial capitals, loss of public sector units, rising fiscal debit, rising public expenses and lessening tax revenues impacted on financial conditions of banks in Pakistan which in turn impacted on international trade of Pakistan (The Financial Daily, 2011). In order to improve the trade position, Pakistan needs to improve the supply of capital. According to the Mercantilism theory, the affluence of an economy is reliant on the funding and quantity of international trade. Thus, Pakistan must boost the export and funding support which can reduce the deficit of current account (Markusen & et. al., 2005). First, Pakistan needs to concentrate on political feasibility. Pakistan needs to implement strategies on war stability because it can impact on foreign investment. Establishing a strong government through election and strengthening the governance can help to turnaround the current account deficit in Pakistan. The second strategy for Pakistan would be to increase the tax base so that it can gain revenue and ultimately reduce the deficit in current account. Furthermore, eliminating financial grants and incorporating productive areas into the tax system can increase the income of government and help to fight current account discrepancy. The third strategy for Pakistan would be to get additional funding support from international contributors such as World Bank and International Monetary Fund among others. This financial support is crucial for Pakistan for funding the current account shortage and to correct the global economic position (Maqbool, 2012). Question 3 Free on Board (FOB) Free on Board is a kind of duty which is levied on seller in order to clear the products for export. FOB requires seller to transport products on board a container selected by the purchaser. Under FOB, the seller satisfies its responsibilities to transport the products which are handed over vessels’ rail. The word ‘free’ denotes responsibility to transport products to a designated destination. In international trade, FOB is an abbreviated term which depicts time, place of shipment, and fee, when threat of loss moves from seller to the purchaser, as well as the prices of cargo and protection charges (Gillies & Moens, 1998). Cost Insurance and Freight (CIF) Cost Insurance and Freight (CIF) is the other international trade abbreviation which indicates the obligation of sellers with respect to transporting products. Sellers are responsible for paying expenditures related to the carriage, but once products pass the harbour of consignment, all the responsibilities of products as well as risks of damage are shifted to the purchasers. According to CIF, seller is also liable for acquiring and remunerating for marine insurance in purchaser’s designation for the consignment. CIF is applied only in sea and domestic watercourse transport. In international trade, CIF is a legal term, however the exact meaning of CIF is much complex and can vary from nation to nation (Hinkelman & Putzi-Ortiz, 2009). Direct Duty Paid (DDP) Direct Duty Paid (DDP) is an international abbreviation with respect to sales where seller is responsible for making any product available for cited rate. Under DDP, the seller must obtain import authorisation. The term ‘DDP’ is ideal if clearance of products for imports comprises the fee of value added tax or corresponding tax which can only be subtracted for tax determinations by an organisation for international trade. DDP cannot be applied if the seller is incapable to procure directly or indirectly the import authorisation (Gillies & Moens, 1998). References Beamish, P. W. & et. al., 2003. International Management: Text and Cases. McGraw-Hill Education. Benjamin, D. K., 1999. Voluntary Export Restraints on Automobiles. PERC Reports: Volume. 17, No. 3. Cadogan, G., 2010. A Trade Policy Perspective on Import Quotas And The Substitution Effect. Ryerson University. [Online] Available at: http://digitalcommons.ryerson.ca/cgi/viewcontent.cgi?article=1000&context=iitm [Accessed April 16, 2012]. Central Intelligence Agency, 2012. Economy: Pakistan. The World Factbook. [Online] Available at: https://www.cia.gov/library/publications/the-world-factbook/geos/pk.html [Accessed April 16, 2012]. Debaere, P. & Mostashari, S., No Date. Do Tariffs Matter for the Extensive Margin of International Trade? An Empirical Analysis. University of Texas. [Online] Available at: http://faculty.darden.virginia.edu/debaerep/pdf/DSWP-07-09.pdf [Accessed April 16, 2012]. Gillies, P. & Moens, G., 1998. International Trade and Business: Law, Policy, and Ethics. Routledge. Hill, C. W., 2000. International Business: Competing in the Global Marketplace. McGraw-Hill/Irwin. Hinkelman, E. G. & Putzi-Ortiz, S., 2009. Glossary of International Trade. World Trade Press. Hamilton, C., 1986. The Upgrading Effect of Voluntary Export Restraints. Springer. [Online] Available at: http://www.jstor.org/discover/10.2307/40439520?uid=2129&uid=2&uid=70&uid=4&sid=56044010953 [Accessed April 16, 2012]. Jorgensen, J. G. & Schräoder, P. J. H., 2003. Technical Barriers, Import Licenses and Tariffs as Means of Limiting Market Access. Institutter. [Online] Available at: http://static.sdu.dk/mediafiles/Files/Om_SDU/Institutter/Ivoe/Disc_papers/Disc_2003/nr%203%202003%20pdf.pdf [Accessed April 16, 2012]. Krugman, P. R. & Obsfeld, M., 2008. International Economics: Theory and Policy. Pearson Addison-Wesley. Markusen, J. R. & et. al., 2005. International Trade: Theory and Evidence. McGraw-Hill/Irwin. Maqbool, I., 2012. Pakistan’s Economy on the Edge. Newsline Publications. [Online] Available at: http://www.newslinemagazine.com/2012/01/pakistans-economy-on-the-edge/ [Accessed April 16, 2012]. Nistor, C. & et. al., 2010. The American Mortgage Crisis Implications on The International Economics Evolutions. Munich Personal RePEc Archive. [Online] Available at: http://mpra.ub.uni-muenchen.de/25368/1/MPRA_paper_25368.pdf [Accessed April 16, 2012]. Trading Economics, 2012. Pakistan Current Account. Pakistan. [Online] Available at: http://www.tradingeconomics.com/pakistan/current-account [Accessed April 16, 2012]. The Financial Daily, 2011. Pakistan Waning Economy. Articles. [Online] Available at: http://thefinancialdaily.com/Articles/ViewArticleDetail.aspx?ArticleID=5303 [Accessed April 16, 2012]. Read More