Production and Trade at the International Arena - Assignment Example

?Theory of Comparative Advantage According to the 19th Century economic theorist David Ricardo, production and trade at the international arena couldbest be handled from an analysis of the cost benefit basis. Sentiments raised by Hay and Brewer (2011, p1), confirm that the comparison of the relative gains that countries get for taking part in a certain form of trade would assist countries to find the appropriate beneficial combination of international trade engagements. According to the authors, trade from an advantageous position from cost analysis could be used as a specialization criterion for various countries. An illustration is given on how England and Portugal production parameters for wheat and wine affect their position for partaking in international trade. Using postulates from the theory, it is clear that the best combination of trade at the international front should be guided by profitability analysis. The Theory of Comparative Advantage The theory of comparative advantage states that a party enjoys a margin of superiority in producing services or goods. This means that the party enjoys comparative over another country due the opportunity cost that exists due to lower production cost Chang (2008). Better said, two parties can each enjoy from trade if they produce the same goods or services at relative costs that are not equal. This theory also applies even if one party happens to have absolute advantage over another country as it enjoys the capacity to gain when it trades with another that is less efficient provided that the relative efficiencies are unequal. The law of comparative advantage is based on a number of vital assumptions. One of the main assumptions is that the parties involved incur no transportation costs in their dealings. It is further assumed that costs do not vary and no party enjoys economies of scale. Furthermore, it is taken for granted that no trade barriers and tariffs apply to the parties in their engagement in trade. The assumption that factors of production are perfectly mobile also applies for comparative advantage to apply. Yet another assumption is that the goods or services being traded are identical or homogeneous. The final assumption is that the parties involved in trade have perfect knowledge of the goods being traded and therefore buyers and sellers are able to tell where the cheapest products exist. The theory of comparative advantage normally applies in international trade, countries being the parties involved. In its perfect sense, the theory elements responsible for the realization of the theory is very difficult to achieve since international trade often involves transportation, tariffs and trade barriers, the immobility of production factors and imperfect knowledge. According to classical theories related to international trade, countries are bound to gain mutual benefits when they specialize in making goods or producing services with lower opportunity costs. The theory of comparative advantage advocates for free trade and specialization in production rather that pursuit for self sufficiency. The World trade organization has played an important role in the liberation of trade especially beyond national borders Chang (2008). Three major features of the World Trade Organization negotiating environment are the abidance to the most favored nation (MFN) principle, the occurrence of negotiations among few countries, and the extent in times of time of the negotiations with economically significant nations joining the equation on a continuous basis (Bagwell and Staiger, 2001). Under the MFN negotiating environment, there are two major hindrances to multilateral efficiency that come into effect according to Bagwell and Staiger (2001). For one, every market access concession that a country makes to another country automatically is enjoyed by partners who enter the negotiation later. In order to reduce the free-riding potential a nation may end up offering a little to early negotiator so as to maintain bargaining power in latter times. The second hindrance to efficiency in multilateral trade occurs when nations later alter the implications associated with access to the market in their favor based on earlier negotiations. Application of the Theory of Comparative Advantage From basic application perspective, the theory of comparative advantage is the analysis that countries ought to approach venturing into international trade, in light of the relative cost-benefit assessment. This implies that the performance and circumstances of production of competitor states should be made available for comparison purposes. In the event that a country is comparatively in a disadvantageous position to venture into the trade, it is advisable to explore a different area of specialization and leave the relatively low performance area. Simple economic rules provide that the best approach to determine if a particular venture would be favorable should be an analysis of the competitor’s relative advantage. Competitive advantage in the market is usually the key in a competitive business success such as international market with a rich variety of producers having different capacities. Unfortunately, the lack of a level playing ground for all players seems to be a disadvantage on the part of the developing countries and an unfair advantage on developed world. The political system at the helm of international organization particularly the World Trade Organization (WTO) places the developed countries in a better position for trade. This beats economic logic to perform fair trade due to the influence that the political organization infuses into the system. According to Bagwell and Staiger (2001, p1), the organization of international trade is such that the WTO presents a negotiating barrier where the political might and bargaining power greatly affect the opportunity of the trading countries. Despite the existence of economic factors and fairness rules that naturally exist in trade, extra forces of influence of bargain emerge to affect the chances of fairness in trade. Multilateral efficiency is severely damaged by the Most-Favored-Nation (MFN) arrangement that takes charge at the WTO functionality. Trade agreements are therefore biased in favor of the developed and powerful countries that usually have better representation into the WTO at the expense of the poor underdeveloped countries. Sequential program at the helm of WTO provisions of international trade acts as an impediment for fair trade agreement, usually locking the developing countries to access the best international markets while reciprocation of trade access by the mighty appears favorable to them. In line with the observations of Waltz (1979, p68) in his theory of international politics, it is possible for the political might of an actor to influence the interactions with international partners in such a manner that the best interest are secured. The author acknowledges that the internal political stability and role played in international politics in a similar manner as large firms would influence business in the ordinary corporate trade. In the same way, the smaller firm would appear to be disadvantaged due to cut-throat competition launched despite playing clean business competition. Statement on Sources Used The above discourse applies sources that proved reading which sheds light on the various forces affecting trade at the international arena. Factors from the economic perspective provide a fair analysis of approaching trade by both strong and weak states on a free market analysis. Inclusion of trade organizations such as the WTO introduces a different aspect of international trade with respect to control and regulation in form of trade agreements. Despite the orderliness that the bargaining front is initially intended at, it always turns economic tables upside down due to influence it occasions. Political elements of the trade actors are stronger than economic foundations which force imbalance in the system. This reading list is therefore an inclusive package of sources that takes care of theory and visits practical factors that affect trade at the international arena. Various theoretical postulates involved in the formulated arguments are adequately taken care of, regarding trade at the international arena. References Bagwell, K. & Staiger, W. R. (2001) “Shifting Comparative Advantage and Accession in the WTO,” [online] [accessed 6 May 2011] Brewer, T. & Hay, R. M. (2011) “David Ricardo and Comparative Advantage,” [online] [accessed 6 May 2011] Chang, H. (2008). Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, Bloomsbury Press. Waltz (1979) Theory of international politics. Reading, MA: Addison-Wesley Publishers Read More