Globalization and trade - Essay Example

Running Head: GLOBALIZATION AND TRADE Drivers of international trade The main drivers of international trade are: Exchange rates Regimes This is the most significant factor affecting international trade. Various nations have implemented the use of different rates of exchange regimes. The picking of the rate of exchange has been in a way controversial without agreements upon the one considered most effective rate of exchange regime in the process of minimising protectionism. The demand and supply for the currencies as well as the resultant relative values can impact the demand for exports and imports.

As demand and supply for currencies vary, the values of the same currencies also vary. If the currency is strong then imports are less expensive, and that leads to increased demand for imported products and vice versa. Figure 1: Market price for foreign currency P2 S Price of foreign currency P1 in U.S Dollars D2 D1 D1 Q1 Q2 Historical analysis shows us over time nations used following types of exchange rate regimes. The fixed rate of exchange regime the given central bank ensures maintenance the rate of exchange (Mundel 1963).

In the regime of floating rate of exchange; the responsible central bank often never comes into intervention. (Fleming 1962)The controlled exchange rate, when exchange rate is determined by interaction between the intervention of the state and the relationship between demand and supply. (Burr 1960) The connections between the variation of exchange rate and the international trade flows are described using the following theories, elasticity theory , the absorption theory, the J curve theory, the Mundel Fleming theory , the Monetary theory and the neoclassical theory (Mundel 1962, 1963; Fleming 1962; Walras 1954 , Marshal 1923, Burr 1960) Technological Progress If a country has a comparative advantage in technology then it can produce goods efficiently and at a lower cost than the other.

Technology today has been greatest leverage to global trade. It opens up the raised possibilities for occurrence of international trading. Consequently it helps over come specific features impeding so far their international trade. Technology positively affects consumption services directly satisfying consumer needs. Technology development has led to many services becoming cheaper. Lower prices together with high real incomes create additional demand for services perceived as luxury goods. More over consumers are becoming more homogeneous due to unifying forces of media, travel, information transfers among other forces.

(Quinn 1988) Factors of production mobility Countries are endowered differently with factors of production. These cause an economic scenario of comparative advantage. It is an assumption that these resources are immobile between nations but mobile within various sectors. Absence of perfect mobility internationally of resources has led to increased international trade. If capital moves from country A to B and labour moves country B to A .Then we may say that country A has imported labour and exported capital.

In this case resources are not traded but the good or service. (Gandolfo 1998) Threat to international trade Export restriction It is the biggest threat to international trade today. Export restriction can take a number of forms including: exports quotas, export taxes and export licensing requirements among others. The focus on such restriction seems to be on minerals and metals areas. China usually indentified as the most active practitioner of such restrictions is a great threat to international trade, although governments of other emerging markets economies including (India, Ukraine, Russia, Vietnam and Columbia) have also imposed such restrictions.

The issue of export barriers has been raised from informal dispute to formal trade action with recent decision by the United States and the European Union to challenge china export taxes and quotas on raw materials at WTO (OECD, 2010 p 176) References: econedlink.org. (2011). Exchange Rates and Exchange: How Money Affects Trade. Retrieved on 25th April 2011 http://www.econedlink.org/lessons/index.php?lid=342&type=student) Fleming, J.M (1962) .Domestic financial policies under floating exchange rates.

IMF Staff Papers 9(3); 369 -379 Giancarlo Gandolfo(1998) Business and Economics , Springer p126 glossary.econguru.com. (2011). International trade. Retrieved on 25th April 2011 http://glossary.econguru.com/economic-term/international+trade Guile B.R, Quinn J.B (ed) (1988) Technology in services ;Policies for growth trade and employment. National Academy Press, Washington Dc Mundel, R (1963) Capital Mobility & stabilization policy under fixed and flexible exchange rate. Canadian Journal of economic and political sciences p29:475-585 OECD (2010) Organisation for economic cooperation and development.

OECD publishing p 176