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International Trade and Trade Policies

Introduction

Trade policies were initially done away with but globalization has now begun to haunt world governments and many argue that the voracious market forces are gradually making compassionate governments to face a difficult time in shielding their people from the literal beasts of prey that lie in wait across their national borders. Others have argued that such market forces are not predatory and actually play positive roles in preventing greedy governments from cheating their citizens. Although both these sides view the issue from different perceptions, they have arrived at a common conclusion in the context of the fact that omnipotent markets imply the presence of ineffective political systems. Although this concept has become a cliché in the modern age, it is very true that most governments have become less effective as compared to before. The biggest question arises whether globalization by definition and in practice implies the nemesis of the nation state (Hicks, 2004).

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Amidst the globalization process there is a strong inter relationship between trade and industrial development and such a linkage is consistently becoming stronger and stronger. Third world countries now need to shift from traditional trading patterns and to place lesser dependence on exporting semi processed goods and raw materials. They need to place lesser reliance upon the conventional relative advantages of unskilled labor and raw materials. Industrialization is the major thrust area that will transform economies in creating a positive economic structure. In effect, industrialization acts as a catalyst in moving the economy from low value initiatives towards high productivity activities that lead to growth potential and increasing return (Barshefsky, 2006).

Most countries come up with trade policies that are protective to local industries and jobs. Such a country also provides for selective protection by way of exchange controls, quotas and tariffs in addition to liberalizing some industries that were able to attain high performance standards in competing globally (McCormick, 2003).

What is at maximum stake is the speed and content of the procedures through which liberalization is being implemented in African countries. Equally important is the government’s role in providing solutions to rectify market failures and other strategies of intervention that will be required to reshape and use different parameters effectively. So far, economic reforms have not effectively addressed the skill shortages that affect the efficient performance of industries in Africa. However, many industries could become more competitive if they can improve the quality of their human skills. Thus, core competencies have to be improved by including training and education as integrated elements of the restructuring strategy. As a consequence of past experiences, considerable amount of capabilities have been developed in the industrial sector, which are required to be conserved and protected instead of allowing valuable skills to go waste and to result in further deindustrialization(Nau, 2010).

Free trade

Free trade is a model, which allows goods and services to flow freely within or between countries without government –imposed restrictions, which translates into added costs. Economists view this as the best trade policy among nations but some people view it skeptically claiming that foreign competition can destroy local industries and economy at large. This paper analyzes some economical aspects of free trade in a bid to convince its skeptics that it is a viable tool of promoting global economy. Free trade is an important aspect of developing the global economy especially if it can be practiced on a level ground (Jagdish, 2002; Elgar, 2002).

Free trade is essential in promoting the global economy. This is mainly due to the comparative advantage, which is associated with it. Many people oppose it by just viewing matters on the surface level. They fail to look deeper into what free trade can offer. For instance, some fear that trading with a country like China, which produces goods cheaply, can lead to unemployment since the countrymen will be unable to compete favorably with cheaper Chinese labor. Nations can benefit by concentrating on production of goods that best suit them in terms of cost advantage. For instance, although China may produce goods cheaply, it cannot meet all its demands and will be forced to rely on other countries for such goods promoting trade and the global economy. Therefore, free trade enables countries to specialize in areas that suit them increasing production and making more profits. This is in accordance to the law of comparative advantage proposed by David Ricardo (Blinder, 2007).

Protectionist trade can either increase or decrease the costs of respective goods and services to both producers and consumers (Jagdish, 2002).

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Free trade is also significant in promoting economies of scale benefiting member countries. This is because countries often specialize in producing goods which they have higher comparative advantage (Friedman, 1997; Blinder, 2007). They produce the goods in higher quantities enjoying the economies of scale as well as reduced average costs. This usually happens in industries having high fixed costs or those requiring high investment levels. The significant of economies of scale is that it can ultimately reduce the prices of goods and services (WTO, 2000).

Free trade increases competition-making firms to integrate more incentives aimed at cutting costs and increasing efficiency. Such a move can discourage domestic monopolies from imposing high prices. On the other hand, firms in respective countries can benefit from raw materials abundant in other regions. For instance, countries in Middle East have big oil reserves but cannot benefit from them without trade. Similarly, Japanese are good in manufacturing but have few raw materials. Therefore, their manufacturing capabilities would remain dormant without trade ruining their economy.

Since free trade is significant in promoting the global economy, it is necessary for governments to intervene by introducing measures that supports it. The interventions can be in form of taxes and tariffs; subsidies; and non-tariff barriers such as quotas and regulatory legislation. The governments can also seek to establish inter-government trade agreements. In general, governments should try to eliminate any form of protectionist trade (Ryan, 2006).

Firms engaged in free trade factors in some elements of microeconomics such as production costs, profit maximization, and focusing on different market structures. Business firms supply goods and services with an aim of making more profits. To make more profits, they must evaluate the level of output that results in the greatest profits (Samuelson, 1967). For instance, costs of production influences significantly on the level of output. The costs of production incorporate together fixed and variable costs. Fixed costs are costs that remain constant irrespective of the level of output such as insurance premiums and rent. On the other hand, variable costs are costs that vary with the output level such as raw materials and wages. Therefore, the cost of production (total cost) is the sum of fixed and variable costs. There is also another type of cost known as marginal cost. The marginal cost is the cost associated with producing one more unit of output and helps in determined the level at which profits can be maximized (Samuelson, 1967). It measures the change experienced in total cost when there is a variation in quantity produced. It helps the firms when deciding on whether to produce additional quantities or not.

Free trade is an important factor of promoting the global economy. It enables countries to benefit much from the commodities they produce by enjoying the economies of scale and better market organizations. Notably, free trade seeks to counteract protectionist trade whereby governments impose restrictions to trade. However, for better benefits, free trade should be practiced in an environment where all member countries are equal partners.

Protectionism

Many people in developed countries argue in favor of protectionism because of outsourcing and the flight of jobs overseas. Outsourcing has gained credence in recent time because foreign wages are much lower abroad. The result is that jobs at home are lost as employment trends shift overseas. Protectionism is the anti-thesis to the free trade neoliberal ideology espoused by the forces of globalization today (Hoeven and Van Der Kraaij, 2004).

Protectionism is an economic policy, which promotes a strong role for the state in regulating economic policy and advocates restrictions on the international flow of goods. Tariffs and restrictive quotas are important components of protectionism behavior and this concept has its roots in the early theories mercantilism, prevalent during the early years of US Independence. Aimed at discouraging imports and the prevention of foreign goods flooding domestic markets, protectionism today stands in stark contrast to free trade and the policies of economic liberalization. National barriers to global trade are enforced through protectionist policies and this phenomenon has gained new credence in an era of anti-globalization. Prior to the modern globalization phenomenon, key Asian countries such as South Korea employed Import Substitution Industrialization (ISI) as a form of protectionism to shield domestic producers from foreign competition. In today’s global economic marketplace, there are increased calls for the imposition of tariffs and other regulatory measures to protect domestic producers and jobs from foreign take-over. Although detractors exist, as has been evidenced above, many economists argue for strong international trade to provide competition and stimulate domestic producers (Ralph, 2003).

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Case Study. India

The economic development in India is credited back to history when development policies were socialist inspired. Though the country is economic, growing rate was of a snail’s pace after independence, India has been able to find its way to gradually opening up new markets. This was possible courtesy of its economic liberalization. Her income per capital was increasing at an average of 1% per annual. This trend changed with the introduction of fundamental reforms dating back in the early 90’s. It was followed by the renewal of the implemented reforms in the 21st century. Now, India had achieved a ‘free market’ economy and considered being among the fastest growing economies in the world. Her average income had grown to almost 8%, and by the time 2011 reaches, the rate is predicted to be at 11%. Such desirable rates can only be achieved if the nation strives to achieve fundamental reforms in her market. Indians economy is a collective responsibility of its independent states. Each state works to increase its growth rate, which in turn leads to the nations increase growth rate. All the hard work has been rewarded by country coming eleven in the list of the world largest economies.

Different sectors in India have contributed to the growth and sustaining of the economic growth and development. The main sectors being, direct foreign investments, the agriculture sector, manufacturing industry and the working force from the huge population. The growing economy has placed the living standards high to about 76%. Agriculture has been the king pin in the rural areas with more than two-thirds of the population earning their income directly or indirectly from the sector. The cities and towns form the main key elements in India’s economic growth. The major setback in the economic growth has been poverty. For the country to achieve its dreams, it had to reduce the poverty rate in her population. It introduced favorable macroeconomic performances and development reforms. The country governance also checked on other uneconomic dimensions in order to achieve a favorable social development. For the county to progress in its economic reforms, it gave priorities to some of her public sector reforms.

Agriculture is the main source of raw materials, food and products for export to India. The country comes second in production of farm out puts all over the world. Agriculture with other related sectors such as logging, fishing and forestry contributed to about 20% of the country’s GDP in the 2005 financial calendar (Rosenstein-Rodan, 2010, p. 140). The agriculture sector employees approximately 60% of India’s work force. It is the nation’s largest economic sector and contributes significantly in the economic development of India. Special emphases have been placed agriculture to increase the yields. India stands as the leading producer of some of the agricultural products used worldwide. The products are tea, cashew nuts, ginger, milk, coconuts, black pepper and turmeric. India has the largest cattle population of about 193million. Other major agricultural products include; fruit productions like sapota and banana and tobacco. India has invested heavily in storage infrastructure and marketing of its agricultural products. Schemes like the information network, grading and standardization and rural go down have been implemented by the Indian government to improve its marketing infrastructure.

The manufacturing industry in India is another key sector in the country’s economic growth and development. India comes fourteenth overall in factory output. The manufacturing sector together with related fields such as gas, electricity, mining and quarrying contribute up to 28% of the country’s GDP (Kapila, 2009, p. 420). The sector also provides employment to 17% of the nation’s workforce. The privatization of several public sector industries in the economic reforms led to increased production of consumer goods. This is because the sectors that were ones reserved for the public opened up. Liberalization in most of the cities also increased production of essential goods. Foreign competition like cheaper Chinese imports led to the transformation of the Indian private sector. The sector had to change its management form the family members, had to squeeze its costs, rely on low labor technology and costs and concentrated on coming up with new products. The result of the transformation was increase production in both the private and public sector.

In an effort to increase its economic growth and development, India decided to invest in both local and direct foreign investment. To attract more foreign investors, the Indian government has been pushing for economic reforms and securing of legislation. Foreign direct investment is important in both the addition of domestic capital and being the source of global and technological leading practices. Just like in other developing nations, direct foreign investment has been the key to economic development and has been the source to external finances. The rise in foreign direct investment inflow to India to about $15 led to the country becoming the second-fastest growing economy (Brunner, 2010, p. 200). This attracted investors from every part of the world. The increase in foreign direct investment has transformed the market composition to a state of acquiring the existing assets rapidly compared to the investment in new assets (Lall and Stewart, 2004).

The barriers hindering foreign investment have to be addressed by the Indian government. They include; poor roads and other infrastructure and labor laws that are inflexible. Investments in such ventures are beneficial in assisting in formation of human capital, international trade contribution and helps in initiating technological spillovers. The investments also help in the enhancement of enterprise development, and development of business environments that are more competitive. Direct foreign investment has helped India in improving its efficiency in the usage of resources and increasing her total factor productivity. The government went further to initiate measures to liberalize her markets and integrate the market with the global economy. The above led to an increase in both imports and exports. Direct foreign investment has also helped the manufacturing industries. Most companies have teamed up with foreign companies to gain management expertise, access foreign markets and acquire new technology.

The above named sectors would not be that productive without the availability of the huge and cheap working force. The country’s labor force is growing at the rate of 2.5% each year. India’s high population provides both skilled and unskilled labor for all its production sectors. It is estimated that the population provides approximately 460 million workers of which 390 million work in the unorganized sector. The above trend is because of flexibility in employment in the organized sector. The organized sector has adopted measures like increased use of employer’s contract labor to gain from flexible labor practices. Children less than 14 years make 4% of the total labor in India (Kapila, 2009, p. 420). Most of the children work in the rural areas and traditional agricultural practices. Very few are found in sectors such as services, manufacturing and repairs (Killick, 2003).

Future Economic Outlook

The greatest challenge to globalization in developing nations is the ability to integrate sectors to work together. However, for some countries and even sectors within countries, this is not plausible. This is due to a lack of foreign capital, investment, and funds for some nations. This creates a vicious cycle, as these countries will be adversely affected further due to their inability to become economical viable on an international stage (Schmukler, 2004; Shaw, 2003).

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Developing nations must institute specific macroeconomic strategies to decrease the potential for economic crises. This includes regulation on currency and banking practices to insure proper monetary distribution. This is of particular importance due to the high risk of a financial crisis these areas can implement. Another macroeconomic strategy would be to reduce severe fiscal deficits and public debt, as these deter the ability of a nation to manage a crisis. To manage a crisis a nation must avoid large account deficits, currency mismatches, and improve governmental regulations. (Schmukler, 2004; Scholte, 2005).

For those against globalization, isolationism is highly unlikely to benefit developing nations. This is particularly true for nations that are already open to investors, as they will be able to find ways around these restrictions. Furthermore, the sudden loss of open markets may detrimentally affect the financial sector if there are insufficient reserves, high levels of risk, and low capital inflows. Though globalization increases international interest rates and prices on domestic economies, as well as controls the economic situation, there are international financial groups to economically aid developing nations, such as external liquidity mobilization and international financial agreements in the advent of a crisis. (Schmukler, 2004)

Conclusion

With enhanced international trade, it is theorized that developing nations are highly affected by the whims of developed nations. This is particularly the case of the cosmopolitan theory of globalization, which expounds the belief that globalization creates a universal community that promotes the formation of democratic nations internationally, high tariffs on developing nation agricultural goods, heterogeneity, financial risks, and macroeconomic dilemmas. Indeed, with any policy there will be some disadvantages, especially on a global scale. However, the advantages of globalization are enough to directly influence and benefit the economic status of developing nations. This includes the employment of foreign investments and foreign exchange restrictions, promotional of protective environmental regulations, financial sector development, reduced capital costs, and increased financial opportunities (Shaw, 2007).

Reference List

Barshefsky, C. 2006. Trade Deals We Need To Close. Web.

Blinder, A., 2007. Free Trade. Library of Economics and Liberty. Web.

Brunner, H., 2010, ‘Local Economic Development and Global Markets’, Sage Publications Pvt. Ltd, pp 170-200.

Elgar, E., 2002. Innovation and Small Enterprises in the Third World, New Horizons in the Economics of Innovation.

Friedman, M. 1997. The Case for Free Trade. Hoover Digest. Web.

Hicks, S., 2004. Explaining Postmodernism: Skepticism and Socialism from Rousseau to Foucault. London: Scholarly Publishing.

Hoeven R. & Van Der Kraaij, F., 2004. Structural Adjustment and Beyond in Sub- Saharan Africa. The Hague: Ministry of Foreign Affairs.

Jagdish, B., 2002. Free trade today. Princeton: Princeton University Press.

Kapila, U 2009, ‘Indian’s Economic Development Since 1947’, Academic Foundation Press, pp 300-420.

Killick, T., 2003. Explaining Africa’s Post Independence Development Experience. Second Biennial Conference on African Economic Issues, Abidjan, pp. 13–16.

Lall, K. & Stewart, F., 2004. Are Adjustment Policies in Africa Consistent with Long-Run Development Needs? In: Development Policy Review.

McCormick, D., 2003. Enterprise Clusters in Africa. Institute of Development Studies.

Nau, H., 2010. Perspectives on international Relations. Washington DC: CQ press.

Ralph, J. 2003. A Tax System by Design Rather Than Accident, Business Review Weekly.

Rosenstein-Rodan, P 2010.Capital Formation and Economic Development’, Routledge Publishers Press, pp 100-140

Ryan, P., 2006. Reasons for Trade Restrictions. Web.

Samuelson, P. 1967. Summary on Factor-Price Equalization. International Economic Review, 8 (3): 286-295.

Schmukler, S., 2004. Financial Globalization: Gain and Pain for Developing Countries. Federal Reserve Bank of Atlanta, Economic Review 66 (6), p.39-66.

Scholte, J., 2005. Globalization: A Critical Introduction. New York: Palgrave.

Shaw, M., 2003. International Law. Cambridge: Cambridge University Press.

Shaw, M. 2007. Theory of the Global State: Globalism as an Unfinished Revolution, Cambridge: Cambridge University Press.

WTO, 2000. Free trade helps reduce poverty, says new WTO secretariat study. Web.

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