International_Trade_Paper

International Trade Paper This paper will focus on comparative and absolute advantages, effect of import quota and tariff on international trade, and the World Trade Organization and its role in international trade. International trading among countries allows one another access to goods and services typically unavailable domestically. Countries may find trading on an international level beneficial because goods and services can be obtained cheaper. International trade can bring both consumption and production gains to a country. International trade promotes productive efficiency by encouraging a reallocation of resources away from areas of the economy best served by imports into industries which the country itself has a comparative advantage over trade partners. (International Trade, 2006) The ability of an individual, business, firm, or nation to engage in production of a specific good or service at a lower opportunity cost than another entity is referred as comparative advantage (U. S. Bureau of Labor Statistics, 2008). The term comparative advantage also denotes how trade creates values for all parties involved even if only one party can make a product or provide a service with fewer resources than any of the other parties involved. This is the basis of the term “gains from trade”, which mainly refers to the net benefits of comparative advantage. Gains from trade are the principles of the theory of international trade. At the same time, trading involves some costs which may significantly reduce some benefits such as comparative advantage. Comparative advantage does not necessarily serve as a way of resolving deficits originated from trade. As a matter of fact, making comparative advantage attainable may originate a trade deficit. Comparative advantage is a very useful tool to determine what goods and services should be obtained through trade, and what goods or services should be produced. On the other hand, absolute advantage refers to an individual, business, firm, or nation to have a higher production rate than its competitors while using the same exact amount of resources (Investopedia, 2010). The only input used in absolute advantage is labor productivity. Absolute advantage is determined by simply comparing productivity therefore, it is possible for a party to lack absolute advantage. When a party involved does not have absolute advantage, there will not be any trade with the other parties involved. In order to safeguard internal national industries from the threat of being underpriced and run out of business by foreign companies, import quotas are issued. An import quota is “a government imposed limit on the quantity of a good that can be imported” (Hubbard & O’Brien, 2010). By enforcing this quota, businesses avoid the impulse to purchase large amounts of a certain product, at a cheap price, from foreign countries and reselling the goods in their home nation for a profit. If import quotas are neglected to be enforced, the rate of unemployment has the potential to rise because companies may not be able to keep pace with the prevalent opposition from overseas markets. These enforcements can also play a positive role in the strength of domestic businesses. Rivalries amongst one business towards another, on home soil, will become more widespread and established rather than having the burden of extra competition coming from abroad. Tariffs on international trade hurt the country that imposes the tariff. The costs outweigh the benefits and it has been argued that tariffs limit free trade. Tariffs on imported goods are used to keep the goods from other countries from overtaking the domestic market. Tariffs cause reduced economic growth. When consumers are faced with higher prices due to tariffs being imposed, the decision consumers must make is to purchase less of this particular product or to purchase a similar, less expensive item. Tariffs that increase government revenues can be used to benefit the economy. When international trade is down, the seller has lower sales and may be forced to reduce production and labor. This cycle will create a decline in the economy. The World Trade Organization (WTO) supervises international trade, which officially commenced on January 1, 1995. Trading between participating countries is regulated by the WTO. “WTO trade rules are based on two nondiscrimination principles: national treatment (treating one’s own nationals and foreigners equally), and most-favored-nation treatment (equal treatment for nationals of all trading partners in the WTO)” (World Trade Organization, 2005, para. 4). Working through the World Trade Organization (WTO), the United States is a world leader in securing the reduction of trade barriers to expand global economic opportunity, to raise standards of living, and to reduce poverty. The WTO Agreements also provide the foundation for high-standard United States bilateral and regional agreements that contribute to a dynamic and open global trading system based on the rule of law. (Office of the United States Trade Organization, 2010) “International trade is one of the backbones of almost every economy in the world” (wisegeek, 2010). Since some items are not available domestically, it is crucial for a nation to trade products with other countries in order to meet market demands. International trade enables consumers access to products they would not normally have the opportunity of obtaining. Export also opens the gate to increase sales base for producers. References Hubbard, R. G., O’Brien, A. P. (2010). Economics. Ch. 30 The International Financial System. (3rd Ed.). Prentice Hall Publishing. International Trade. (2006). In Collins Dictionary of Economics. Retrieved August 13, 2010, from http://www.credoreference.com/entry/collinsecon/international_trade Investopedia.com (2010). Absolute Advantage. Retrieved August 14, 2010, from http://www.investopedia.com/terms/a/absoluteadvantage.asp Office of the United States Trade Representative. (2010). The World Trade Organization. Retrieved August 13, 2010 from http://www.ustr.gov/trade-agreements/wto-multilateral-affairs U. S. Bureau of Labor Statistics (2008). Division of Information Services. Comparative Advantage. Retrieved August 14, 2010, from http://bls.gov/bls/glossary.htm Wisegeek.com (2010). What is Trade Negotiation. Retrieved August 15, 2010, from http://www.wisegeek.com/what-is-trade-negotiation.htm World Trade Organization. (2005). In Immigration and Asylum from 1900 to Present. 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