Category : International Business Environment, International Business Review, International Trading System
The changes in the world output is dependent on the trade that exists among countries around the world. (2000) reports that on average, world output has grown at a faster rate than in any other period of history, and its major cause has been the rapid growth of world trade, resulting from an increase in the degree of international specialization between countries (). Similarly, a decrease in the world output decreases the other. It has been reported that trade can decrease during times of severe economic recession being a result that fewer consumers are certain about their financial futures, leading them to purchase fewer domestic and imported products (2005). In addition, their relationship can also be attributed to the devaluation of money during economic recession, causing higher costing imports, which make domestic products a little more affordable.
Despite their given direct relationship, (2000) emphasizes that trade has grown faster than output, for economies have become more open and economically interdependent, and at the same time, policy measures adopted by countries stabilize their relations with their trading partners (). This growth rate of trade can be accounted for by the increase in the role of manufactures being exhibited by the developing countries. The interdependence of countries brings about cooperation and economic stability, and harmony in continuous trading relations.
The broad pattern of international trade determines the country’s gain in terms of importing and exporting goods and services in trading with other countries. It was mentioned earlier that countries are dependent from one another, whether they are developed or still developing. This means that different countries rely on each other in terms of trade. It has been reported that the main pattern of trade is that developing countries tend to export mainly primary goods, such as raw materials, and import mainly manufactured goods, including cars, machinery and computers; while the developed countries tend to import primary goods and export manufactured goods ( 2006). Developed countries, such as the United States and United Kingdom need raw materials for most of their manufacturing industries, and obtain them from developing countries. These raw materials include oil, coffee, tea, rice, coal, grains, fish, textile, logs, and fruits and vegetables. In contrast, developing countries, such as the Philippines, Brazil, and India need manufactured goods for their development.
If nations will cut off trade with one another, then it will result to lack of resources, necessities and turmoil. Take for example the situation of the Philippines. The Philippines continually import rice from other rice-producing countries to feed its citizens. Due to the rapid increase of its population, most of the agricultural lands are turned into neighborhoods to accommodate more Filipinos, leading to the decrease in rice produce. Most of the equipments, such as computers, cell phones and other machines used for production, communication and transportation are imported from China, Japan, US and Europe, so cutting off trade with these countries would mean the crippling of the economy. Cutting off trade with the United States would mean lack of airplanes, ships, cars, and even military equipments, and delay the Philippines’ objective for economic development, stability, education, and global competitiveness.
Given that many advantages can be attained in facilitating trade, each country must still protect its own industry from being harmed by too much products coming in, for the increase in imported goods would indicate lower prices, resulting to the destitution of smaller businesses. This is why governments also promote and restrict international trade. It has been reported that the rapid growth of trade has been achieved since the Second World War in bringing about a gradual reduction in the level of trade barriers both in regional and global levels, and by technological changes in the 21st century, especially in the area of telecommunication and transportation (Grimwade, 2000, p. 11). The General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO), plays the regulation of the international trade at the global level. This introduced a set of rules to govern world trade that gave stability and certainty of access to world markets for exporters and created a framework through which countries could negotiate freer trade (Grimwade, 2000, p. 11). This resulted to the large reduction in the level of tariffs, particularly in relation to industrial goods.
At the regional level, restriction of trade is achieved through the formation of regional free trade areas and customs unions, such as in Western Europe, with the creation of the European Communities (EC) in 1958 and the European Free Trade Area (EFTA), which resulted in the elimination of tariffs on trade between member states. Some other includes the North American Free Trade Area (NAFTA), which provided free trade in goods and services between the US, Canada and Mexico, the MERCOSUR in South America, and the AFTA or the Asian Free Trade in South East Asia.
Different countries have different beliefs in establishing and managing their own governments for their own welfare. Both the concepts of the market economy and the mixed economy are being debated upon on its advantages and disadvantages on being imposed by a government. These are useful for careful evaluation of their true essence, and for us to decide whether our present system needs to be changed.
The market economy seems a very effective type of economy as it offers economic freedom, and limited government intervention in terms of trade. It has been reported that it follows theory of Adam Smith, that of the free market economy, where the allocation of resources is determined by the ‘invisible hand’ of the price mechanism, and is commonly associated with capitalism ( 2005). It encourages innovation, efficiency and entrepreneurship and provides less market restrictions. However, market economies cannot provide the necessities to the public, such as healthcare and education, due to the undemocratic market forces, being controlled only by few powerful individuals in the society. Social disparities, such as poverty and inequality become the result of this.
The mixed economy contains both private and public enterprises. The government operates taxation policy in order to fund essential services, and private companies operate to produce goods for all other sectors in the economy. This type of economy seems the best possible economy to be implemented, but its drawbacks could be the high amount of taxes to be imposed by the government on the people, possible poverty, increase in prices due to increase in tax, wage hike increase, and government destabilization.