Running Head: INTERNATIONAL TRADE

Assignment 1: International Trade and its Consequences. Kan Nguessan ECO 301 Stayer University

INTERNATIONAL TRADE

International Trade and its Consequences The purpose of this paper is summarized in analyzing the concept of comparative advantage, the issue regarding the migration of productive factors and the impact of protectionism policies adopted by governments. Globalization has transformed the world; this new era has eradicated the distance between nations, openness to the world is necessary to development. Many countries have transited from a central economy based to a market economy. However, what are the real impacts of globalization? How the concept has increase the degree of trade and interactions between nations throughout the world? The concept of comparative advantage and why trade occurs In the absence of trade, countries do not benefits from their resource endowments; that is, trade between countries is the most efficient manner for countries to expand. The last transitional countries such as China and India have made openness their priority to access the international market; however, trade can only exist between two nations as long as their use the natural resources. Nature has been generous to some countries such opportunity can be find in both developed and developing countries such as Zambia, other Asian countries which have emerged during the last decades. The comparative advantage stipulates that two nations can only trade if both are specialized in at least one good. If a country like the United States have the lower opportunity cost in producing corn or wheat, they should specialized in producing this good at a constant rate. Because the United States has a lower comparative advantage in producing corn, and they need coffee from Brazil, both countries should trade. Workers in the United States consume more coffee, some workers regularly afford a cup of coffee at least three times during the day, and

INTERNATIONAL TRADE

therefore the demand for coffee in the United States is greater than in Brazil. With their tropical climate Brazil can export coffee as long as they resources endowment are abundant. Because of the differences in tastes and preferences, countries are more likely to find common trade partners where they have more opportunity to commercialize their products and goods. This is the reason why the United States has a long historical trade with nations such as Brazil. The change in consumer s preferences will immediately change the terms of trade... The sources of comparative advantage There are different sources of comparative advantage. All resources that allow a country to produce a good at an increasing economy of scale are called factors endowments. Because countries differ from size and demography, nations like China, Brazil, and the United States have large resource endowment compare to other developing nations. The most advanced countries are more likely to their raw material due to the level of technology and human capital. In other words, a country can have excessive resources; however without human capital that involves skills, higher trained engineers, they have challenges to overcome to compete against the most powerful countries. It is imperative to recognize that countries differ not because of technology, which is assumed to be everywhere the same, but because factors endowments are distributed unevenly among them (Maneschi, 1998, p. 23 ). The demand schedule varies among nations. To fulfill a specific demand, a country must ensure that their human capital and labor is efficient. China and India are more powerful in term of capital labor. Economics theory suggests that as long as capital labor is in abundance, the labor is more likely to be cheaper. This is the reason why labor is less expensive in China. They are considering the most populated nation across the planet. With about one billion of population, c\China demography has sufficient resources to compete to gain from trade. Trade

INTERNATIONAL TRADE

liberalization has participated in this development of resource endowments in countries member of WTO. Because of globalization China has been able to attain a level f trade relatively higher compare to any nation in the world. Claro, (2009) suggests that foreign investment is positively correlated with exports and GDP growth. Moreover, as China demography is abundant, additional resources are inelastic to the marginal cost of labor. Hence, factors prices differences encourage foreign firms to move capital and technology to the low-wage domestic economy in order to enjoy low labor cost (Claro, 2009, p. 745 ). Analyze the international movement of productive factors. Immigration has been a subject of interest for some companies; however it represents a burden for many workers. In the United States and many others countries, the question of integration is viewed differently by economists. Some analysts suggest that the movement of labor in the United States endangers companies that have been employing qualify labor for a long time. Many economists suggest that migration is a mechanism for reducing spatial income differentials (Ozgen, Njikamp, & Poot, 2010, p. 2). Divergences occurs around the debate about international labor movements through the most developed countries for reasons such as better wage, higher opportunity of employments for the immigrants and lower opportunity for domestic workers without higher college degrees. Construction companies in general enjoy the influx of Mexican immigrants because of the ability to pay them lower wages. Some economists suggest that the brain drain lead to the adjustment of wage rates between two countries (Carbaugh, 2010, p. 333). Some companies benefit from human capital influx because of the ability to adjust the cost of labor. That is, with more labor influx more, competition is engaged in the labor market which helps companies with the wide range of choices for job applicants.

INTERNATIONAL TRADE

Immigration is a controversy debate; it has double effects on the economy. Economists are concerned about both negative and positive effects of the international movement of labor. However outsourcing is a powerful way for some companies to compete against the multinationals. The wage differential may affect some businesses and force them to shut down. Suppose a company employs only immigrant at a lower wage, this practice may affects other multinational in the competition which does not have the opportunity to hire workers at a lower wage. Thus, this may grant full opportunity for one business to maximize their profit in the shortrun by paying lower wages to their employees. Explain the economic effect of protectionism. Although protectionism has been prohibited by WTO, many countries are using it as an instrument to protect their infant industry and their domestic jobs. Nations such as the United States and China impose certain forms of tariffs and nontariff barriers to others nations that which imports may constitute a challenge for domestic exporters. Multiple damages involve the implementation of barriers. Tariffs can increase the welfare lost in a country, in fact the tariff increase the marginal cost of production by moving the supply curve of a country back which change the equilibrium price of international markets. Another form of nontariff restriction is called quotas. Today, many countries use quotas as a form of protectionism. The effects of quotas are deteriorating for one country and beneficial for another one. Many countries are more likely to use tariff more than quotas. Moreover, the effect of quotas is limited in imposing limits on the number of goods acceptable to import. It may also involve a period of time. In fact, some government may decide to implement a certain quantity of a specific foreign good during a period of the year. After that limit is past due, no one is allowed to export in the US for instance. Today, countries such as China and the Unite States have

INTERNATIONAL TRADE

different form of protectionism. However, it has been demonstrated that most of the developing countries are suffering from such policies. Therefore, their economic impact is much significant compare to the developed countries. Many countries argue that protectionism is implemented to help their struggling economies dealing with dumped goods. Dumping has been used by many countries such as China to have advantages in selling quickly their goods regardless of any economic effects on other countries. But today, more regulations are voted in order to regulate tariff and nontariff barriers of trade. In this world, countries benefit from trading by specialization, they used the different resources endowment to compete against each other. The sources of comparative advantages are very important international trade. However, international trade has not always been easy for certain countries because of protectionism. Therefore, how the economic stratification of the world could be without such policies?

INTERNATIONAL TRADE

References Carbaugh, R. (2010). International Economics. Cengage learning. Claro, S. (2009). FDI liberalization as a source of comparative advantade in China. Review of Development Economics, 13(4), 720-753. Maneschi, A. (1998). comparative advantage in internatioanl trade: a historical perspective . Edward Elgar publising . Ozgen, C., Njikamp, P., & Poot, J. (2010). The effect of migration on income grwoth and convergence:Meta-analysis evidence. . Papers in Regional Science, 89(3), 537-561. .