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The value of world trade Essay

The value of world trade has been growing at a faster rate than world GDP. Asses the factors which might explain this trend. (20)

Between 1980 and 2002, world trade has more than tripled while world output (measured in terms of GDP) has only doubled. The rise in trade relative to output is common across countries and regions. Some of this increase can be accounted for by the fact that traded goods have become cheaper over time relative to those goods that are not traded. However, even in nominal terms the trade to GDP ratio has increased over this period. This means other factors may also be contributing to the phenomenon; one such factor is globalisation. Globalisation has no definitive meaning although it is described by the IMF as “the growing economic interdependence of countries worldwide through increasing volume and variety of cross-border transactions in goods and services, freer international capital flows, and more rapid and widespread diffusion of technology”.

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As stated by the IMF in their definition, technology has played an integral part in the rise of globalisation. The ascent of communication methods such as the internet and email have allowed firms to become multinational due to the ease and lack of expense of managing a global supply chain efficiently in the twenty-first century. The marginal costs of technology are now close to zero, and thus only fixed costs remain. The ease of communication also enables people to voluntarily cross national trade boundaries. Many multinationals have utilised the low communication costs to their advantage by offshoring more and more of their operations to countries with lower variable (labour) costs. Production teams may have been moved to China, a relatively new economy to the world of trade, since the cost of production is much lower there and ease of communication allows headquarters (which are usually based in an MEDC) to keep in touch easily.

However, it is widely speculated that technology efficiencies have run their course and that few further improvements can be made to the industry. A key indication is that marginal costs are already near zero. This suggests the breakthrough efficiencies such as wireless internet will not come as frequently, nor be as ‘breakthrough’, and thus will not have the same effect as before. As a result, world GDP is likely to begin to grow at the same rate as world trade in the future.

Another source of the rise of globalisation is the reduction in trade barriers. The World Trade Organisation has sought to reduce the overall level of protectionism in the world economy through successive rounds of negotiations. Tariffs quotas and subsidies are inconsistent with globalisation, and the WTO has managed to diminish these with significant success, for example Uruguay saw a reduction in tariffs on the average industrial good fall from 6% to 4%. This has stimulated world trade, and hence has meant increased interdependence.

This has been heightened by increasing pressure from the Americans through the Washington Consensus. America is a poster country for capitalism with its exports amounting to $1.3 trillion and imports amounting to $1.9 trillion in the 2010-2011 fiscal year. A reduction in protectionism creates increased ability to make use of comparative advantage, which is synonymous with greater trade flows. Comparative advantage is where the internal opportunity cost of producing one good in terms of another is lower in one country. Less tariffs aid this as they allow the terms of trade to be more exploitative.

Although the rise in trade relative to output is common across countries and regions the relative growth in trade and output varies greatly. The reductions in tariffs have tended to be on the goods which MEDCs (namely the USA, Japan and the UK) have wanted to export, whilst damaging the trading terms of newly developing countries. This, as well as the poor labour wages exploited by MEDC multinationals, is cited as a factor in the lack of domestic demand in growing economics such as China, which as a result has caused political tension, among other problems. Furthermore, the continuance of retaliatory tariffs as a response to transgressions also indicates the problems with more liberal borders.

A final factor explaining the surprising rate of world trade is the transport developments which have occurred over the last 100 years, particularly in the aviation industry. The internal economies of scale of increased dimensions, reduces average total costs. This is particularly true in NEDCs who previously had poor transport links. Improvements in their infrastructure, combined with fast economic development in these countries have lead to an increase in demand for foreign imports. An example of transportation developments is the Panama Canal, which will reduce the cost of importing goods from China to East America by up to 30%.

Ability to move goods cheaply greatly effects trade since high transport costs can outweigh the benefits received from lower internal opportunity costs, which would result in trade no longer being mutually beneficial for bother countries (there is no comparative advantage). In the future transportation of goods and services could take a step backwards if no feasible alternative to oil is found. Not only are there currently spiralling oil costs due to the political instability of nations holding the oil, but it is a finite resource and thus is going to become more expensive as it grows to be scarce.

Overall, the most significant factor is likely to be the reduction of trade barriers however globalisation cannot occur without all the factors working together. The growth of globalised products and transnational corporations leads to continuation of this sort of economic integration. Nevertheless, the sustainability of the rate of increase for world trade is in doubt, not only because the accuracy of measurements can be questioned but also because the rise of the BRICs may soon mean MEDCs can no longer determine the conditions of trade as they used to.

Evaluate the disadvantages of further trade liberalisation to the UK. (30)

Trade liberalisation is considered to be the removal or reduction of restrictions or barriers on the free exchange of goods between nations. This includes the removal or reduction of both tariff (duties and surcharges) and non-tariff obstacles (like licensing rules, quotas and other requirements). Over the last 50 years trade liberalisation in the UK has become very popular, with the abolishment of capital restrictions in 1979 and the WTOs influence.

One consequence of trade liberalisation has been increased insecurity in the workplace. Manual workers are particularly under threat as companies outsource their production lines overseas to low-wage economies. Many factory workers in the UK have been made unemployed as multinational firms have chosen to relocate their production teams in lower-cost economies such as China or India. Often it can be difficult for these workers to find employment in growth industries due to their lack of knowledge or skill in industry and government assistance is necessary (in the form of training programmes).This causes increased unemployment.

Although this may previously have been a particularly significant disadvantage to the UK in the past, when manufacturing played a big part in the UK’s economy, it is now less so. The UK is currently a country dominated by tertiary sector employment, with 81% of all jobs classified as tertiary. As the UK specialises more it should gain further comparative advantage through economies of scale or new (more efficient) ways of working. This makes tertiary sectors likely to be growth industries, and thus provided there is sufficient training to update workers’ skills, trade liberalisation may even cause unemployment to fall.

Another disadvantage to trade liberalisation in the UK is that there is a real danger of consistently running a current account deficit. A current account deficit occurs when the domestic market are importing more than they are exporting. Although this will lead to an increase in the standard of living in the short term, in the long term it may lead to more debt for future generations. If trade liberalisation increases it is likely that interdependence between countries will also increase; at the same time national debt is also likely to increasing.

In 2007 the world saw the first major global recession. Suddenly capital was hard to find, banks were unwilling to lend to each other – even government bonds were not selling. This led to a sharp fall in demand and high unemployment – for a country with a current account deficit this can be devastating as not only will its debt repayments decrease but demand for its few exports are likely to fall, worsening the position of the current account. In 2010 the UK paid �30bn in debt interest. As a consequence countries such as the UK may be forced to implement harsh austerity plans or face soaring borrowing costs.

The extent of this disadvantage depends on the elasticity of the demand for the products being imported. If the majority of imports are consumer durables from Germany then the effects of a global crisis may be minimised as it is easier to import less of these products since they are nonessential, however an overdependence on food could lead the UK being more susceptible to exogenous shocks. Domestically produced food is considered to generally be much more expensive – if consumers have taken a myopic view and chosen to import food rather than produce it in the UK in times of crisis there could be real shortages or extremely high prices. However, conversely some believe that the benefits gained from importing food as opposed to growing our own outweigh the expense in downturns, since farming in the EU is so costly (the EU subsidises cows at over �2.50/day).

The third disadvantage shows the potential problems of trade liberalisation in the UK’s future. When they Kenyan government, under instruction from the IMF, reduced restrictions on imported clothing and deregulated the cotton market, cheap clothing from Asia and Europe flooded into the country, devastating one of Kenya’s most established industries. In 1984 Kenya produced 70,000 bales of cotton each year; by 1995 production had dropped to just 20,000. A similar story could play out in the UK.

Developing or new industries may struggle to establish themselves in a competitive environment without any short-term protection in terms of tariffs or government policies. Without the economies of scale which larger, foreign transnational companies may have new companies will have high prices, leading to a lack of demand for their product. This may result in overdependence on other countries to produce and export in areas which the UK does not specialise in; first mover disadvantages will also be significant here. In the long term this may result in the UK falling behind in new technologies.

In reality policies in the UK will be made to help subsidise new industries and growth markets until they are established enough to compete without help. Once the aid is removed the lack of tariffs will help quickly show and eliminate the firms which are inefficient, leading to a global market which produces the most output for the least input. Furthermore, countries are likely to make sure they defend their own business for longer since the global financial crisis, as protectionism has become popular again.

Trade liberalisation has created a wave of successful multinational firms which act as a role model for businesses worldwide; however they can also create negative externalities. Trade liberalisation allows multinationals to develop by making it possible to split the production process between different companies (helping to minimise costs) due to transportation and technological developments, as well as reducing tariffs to help these companies get their products into as many countries as possible.

The top 500 multinational corporations account for nearly 70 percent of the worldwide trade; this percentage has steadily increased over the past twenty years. However, despite making supernormal profits and using huge quantities of the world’s scarce resources some of these companies produce significant externalities through their disregard for the environment. The world’s 3,000 largest companies are causing �1.4 trillion worth of environmental damage every year, through the release of greenhouse gases and over-use and pollution of freshwater and fisheries. Other negative externalities include regulatory capture and loss of national culture.

However, companies such as Innocent are setting a new precedent for global corporations. Fair Trade has also become popular in the UK, and so externalities from multinationals may soon fade.

Overall, the advantages and disadvantages of trade liberalisation are still relatively unclear as globalisation is a new concept. Although the UK government has control of certain tariffs within the UK it must be remembered that it must also adhere to regulations set by the EU and WTO and some disadvantages of trade liberalisation may simply have to be put up with.

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