International trade is an exchange of goods and services between individuals and firms from different countries. For several millennia, since the dawn of civilizations, the export of goods to foreign countries in exchange for foreign goods was an integral feature of the global economy.
There are several advantages of International Trade. One of them is that international trade enables every country to receive goods, which country does not produce itself as any country is not self-sufficient. There are also limitations of International Trade. For instance, legal and regulatory forces can heavily affect businesses. Government laws, trade regulations, taxes, and other issues are interpreted differently country by country. This can discourage participation in global business (Feenstra, 2003).
This report covers the following four keys points: theories of absolute and comparative advantage, influences that affect exchange rates, reasoning behind free trade agreements (FTAs), and government policy on economic behavior.
So, what are the theories of absolute and comparative advantage? The theory of absolute advantage is attributed to Adam Smith. The essence of the theory is that different countries produce goods with different production costs: some countries have large costs, while others have lesser one. Therefore, the prices of goods are different. It creates the possibility to export abroad some goods with higher profits than to sell them domestically while other goods is more profitable to import rather than to buy within the country. Thus, Smith responded to a question what goods should be exported and what goods should be imported. In his view, goods produced with low production costs should be exported, and those that are domestically made with high cost of labor, should be imported (Absolute and Comparative Advantage, n.d.). David Ricardo discovered the law of comparative advantage. It means that each country should export those goods in the production of which the labor productivity at its enterprise exceeds the productivity of similar enterprises in other countries. Specialization of countries based on the principle of comparative costs contributes to more efficient allocation and use of resources, increases the level and quality of life of people through trade with other countries.
International trade is beneficial to all participants. Each country can find its place in the world market using its comparative advantage (Absolute and Comparative Advantage, n.d.).
As to the exchange rate, it is the value of the one country’s currency denominated in foreign currency or international currency units. Like any price, the exchange rate deviates from the cost basis that is the purchasing power of currencies, under the influence of supply and demand of currency. The ratio of the supply and demand depends on several factors. Among them are the following:
- The purchase power of money and inflation.
- The balance of payments.
- The difference in interest rates in different countries.
- The state of the currency markets.
- The degree of confidence in the currency in the world markets depends on the economy and political situation in the country (Feenstra, 2003).
There are many issues surrounding international trade such as child-labor laws, environmental concerns, offshore outsourcing, etc. Among them is widely debated Free Trade Area of Americas (FTAA). The idea of FTAA creation was launched at the first Americas summit in Miami, 1994. Advocates say that the creation of FTAA should ensure equal rights for both domestic and foreign investors in each country of the trade agreement, free access of producers to the markets of member countries, collegiality in decision of the trade disputes. United States particularly insisted on the removal of customs barriers and restrictions as well as the equation of import tariffs. In 2001, Latin Americans expressed concern that, after the ratification of free trade agreement, the north-American goods will replace local products from the national markets, which are now protected by high import duties. So, the question is still opened. Economic relations can function properly only and exclusively in the legal environment. Legal normative form naturally meets the essence of economic relations, the market economy. Single legal basis for all relationships of the economic cycle is the property right.
Government intervention in economic relations can be positive if, through this intervention, the violated rights of one of the parties are being protected, and negative if it restricts the freedom of the owner, that is his/he right. Thus, the legal right is a way of self-regulation of economy. The legal impact of the government on the economy is designed primarily to ensure the legality by economic activities, protection of the interests of participants in the market, which has a positive impact not only on domestic economic development of state capacity, but also reinforce a positive image for foreign economic cooperation (Feenstra, 2003).
What is the WTO? WTO is World Trade Organization the main advantage of which is that the countries, the members of this club, interact through non-discriminatory trading system, where each participant receives a guarantee of a fair and consistent treatment of its exports to the markets of other countries, pledging to provide the same conditions for imports into its own market. In this case, developing countries are provided with more flexibility and freedom of action in the fulfillment of their obligations. In a pragmatic sense, the receiving of such benefits is the goal of joining to the WTO.
WTO covers many aspects and one of them is a concern about environment. By the time of the WTO creation, the awareness of the interconnection between trade, environment and sustainable development has received greater recognition. As a result, in the preamble to the Marrakesh Agreement about WTO establishing was mentioned the term «sustainable development». In addition, the Committee on Trade and Environment (CTE) was set up in the WTO.
Summarizing the main issue of this report, it should be said that International trade allows us to expand markets of goods and services that could not be available to us without it. Through it, we can buy foreign goods, choose the products not only among domestic competitors but also among foreign one. As a result, international trade is a great competitive environment, and sellers are trying to offer consumers better prices. International Trade as the exchange of goods and services between countries leads to global economy, when prices or demand and supply depend on events occurring in the world. Global trade provides an opportunity for customers and countries to have the products and services are unavailable in their own countries. Practically, they can acquire any type of product.
- Absolute and Comparative Advantage. (n.d.). Retrieved May 29, 2009, from http://db.lib.uidaho.edu/ereserve/courses/b/business/380_01/smith.pdf
- Feenstra, R. C. (2003). Advanced International Trade: Theory and Evidence. Princeton: Princeton University Press.
- World Trade Organization official website. www.WTO.org