International trade has many potential benefits for participating countries, yet governments regularly impose barriers to trade. By using real-life examples, discuss the benefits of international trade and the reasons why restrictions are imposed.
We have been trading across boundaries since we found ways to move past borders. International trade is exchange of capital, goods, and services across international borders. There are two main ways for international trade, Exporting: Sale a product that produced in a country for consumers of another country, and Importing: Buy a product that produced in another country for consumers of your country. After international trade has taken part in the world in histories, it has gain political, economic, social importance in centuries, with all those importance of international trade; it has many benefits for participating countries.
Throughout this essay I will interpret international trade and its potential benefits, and discuss the barriers which are associated with it, and at the end I will contribute a conclusion based on these aspects.
Benefits of International Trade
There are many items in a country that it doesn’t have some that natural resources; such as oil and natural gas, metals, timber, coffee, tropical fruits, etc and this country need or want them, thus, every country in the world trades something from another country. All those are can show us how trade takes part in our life and how it is important for human life. Also some other gain from trade can explain, decreasing cost of goods for consumers, increasing competition between firms which make them to produce better quality of goods for cheapest price.
On the other hand, it is also one of the important sources of economy for a country and it gives a large platform to the firms for introduce their goods, it increase sales and profits of firms or countries and, also international trade is main revenue for almost all countries in all over the world in now days. According to Gottfried Haberler, the theory of international trade is, it is the individual subject who buys and sells, pays and is paid, grants and receives loans, and, in short, carries on the activities which, taken as a whole, constitute international trade. It is not, for example, Germany and England, buy individuals or firms located in Germany and England who carry on trade with one another. ( Ingham B. (2004))
Some of the key advantages for trade may define into two main topics: ‘Comparative advantage’ and ‘Absolute advantage’.
“Comparative advantage” is the ability to do produce something more professionally with lower opportunity cost than another country. Essentially, if a country could produce a bottle of wine is relatively cheaper than other countries then that country has comparative advantage on production of wine. To buy goods from other country that can produce cheaper than your country is good for your country’s economy as well. For instance, Germany is can produce cars cheaper opportunity cost than Turkey can produce, and Turkey can produce clothes cheaper than Germany can produce. Both of countries can concentrate to produce their good for cheaper prices from each other country, and they can trade their production to each other or other more countries.
“Absolute advantage” is the ability to do produce something more professionally with not as much of labour or resources than another country. If a country can produce one of some goods with less resources and better quality than from other countries, then that country has absolute advantage on those goods against other countries. For instance in now days, France can produce a bottle of wine with less resources and labour than Turkey, and France has absolute advantage on wine production.
Why government regulate international trade?
When we talk about the advantages which are associated with international trade, there are also some disadvantages. These could be competition between domestic and foreign producers. To buy cheaper goods from other countries is might be good for your domestic costumers but it is not essential for your domestic firms and your country. For instance one of the 21 century’s the largest movers in the international trading world that we have today are China where labour is plentiful and cheap, hence it become unprofitable for the domestic producers to compete with the Chinese producers. Thus, a barrier is essential for the survivals of the domestic producers.
A barrier for trade is a specific term describes a government strategy that restricts international trade. The most known barriers to trade are tariffs, quotas, and non-tariffs barriers.
Tariffs: A tariff is a tax on imports, which is collected by government. Because of tariffs imports decreases and also it raises the price of the good to the consumer. There are 2 mains tariffs type,
An “ad valorem tariff” is the percentage on the market value of the imported goods.
A “specific tariff”, is a tariff of a specific amount of money that put onto market value of the imported goods. Also, tariff can call as duties or import duties.
The diagram below is showing us effect of a tariff to a country.
(Module Booklet, p.38)
As we can see on the diagram; the domestic demand curve is “D”, the domestic supply curve is “Sdomestic”, and the equilibrium domestic price is “C”. The supply curve for world market value of a product is “Sworld”, and the supply curve after imposed tariff is “Stariff”.
When the world market value is at “A” (without tariff), Firms can imports H amount of goods from other countries and domestic supply curve is on the “P” point. In this case, we can see that costumers are spending much money for imported goods because of cheaper prices. Thus, governments impose tariffs to imports good to keep balance between domestic goods and imported goods.
We can see on the diagram, after imposed tariff the price supple curve is at “B” and the quantity demanded for imports drop from “H” to “D” at the same time domestic consumption is increased from “D” to “E”. The area “MLNK” is represents us government revenue after imposed tariff (Taxes), also there is some domestic loss after imposed tariff that we can see on “PNM” and “LKJ” areas. To sum up, this diagram represents us, how governments keep control goods prices equilibrium between domestic producers and foreign producers.
Quotas: Quotas are a type of protection for domestic producers that set a limit on the quantity of a good that can be imported into a country in a given period of time. A quota works by reducing the amount of foreign importing goods to a country and because of less importing, it is raises the price of that imports, and also it is encourages domestic costumers to buy domestic products. Quotas, like other trade restrictions, are used to benefit the producers of a good in a domestic economy at the expense of all consumers of the good in that economy. (Sheffrin S. M. (2003))
For instance, Turkey can put a quota on textile products of Poland and in that way, Turkey can much more sell their own products much more.
Non-Tariff Barriers: A non-tariff barrier to import is a policy used by government to reduce imports. Non-Tariff barriers reduce imports by limiting to quantity of imports, increasing the value price of imports that getting into market.
Protectionism: It is might a fact that trade is help most of countries economy’s but there is no certainty that international trade do not make every countries economy better. Thus, some of countries can use benefits of international trade; there is a method call protectionism that a policy of protecting domestic industries against overseas competition as this essay explain them above by using Tariffs, Embargos, and Quotas or with the other restriction placed on the imported goods. This protection helps the country to specialise within the economy in the short-run and prepare them to compete in the world market in long-term.
Economics Nobel Prize winner and trade theorist Paul Krugman once famously stated that, “If there were an Economist’s Creed, it would surely contain the affirmations ‘I understand the Principle of Comparative Advantage’ and ‘I advocate Free Trade’.” (Krugman, Paul R. (1987))
As we can read from a famous theorist is quote (Krugman P.), he wanted to state that as every individual country has some “comparative advantage” in the production of some goods and in the process they should take advantage of them in the international market as foreign money would be coming into the domestic economy.
To sum up, International trade is very important in now a days for a country’s economy and also;
imagine that if our choice were limited to what we can produce locally, for instance, as mentioned above because of comparative advantage or absolute advantage one country probability is not able to produce things lower opportunity cost than another country in this case; without the imports and exports, we would spend much money to produce for something than we could buy from foreign countries, and also we would be living in a small world that we have only lack of services and requires, so we might would be living without cotton clothes, tropical fruits, cars, coffee, wine, or even without natural gas that make our houses warm. Humans are needs that products and they always prefer to buy them as cheaper as they can.
* Sheffrin, Steven M. (2003) Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 449.
* Krugman, Paul R. (1987) “Is Free Trade Passï¿½?” The Journal of Economic Perspectives , p.p. 131-144
* Ingham, B.(2004) International trade: Why international economics?, p.p. 1, England: Edinburg Gate
* Hata P.(2008) Benefits of International Trade. (online) Available from:
http://ezinearticles.com/?Benefits-of-International-Trade&id=1259699 (accessed 05/08/2008)
* Neely C. Economic research, Economists (2008) Why Trade? (online) Available from:
http://research.stlouisfed.org/econ/cneely/trade/sld019.html (accessed 15/02/2009)