For the investor, FDI offers company expansion and growth, which means higher revenues. As with all theories, there are opposing views. International trade has two contrasting views regarding the level of control placed on trade between countries.
Free trade is the simpler of the two theories. This approach is also sometimes referred to as laissez-faire economics. With a laissez-faire approach, there are no restrictions on trade. The main idea is that supply and demand factors, operating on a global scale, will ensure that production happens efficiently. Therefore, nothing must be done to protect or promote trade and growth because market forces will do this automatically. Protectionism holds that regulation of international trade is important to ensure that markets function properly.
Advocates of this theory believe that market inefficiencies may hamper the benefits of international trade, and they aim to guide the market accordingly. Protectionism exists in many different forms, but the most common are tariffs , subsidies , and quotas. These strategies attempt to correct any inefficiency in the international market. As international trade opens up the opportunity for specialization, and thus more efficient use of resources, it has the potential to maximize a country's capacity to produce and acquire goods.
Opponents of global free trade have argued, however, that international trade still allows for inefficiencies that leave developing nations compromised. What is certain is that the global economy is in a state of continual change. Thus, as it develops, so too must its participants. Federal Reserve Bank of Dallas. Accessed August 5, The Library of Economics and Liberty.
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I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Part Of. Global Players. Table of Contents Expand. Understanding International Trades. Imports and Exports. Comparative Advantage. Efficiency and Global Trade.
Origins of Comparative Advantage. Other Possible Benefits of Trade. Key Takeaways International trade is the exchange of goods and services between countries. Trading globally gives consumers and countries the opportunity to be exposed to goods and services not available in their own countries, or more expensive domestically.
The importance of international trade was recognized early on by political economists such as Adam Smith and David Ricardo. Still, some argue that international trade can actually be bad for smaller nations, putting them at a greater disadvantage on the world stage.
They may also be more easily available or simply more appealing than locally produced goods. In many instances, no local alternatives exist, and importing is essential.
The production of goods and services in countries that need to trade is based on two fundamental principles, first analysed by Adam Smith in the late 18 th Century in The Wealth of Nations, , these being the division of labour and specialisation. In its strictest sense, a division of labour means breaking down production into small, interconnected tasks, and then allocating these tasks to different workers based on their suitability to undertake the task efficiently.
When applied internationally, a division of labour means that countries produce just a small range of goods or services, and may contribute only a small part to finished products sold in global markets. For example, a bar of chocolate is likely to contain many ingredients from numerous countries, with each country contributing, perhaps, just one ingredient to the final product.
Specialisation is the second fundamental principle associated with trade, and results from the division of labour. Given that each worker, or each producer, is given a specialist role, they are likely to become efficient contributors to the overall process of production, and to the finished product.
Hence, specialisation can generate further benefits in terms of efficiency and productivity. Specialisation can be applied to individuals, firms, machinery and technology, and to whole countries.
International specialisation is increased when countries use their scarce resources to produce just a small range of products in high volume. Mass production allows a surplus of goods to be produced, which can then be exported.
While the new environment for trade creates new opportunities, it also increases the costs of trade barriers. When goods and components cross borders many times in GVCs, even small tariffs can add up, and the costs of inefficient border procedures are multiplied.
Trade facilitation —the transparent, predictable and straightforward procedures that expedite the movement of goods across borders — is becoming ever more important, and is especially critical for trade in perishable agricultural products or high-tech manufacturing components, both of which are highly sensitive to delays.
Trade facilitation is becoming even more important in the digital era. TiVA data also highlight how important services are to global trade. Even though services generate more than two-thirds of global GDP, employ the most workers in major economies, create more new jobs than any other sector, and are critical to competitiveness, obstacles to trade in services remain pervasive.
Regulatory reforms and liberalisation of trade and investment in services are needed to enhance competition and increase the productivity and quality of services.
Indeed, international trade can be strongly impacted by non-tariff barriers that originate from domestic regulations, or from limitations to foreign investment. The challenge is to meet policy objectives in ways that maintain the gains from trade. Digital techonologies and related new business models are also now changing the way we trade.
Digitalisation reduces the cost of engaging in international trade, connects a greater number of businesses and consumers globally, helps diffuse ideas and technologies, and facilitates the co-ordination of GVCs. But even though it has never been easier to engage in trade, the complexity of international trade transactions has increased dramatically, posing new challenges for firms, individuals and governments. Emerging technologies like 3D printing are poised to further change how we trade in the future.
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