Research Paper on "International Business"

Research Paper 7 pages (2123 words) Sources: 7

[EXCERPT] . . . .

International business is a term used for commercial activities that occurs among private or public enterprises or government between two or more nations. International business has started several centuries ago when nations believe that they could source for products that are in short supply from other countries. After the industrial revolution, there was a significant increase in the international business, many companies started to enjoy economic of scales. With increase in the level of output, many companies were unable to find enough markets for their products in the local markets. To find market for their products, these companies started exporting their products to other countries. It was after the end of the Second World War that trade between nations increase tremendously. The post war construction led to the rapid development of infrastructures across several part of Europe and other part of the world. With rapid improvement in transportation, there is increase in the international trade among nations and importation and exportation of good increase. With the growth of international business, nations start to derive comparative advantages by engaging in international business. There is increase in the world output leading to the increase in welfare gains among nations. Despite the benefits derived from international business, there are some arguments that international business has negative effects on the development of domestic companies. In many countries especially, in developing countries, people prefer to buy foreign products at the expense of products produced by local industries. To protect domestic industries, many countries start to imposing trade barriers. While there is argument that trade barriers is beneficial because it allows the domestic industries to grow, however the economic theory argues that trade barrier does not allow competition among firms and without competition, there would be absence of economic efficiency.

The objective of this paper is to explore the concept of trade barriers or the economic bases for trade policies.

Trade Barriers

The concept of trade barriers refer to the government action in imposing restriction on international trade. The major objective of trade barriers is to make imported products less competitive compared to domestic products. Countries employ varieties of strategies to limit free trade. Country could use tools such as tariff barriers, non-tariff barriers or quota. Holzman categorized trade barriers as tariff, exchange, explicitly commodity quotas, different sales taxes on imported products and hidden quotas. (159). Tariff barrier is a form of trade barrier where nations increase the import duties on foreign products in order to increase their prices. The approach is effective because it discourages buying habit of foreign products and increases the markets for domestic products. The shortcoming of the tariff barrier is that it does not allow the efficient production of goods and services. The local industries may start to produce inferior or substandard products because of the government protectionism measures. The tariff barrier could also lead to retaliation from the exporting countries, and the approach may lead to trade war.

In addition, government may use prohibitive tariff to reduce or stop importation altogether. This type of tariff is designed to protect the infant industry, protect the consumers from buying harmful goods or is used when there is a surplus of goods in the economy. Other form of trade barrier is non-tariff barriers where countries make law on the category of products that could be allowed to in the country. One of these non-tariff barriers is technical barriers to trade (TBT) which refers to the standard and technical regulations that define the specific requirement of a product. The regulation could place specific requirement on size, design, shape, packaging performances or functionality. Conformity could also include inspection product testing and certifications. TBTs are introduced by government with special objective in mind to protect human health and safety as well as protecting the environment. However, there are argument from some quarters that TBT could hurt competition because foreign companies will need to adjust product specification to comply with the regulation and this may lead to the increase in the price of products. Several countries in Europe have used these requirements to ban the imported beef of cattle raised with hormones.

Another form of trade barrier is subsidy. Government may subsidize the production of certain goods and services to make them cheaper than foreign products. The major objective behind subsidy is to make the goods produced domestically to become cheaper than the products produced at foreign markets. By making locally produced goods cheaper, there would be increase in the exportation and decrease importation. Embargo is another form of trade barrier. Embargo means total ban on the importation of certain goods and services.

Several factors may make a government to formulate a policy on trade barriers. In developing economies, governments use trade barriers to protect the infant industries. In developed economy, tariff could also be used to protect special category of domestic industry.

Argument in favor of Trade Barriers

Protection of Infant Industry: Infant industry is composed of companies that are still not well developed and could not face competitions with the imported goods. To protect the infant industry, government could levy high import duties on the imported goods in order to increase their prices. The strategy is often employed by the developing economies to discourage the importation of foreign goods and encourage the consumers to buy the locally produced products. One of the advantages of this kind of tariff is that it decreases unemployment while allowing local industries to grow. By facing minimal competition from foreign products, the economy may shift from agricultural economy to industrial economy. Many emerging market such India, Taiwan, Brazil etc. implement this type of trade barriers to develop their local industries between 1980s and 1990s. At present, many of the emerging economies are having healthy economies.

The shortcoming of this form of protectionism is that it does not encourage competition among the industries leading the local industry to produce inferior or substandard products. Major setbacks to the development of many African economies are that they overprotect the local industries allowing them to face little or no competitions. Thus, many of the industries produce inferior products that could not compete internationally. Trade barrier implemented to protect the infant industry contradicts the theory of comparative trade advantage that states that different countries have different endowment of factor of productions, and countries should specialize in those goods and services that they believe they have advantage. If a country specializes in the production of goods that it believes having a comparative trade advantages, the total output will increase and there will be an improvement of economic welfare. (Bradford and Lawrence)

Protection of Domestic Employment: Another factor leading countries to implement trade barrier is to protect domestic employment. The possibility of allowing competition from foreign companies can threaten the growth of domestic industries which may lead domestic industries to start massive layoff of worker to cut costs. However, allowing local industry to develop without competition will lead to the stunted economic growth because the industry is growing with the backing of the states. From the perspective of economic theory, free trade both creates and destroys jobs in the economy similar to other market forces. Free trade creates jobs in the sectors that have comparative advantages and destroys jobs in the sectors with comparative disadvantages. The economic theory further argues that there is no net job loss due to free trade. Between 1992 and 2000, the United States increased the rate of importation by 240%. During the same period, the total employment increased by 22 millions and unemployment declined from 7.4% to 4.0%. (Elwell 8)

Protecting Consumers: Governments could levy taxes on products that they think could endanger population. For example, Europe imposes tariff on the imported beef raised with hormones

Retaliation: States also implement trade barrier as form of retaliation.

National Security: Trade barrier could also be employed to protect certain industries. In the developed economies, trade barrier is used to protect industries that are strategically important to the national economy. For example, defense industry is often seen to be strategically important for the state interest, thus the industry enjoys high level of protection. In the United States and the UK, the governments implement trade policies to protect the defense-oriented companies.

Effects of Trade Barrier

From the perspective of economic theory, the major objective of international trade is to increase the standard of living of the people of all trading nations. Typically, the disadvantages of trade barriers outweigh the benefits. Elwell argues that economists do not generally support the trade barrier. Protection of trade imposes costs on the economy, and the costs arise from the inefficient allocation of resources and foreign retaliation. The central theme of international trade is to enrich each trader even if a trading partner is less efficient. The international trade leads to fuller use of economic of scale as well as inducing innovation within the economy. Imposing barrier on trade will prevent nations from fully realizing the economic gain of international trade. Typically, trade barrier will prevent over allocation of scarce resources… READ MORE

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