Case Study on "International Trade Is an Important Economic Tool"

Case Study 15 pages (4173 words) Sources: 13

[EXCERPT] . . . .

International Trade is an important economic tool for countries around the world. This is one tool that catalyses the achievement of various macroeconomic objectives of a government. These objectives include increasing output and Gross Domestic Product, achieving positive economic growth, earning greater foreign exchange and a positive Balance of Payment along with increasing standards of living and allowing wider choices of goods and services to their consumers. The international trade may include trade of both visible goods as well as invisible goods.

Since International Trade takes place between countries across geographical boundaries foreign relations between countries and transnational treaties have a direct role to play in increasing and/or decreasing the International Trade of the countries. This of course means that the responsibility of developing favorable international trade and foreign policy lies on the shoulders of the political leadership of the country.

During the past couple of years, China has emerged as an important and highly competitive economy in the international market. China is currently the fastest growing economy in the world. China enjoys a high competitive edge over other economies due to the fact that the abundance of natural resources and cheap labor and energy resources enables China to keep its costs of production low and in turn, it is able to charge lower prices from the importers as compared to other competing economies. Over a period of time China had seen a rapid transition from primary sector of economy to the secondary sector with rapid industrial growth and phenomenal structural changes in the economy.

China is a major trading partner of Australia. A major proportion of Australian exports which include mainly primary resources along with some mineral resources and tertiary exports are consumed by the Chinese economy. In return, Australia imports value added industrial commodities from Australia. What poses a great concern for the Australian economy is the fact that the country exports primary resources, which are of lower monetary value as compared to the Chinese imports of industrial and value added goods and technology which is of higher monetary value. The ultimate effect of this kind of a trade on Australian balance of payment is that Australian economy ends up experiencing negative pressures on its balance of payment, particularly the current account. For this reason, it has now become important for Australia to devise a trade and foreign policy for Australian trade relations with China, such that it helps curtailing the current negative pressures on the Australian balance of payment.

The reason why Australia has to be more intelligent in devising a trade and foreign policy for China to suit its benefits is that China is an important trade partner of Australia. Any policy that would put Chinese interests at stake would directly mean that Australia will lose an important trading partner which would leave Australia in much more severe conditions. For this reason, Australia must rule out any pro-protectionism trade policies such as imposing tariffs, quotas or duties. This would not only provoke China to take similar actions in retaliation, but will also make Chinese goods expensive in Australia, thus impacting production costs of Australian industries that use Chinese raw materials.

In order to counter the problem Australia can follow the economic model of the likes of India and can import technology from China and should consider producing industrial goods on its own. Australia should also consider exploring newer markets for risk diversification. Given the edge that Australia enjoys in tertiary sector over China, it can increase tertiary sector ecports to China.

Outline

China's industry is rapidly growing and its cost efficiency is posing competitive threats to other international economies.

China is Australia's major trading partner consuming most of Australia's exports.

Australia exports mainly natural resources and primary products to China and imported high value added goods in return. This means a negative balance of payment for Australia.

Australia cannot afford to use protectionism-based trade policies for China as China will do the same in retaliation. Australia must therefore consider diversification in other market sectors.

Introduction

Ever since the concept of specialization was evolved in the field of economics, the concept of International Trade emerged as an important economic objective for any economy. In order to achieve its targets, any economy needs finances. Although, major sources of finance are the direct and indirect taxes, however, a very important economic tool for any country is its foreign exchange. The foreign exchange does not only earn income for the economy, but it also helps in appreciating the economy's foreign exchange of the economy in the international market.

A very important objective for any economy is to maintain a positive Balance of Payments. This means that the economy would want its exports to exceed its import bill. Exports exceeding the imports would mean that the country is selling more in international market and buying less from outside. This will result in more net inflows in the economy.

In order to maintain a positive balance of payments many countries introduced barriers on international trade. These barriers included import duties, tariffs and quotas, which were physical and monetary restriction on the imports. The main idea to impose trade barriers was to make foreign goods less affordable in the domestic market so that domestic markets could be protected. However, as globalization increased, the concept of Free Trade emerged and overshadowed the aims and objectives of trade barriers.

While all economies aim at maximizing exports and minimizing imports, many countries fail to do so despite of the fact that they have huge exports in terms of physical quantity. However, it is the monetary value that counts in the economic system and physical quantity is of little value. For example exporting large quantities of low priced goods in return of imports of small quantities of high priced commodities may result in the import bill exceeding the exports, which means a negative balance of payments. This problem is greatly faced by those countries whose major import commodities include oil. Free trade is more supported over protectionism policies because contemporary economists argue that free trade leads to increased specialization and competition. It is an established fact that competition would lead to more efficiency and better utilization of resources, therefore any inefficient businesses will automatically get out of the market (Lipsey & Chrystal, 1997).

There is no doubt in the fact that China is the current market leader in everything from a small thumb pin to an air conditioner or a motor vehicle. Chinese have been able to exploit the market very cleverly due to the fact that they are the cheapest. China has hit the major world producers like Finland and other mobile producers in the field of mobile technology due to the very cheap mobile phones being offered by Chinese companies such as Benq and China Mobile. The fact that China has been offering cheap products to its international customers is the fact that it has a large amount of cheap labor available which is not easily available in countries like Australia and other European countries.

The rising of the Chinese industry has simply lead to the decline of the other industries world-wide. In every market, the product says itself that china leads the world by the tag on it saying "Made in China." Even the Middle-east markets are flooded with Chinese products swapping out the quality consciousness and bringing in the cheap factor that leads consumers to make their choices on the basis of prices due to the fact that the difference is not slight but the price difference is too much. It is not only the Australian exports that have suffered due to Chinese products flooding the market but this is the story of nearly every country who have not been able to offer something very different from that which Chinese offer the world.

China has especially hit the western markets so badly that the Government of United States had to pressurize the Chinese Government to revalue their currency in line with their increased exports. The revaluation would have the effect of making the Chinese exports less cheaper in the international markets which would mean that goods from other countries would have a better chance to compete with the Chinese products.

Analysis of the International competition from China

The competition given by China to its competitors in the international markets has been great as China is now the world's third largest trader, the second largest exporter and on the other hand it has remained to be the major importer of fossils such as fuel and coal and of other raw materials. The rising of the Chinese industry and the rapid economic growth that China has experienced in the past few decades has made the governments of other countries a tough challenge towards the drafting of their foreign policy as they strive to survive the international competition from China, they make sure that their foreign policy terms with China are such that allows them to trade with them on the basis of mutual advantage rather… READ MORE

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