These policies dictate the terms of trade between nations in the global markets. International trade policies are particularly of utmost concern to Less Developed Countries LDCs because they determine the terms on which such countries will participate in the global market.
Free trade policies, for instance, eliminate barriers to commodities produced and traded by the parties, thus opening up markets. A multinational trade agreement is arguably the best outcome of various trade negotiations involving major trading nations or territories. GATT was set up in by major countries such as the United States in the wake of the global wave of protectionism.
GATT significantly reduced tariff barriers among industrial countries particularly on manufactured goods. International trade and their consequential policies improve and facilitate international relations, trading, technology sharing, consumption and real income of countries involved. International trade represents a considerable share of GDP in most states as well as countries globally.
The behavior and motivation of countries or corporations involved in international trade do not change significantly compared to domestic trade. Nevertheless, international trade is arguably more costly relative to domestic trade due to the policies reinforced. The factors that contribute to the changes in the RCA of a country include economic factors, structural changes, improved world demand, and trade specialization.
The index for commodity j from country i is computed as. If the value of the index of revealed comparative advantage RCA ij is greater than unity i. As indicated in Table 2. On the other hand, India has an RCA in resource-based and low-technological industries, such as fresh food, leather products, minerals, textiles, basic manufacture, chemicals, and clothing.
This implies that countries specializing in medium- to high-technology products may explore opportunities of expanding bilateral trade with India and those in resource-based industries may stand to benefit substantially by an increase in demand of such products in China.
For example, Latin American countries mainly produce and export various commodities. The major producer of Latin America is copper, oil, soy, and coffee, as the region produces about 47 per cent of the world soybean crop, 40 per cent of copper, and 9. Thus, revealed comparative advantage may be employed as a useful tool to explain international trade patterns.
Some of the most important limitation of theories of specialization are as follows: Specialization in one commodity or product may not necessarily result in efficiency gains. The production and export of more than one product often have a synergistic effect on developing the overall efficiency levels. These theories assume that production takes place under full employment conditions and labour is the only resource used in the production process, which is not a valid assumption.
The division of gains is often unequal among the trading partners, which may alienate the partner perceiving or getting lower gains, who may forgo absolute gains to prevent relative losses. The original theories have been proposed on the basis of two countries-two commodities situation.
However, the same logic applies even when the theories experimented with multiple-commodities and multiple-countries situations. The logistics cost is overlooked in these theories, which may defy the proposed advantage of international trading.
The earlier theories of absolute and comparative advantage provided little insight into the of products in which a country can have an advantage. Heckscher and Bertil Ohhn developed a theory to explain the reasons for differences in relative commodity prices and competitive advantage between two nations. Thus, a country with an abundance of cheap labour would export labour-intensive products and import capital-intensive goods and vice versa. It suggests that the patterns of trade are determined by factor endowment rather than productivity.
A country would specialize in production of labour intensive goods if the labour is in abundance i. This is mainly due to the ability of a labour-abundant country to produce something more cost-efficiently as compared to a country where labour is scarcely available and therefore expensive. In countries where the capital is abundantly available and labour is relatively scarce therefore most costly , there would be a tendency to achieve competitiveness in the production of goods requiring large capital investments.
As the same product can be produced by adopting various methods or technologies of production, its cost competitiveness would have great variations. In order to minimize the cost of production and achieve cost competitiveness, one has to examine the optimum way of production in view of technological capabilities and constraints of a country. According to the factor endowment theory, a country with a relatively cheaper cost of labour would export labour-intensive products, while a country where the labour is scarce and capital is relatively abundant would export capital-intensive goods.
Wassily Leontief carried out an empirical test of the Heckscher-Ohlin Model in to find out whether or not the US, which has abundant capital resources, exports capital-intensive goods and imports labour-intensive goods. He found that the US exported more labour-intensive commodities and imported more capital-intensive products, which was contrary to the results of Heckscher-Ohlin Model of factor endowment.
As per the Heckscher-Ohlin theory of factor endowment, trade should take place among countries that have greater differences in their factor endowments. Therefore, developed countries having manufactured goods and developing countries producing primary products should be natural trade partners. A Swedish economist, Staffan B.
Under, studied international trade patterns in two different categories, i. It was found that in natural resource-based industries, the relative costs of production and factor endowments determined the trade. However, in the case of manufactured goods, costs were determined by the similarity in product demands across countries rather than by the relative production costs or factor endowments.
It has been observed that the majority of trade occurs between nations that have similar characteristics. The major trading partners of most developed countries are other developed industrialized countries. If two countries have similar demand patterns, then their consumers would demand the same goods with similar degrees of quality and sophistication. This phenomenon is also known as preference similarity. Such a similarity leads to enhanced trade between the two developed countries.
Since developed countries would have a comparative advantage in the manufacture of complex, technology-intensive luxury goods, they would find export markets in other high income countries. Since most products are developed on the demand patterns in the home market, other countries with similar demand patterns due to cultural or economic similarity would be their natural trade partners. Countries with the proximity of geographical locations would also have greater trade compared to the distant ones.
This can also be explained by various types of similarities, such as cultural and economic, besides the cost of transportation. The country similarity theory goes beyond cost comparisons. Therefore, it is also used in international marketing. Countries do not necessarily trade only to benefit from their differences but they also trade so as to increase their returns, which in turn enable them to benefit from specialization.
International trade enables a firm to increase its output due to its specialization by providing a much larger market those results in enhancing its efficiency. The theory helps explain the trade patterns when markets are not perfectly competitive or when the economies of scale are achieved by the production of specific products.
Decrease in the unit cost of a product resulting from large scale production is termed as economies of scale. Companies benefit by the economies of scale when the cost per unit of output depends upon their size. The larger the size, the higher are the economies of scale. Firms that enhance their internal economies of scale can decrease their price and monopolize the industry, creating imperfect market competition.
This in turn results in the lowering of market prices due to the imperfect market competition. Internal economies of scale may lead a firm to specialize in a narrow product line to produce the volume necessary to achieve cost benefits from scale economies. If the cost per unit of output depends upon the size of the industry, not upon the size of an individual firm, it is referred to as external economies of scale. This enables the industry in a country to produce at a lower rate when the industry size is large compared to the same industry in another country with a relatively smaller industry size.
Although no single firm needs to be large, a number of small firms in a country may create a competitive industry that other countries may find difficult to compete with. The automotive component industry o India and the semiconductor industry in Malaysia are illustrations of external economies of scale. The development of sector-specific industrial clusters, such as brassware in Moradabad, hosiery in Tirupur, carpets in Bhadoi, semi-precious stones in jaipur, and diamond polishing in Surat, may also be attributed to external economies.
The new trade theory brings in the concept of economies of scale to explicate the Leontief paradox. Such economies of scale may not be necessarily linked to the differences in factor endowment between the trading partners.
The higher economies of scale lead to increase in returns, enabling countries to specialize in the production of such goods and trade with countries with similar consumption patterns. Besides intra-industry trade, the theory also explains intra-firm trade between the MNEs and their subsidiaries, with a motive to take advantage of the scale economies and increase their returns.
International markets tend to follow a cyclical pattern due to a variety of factors over a period of time, which explains the shifting of markets as well as the location of production. The level of innovation and technology, resources, size of market, and competitive structure influence trade patterns. In addition, the gap in technology and preference and the ability of the customers in international markets also determine the stage of international product life cycle IPLC.
In case the innovating country has a large market size, as in case of the US, India, China, etc. This mass market also facilitates the producers based in these countries to achieve cost-efficiency, which enables them to become internationally competitive. However, in case the market size of a country is too small to achieve economies of scale from the domestic market, the companies from these countries can alternatively achieve economies of scale by setting up their marketing and production facilities in other cost-effective countries.
Thus, it is the economies of scope that assists in achieving the economies of scale by expanding into international markets. The theory explains the variations and reasons for change in production and consumption patterns among various markets over a time period, as depicted in Fig. Since, in the initial stages, the price of a new product is relatively higher, buying the product is only within the means and capabilities of customers in high-income countries.
Therefore, a firm finds a market for new products in other developed or high income countries in the initial stages. The demand in the international markets exhibits an increasing trend and the innovating firm gets better opportunities for exports.
Moreover, as the market begins to develop in other developed countries, the innovating firm faces increased international competition in the target market. In order to defend its position in international markets, the firm establishes its production locations in other developed or high income countries. It is noteworthy that the ten leading exporters comprise the same countries as the group of the top ten leading importers, although the annual variation of trade differed markedly between the leading traders.
This can be carried out for the trade with all the countries in the world collectively or individually, with a group of countries, or a particular country.
There has been a significant shift in the composition of world merchandise exports over the last four decades, as shown in Fig. Food exports that accounted for Agricultural raw material that constituted 78 per cent of world merchandise export in declined to 1. The share of ores, metals, and precious stones in world merchandise exports declined from 12 per cent in to 5. Manufactured goods have shown a gradual rise from During recent years, weak and stagnating prices of food, agricultural raw materials, and manufactured goods contrasted with a further steep rise in prices for metals and fuels.
The share of fuels increased to On the other hand, the share of food and agricultural raw materials in the world merchandise exports decreased to a historic record low of 8 per cent in Although recent oil price developments played a major role in the further relative decline of agricultural products in world merchandise exports, they only accentuated an existing long-term downward trend. The share of agricultural products in the world merchandise exports has decreased steadily over the last six years from more than 40 per cent in the early s to 10 per cent in the late s, as both volume and price trends have been less favourable than for other merchandise products.
Despite the decline in the share of agricultural products in world exports, the export value of agricultural products in world trade has increased thirty-folds between and During the s, the export value of electronic goods rose an average by 12 per cent or two times faster than all other manufactured goods.
Among the manufactured goods, it is estimated that the largest value increases during recent years were for iron and steel products, as well for chemicals. Although, there was a recovery in the global demand for computers and other electronic products, the growth rate of their trade value was less than that of manufactured goods.
The growth in share of manufactures in total exports has a significant impact on the overall export. The gradual shift towards manufacturing has led to rapid export growth where the share of manufactured exports was already large.
Developing countries derived 70 per cent of the merchandise export revenue from the sales of primary commodities—agriculture and energy—two decades ago, whereas presently 80 per cent of the revenue comes from the export of manufactured goods.
Trade is the process of purchasing and procuring of goods and services with the object of selling them at a profit. Trade means buying and selling of goods. It involves the exchange of commodities.
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