International Trade Theory and Policy Essay Example for Free

International Trade Theory and Policy Essay Multilateral trade negotiations forums are organizations established to regulate trade between many countries of the world. The agreement involves establishing organizations which regulate trade in the entire world. The increase in globalization has forced many countries to form regulatory organizations to avoid bad trade practices. To enhance trade many countries have created trade agreements to remove barriers to trade. Economic integration is the most important aspect discussed by the trade agreement organizations. The organizations aim at achieving an integrated economy where countries can trade with each other. After the World War II many leaders of the world felt that the economies of the destroyed countries could only be improved through trade. One of the proposals to improve trade was to create a laissez-faire global economy but this was rejected since it was not applicable. The leaders agreed to establish global trade organizations which would enhance trade by reducing the barriers to trade which had been placed by the countries. During the war many countries created strict barriers to trade to protect their economies from external influence (Anderson, 2005). The General Agreement on Trade and Tariffs was the first agreement to be established. The agreement was established to enhance trade between the member countries but was later converted into World Trade Organization (WTO). The International Monetary Fund was also created to regulate the economic status of the developing nations as well as regulate international economic activities (Smith, Sumner Rosson, n. d. ). Reconstruction of the damaged economies after the World War II was the priority of these organizations. For many years several amendments have been made to accommodate the changing economic climate. Trade liberalization has been the most important aspect during the amendments. For example, according to Anderson. (2005, pg. 414), the Uruguay Round of multilateral trade negotiations led to agreements signed in 1994 that contributed to trade liberalization over the subsequent 10 years. † Despite the many advantages accompanied by the establishment of the international trade organizations, there have been several disadvantages accompanied by the activities of opening up of domestic markets to international trade. An example is the global economic recession of the 2007-2009 that was experienced by the world economies after the banking industry and the mortgage industry collapsed due to poor financial practices by the U. S. banks. Importance of multilateral trade institutions The multilateral trade organizations were created to enhance trade and stability of the economies of the member countries. Initially they were established to reconstruct the economies which had been destroyed during the World War II. Many countries realized the importance of trade in improving the economies after the war. Trade was the only tool that could restore the original status of the economies. Before and during the war many countries had put a lot of trade barriers to prevent trade with other countries. Opening up domestic economies required negotiations with all countries of the world to enhance a more open economic system (Warnke, 1996). Multilateral trade institutions improve international trade since they encourage member countries to open up their domestic markets to international trade. Trade disputes are resolved more easily between and among conflicting countries, hence leading to a good relationship between countries. Production according to comparative advantage has been encouraged by the improvement in international trade. Countries are encouraged to produce goods which they can produce most economically. Different countries have different resources which give them the potential to create income generating products. Through international trade resources are utilized optimally since an economy will specialize in the production of products which it has greater advantages (Bernard et al. 2007). International trade has encouraged countries to specialize in the production of goods and services. The mobility of factors of production has been accelerated by globalization. More industries are encouraging division of labor to increase the productivity of labor factors of production. More industries have developed with the expansion of international trade. These industries create more employment opportunities to the citizens of a country. As the par capita income of the people increases their living standards is improved. Poverty alleviation campaigns have encouraged improved international trade as one of the strategies to enhance development of nations (Bernard et al. 2007). Opening up the domestic market to international trade creates more advantages than disadvantages. The international prices are lower than the domestic prices. The consumers obtain goods and services at lower prices. The competition created by the international trade encourages the domestic firms to be efficient in their production systems. The customers are provided with a wide variety of products to select from (Bernard et al. 2007). Multilateral trade organizations control the globalization of economies. Globalization refers to the international operation of business activities and the transfer of information between countries. Globalization has affected business activities both positively and negatively. Global markets have emerged and many companies are operating in several countries. This has created competitiveness of the companies since the global markets are larger than regional markets. Globalization is the process of integrating the global economies, societies and cultures by connecting communication and trade networks. Economic globalization refers to the integration of global economies by enhancing trade, foreign direct investment, sharing of technology, movement of people and flow of capital. The factors which influence the rate of globalization are the world economies, technology, and socio-cultural, political and biological aspects (Warnke, 1996). Globalization has improved the exchange of technologies and knowledge. This has increased the capacity of businesses to expand on the number of innovative products in the market. The public sector alone cannot accommodate all the skilled labor in a country and trade provides more employment opportunities for the people in a nation. As economies become more global people with skills can move to countries where there is high market potential for their labor. The introduction of internet has increased efficiency in trade by enabling people transfer information more easily. Trade attracts private investment and this generates more capital in the economy. The gross domestic product of a country increases with increase in trade. Growth and development of an economic is accelerated by trade since more income is generated and the living standards of the people are improved (Daniels, Radebaugh Sullivan, 2007). Poverty levels in both developing and developed countries have declined by greater margins due to participation of countries in the international trade. Economies have acquired more wealth and the gross domestic product of countries has improved. WTO has become the custodian of international law on trade. The enforcement of trade laws about good trade practices has been possible after the creation of WTO. The establishment of regional and multilateral trade agreements was experienced after WTO was created. This has encouraged many countries remove barriers to trade (World Trade Organization 2010). Weaknesses of multilateral trade institutions Most of the multilateral trade organizations are affected by the political climate in the member countries. Any political war between the member countries can ruin the operation of the organizations. When the organizations support some political organizations; they affect the interests of the members and this reduces the delivery of the required obligations. Politically strong countries have dominated the operations of the multilateral organizations and this is causing a lot of concern to the global trade communities. Decision making at the trade organizations has become very difficult since many participants are not willing to accept rules which affect their economies negatively. Anderson (2005, pg. 417) suggests that although trade can and should play an important role in allowing developing countries to lift themselves out of poverty, in reality international trade agreements and institutions have more often than not contributed to the continuation of global social and economic injustice. The developed nations have dominated the multilateral trade organizations. For example, according to Anderson (2005, pg. 31) with decision-making based on a consensus system, so each member has equal decision-making power, the WTO is held to be the most democratic of all the international institutions with a global mandate. In practice, however, the working methods of the WTO lack transparency, inclusiveness and equity. There have been conflicts as the developing nations are becoming concerned about the great influence the developed nations have on the decisions in these organizations. Multilateral trade agreements are complicated to establish since many countries are involved. The interests of each country should be represented during the negotiations to ensure that conflicts do not arise afterwards (Amadeo, 2010). Despite the establishment of the trade organizations many countries continue to place more trade discrimination measures upon other countries. They include not just trade taxes-cum-subsidies but also contingent protection measures such as anti-dumping, regulatory standards that can be technical barriers to trade, and domestic production subsidies Anderson (2005, pg. 415). Many trade distortions have occurred since the global economies were established. Multilateral trade organizations have encouraged the opening up of economies to international market influence. The opening up of domestic markets has affected the global economies. Several disadvantages have been accompanied by the opening up of the domestic markets, for example, the global economic meltdown of the 2007-2008. The crisis started with the rise in prices for basic products due to the international increase in fuel prices. The prices of oil and food products increased within a short duration leading to an economic crisis which affected many people in US. The prices for many products increased and inflation was experienced all over the country. Many subprime borrowers had low incomes and the rise in prices for basic products increased the expenses for their living. Many companies retrenched employees to accommodate the increasing production costs. The borrowers were unable to repay the loans resulting to massive defaults. More than 100 subprime mortgage intermediaries filed for bankruptcy. Reacquisition of the houses from the defaulters caused a lot of people to become homeless (Platt, 2008). Subprime mortgages are policies which have a high risk of default. Subprime borrowers are the people with low incomes and have a poor credit history. They have higher risk of default compared to the prime borrowers. The US government had deregulated the real estate mortgages leading to massive investment in subprime mortgages. This caused the risky lending of subprime mortgages. The subprime mortgages were not popular initially but they became widely used in the 1990s. The climax of the sub prime mortgages was in 2006 when they accounted for more than 21 percent of all mortgages traded in the US market. The value of subprime mortgages in 2006 was valued at $600 billion. Many subprime mortgage intermediaries were established to reap the benefits of the expanding industry (Helleiner, 2009). The world economies have experienced a major decline due to poor performance of many industries. This is a crisis which has affected all sectors of the economy. Williams (2009) claims that the crisis was initiated by the subprime mortgage lending crisis in US. The banking sector issued many loans to subprime mortgage intermediaries. Due to the expanding market in the sub prime mortgage market many banks issued unsecured loans to the intermediaries. The climax of the boom was reached in 2007 when the prices of products started to increase and many subprime mortgage lenders were unable to repay their loans. This led to massive default of debts and banks registered huge losses. This reduced the lending capacity of many banks. The resulting effect was lack of credit in the economy and the collapse of many companies (Stapledon, 2009). The government of US is to be blame for the crisis. The 102nd Congress under the leadership of George W. Bush deregulated the housing sector in 1992 (Guttmann, 1994). The main aim was to increase the availability of money for buying housing. Fannie Mae and Freddie Mac companies were deregulated and could spend $97. 50 to buy housing loans. Banks with $100 could spend more than $90 buying mortgage loans. The companies had been ordered by the congress to retain more capital to for risk allowance but this was not practiced. Since 1992 the mortgage sector experienced the highest boom with many companies investing heavily in the sector. Subprime mortgage intermediary companies were developed to assist homeowners acquire loans from the banks (Stapledon, 2009). The banking sector was the worse hit by the crisis. Inter-bank lending declined and banks had no money to issue to their customers. Most of the banks collapsed while others registered huge losses. This was as a result of failure by many subprime mortgage intermediaries which defaulted the huge loans they had acquired from the banks. The central bank could not lead to all the banks due to the massive crisis that affected the entire country. Since US is a market for many commodities from other countries there was an extension of the crisis to other economies causing a global economic meltdown. Many economies declined since they had no market for their goods. Inflation increased as prices persistently increased. The entire world encountered economic crisis which resulted into failure by all sectors of the economy in the world (Stapledon, 2009). Many international organizations have intervened to eradicate the problem. The intervention by the World Bank has created better results in the efforts to reduce the impacts of the crisis. World Bank has issued loans to many countries to increase the income levels of the people. Many companies have been able to access loans due to the fun ding by World Bank. The availability of loans has increased since last year and many companies have regained their capacity (Bayne, 2008). The World Trade Organization has negotiated with the oil producing countries to reduce the oil prices as one of the measures to reduce the effects of the crisis. The global oil prices increased causing the prices of many products to rise. The high product prices caused inflation in the whole world. WTO has also encouraged trade by persuading some countries remove the trade barriers they had placed upon their trade partners when the crisis was at the climax (Stephen, T. 2008).