Globalization and International Economic Relations | Economy Watch
International trade and cross-border investment flows are the main elements of this . are not enforced, business relationships fail, foreign investors flee, and. Why analyze the benefits and costs of international trade? Image of a Globalization is the process by which the world, previously isolated through physical and. Globalization has a major impact on the economic scenario of individual countries and the global economy as well. International economic relations have .
Globalization and International Trade | The Geography of Transport Systems
The Flows of Globalization In a global economy, no nation is self-sufficient, which is associated with specific flows of goods, people and information. Each nation is involved at different levels in trade to sell what it produces, to acquire what it lacks and also to produce more efficiently in some economic sectors than its trade partners. It now plays an even more active part in the economic life of nations and regions, but trade should be taking place only if there is a benefit for the partners involved.
Trade can be a convenience, but also a necessity. It is a convenience, as supported by conventional economic theorywhen trade promotes economic efficiency by providing a wider variety of goods, often at lower costs, notably because of specialization, economies of scale and the related comparative advantages.
It is a necessity when trade enables to acquire goods that would otherwise not be available in a national economy such as energy, minerals or food. However, the benefits of trade can be subject to contention with several theoretical foundations of international trade articulated to provide an explanation of its rationale: A trade system where a nation tried to impose a positive trade balance more exports than imports, particularly value-wise on other nations to favor the accumulation of wealth.
This system was prevalent during the colonial era and often undertaken by charter companies receiving a monopoly on trade. Mercantilism represents the antithesis of free trade since trade relations are controlled and aligned to benefit one partner at the expense of the other.
Still, mercantilism established the foundations of a global trading system, albeit an unequal one. A more recent trade system, which like mercantilism leans on establishing a positive trade balance to meet economic development goals.
Export-oriented strategies can be considered a form of neomercantilism, particularly if a government establish an incentive and subsidy system e. Neomercantilism can also be a response by some governments to the competitive and disruptive consequences of free trade, particularly if the trade partners are engaged in neomercantilist strategies.
The outcome is tariff and non-tariff measures regulating trade and protecting national commercial sectors that are perceived to be subject to unfair competition. Therefore, neomercantilist strategies can be controversial and subject to contention. Based on a nation or a firm able to produce more effectively in an economic sector while using less resources e.
It therefore has an absolute advantage. Global efficiency can thus be improved with trade as a nation can focus on its absolute advantages, trade its surplus and import what it lacks. The drawback of this perspective is that in theory nations having no absolute advantages should not be involved in trade since they may have little to gain from it. Absolute advantages tend to be an enduring characteristic, particularly for resources where large producers keep an advantage as long as a resource is available or has a market.
Even if a nation or a firm has absolute advantages over a wide array of economic sectors, it can focus on the sectors it has the highest comparative advantages the difference of its production costs and those of its competitors and import goods in sectors it has less comparative advantages. The comparative productivity increases the total production level since that even if a nation or a firm has no absolute advantages, it can focus on sectors where the total productivity gains are the most significant.
A comparative advantage can also be the outcome of economies of scale applied to a product or sector where the resulting lower costs provides competitiveness.
Comparative advantages tend to be a temporary characteristic, that can change with the evolution of labor costs and technology.
Expands the comparative advantages perspective by underlining that trade is related to the factors endowments of a nation. The most basic endowments are capital, land and labor. A nation will export goods to which it has notable factor endowments and imports goods in which it has scarce factor endowments.
As such, nations that have low cost labor available will focus in labor intensive activities while nations having high capital endowments will focus in capital intensive activities. Factor endowments can be improved through capital and human resources investments. This process has been facilitated by significant technical changes in the transport sector.
It has become increasingly possible to trade between parts of the world that previously had limited access to international transportation systems. Further, the division and the fragmentation of production that went along with these processes also expanded trade. Trade thus contributes to lower manufacturing costs. Without international trade, few nations could maintain an adequate standard of living, particularly those of smaller size. With only domestic resources being available, each country could only produce a limited number of products and shortages would be prevalent.
Global trade allows for an enormous variety of resources — from Persian Gulf oil, Brazilian coffee to Chinese labor — to be made more widely accessible.
It also facilitates the distribution of a wide range of manufactured goods that are produced in different parts of the world to global markets. Wealth becomes increasingly derived through the regional specialization of economic activities.
This way, production costs are lowered, productivity rises and surpluses are generated, which can be transferred or traded for commodities that would be too expensive to produce domestically or would simply not be available.
As a result, international trade decreases the overall costs of production worldwide. Consumers can buy more goods from the wages they earn, and standards of living should, in theory, increase. These interdependencies imply numerous relationships where flows of capital, goods, raw materials, people and services are established between regions of the world.
International trade is also subject to much contention since it can at time be a disruptive economic and social force as it changes the conditions in which wealth is distributed within a national economy, particularly due to changes in prices and wages. One particular challenge concerns the substitution of labor and capital. While in a simple economy labor and capital infrastructures can be reconverted to other uses, in complex economies labor and capital cannot be easily reallocated.
Therefore, trade can at the same time lead to more goods being available at a lower price, but with enduring unemployment and decaying infrastructures unused factories and connectors.
Globalization and International Trade
In turn, this can incite economies to adopt protectionist policies since this transition is judged to be too disruptive. The Setting of the Contemporary Global Trade System International trade, both in terms of value and tonnage, has been a growing trend in the global economy. It is important to underline when looking at the structure of global trade that it is not nations that are trading, but mostly corporations with the end products consumed in majority by individuals.
The nation is simply a regulatory unit where data is collected since freight movements crossing boundaries are subject to customs oversight and tabulated as trade flows. Inter and intra corporate trade is taking place across national jurisdictions is accounted as international trade.
The emergence of the current structure of global trade can mainly be articulated within three major phases: First phase immobile factors of production. Concerns a conventional perspective on international trade that prevailed until the s where factors of production were much less mobile.
Prior to the end of World War I, global trade was mainly structured by colonial relations, but was fairly unregulated. There was a limited level of mobility of raw materials, parts and finished products.
After World War I international trade became fairly regulated with impediments such tariffs, quotas and limitations to foreign ownership. Trade mainly concerned a range of specific products, namely commodities and very few services that were not readily available in regional economies.
Due to regulations, protectionism and fairly high transportation costs, trade remained limited and delayed by inefficient freight distribution. In this context, trade was more an exercise to cope with scarcity than to promote economic efficiency. Second phase mobility of factors of production. From the s, the mobility of factors of production, particularly capital, became possible. The legal and physical environment in which international trade was taking place lead to a better realization of the comparative advantages of specific locations.
In addition, containerization provided the capabilities to support more complex and long distance trade flows, as did the growing air traffic.
Due to high production legacy costs in old industrial regions, activities that were labor intensive were gradually relocated to lower costs locations.
The process began as a national one, then went to nearby countries when possible and afterwards became a truly global phenomenon. Thus, foreign direct investments surged, particularly towards new manufacturing regions as multinational corporations became increasingly flexible in the global positioning of their assets. Third phase global production networks. There is a growth in international trade, now including a wide variety of services that were previously fixed to regional markets and a surge in the mobility of the factors of production.
Since these trends are well established, the priority is now shifting to the geographical and functional integration of production, distribution and consumption with the emergence of global production networks. Complex networks involving flows of information, commodities, parts and finished goods have been set, which in turn demands a high level of command of logistics and freight distribution.
In such an environment, powerful actors have emerged which are not directly involved in the function of production and retailing, but mainly taking the responsibility of managing the web of flows. International trade requires a full array of services related to distribution and transactions. The volume of exchanged goods and services between nations is taking a growing share of the generation of wealth, mainly by offering economic growth opportunities in new regions and by reducing the costs of a wide array of manufacturing goods.
Trade Costs and Facilitation The facilitation of trade involves how the procedures regulating the international movements of goods can be improved so that actors involved in international trade have move efficient formalities. For regulatory authorities, trade facilitation improves their effectiveness as well as reducing the risk of custom duty evasion.
It depends on the reduction of the general costs of trade, which considers transaction, tariff, transport and time costs. These trade costs are derived from two main sources: These are usually exogenous factors separating two trade partners such as distance, transportation costs, travel time, as well as common attributes shared by trade partners. These usually involves being part of an economic agreement e. Relates endogenous to factors that are either related to the origin or the destination of trade.
This usually involves customs procedures tariffs and non-tariffsthe overall performance of the national transport and logistic sector and how well an economy is connected to the international transport system through its gateways mostly ports and airports. Thus, the ability to compete in a global economy is dependent on the transport system as well as a trade facilitation framework: A multimodal and intermodal freight transport system composed of modes, infrastructures and terminals that spans across the globe.
For economic relations between nations to be successful, a number of conditions need to be fulfilled. Unrestricted movement of goods and services, flow of capital, mobility of workforce, and reduction of regulatory obstacles need to be ensured for successful economic relations. Globalization has played an important role in fostering economic relations among nations across the world. In the era of globalization, countries have realized that economic co-operation with other nations is strategically important for the growth of the economy.
The important aspects of globalization and international economic relations are - Globalization ensures easier movement of goods and services across nations. This is an absolute necessity for fostering international economic relations. Easier movement of people between countries has also been made possible by globalization which is conductive to international economic relations.
This also helps people in one country to migrate to another for employment thereby addressing the problem of unemployment in many countries. Globalization leads to free trade between countries. Since the early days of globalization numerous bilateral trade agreements have been signed between countries. Globalization has ensured easier and faster flow of information across geographical boundaries.