International Business

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INTERNATIONAL BUSINESS

International Business

International Business

Free trade theories are often seen as the solution for improving a country's economy by trading with the rest of the world; however most countries still retain some protectionism for selected industries.

Introduction

World trading patterns have developed has not benefited certain developing countries that have specialized in a narrow range of commodities for which world demand has grown slowly.

A country's international trade dealings affect its balance of payments, insofar as exports earn foreign exchange while imports require financing in terms of foreign exchange. The foreign exchange market acts as a conduit for the purchase and sale of foreign currency used to finance trade. A country's international trade performance will affect the value of its domestic currency when traded against other countries' currencies, that is, its exchange rate.

Discussing the relevant trade theories supporting the first sentence and then critically evaluate why some countries still opt for protectionism to achieve their economic rationales

The idea of free trade was popularized by the classic liberal economist David Ricardo in his Theory of Comparative Advantage. Ricardo argued that the wealth of all nations would be greater if each country specialized in creating the goods and services it produced most cheaply and effectively and then traded those products for products that it did not make as efficiently. These ideas stand in sharp contrast to the mercantilist and imperialist policies that governed trade for most Western countries in Ricardo's lifetime (1772-1823).

The idea of free trade has been at the base of much of America's trade policy, especially since the close of the nineteenth century. Secretary of State John Hay's Open Door notes of 1899 were an early articulation of the American vision of free trade. Hay called for all powers with spheres of influence in China to relinquish their special trading privileges and allow the commerce of all countries to trade on terms equal to those of the power controlling the sphere. Although Hay's idea was rejected at the time, achieving a system in which no nation's trade was discriminated against became a cornerstone of American policy.

Since the 1934 passage of the Reciprocal Trade Agreements Act, which permitted President Franklin D. Roosevelt to reduce tariff rates by up to 50 percent, free trade has been the more or less dominant trend in American trade policy, although occasionally individual industries have been able to secure protectionist relief. Roosevelt's reciprocal trade program sought to bring about free trade through bilateral agreements to remove trade barriers between the United States and other countries. After World War II, the United States extended these agreements with a new approach to trade negotiations embodied in the 1947 General Agreement on Tariffs and Trade (GATT). Countries were invited to participate in rounds of multilateral negotiations to create tariff schedules and mutually-agreed-on trading rules. Most-favoured-nation clauses ensured that all participating countries received the benefits of trade concessions given by any other member, allowing for a fairly comprehensive, but often slow, lowering of trade ...
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