Impact of International Trade from Nation to Nation

International Trade from Nation to Nation

Introduction

International trade is the exchange of goods and services across borders. However, the boundaries between trade and investment have become increasingly blurred. Many services can only be delivered across borders through a foreign commercial presence, implying foreign direct investment. An increasing share of world trade also takes place within multinational firms or through international production networks in which multinationals play a central role. World trade is dominated by more economically developed countries (MEDCs), who have a much larger share than less economically developed countries (LEDCs) (Marrewijk, 2002). Newly industrialized countries (NICs), those countries on the Pacific Rim that have invested heavily in exporting cheap manufactured goods, are serious competition for many traditional MEDC industries. To state in simplified terms a complicated world-trade pattern, LEDCs export mainly raw materials from their primary industries, while MEDCs and NICs process these raw materials into manufactured goods. These manufactured goods are then sold both domestically (within the country) and abroad.

Discussion

Impact of Trade Liberalization

Trade liberalization refers to the opening up of markets to foreign imports and entails the abolishment or reduction by governments of tariff and no tariff barriers (quotas, standards, etc.) that limit trade in goods or services across countries. Governments can liberalize trade unilaterally or on a reciprocal basis in negotiations with other countries and can apply any cuts in a preferential or a no preferential manner (Romalis, 2004). Preferential liberalization removes barriers to imports only from selected countries and can lead to the establishment of free trade areas and customs unions, whereas nonpreferential liberalization applies to all countries that are covered by a most favored nation clause. The modern international trading system built around the World Trade Organization is based on the nonpreferential liberalization of trade and thus limits member countries' discretion to liberalize trade preferentially (Romalis, 2004).

A country that abolishes all its trade barriers engages in free trade. Whatever the causes of trade liberalization, a step toward free trade is likely to have consequences for the distribution of wealth in a country and the political organization of that country. With respect to the distribution of wealth, trade liberalization produces winners and losers in a society. Unless a government redistributes income, this will lead to greater inequality an effect that is confirmed by a series of empirical studies (Krugman, Obstfeld, 2005). What is more, some authors have suggested that free trade will undermine a country's capacity to redistribute income, since an open trading system makes it easier for companies to relocate to countries with lower taxes and less welfare spending. The evidence concerning this expectation, however, is at best mixed.

Trade liberalization may also have an impact on the political organization of countries, especially if an initial move toward freer trade makes them dependent on continued openness. A country that becomes dependent on relatively free trade may require changes in the political structure that lock in liberal policies. This may be achieved, for example, by adopting corporatist practices, with strong domestic ...