Impact of International Trade on Economic Growth: An Analytical Essay

Introduction

International trade plays a significant role in economic growth of a country and in current financial system both worldwide trade and economic growth are the most popular concepts. The term international trade is used to indicate the buying and selling of goods and services between countries for pleasing the needs of its population. International trade enables the countries to sell their domestically produced items and services to other countries. Economic growth helps to extend the actual per capital income of a population of the country which can be sustained over a long period of time. Equally essential are the roles of the regional and international specialization. Regional specialization means that a number of areas or areas in a country specialize themselves in the manufacturing of different products. International specialization means that different countries of the world specialize in producing different goods. Factors which decide regional specialization are more or less the same as those which determine worldwide specialization. A country which produces surplus of a good, produces more than its requirements, will export it to other countries in exchange for the surplus produces of those countries.

Objectives of the study

The objectives of the study are:

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• To determine the impact of international trade on economic growth in the world.
• To determine the relationship between international trade and economic growth.
• To determine the disadvantages of International Trade
• To determine the opportunity of international trade in Bangladesh.

The need of international trade?

International trade is needed so that all countries can avail themselves of the things that they need (and want), and that are not available in their own country. The most common example is oil, which is needed throughout the world, but it is limited to particular areas, and so is traded internationally.

International trade accounts for a huge part of a country's gross domestic product (GDP) and is a vital source of revenue for all countries, particularly those that are developing, though it is the nations that have the strongest international trade, and who have prospered by it, that have become the driving force behind world economy.

It is usually accepted that the benefits of international trade, and therefore, the reasons why it is needed are: It enhances domestic competiveness; it increases sales and profits; it takes advantage of international trade technology; it extends the sales potential of existing products; it maintains cost competiveness in the domestic market; it increases the potential for business expansion; it achieves a global market share; it reduces the dependency on markets that already exist; and it stabilizes seasonal market fluctuations.

The importance of international trade:

International trade between different countries is an important factor in raising living standards, providing employment and enabling consumers to enjoy a greater variety of goods. International trade has occurred since the earliest civilizations began trading, but in recent years’ international trade has become increasingly important with a larger share of GDP devoted to exports and imports.

World Bank stats show how world exports as a % of GDP have increased from 12% in 1960 to around 30% in 2015.With an increased importance of trade, there have also been growing concerns about the potential negative effects of trade – in particular, the unbalanced benefits with some losing out, despite overall net gains.

Importance of trade

1. Make use of abundant raw materials

Some countries are naturally abundant in raw materials – oil (Qatar), metals, fish (Iceland), Congo (diamonds) Butter (New Zealand). Without trade, these countries would not benefit from the natural endowments of raw materials.

2. Comparative advantage

The theory of comparative advantage states that countries should specialize in those goods where they have a relatively lower opportunity cost. Even if one country can produce two goods at a lower absolute cost – doesn’t mean they should produce everything. India, with lower labor costs, may have a comparative advantage in labor-intensive production (e.g. call centres, clothing manufacture). Therefore, it would be efficient for India to export these services and goods. While an economy like the UK may have a comparative advantage in education and video game production. Trade allows countries to specialize. More details on how comparative advantage can increase economic welfare. The theory of comparative advantage has limitations, but it explains at least some aspects of international trade.

3. Greater choice for consumers

New trade theory places less emphasis on comparative advantage and relative input costs. New trade theory states that in the real world, a driving factor behind the trade is giving consumers greater choice of differentiated products. We import BMW cars from Germany, not because they are the cheapest but because of the quality and brand image. Regarding music and film, trade enables the widest choice of music and film to appeal to different tastes. When the Beatles went on tour to the US in the 1960s, it was exporting British music – relative labor costs were unimportant. Perhaps the best example is with goods like clothing. Some clothing (e.g. value clothes from Primark – price is very important and they are likely to be imported from low-labor cost countries like Bangladesh. However, we also import fashion labels Gucci (Italy) Chanel (France). Here consumers are benefitting from choice, rather than the lowest price. Economists argue that international trade often fits the model of monopolistic competition. In this model, the important aspect is brand differentiation. For many goods, we want to buy goods with strong brands and reputations. e.g. popularity of Coca-Cola, Nike, Addidas, McDonalds etc.

4. Specialization and economies of scale – greater efficiency

Another aspect of new trade theory is that it doesn’t really matter what countries specialize in, the important thing is to pursue specialization and this enables companies to benefit from economies of scale which outweigh most other factors. Sometimes, countries may specialize in particular industries for no over-riding reason – it may just be a historical accident. But, that specialization enables improved efficiency. For high value-added products, multinationals often split the production process into a global production system. For example, Apple designs their computers in the US but contract the production to Asian factories. Trade enables a product to have multiple country sources. With car production, the productive process is often even more global with engines, tyres, design and marketing all potentially coming from different countries.

5. Service sector trade

Trade tends to conjure images of physical goods import bananas, export cars. But, increasingly the service sector economy means more trade is of invisibles – services, such as insurance, IT services and banking. Even in making this website, I sometimes outsource IT services to developers in other countries. It may be for jobs as small as $50. Furthermore, I may export a revision guide for £7.49 to countries all around the world. A global economy with modern communications enables many micro trades, which wouldn’t have been as possible in a pre-internet age.

6. Global growth and economic development

International trade has been an important factor in promoting economic growth. This growth has led to a reduction in absolute poverty levels – especially in south east Asia which has seen high rates of growth since the 1980s.

Role of international trade in economic development

International trade is now not a new idea among different countries. In the past, there had been a number of considerable cases of global trade. In 14th and fifteenth century traders used to transport silk and spices via silk route. In the 1700s fast cursing ships used to transport tea from China to different European countries. Foreign exchange also has a large effect on financial development.

The role of foreign trade can be judged by means of the following facts:

• Foreign trade and economic development

All the nations export a lot of agricultural product to different nations and import capital goods. Hence, it the economic development of united states especially relies upon of overseas trade.

• Foreign trade earning

Foreign trade provides overseas trade that is used to eliminate poverty and for different productive purposes.

• Market expansion

International trade plays a vital function in growing the production of any country. The overseas exchange is a great element in increasing the market and encouraging producers. In nations where the domestic market is restricted it is crucial to promote the product in other countries.

• Increase in investment

Foreign trade encourages the businessmen to extend the investment to produce extra goods. So the rate of funding increases.

• Foreign investment

Foreign trade gives incentives for the overseas investors, besides nearby investment, to make investments in these nations the place there is a lack of investment.

The importance of global trade on economic, political, and social conditions has been theorized in the Industrial Age also. It is vital for the boom of globalization

Is International Trade Good or Bad?

What is international trade?

International trade is the exchange of products and services throughout borders. Since the sunrise of civilization, humans have been concerned with trading. Earliest recognized trades were barter based, and after the invention of money, items would change hands in return for valuable metals or different types of capital. Export refers to sending products or services from your country to different countries, and the vendor is referred to as an exporter. Import, on the other hand, refers to a good or service that is added into your country from the backyard and the entity bringing the trade in is known as the importer.

Pros of international trade

1. International trade permits agencies to increase their commercial enterprise in unexplored markets and territories.
2. Gives a probability to groups and nations to earn and bring in overseas reserves.
3. It affords the energy of choice to the customer and will increase market opposition main to higher quality and lesser costs for the consumers.
4. It helps nations develop via focusing on producing goods and services for which they have assets (land, labor, capital or technology) domestically available. As an example, India emerged as a enormous exporter of Information Technology services over the previous couple of many years due to a massive resource pool of engineering graduates and English-speaking capability.
5. International trade additionally throws open the doors for Foreign direct investments, which means that you may want to make investments capital in a corporation primarily based in any other country.
6. It creates extra jobs domestically if you are exporting goods or services.
7. Being capable to ship your goods or services into different markets gives hazard mitigation to your business.

Cons of international trade

While international trade has its set of advantages, it really does come with an equal quantity of pitfalls some of which are listed below:

1. While free trade is right for developed nations, it might also not be so for growing nations that are flooded with cheaper good from different countries, consequently harming the local industry. Such imbalance leads to protectionism and trade restriction (tariffs, subsidies, and quotas)
2. People in some international locations lose jobs because jobs pass to areas the place the team of workers and the price of dwelling are low. A traditional example is IT and ITES (call centers) outsourcing.
3. If nations import greater than they export, it leads to a trade deficit which might also construct up over the years. The current escalating trade conflict between US, China, and different countries is the result of developing trade deficit and flooding of low cost good by China in the US (and different countries) over the last couple of decades.
4. International trade poses a political risk to nearby governments which might also have to face extended interference in home things leading to altering geopolitical landscape. Chinese effect and interference in Pakistan, Maldives, and many African nations reflect the pitfalls of such trading ties.
5. In current times there have been situations of information theft through unethical means main to security risks for many countries. Snooping is feasible with the aid of shipping gadgets (like mobile phones, tablets, and printers) with spy software. China is accused via many international locations of espionage.
6. Dumping of low-cost and out of date products (like old non-conforming vehicle models) has a dangerous effect on the environment of terrible recipient countries.
7. Credit risk unless properly managed can affect a company’s funds and future severely.

Problems arising from free trade

Given the importance of free trade to an economy, it is unsurprising that people are concerned about the potential negative impacts.

• Infant industry argument. The fear is that ‘free trade’ can cause countries to specialize in primary products – goods which have volatile prices and low-income elasticity of demand. To develop, economies may need to restrict imports and diversify the economy. This isn’t an argument against trade per se, but an awareness trade may need to be ‘managed’ rather than just rely on free markets. See more at Infant Industry Argument.
• Trade can lead to cultural homogenization. Some fear trade gives an advantage to multinational brands and this can negatively impact local produce and traditions. Supporters argue that if local products are good, they should be able to create a niche than global brands cannot.
• Displacement effects. Free trade can cause uncompetitive domestic industries to close down, leading to structural unemployment. The problem with free trade is that there are many winners, but the losers do not gain any compensation. However, free-market economists may counter that some degree of creative destruction is inevitable in an economy and we can’t turn back to a static closed economy. On the upside, if the uncompetitive firms close down, ultimately new jobs will be created in different industries.