International Trade. Reasons for Protectionism. Methods of Controlling International Trade

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Economist Kenneth Boulding uses the term ‘cowboy capitalism’ to describe the situation when people abuse their environment with impunity. The cowboy capitalist cannot operate successfully without a vast world of untapped markets. Another term to describe our world is called ‘global village’ which assumes that all people are interdependent. Resources are limited, that’s why it’s vital to use them rationally. This new awareness must accompany the learning of world trade concepts. International trade demands a place in the education of all business people who mean to survive in the global market.

Forms of International Business

International trade An exchange of goods, results of intellectual labour, services and work force on the international level. International trade is the most ancient and important form of the world business. At the heart of international trade lies the tendency of the world economy to use the results of the international division of labour most efficiently. This leads to specialisation of countries in the production of a particular good. So, the main reason for people and nations to trade is the benefit derived from specialisation. Another one is the difference in technology. Technology refers to the techniques used to turn resources (labour, capital, land) into


International production Cooperation Production relations for joint activities in terms of international labourdivision. Joint ventures and multinationals are the examples of thisform. Nowadays employing foreign assets is widely spread: selling andpurchasing patents and licences, employing foreign technologies,trademarks and brands, franchising, transfer of know-how, etc.

International services Economic goods which do not take a tangible and storable form but bring benefit to the consumer. They include consulting, transport, insurance, scientific and technical, tourist and other services.

International finance and credit relations World business related to the operations with money and securities.

International investments The activity based on international capital transfer from one country to another aiming at profit gaining and social effect. There are direct investments acquiring the right of ownership and portfolio investments.

      International trade arises simply because countries differ in their demand for goods and in their ability to produce them. On the demand side, a country may be able to produce a particular good but not in the quantity it requires. On the supply side, resources are not distributed throughout the world. One country may have an abundance of land; another may have a skilled labour force. Because factors are difficult to shift, countries specialise in producing those goods in which they have the greatest comparative advantage, exchanging them for the goods of other countries.

International trade has the following advantages.

1) It enables countries to obtain the benefits of specialisation. Specialisation by countries improves their standard of living. It is obvious that without international trade many countries would have to do without certain products. More important, many goods can be enjoyed which if produced at home would be available only to the very wealthy.

2) By expanding the market, international trade enables the benefits of large-scale production to be obtained. Many products, e.g. computers, pharmaceuticals, aircraft and cars, are produced under conditions of decreasing cost. Small countries such as Switzerland have little market capacity. By means of international trade it gets access to new outlets.

3) International trade increases competition, which prevents monopolies, and thereby promotes efficiency in production.

4) International trade promotes beneficial political links between countries (EU).

      International trade transactions are exposed in the balance of payments. It is the net result of all transactions, including trade in goods, between one country and all others. A table of the balance of payments shows amounts received from foreign countries and amounts spent abroad. If receipts exceed spending, a country has a balance surplus. On the contrary, if spending exceeds receipts, a country has an adverse balance. The balance of payments account is divided into the current account, the capital account and the official foreign exchange reserves. The current account records payments for immediate transactions, such as the sale of goods and rendering of services. Consequently, it is subdivided into the visible account (often called the trade account or balance of trade), comprising the movement of goods; and invisible account, comprising the movement of services, transfers and investment income.

Capital account is the second part of a balance of payments composed of movements of capital and international loans and grants; a record of international exchanges of assets and liabilities.  This account is normally subdivided into long-term and short-term  investments. Long-term capital is again subdivided into foreign direct investment (FDI) for the establishment of commercial premises and industrial plant; and portfolio investment for the purchase of bonds and shares. The third element in the balance of payments is changes in official foreign exchange reserves. Such reserves are liquid assets held by a country’s government or central bank for the purpose of intervening in the foreign exchange market.

In the case of specialisation and trade between countries there are two important economic principles, the benefits of the division of labour and the principle of comparative advantage.

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