15 Pages, Grade: 1,0
HISTORY OF INTERNATIONAL TRADE
TRADE BARRIERS IN THE TRIAD
EFFECTS ON DEVELOPING COUNTRIES
EFFECTS ON TRIAD MEMBERS
ENVIRONMENTAL AND ETHICAL ASPECTS
EVALUATION AND CONCLUSION
Trade barriers are closely linked to, if not a direct consequence of, the practice of international trade. Thus, in order to present the context in which this paper will argue, it will start by introducing international trade as a branch of economics, briefly outline its history and contrast a number of common economic theories. Some of these advocate free multilateral trade as a means to generate greater welfare for all participants whereas others see trade barriers as a necessity. The historical and theoretical overview will lead to the description of today’s status quo in international trade relations. Building upon the illustration of the triad’s role in contemporary international business the study will turn towards the discussion of the implications of trade barriers in the triad communities and examine if their reduction would be beneficial or unfavourable. Thereto trade barriers in the three economic blocs of the triad and their rationale will be presented first. The study will then proceed by highlighting the effects of these trade barriers on developing countries, on the applying countries themselves and on other members of the triad. In doing so the study will contrast the trade barriers’ potential benefits with the costs they might inhere. Finally the study will discuss environmental as well as ethical aspects of the trade barriers.
Evaluating and concluding on the trade barriers’ implications the study will emphasise the overweighing benefits of a drastic reduction of trade barriers in the triad nations and evaluate the likeliness of such a trade liberalisation.
According to Rugman and Hodgetts (2003), international trade is “the branch of economics concerned with the exchange of goods and services with foreign countries”. Being established many thousand years before Christ, trade attained significant international importance with the rise of the Mercantilism theory in the 18th century. This trade theory suggests that a country can “improve [its] economic well-being […] by encouraging exports and stifling imports” (Rugman and Hodgetts, 2003). However, in 1776, Adam Smith criticised this at that time very popular theory in his paper An Inquiry into the Nature and Causes of the Wealth of Nations (Wikipedia, 2005). He argued that economic specialisation would benefit countries by providing greater efficiency and greater productivity. Smith advocated free trade as a means to enhance efficiency and thus maximise economic welfare. This has become known as the theory of absolute advantage (Rugman and Hodgetts, 2003).
In 1817 David Ricardo, James Mill and Robert Torrens developed the theory of comparative advantage as an extension of Smith’s theory (Wikipedia, 2005). Their trade theory proposes that nations can also benefit if countries produce “those goods for which they have the greatest relative advantage” (Rugman and Hodgetts, 2003). Even if one country is able to produce all goods more efficiently than another country, both countries benefit if the inefficient nation sells the good it produces best to the more efficient nation (Wikipedia, 2005).
When John Stuart Mill put his arguments forth that the application of tariffs might be beneficiary for a country in terms of reciprocity in trade policy in 1844, he stayed in line with the economists’ tradition of argumentation based on national advantage. However, he questioned the thitherto belief of free trade to be the superior international trade policy for a country’s benefit. He extended his claim for trade barriers in 1848 by arguing that it was one of a government’s duties to protect domestic, infantile industries from foreign competition. In the aftermath many countries striving for industrialisation adopted his trade theory (O’Brien and Williams, 2004; Wikipedia, 2005).
Yet, from 1929 until 1941 the Great Depression occurred, an immense global recession constituted by a vast drop in international trade. As it was believed to been caused by a great variety of worldwide trade restrictions (Khan, 1946 cited in Madsen, 2001), several countries signed the General Agreement on Tariffs and Trade (GATT) in 1947 in order to liberalise international trade. In 1995 the GATT was followed by the establishment of the World Trade Organization (WTO) which was meant to provide a basis for the implementation of the agreement (Rugman and Hodgetts, 2003).
Today, with 148 member states, the WTO is the largest global international organisation dealing with the rules of trade between nations. As its main task the WTO regards the resolving of trade disputes among its members and the enforcement of the provisions of the WTO agreements which form the successors of the original GATT agreement. In order to be capable of enforcing these provisions the members of the WTO can collectively impose trade sanctions on countries that refuse to comply with their decisions (WTO, 2005).
The focus of this study will be on a further important formation – though not a formal organisation – in today’s global business environment, the so-called “triad”. “The triad is a group of three major trading and investment blocs in the international arena: the United States, the European Union, and Japan”. Together these countries account for about 80 per cent of today’s global foreign direct investment, over 60 per cent of the world’s imports and over 50 per cent of its exports. These data reveal the central importance and the dominance of the triad in international business (Rugman and Hodgetts, 2003).
As this historical outline of economic theories and international trade has shown, the policy of free trade is a very controversial issue. In line with the controversy about the positive and negative impacts of trade barriers, the study will now examine possible effects of the trade barriers in the triad communities. However, contrary to the historical economic theories’ focus on national advantage, the paper will shed light on self-interest of the triad members as well as implications for developing countries. Furthermore it will take into account considerations regarding environmental and ethical issues as well as global welfare.
To start the discussion of the impact of trade barriers in the triad communities, this paper will take on an argument introduced earlier by John Stuart Mill. He contested that governments may or even must protect young industries until these have reached a mature state in organisational effectiveness through a learning-by-doing process. In fact as Chang (2003) points out today’s developed countries have heavily employed protectionist measures in their early years of industrialisation in order to promote their infantile industries. In doing so, they have attained a high degree of national competitiveness.
Yet, having attained industrial development in the meanwhile, the triad communities still employ trade restricting measures to protect their industries. Today these measures frequently aim at the protection of mature industries, often under serious threat of foreign competition or of importance for the country’s economy (Blonigen and Prusa, 2003; Moon and Goodrich, 1996).
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