Comparativeand Absolute Advantage in the International Trade
Comparativeand Absolute Advantage in the International Trade
Theconcept of international trade has gained populated following theincrease in the desire of countries and individual companies to enterforeign markets. However, countries are only able to enjoy theabsolute advantage in the international market when they produce atlower cost than others (Schumacher, 2012). Similarly, countries canenjoy comparative advantage by producing goods at a lower opportunityand marginal costs than the rest. This paper will address differentaspects of the comparative as well as absolute advantage by answeringfour questions as considered below.
Question1: Acceptance of goods that are made in foreigner countries
Thecontinued acceptance of goods that are produced in the foreigncountries into the U.S. affects the stakeholders in different ways.The American workers suffer from the fear of losing jobs (Schumacher,2012). This is attributed to the fact that the flooding the U.S.market with imported goods forces the local companies to lay off someof their members of staff after losing part of their market share.However, the American consumers benefit from the increase in therange of products available in the market. In addition, localconsumers are able to access cheap products.
Foreignerworkers who are employed by companies that are allowed to sellproducts in the U.S. are affected in a positive way. They enjoy jobsecurity and better salaries since their employer are able to accessa bigger market, which increases their profitability (Schumacher,2012). In most cases, foreign firms are able to manufacture productsat a lower cost, which enables them to compete with the Americanscompanies.
Foreignconsumers are mostly affected in a negative way. The prices arelikely to increase in the foreign markets. This increase isattributed to the fact that manufacturers are able to sell at betterprices in the U.S. market. Therefore, they are likely to eitherprioritize the U.S. market or increase the prices in their respectivecountries.
Question2: Tariff or ban of foreign products
Adecision to institute a ban or a tariff has cons and pros. Thesetrade measures promote the local manufacturers by reducing the levelcompetition (Kim, 2011). Tariff and ban reduce the amount of foreigngoods that can reach the local market, which reduces the competition.Therefore, workers in the U.S. market enjoy job security and betterwages. Foreign consumers enjoy low prices since manufacturers intheir respective countries lose a variable market share following theinstitution of bans and tariffs.
However,the limitation of the amount of foreign goods denies the localconsumers the opportunity to enjoy a wide variety of products and lowprices (Kim, 2011). A decline in the level of competition isaccompanied by an increase in prices. The loss of a variable marketshare reduces the profitability of manufacturers in the foreigncountries. Employees of these firms suffer from the loss of jobsecurity and low wages following the decline in the profitability oftheir employers. Moreover, the two measures (ban and tariff)discourage trade between the U.S. and foreign nations. Tariffsdiscourage trade by increasing the price of foreign products comparedto the locally manufactured goods. A ban discourages trade byreducing the number of products that can reach the U.S. market.
Question3: Trade agreements
Thetrade agreements (such as NAFTA, FTAA, TAFTA, and the Trans-PacificPartnership) have similar pros and cons. These agreements provide amore dynamic economic environment since local businesses are forcedto adopt effective strategies (such as innovation) following thetermination of protectionist measures, including tariffs (Mot, 2014).Moreover, the agreements are associated with an increase in theforeign direct investment since investors from the member countriesare given an environment that encourages them to enter the localmarket. The foreign currencies boost the national economy.Additionally, the agreement minimizes the government expenditure. Theamount used to subsidize the local business is reduced, which is oneof the requirements of the trade agreements.
However,the agreements result in stiff competition, especially when somemembers are able to manufacture goods at lower prices compared toothers. Moreover, countries that are more advanced in terms oftechnology gain more from the agreements than the developing nations.The agreements also encourage the movement of employees fromdeveloping to developed nations as employers try to reduce the costof labor (Mot, 2014).
Thepros and cons result from the conflicts between developed anddeveloping nations. The stakeholders in the developed nations sufferfrom the fear of losing jobs and the entry of cheap goods into theirmarkets. The stakeholders in developing markets fear that localproducers might not compete fairly with companies that have advancedtechnology from developed nations.
Question4: Cultures of the citizens of the various trading partner countries
Apartfrom the economic factors, cultural differences are likely to affecttrade between America and other partners. Americans are likely togain the benefits associated with the inclusion of social matters inbusiness talks. For example, the presence of Brazil as a member ofNAFTA will help Americans learn how to develop the personalrelationships in the process of business negotiations (Mot, 2014).Brazil and other South American countries are likely to benefit fromthe culture of individualism since it enhances efficiencies in thebusiness. However, these cultural exchanges might force SouthAmerican nations that are members of NAFTA and FTAA to focus onprofit making at the expense of human relations.
Theability to comprehend and accept cultural differences will enhancemutual respect between trading partners from various cultural groups.In addition, the understanding will create an environment that willfacilitate the sharing of the positive aspects of each of thecultures. Most importantly, the understanding and acceptance ofcultural differences in the global context ensures that culturaldifferences do not act as barriers to trade.
Civiceducation is one of the key strategies that can be used to increasethe Americans’ understanding of the foreign cultures. Thegovernment and other stakeholders may conduct the civic educationthrough the media and seminars.
Theacceptance of foreign goods affects local employees and foreigncustomers negatively. However, foreign employees and local consumersare affected in a positive way. The international trade encourageseconomic development, but it is affected by cultural differences.Cultural competence in American can be enhanced through civiceducation.
Kim,J. (2011). Theeffects of trade on unemployment: Evidence from 20 OECD countries.Stockholm: Stockholm Sweden.
Morelock,J. (2016). Advantages and disadvantages of tariffs in the U.S. today.OurEveryday Life.Retrieved October 2, 2016, fromhttp://peopleof.oureverydaylife.com/advantages-disadvantages-tariffs-today-10751.html
Mot,A. (2014). The transatlantic trade and investment partnership.Journalof Public Administration, Finance, and Law,5, 126-142.
Schumacher,R. (2012). Adam Smith’s theory of absolute advantage and the use ofdoxography in the history of economics. ErasmusJournal for Philosophy and Economics,5 (2), 54-80.