Essay Example on the Importance of the WTO in International Trade

The World Trade Organization plays a critical role in international trade, the global economics, legal and political issues that arise in international business as a result of globalization. WTO has emerged as one of the most powerful global institutions that have the responsibility of reducing barriers to trade between countries and opening new markets (Matsushita, Schoenbaum, Mavroidis, & Hahn, 2015). The main goal of WTO is to provide a fair platform for all its member countries to help in services for instance exports, imports and conduct business in peace. One of the advantages to the member countries is that it lowers the trade-related barriers among themselves, while countries who are not WTO members must negotiate related trade agreements independently with their trading partners.

WTO is important in international trade in the following ways according to Matsushita et al., 2015):

It facilitates the administration, implementation and providing smooth operations of trade agreements between countries.

It also provides a forum for trade negotiations between the member countries

It also engages in settling trade disputes among member countries through the established trade rules and regulations

It also cooperates with the International Monitory Fund (IMF) and World Bank in terms of making cohesiveness in making global economic policies.

Importance of International Trade

International trade is mainly the exchange of goods, services and capital among various countries and regions without hindrance. International trade has continued to flourish over the years as a result of the many benefits that it offers to countries across the globe (Feenstra, 2015). International trade mainly accounts for a significant part of the gross domestic product of a country and also an important source of revenue. The international trade system has grown and spread fast, as a result of the modern production techniques, advanced transportation, international corporations, outsourcing manufacturing services as well as rapid industrialization (Feenstra, 2015). The following are some of the benefits of international trade according to Feenstra, (2015):

It enables full utilization of the resources, for instance, the developing countries export raw materials to developed countries where it is required in high demand, and gains foreign exchange.

International trade, encourages growth of small and midsized businesses as a result of exports, especially in the United States.

International trade also causes growth of industries, such as the manufacturing industries due to availability of ready market for the finished goods.

It enhances global competitiveness, especially with regards to vast productivity gains that is driven by automation and information technologies.

International trade is also known to increase sales and profits for business, due to availability of a vast market for goods and services.

It also helps in stabilizing the seasonal market fluctuations that are caused by influx of goods or services in the market.

International trade also opens markets for companies internationally, hence reducing their dependence on the existing domestic markets. It also offers companies a chance to benchmark on the best production technologies that exist in the markets.

Importance of International Law in Governments

International law is a body of rules, norms and standards that apply between the sovereign states and other entities that are recognized as international actors (Gray, 2018). One of the important elements of international law issovereignty. The others include recognition, consent, freedom of high seas, self-defence, and freedom of commerce and protection of nationals abroad. International law governs the legal relations among the international subjects. The importance of international law in governments according to (Gray, 2018) include:

It governs the relations between states. It provides the basis for stability and peace with the aim of protecting the wellbeing of the human kind

With globalization, the importance of international law cannot be underestimated, as a result of the complexity of the international legal issues. Therefore, international law plays a crucial role in strengthening the foreign policy of governments and that it is committed to ensuring that law governs international relations and not force.

It also prohibits countries from resulting in forcing, by encouraging solving issues using peaceful means.

It also provides the government with rules and regulations that ensure that that the basic human rights are protected, and exercised freely by individuals.it also requires governments to take full responsibility of ensuring that it protects the environment by preserving the natural resources and protecting the climate.

International law also facilitates communication and trade, which are of great benefits to governments regarding the economy.

The Distinction between the Principle of Absolute Advantage and the Principle of Comparative Advantage

Absolute and comparative advantage are terms that are widely applied in international trade, and they deal with production, goods and also services (Feenstra, 2015). These terms are however distinct in their application.

Absolute advantage is the condition which a country produces particular goods and services at a lower cost compared to another country (Feenstra, 2015). Comparative advantage, on the other hand, is a condition which a country produces particular goods at a lower opportunity cost in comparison with other countries (Feenstra, 2015). Absolute advantage does not create a mutually beneficial trade, while competitive advantage provides an ideal environment which trade is beneficial.

Why Comparative Advantage Important in Achieving the Efficiency of International Trade Activities

Comparative advantage describes a situation which a country produces a certain product better than the other, and it compares the output of production of the same goods and services, between two countries. It looks at the overall production of service or goods within a time frame (Feenstra, 2015). Opportunity cost is the fact that is involved in comparative advantage. According to David Ricardo, who first applied the term, a country that specializes in comparative advantage has higher gains in terms of trade, and the total global output increases. When a country specializes in the production of a particular good or service at 100%, it leads to increase in total world production, which is an advantage to international trade, and the country that specializes in the production (Feenstra, 2015).

Shortcoming of the Principle Theory of Comparative Advantage

For a long period, David Ricardos theory of comparative advantage was widely accepted as an explanation of international trade, but it is subject to certain limitations according to Feenstra, (2015).

The theory is based on comparisons between two countries and two commodities. International trade, on the other hand, involves many countries and a variety of goods and service.

The theory also expresses the value of goods in terms of labor content. Classical economists also developed the Labour Theory of value and it, is subject to many limitations, and it is not to be inapplicable in reality. The value of trade is expressed in terms of money.

The theory also ignores the transport cost in determining the comparative cost difference. Also, the concept of demand is ignored, as the theory mainly focuses on supply.

There is considerable difficulty in terms of labor mobility and capital within the country, and the mobility between different nations is ignored. The theory also assumes the concept of free trade, that is, there is no restriction in movement of goods. It is, however, unrealistic to assume it since there are barriers to trade such as tariffs and non-tariffs to international trade.

The concept of complete specialization is also unrealistic. The theory is based on static theory, that is the assumption that there is a fixed quantity of resources, and does not consider the effect of growth.

How Quota Affects Market Efficiency of Trade

Quota are limits to the quantity of products coming into the country. Quotas are imposed to protect the domestic producers. Quotas, do not generate revenue for the government, but all the benefits go to the producers and the importers who manage to get scarce and valuable import permits (Blonigen, Liebman, Pierce & Wilson, 2013). Quotas keep the volume of imports unchanged, regardless the demand, because it makes the horizontal elasticity of the supply curve to be inelastic. The outcomes of quotas are certain and precise because the volume of imports remains unchanged (Blonigen et al., 2013). Governments find it easy to impose quotas because they are flexible, and can easily be imposed and removed than tariffs, which are considered permanent measures.

Regarding the effect on market efficiency, scholars have urged that adoption of quarters could increase welfare as measured against the policy of status quo these generating distortions and misallocation of resources (Blonigen et al., 2013). They are also regarded to be inefficient and could cause considerable transfers from the consumers to the producers. Quotas are considered to be a welfare-improving policy instrument but, welfare gains expected from the corrective quotas instruments are overestimated in the static approach, compared to dynamic approach.

Alternative Government Policy to Quota

The alternative policy to quota is the free trade policy or laissez-faire, where by the government does not discriminate against the imports or even interfere with exports by applying tariffs to imports or subsidies to exports. The policy is based on Adam Smiths argument on the division of labor among countries that leads to specialization, higher aggregate production and greater efficiency (Blonigen et al., 2013). Free trade policy is known to increase all-round prosperity, as a result of increased global outputs. The concept of specialization also ensures that there is optimum and efficient resource utilization and hence economies of production. The concept of free trade also encourages competition, and therefore the domestic producers may not always want to lose ground, thus preventing domestic monopolies and freeing the consumers from exploitation (Blonigen et al., 2013).

Way which the intervention policy of optimal tariff help the new US government achieve its goal of more jobs

Optimal tariffs are designed to maximize the welfare of a country. The purpose of these tariffs is to increase the overall income of a country. Only large countries such as the United States can apply optimum tariffs to reap benefits, and they have a huge impact on trade. These tariffs were designed to increase the wealth of the county (Blonigen et al., 2013). It implies that the true cost of imports is higher than the market price, due to additional costs of exports required to buy the unit of imports. The primary function of the optimal policy is to drive a wedge between the world prices and the domestic, but it occurs when the foreigners do not react (Blonigen et al., 2013).

In curbing unemployment in the United States, optimal tariffs would drive companies to open up manufacturing plants for materials such as steel. Increase in domestic prices, and lower tariff-exclusive import price would lead to an incidence of 40-60 split between the consumers and foreign exporters (Blonigen et al., 2013). Using this tariff the United States may temporarily curb unemployment, but in the long run, it might lead to depression thus creating a world economic crisis.

References

Blonigen, B. A., Liebman, B. H., Pierce, J. R., & Wilson, W. W. (2013). Are all t...