Accession To International Organizations

Published Date: 02 Nov 2017

Student Name: Stephen Chege Mwangi

Student ID: 129154716

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Module Name: International Business Environment

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Due: 13th May 2013

Centre / College: Intel College

Module Code: PGBM04

Assessment Title: Why Governments advocate free trade policies.

and the role played by marketing staff in the

present and future development of the

Organization

and the role played by marketing staff in the

present and future development of the

Organization

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Learning Outcomes Assessed:

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Free trade policies: Why Governments impose barriers to protect their domestic industries, the form such measures take and their impact on producers and consumers.

Table of Contents

1.0 Introduction

Trade can be traced back in the olden days, during the days of barter trade. This has however changed over the years with the modernization and globalization. The evolution in trade has taken many forms and shapes. Globalization has particularly influenced the evolution of trade in more than one way. It has led to the free movement of goods across countries leading to international trade. Various theories explain the origin of international trade, some of the theories as old as the theories published in Adam Smith’s "Wealth of Nations" to the more modern theories. In his book "wealth of Nations", Adam Smith (1776) argued that when citizens of a country can import and export goods and services without facing barriers or restrictions from their countries, then such citizens benefit from free trade. He further argued that countries should produce only that which they can produce efficiently and export to other countries and then import from other countries that which they cannot manufacture efficiently. This way he argued, both countries would benefit from trade. He termed this as the principle of absolute advantage. Then came the theory of comparative advantage by David Ricardo that argued that when countries specialize on industries not necessarily that they are efficient at, but those which they have a comparative advantage, then the countries will benefit from trading with each other. His theory stressed that when two countries are trading they both benefit and no country losses. More modern theories, such as the first mover advantages theory by Krugman have advocated for government intervention in Transnational Corporations (TNC) to promote innovation and entrepreneurship hence boosting a country’s competitive advantage. The most recent theory of international trade was developed by Michael Porter in his 1990 theory of comparative advantage. He argued that each nation has certain attributes that shape its national competitive environment (Morrison, 2006).

Since the Second World War, Tariff Barriers have declined significantly especially in developed countries, whose tariff barriers are at single digit levels. These graduals diminish of the tariff barriers can be attributed to the sponsorship of the General Agreement on Tariffs and Trade (GATT) which has been replaced by the World Trade Organization (WTO). Although this has not seen an end to protectionism, it has seen the expansion of free trade (Rivera-Batiz & Olivia, 2003).

2.0 Reasons for Free Trade Policies

Free trade is the movement of goods and services across a country’s borders without the interference of the state. Globalization has led Governments around the world to liberalize trade hence leading to the adoption of measures that minimize trade barriers such as tariffs and import taxes.

2.1 Accession to international organizations

The main reason countries are forced to embrace economic liberalization and hence free trade policies is as a result of accession to international organizations such as the World Trade Organization. As Allee & Scalera ( 2012) argued that states experience different levels of rigors before joining the World Trade Organization. As a result of this rigorous process that demands greater policy change before being ccepted as member sates, countries undergo liberalization and henceadopt free trade policies. Furthermore, International organisation membeship alone does not guarantee trade gains. Rather it is the extent of trade liberalization that a country has undertaken that guarantees it trade gains. Allee & Scalera ( 2012) argued that the countries that experience the most accession driven liberalization also experiene the greatest trade from the World Trade Organiation membership especially in the year immediately after becoming a member. Therefoe during theprocess of joining international organisations, countries experience diferent level of scrutiny (Allee & Scalera, 2012). Those countries that experience the most scrutiny experience a high level of policy change and hence greater libralization. Although such countries take longer before they are enlisted as members of the WTO, they benefit more than sttes that teke a shorter time to accendto international Organizations. In contrast, states that do not engage in widespread and rigorous process of policy changes particularly in reduction of trade barriers or tarific or non tariffic commitments receive little or no benefit at all from WTO membership (Allee & Scalera, 2012). Therefore according to Allee & Scalera ( 2012) there is a direct proportion between the effort undertaken by a state to become a member of an International Organization and the benefits reaped from such an Organisation. These views were reinforced by Madanmohan & Someshwar (2010), in their study of the removal of tariff and non-tariff barriers on textile and apparel by the Chinese and North American Economies as aa pre-condition to joining the WTO . The Chinese Economy increased by 2% mainly due to a largge increase in th output of textile and apparell industries.

2.2 Free trade benefits all countries

Free trade also leads to economic growth. A free and fair global trading opens up the barriers caused by protectionism measures and ensures that companies can grow in foreign markets and at the same time remain competitive at home because of the efficeincy associated with free trade. The gains derived by companies expanding in foreign mrkets lead to Economic growth, local expansion of companies hence creating employment opportunities.This as explained by Lawrence & Edwards (2012) "that’s why U.S. Policy makers have traditionally urged developing countries to reduce tariff and non tarrif barriers, often arousing their ire".

2.3 protectionism is costly

Proponents of this premise argue that protecting infant industries can be justified but then it comes at such a high cost to the country practicing it (Morrison, 2006). In his book The Competitive advantage of Nations, Michael Porter (1998) developed the attributes that shape the national competitive environment and argued that these factors either relate to the national environment or to the firms and industries. Additional to these factors were Government and chance which porter argued that chance can open numerous unexpected opportunities while Government policies can be highly influential and can play a crucial role in building national competitive advantage. He however noted that Governments role can only be beneficial if it is indirect rather than direct. Indirect Government policies has been a key to international success however direct policies that are often associated with protectionism encourage domestic rivalry that is not a conducive environment for Economic growth (Porter, 1998).

Furtehrmore, domestic industries nurtured through protective measures do not always become competitive in the world market resulting more often in inefficient outlets that cannot participate in the growth of the economy (Morrison, 2006).

The cost of Government intervention is therefore quite prohibit in all the three spheres that it occurs i.e. the internal costs, the direct external costs and the indirect external costs. This led Lipsey & Chrystal, (2006) while advocating for thee need of governments to stop protectionism that "the policy world is not a simple place, and policies that help to achieve desired goals over one time-span must be constantly scrutinized for undesired effects over other time spans" (Lipsey & Chrystal, 2006, p. 353)

3.0 Why Governments impose barriers of trade

Countries productive capabilities are not fixed as alluded in the theory of comparaive advantage, this flexibility or dynamism have have led to shifts in production capabilities. Thirty years ago, China was not manufacturing electrical and electronic equipments but it does today. This phenomenon therefore mean that when two countries are doing business one stands to benefit more than the other. Particularly when in among thhe trading partner one is more economically developed than the other. Globaluzation has increased theposibility that two counties productive capabilities are not fixed. This phenomenon leads countries to protect their own economies from exploitatioon by giant economies whoe poductive capabilities hve evolved (Gomory & Baumol, 2009).In concurring with the above view, other authors contend that international trade law must be developed with the aim of increasing national earnings capacity and not just creating enabling conditions for tariff reduction or the harmonization of municipal law with international trade law (Warburton, 2010). To cope with these measures, countries impose tariff and non tariff barriers to protect home economies or to benefit from trade with a partner state.

3.1 promoting industrialization

Every country is faced with a tricky task of balancing between trade policy and national priorities. National priorities vary from one country to another depencding on whether the country is developing or developed and also depending with whether the country relies on trade or agriculture for economic growth. Developing countries that rely on agriculture and which want to hasten economic growth by moving from exportes of raw materials to value addition to the raw materilas and then exporting the finished products may adopt a more protectionist trade regime where they protect the infant industries to compete with international manufactures of such products. Industrialization is therefore promoted by restricting the flow of imported products and encouraging local production for the domesgtic markets until the industries are mature enough to withstand comptetition form imports. According to Morrison (2006), the newly industrialized economies of South East Asia has been guided by Government through industrial policy, transforming the countries from mainly agricultural economies to industrial economies. (Morrison, 2006).

3.2 Protecting Employment

Countries that have embraced free trade policies have reported loss of employment as a result of competitive imports. In America, the open trade policy has often come under sharp criticism for having contributed to loss of employment especially in the manufacturing sector. The rate of employment decline in America has been 0.4 percentage points per year from 2000 to 2010 (Lawrence & Edwards, 2012) Governments therefore tend to safeguard domestic jobs by restricting imports by charging high tariffs to imports that are locally manufactured (Morrison, 2006).

3.3 Protecting Consumer Interest

Consumers are known to be the ultimate beneficiaries of free trade due to the competition that follows leading to efficient production of goods and services hence cheaper high quality goods and services to the consumer i.e. competition is known to bring down prices and increasing choice. However, Governments are charged with the responsibility of ensuring that its citizens are receiving safe and healthy goods. The need for the Government to be more vigilant in this role has grown with increased globalization and increased developments in food production leading to Genetically Modified foods (GMO’s) Hormone treated beef from the US. Governments therefore can set trade barriers depending with their perception of certain goods and the preferred policy to protect consumers (Morrison, 2006).

3.4 Promoting National Interest

Morrison (2006) advanced the strategic sensitivity theory, stating that domestic suppliers are prferable to foreign suppliers and therefore domestic suppliers should be protected. This explains why countries protect food production, because of the strategic importance of safeguarding food supply and also the agricultural employment. On this basis, subsidies have been used by many Governments across the world to protect certain industries. In Kenya for instance, Tea and sugarcane farmers have been protected by the Government through the creation of the Kenya Tea Development Agency – KTDA (a fully farmer owned and managed Company) to promote the development of small holder tea while Kenya Sugar Authority (KSA) to act as an advisory body to the government on the development of the small holder based sugar industry. The two commodities tea and sugar are considered political crops in Kenya, Tea due to its contribution to the GDP and foreign exchange earnings and sugar due to its popularity with the masses (Ochieng, 2006).

A country may also protect its industries as a means of maintaining national culture and identity. The Kenya Nationl Museum for example has been a parastatal since inception due to the country’s need to protect and promote Kenya’s heritage through exhibitions and research.

This argument can be concluded by noting that government barriers of trade are intended to meet social objectives. The major objectives of government intervention are social efficiency and social equity (Sloman & Hinde, 2007). Sloman and Hinde (2007) argued that if the marginal benefit of producing a commodity to society is exceeds its marginal cost of production, then such a commodity is said to be socially efficient. We can therefore say that Governments promote socially effiecient production practices by imposing barriers of trade. This can be done through imposing heavy bans and taxes on commodities that are perceived to be less socially efficient and subsidizing the commodities that are perceived to socially efficient.

4.0 Forms of trade barriers

Trade barriers can be in form of tariff or non tariff barriers. "A tariff is an amount of money paid by an importer to the government to allow him to bring goods into the country" (Winters, 1991) Tariff barriers also include taxes and subsidies. Tariffs are therefore forms of indirect taxes, governments either specify the amount to be levied on a specified quantity of a product. But sometimes governments also peg this tariff at a percentage of the price of a commodity. The latter is referred to ad valorem tariff.

Non tariff barriers on the other hand are restrictions by other range of measures except for tariff barriers. These includes Quotas which is the Government’s limitation of the amount of a commodity that can be imported in a country or limit the age say of vehicles that can be imported in a country. Quantitative restrictions of goods started in the First World War but its prominence has dwindled significantly over the years (Winters, 1991). The effects of Quotas are to reduce the supply of imports on the domestic market. Governments also use exchange controls as means of restricting imports. This is achieved by controlling the amount of foreign exchange available to importers by influencing the exchange rate with the local currency. Whereas most developed countries around the world have abolished exchange controls, developing countries still use exchange controls to control imports. In United Kingdom for example all exchange controls were abandoned in 1979 whereas the European Union abandoned exchange controls in 1993 (Bramford, Brunskill, Cain, Grant, Munday, & Walton, 2002).

5.0 Impact of trade barriers to producers and consumers

Trade barriers often impact on the prices that producers charge their product in the open market. In a perfect environment, a producer maximises the profit of a commodity by ensuring production at the lowest of costs. However in a government regulated environment, the producer does not control all the factors and therefore production effieiency is not the only factor determining the the price of goods and services in order to met the producers objective of profit maximisation. The costs incured by the producer or manufacturer would include government imposed costs such as taxes, tarif charges etc. These affects the affordability of a commodity in the market eventually dictating the fate of the producer (Winters, 1991).

Consumers are invariably affected by the consequences of output flactuations as this determine thee pricee of a commodity from one season to another. However in a country where governments have not imposed trade regulations, this seasonalities are leveled out by importing in low seasons to meet shorfalls in supply. Some governments vary the supply of some commodities in their markets by simply lifting the barriers in terms of shortages, thereby allowing more imports and reinstating the barriers in times of plenty therefore preventing imports from getting into the country (Winters, 1991). This flactuation in policy is aimed at giving competitive advantage to home based goods and services and therefore making them more attractive to consumers as a result of a fall in imports. (Bramford, Brunskill, Cain, Grant, Munday, & Walton, 2002)

6.0 Conclusion

In view of the numerous socisl benefitys that free trade has as opposed to protectionism, governments are justified to advocate for free trade. Even though no government has fully attained free trade status developed countries have led the way in liberalizing trade, additionally international organisations such as the World Trade Organisation (WTO) continue to push for a free trade status amongst member countriees hence increasing the level of liberalization in the world. Hopefully as more developing states accend to the World Trade Organisation (WTO) this will hasten the pace of attaining a full free trade status amongst states in the world. Globalisation is hoped to accelerate the interdepence amoungst countries therefore increasing the need for free trade.