- March 23, 2023
Benefits and challenges of global trade
Around 3000 BC, Mesopotamia and the Indus Valley in Pakistan engaged in the earliest recorded transoceanic trade.
Fast forward to 5,000 years later, international commerce has become a norm, and countries worldwide depend on each other, driving globalisation. Global trade between nations is essential for raising living standards, generating employment, and giving consumers access to a wider selection of goods.
It enables wider choices for consumers, countries to make greater use of surplus raw materials, and much greater economies of scale because firms and countries can specialise in producing certain goods that have been transported around the world. Vietnam has been the hottest industry lately, to stay updated on Vietnam, you can view all these information on Vietnam in here on our platform: https://data.cic-tp.com/asia-trade-data/vietnam-import-export-data
If you’re considering whether you should take the risk and expand your business beyond your home country, this article is for you. Continue reading to know more about the benefits and challenges of global trade.
Benefits of Global Trade
Global trade is crucial for raising living standards and lowering the poverty rate. The benefits of global trade include an abundance of raw materials, comparative advantage, greater options for customers, and increased opportunity for specialisation and economies of scale. Let’s go over them one by one.
1. An abundance of raw materials
Across the globe, raw materials are traded as commodities on commodity markets. Since raw materials, like labour and capital, are production elements, traders buy and sell them on the market.
Some nations naturally have an abundance of raw commodities, like oil (Qatar), metals, fish (Iceland), Timber and coal (USA), diamonds (Congo), Graphite (India), Natural gas (Russia), and butter (New Zealand). Without commerce, these nations wouldn’t gain from their natural endowments of raw commodities.
Eli Heckscher and Bertil Ohlin created a theoretical model for this. The Heckscher-Ohlin (H-O) model states that nations will specialise in producing and exporting items that take advantage of significant local factor endowments. On the other hand, countries will import certain products for which resources are scant.
2. Comparative advantage
Global trade enables national specialisation. It offers individuals and nations the chance to experience products and services that are either unavailable or more expensive domestically.
This is another benefit of global trade. According to the principle of comparative advantage, countries should concentrate their efforts on industries that offer comparatively lower opportunity costs.
Even if one nation can make two things at a lower overall price, that doesn’t imply they should. Japan, one of the technologically advanced countries, has a comparative advantage in textile and clothing because they have more machinery available. Specialised, capital-intensive labour is an area where the United States has a competitive advantage.
American employees generate high-end products or profitable investment prospects for less money. India has a competitive advantage in the labour-intensive industry due to its lower labour costs (e.g., call centres and clothing manufacturers). India would thus benefit from exporting these products and services.
3. Greater options for customers
The new trade theory gives less weight to comparative advantage and comparable input costs. According to the new trade theory, providing customers with a broader range of different items is a driving force behind global trade in the real world.
The best illustration may be with products like apparel, and Primark values clothes and imported designer items from brands such as Gucci and Chanel in the market. Besides the immense price difference, the two are distinct in many aspects, enabling consumers to have more choices.
4. Opportunity for specialisation and scale economies
Another aspect of the new trade theory is that it does not matter what countries specialise in; the essential thing is to pursue a specialisation, allowing companies to gain from economies of scale, which exceed most other factors.
Sometimes, for no apparent reason, countries may specialise in particular sectors; it might simply be a historical accident. But with such specialisation, production may rise.
Multinational corporations frequently divide the production system into a global production system for items with high value added. For instance, Apple develops its computers in the US but outsources manufacturing to companies in Asia.
Global trade makes it possible for a product to come from several nations. The manufacturing process is sometimes much more international in cars because components like engines, tires, design, and marketing may originate in several countries.
Challenges Emerging from Global Trade
There are also challenges with the implications of unequal distribution and the global trade impact on the environment. While global trade is unlocking opportunities for many countries and businesses, it is inevitable for such activity to bring undesirable consequences, from cultural effects to income equality.
1. Industry argument
A major challenge of global trade is that there is concern that “free trade” may lead to nations specialising in essential commodities with unstable pricing and poor income elasticity of demand. Import restrictions and economic diversification may be necessary for countries to advance. This isn’t a case against global trade, but there may be instances where a transaction has to be “managed” as opposed to only relying on free markets.
2. Cultural homogenisation
Some worry that global trade favours global brands, which poses a challenge for local food and customs. Supporters contend that if local goods are of high quality, they ought to be able to carve out a niche that multinational corporations cannot.
3. Displacement effects
Finally, displacement effects are seen as global trade challenges because uncompetitive domestic industries may collapse due to free trade, creating structural unemployment. Free trade has the drawback of having many winners but no compensation for the losers.
Free-market economists may disagree and argue that there will always be some degree of creative destruction in the economy and that we cannot return to a closed, stagnant system. On the plus side, new employment will eventually be generated in many areas of the uncompetitive businesses shut down.
Now that you are aware of the benefits and challenges associated with global trade, are you looking to kickstart global trade for your business?
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