International Trade and Comparitive Advantage

International Trade and Comparitive Advantage

International Trade and Comparative Advantage

More and more American multinationals enter developing countries and benefit from the advantages of richer resources and cheaper workforce; they also make efforts to increase these advantages. An instance in this case could be given by the tobacco industry, where American companies move to the developing countries. Here, they motivate farmers to renounce working the land for crops and replace these food subsidies with tobacco plants. The stimuli for this venture revolve around a sure demand, loans or subsidies. The question posed here is why would American corporations invest in foreign tobacco crops rather than national ones, foremost when the first involve initial costs? The answer could be that despite the initial costs, the long run expenditures are still reduced in comparison to those incurred by local farmers. Also, despite reduced costs, the corporations can also benefit from vast expertise in the field of growing tobacco plants. Even if the American farmers possess better and more superior technologies, the ultimate quality of foreign tobacco is superior as it is based on decades of experience, dedication and manual labor, which in some cases presents superior quality.

To the foreign farmers, the contracts generate short-term profits, guaranteed by an existent and promised demand. On the long run however, their position is unstable as the American corporations could easily move their demand to other countries, which present better advantages.

The practice however has more extensive effects in both local and international markets and these impacts are felt by the tobacco and food industry. On a local scale, the food industry is suffering in that the land is no longer used for growing aliments. This then means that the food items become more expensive and rare and they therefore have to be imported. The local tobacco industry could be expected to flourish as the investments in it grow. As the American multinational is able to reduce costs due to outsourcing, the international price of tobacco products could become reduced as the output increases. Given that the demand for food products increases, it could happen that the output decreases, but the price increases. These effects are likely to impact the local and international equilibriums.

The issue of outsourcing is a sensitive one, with both supporters and disclaimers. Acme Motors has been able however to satisfy both pro and con arguments by simply having their engines manufactured in Mexico and the rest of the parts and assembling in the United States. To better understand, outsourcing has been accused of stealing jobs from the Americans. But since Acme still handles most of its manufacturing operations within the U.S., they managed to save numerous American jobs. As a result then, their image and reputation are still intact. Then, the products manufactured abroad have often been subjected to criticisms, in both terms of economic effects upon the national labor force, but also in terms of product quality. In this instance then, the label 'Made in America' is a sign of national trust and high quality. Acme Motors is able to benefit from this as well.

But since producing automobile internally is so beneficial for Acme, the question remains why they, in the first place, moved engine manufacturing from Detroit to Mexico. The answer is the most simplistic one: cost reduction. The Detroit area is highly specialized and as a result, highly costly. Even with the transportation costs incurred, the expenditures are still reduced in comparison to those that would be incurred from producing all engines internally. Moving the manufacturing plant to Mexico did not imply loses in engine quality, moreover when the Mexican labor force is used to outsourcing operations and is becoming increasingly specialized in various fields.

The effects of such international operations are felt by all company stakeholders, including its customers. They are sometimes content with the lower price possible through outsourcing operations. They can also be content with a wider product offering. As more and more companies decide to engage in international activities, the results materialize in more products and cheaper products, which are often satisfactory for the clients. In terms of quality however, the customers could accuse the manufacturers of inferior quality. An example in this instance are the complaints forwarded by Wal-Mart consumers, who often blame the low price organization for selling low quality items.