International Trade and Finance

International Trade

Each year, globalization plays a more profound role in regards to the national economies of the world. Globalization has allowed for the expansion of corporations beyond their natural domestic limits. As such it has contributed to an increased standard of living for those who embrace its presence. Free trade therefore, is a welcomed addition within the overarching trend of globalization. Free trade allows for the transfer of goods and services when demanded by specific economies. It also allows the countries best suited for such activities to flourish. For example, China is proficient in manufacturing which allows the country to export far more goods than it imports. Developed nations such as Europe, America, and to a smaller extent, Japan demand these cheaper goods as they import more than they export. This trade allows both parties to subsequently flourish. China can sell its products to generate addition funding to expand its economy while America and Europe have access to low costs goods and services. With the advent of globalization, Chinese manufactures are better equipped to expand overseas to expand their manufacturing competitive advantage. This expansion allows lower cost goods and services to reach otherwise inaccessible areas of the world, thus increasing their standard of living. A shirt that once cost $15 now only costs $5. Society benefits as more dollars can be allocated to discretionary funds further boosting economic activity and subsequent prosperity. These savings are a direct result of free trade among nations with strong competitive advantages relative to their peer nations.

Naturally, as a direct result of free trade, certain industries and business will become obsolete. For example, due primarily to China, American manufacturing has suffered tremendously. What once was a very robust and vibrant manufacturing sector has now reduced to mere percentage points of American GDP. The America auto industry has suffered substantially due primarily to free trade as the Japanese manufacturing techniques provide cheaper and more efficient vehicles. This creative destruction provided better, safer, and more cost efficient cars to America and the developed world. In fact, due to near bankruptcy circumstances, America auto manufactures have been able to copy and mimic some of the manufacturing techniques of their Japanese counterparts. Due to free trade in tandem with globalization, automobiles are now produced in a manner better for society. This would not have occurred if it weren't for the efforts of free trade allowing the seamless transfer of goods and services from one nation to another (O'Sullivan, 2003).

I personally believe free trade is warranted as emerging markets begin to develop. Free trade allows for the transfer of goods and services that help society as a whole. Each country has some form of competitive advantage relative to their peers. China with its manufacturing prowess, America with its service oriented infrastructure, Europe with its fashion and premium brands, and Japan with its technological advancements all can further the quality of life for society. This can not occur without free trade however. By giving unfair advantages to other countries in the form of tariffs or quotas only hinders advancement. Tariffs discourage innovation and dispel potential trading partners who otherwise can contribute to society. As such, I believe it is best for society to allow free trade and globalization to continue to flourish.

Foreign Exchange rates can also have a profound impact on international trade. Foreign exchange rates are simply the rate at which one currency can be exchanged for another. For instance, currently $1 is worth 1.26 Euros. Likewise 1.26 Euros can be exchanged for $1. These exchange rates are determined by simple supply and demand. Once the demand for a particular currency increases substantially, then the currency's price relative to other currencies increases. Currently, due to the European debt crisis, many investors are flocking to "safe" assets such as the American dollar or the Swiss Franc. As a result, the euro is devalued as demand for the currency is dwindling due to uncertainty regarding the nation's future. Inflation also has a role in exchange rates. As one currency is being devalued relative to others, it usually enhances the value of the stronger currency. For example, if inflation is occurring a very high levels is Brazil, investors would require more Brazilian Reals per dollar (Sanger, 2010).