International Trade I\'ll Take Four of Those

International Trade

I'll Take Four of Those in Blue

International trade is a fundamental tool in building a healthy economy. This does not mean that nations should open their economic borders in an indiscriminate way, for unfettered trade is not in the interest of any particular nation. Rather, there are worse and better combinations of free trade, tariffs, and protectionism for any given national economy at any given moment in time. This trade simulation proposes a set of conditions for international trade that are in the best interest of the nation of Rodamia, as proposed by the trade representative of the country.

Rodamia's economy is based primarily on the service industry, with two-thirds of the nation's income from this sector, almost a third from industry, and just four percent from agriculture. This is a problematic profile in that arguably the most important function of any national economy is to provide food for the citizens of that nation. Rodamia will have to import some of its food.

In the simulation, as the trade representative for the small country of Rodamia, being able to understand the country's economy and making decisions-based to help the economic was difficult without first understanding how the country's GDP broke down. A large portion of the country's GDP came from services at 66% and 30% came from the industry and a small portion at 4% came from agriculture, which consisted mainly of corn, wheat, cotton, dairy and poultry products. In the simulation, there are four points in which a decision has to be made that can either help or hurt the economy.

Its neighbors are likely partners in international trade. This is universally true. Neighboring nations may not in the end prove to be the best trading partners. For example, if one nation does not have a climate that is good for growing grain crops, its neighbors are also likely not to have a climate favorable for these crops and so the first nation will have to expand its reach. However, trading with neighboring nations has distinct advantages if the right goods are available: The transportation costs are less when the distance that goods will be transported are less.

The three neighboring countries to Rodamia can all be good trading partners to the nation, although the some set of trading conditions are not ideal for each one of them. Key to understanding what is in the best interest of Rodamia is an understanding of a few principles central to trade theory. The first of these is comparative advantage. The model of law of comparative advantage is that two parties (countries, companies, individuals, etc.) can both achieve an advantage from a trade if it the good costs the parties different amounts to make the good (or provide the service).

It is almost never the case (indeed, it is arguably never the case) that a good will cost precisely the same amount to make in two different countries (or companies, etc.), thus there is almost always a trade scenario in which international trade will be profitable. An analysis of comparative advantage allows for an assessment of what a country is more and what it is less efficient at. Comparative advantage in international trade occurs when one nation that is relatively less efficient at producing Good X but more efficient at producing Good Z. sets up a trade agreement with a country that is more efficient at producing Good X and less efficient at producing Good Z. Each nation steps in to meet the needs and cover the weaknesses of the other (Chang, 2008, p. 48). (This contrasts with absolute advantage, in which one nation is more efficient at producing everything than is another nation.)

Thus in assessing how Rodamia should arrange its trading partners and define its trading policy in terms of assessing its comparative advantage vis-a-vis its neighbors. Such an assessment suggests that for Rodamia should export cheese and DVD players to its neighbors while importing corn and watches from them. This assessment is based on a general understanding of comparative advantage as well as the information provided on the economy of Rodamia in the Trade Commission Report and the Production Possibility Frontier. This latter document helped to define the opportunity costs for the production of each of four goods (corn, cheese, watches, and DVD players) in each of the four countries.

An opportunity cost is the difference between the best option in any given economic scenario and the next-best option. It can be seen as a way of operationalizing and so analyzing and assessing the way in which entities choose between the best and second-best options. Another way of looking at this concept in terms of the simulation at hand is this: A field can be used to grow corn, but if it is, then it cannot be used to graze cows. So a field that is put into corn production cannot be used to make cheese (via grazed cows). The difference between the profit made by growing and selling corn and raising cows and selling cheese is the opportunity cost (Buchanan, 2008).

In addition to the above recommendations, the Trade Representative should recommend the imposition of an anti-dumping tariff on imports from Suntize to compensate for a dumping margin of 25% by that country. The best price for the tariff is $40 per unit, which is equal to 25% of the export price, and so brings the exchange back into parity.